A significant portion of startup news deals with startups raising investments and clearly we see such news creating positive waves in the entrepreneurial ecosystem. Why do such news create these positive vibes, and what should other entrepreneurs infer from this is subject of another blog, but for this one we shall limit ourselves to what entrepreneurs need to think of when looking for external investments.
Investment events are a validation in some form of the business potential of the entrepreneur’s idea, but it definitely is not the ultimate state a start-up should reach! The journey from on-boarding an investor to realizing a self-sustaining business with a lot of customers buying the product/service is really the aspiring state for start-up that is just blossoming. Getting an investor thus, is an important but not a necessary milestone in the start-up's journey.
External Investment could take many forms, prominent forms include: Seed Capital, Angle Capital, Venture Capital etc. Each one of these investors come in (often not voluntarily, but through an elaborate persuasion by the entrepreneur), at a different state of the start up.
Start-up investment by its very nature requires a lot of patience and is riskier than debt financing models - where there is periodic return on investment in the form of interest earned. Expecting a start-up to give returns within a year of investment is in most cases unrealistic!
Very often in the geist to raise the investment early, entrepreneurs raise capital from investors who do not understand the dynamics of the way start-up funding operates. Many entrepreneurs are left with painful experiences and sore relationships with such to such experience.
These issues are most common amongst fist time individual investors - it is really an expectation difference and communicating early and clearly about the way such an investment would operate is the best way to handle such scenarios. Personality fit is important to ensure that the investor relationship is working well.
In addition to the financing that an investor gets to the table, following are some of the other issues an entrepreneur would need to think of when raising an investment:
An experienced investors would have seen a lot of startup issues at close quarters and the suggestions and experience would be of enormous value - investing in choosing the right investor at the right stage and aligning the incentives appropriately would be every important.
Most importantly, you would always need to remember the following - investors are in the company to primarily support your venture - they share the risks of the venture with you, they would only make money for themselves when they make an exit. So ensure that there are exit opportunities for the investors - not having exit opportunities would not make the deal worthy of interest to the investor.
Understanding the pressures of the investors would definitely help explain the numerous horror stories that float around in the ecosystem. The investors are also in it to bake the cake, so that they could make some profit, right!
Note: We haven’t discussed about debt financing here, debt financing should ideally come at a later stage of the venture and if taken up at the wrong time, it would
Investment events are a validation in some form of the business potential of the entrepreneur’s idea, but it definitely is not the ultimate state a start-up should reach! The journey from on-boarding an investor to realizing a self-sustaining business with a lot of customers buying the product/service is really the aspiring state for start-up that is just blossoming. Getting an investor thus, is an important but not a necessary milestone in the start-up's journey.
External Investment could take many forms, prominent forms include: Seed Capital, Angle Capital, Venture Capital etc. Each one of these investors come in (often not voluntarily, but through an elaborate persuasion by the entrepreneur), at a different state of the start up.
- Seed Capital is one of the investments coming earliest in the life-cycle of a startup – could often be just after the first investment of the founders. This capital investment is generally acquired when the firm at a stage where there are a lot of experiments going on and the numerous hypotheses on the ideas are still being validated. The buy in by the investor would mostly be based on the entrepreneur's ability or the belief in the idea itself.
- The Angle Capital could be next in the series of investments raised, where the experimentation has possibly yielded a limited range of options to venture into and would benefit from an individual who could be more than just an investor - possibly opening up his/her network to allow the product/service be adopted. There is more than just the return expectation; the buy in to the idea is a bit more personal & emotional.
- The Venture Capital generally comes in at the growth stages of the start-up. At this stage, most of the uncertainties of the business arising from the customer's side (could be product features, pricing, leads, sales cycle etc) are all negotiated and settled to a large extent. The growth plans of the venture, market size, return on investment etc would be key factors that could get the venture capitalist on-board.
Start-up investment by its very nature requires a lot of patience and is riskier than debt financing models - where there is periodic return on investment in the form of interest earned. Expecting a start-up to give returns within a year of investment is in most cases unrealistic!
Very often in the geist to raise the investment early, entrepreneurs raise capital from investors who do not understand the dynamics of the way start-up funding operates. Many entrepreneurs are left with painful experiences and sore relationships with such to such experience.
These issues are most common amongst fist time individual investors - it is really an expectation difference and communicating early and clearly about the way such an investment would operate is the best way to handle such scenarios. Personality fit is important to ensure that the investor relationship is working well.
In addition to the financing that an investor gets to the table, following are some of the other issues an entrepreneur would need to think of when raising an investment:
- Past Track Record of the investments – you could benefit from not just the background understanding of the investor but also the kind of inputs one could expect once on-board.
- Expectations of returns (may be in percentage terms) on the investment – will you be willing to share the equity asked for given the background?
- Network of the investor - could be enormously useful not just to gain/extend the product traction, but also hiring the right talent. A lot of feedback on the prospective employee could be learnt about. More about hiring the right employee here.
- What are the other investments (portfolio) that the investor has? - If this is the only investment made by the investor, then the risk is possibly higher on the start up! The above mentioned scenario could be more realistic
An experienced investors would have seen a lot of startup issues at close quarters and the suggestions and experience would be of enormous value - investing in choosing the right investor at the right stage and aligning the incentives appropriately would be every important.
Most importantly, you would always need to remember the following - investors are in the company to primarily support your venture - they share the risks of the venture with you, they would only make money for themselves when they make an exit. So ensure that there are exit opportunities for the investors - not having exit opportunities would not make the deal worthy of interest to the investor.
Understanding the pressures of the investors would definitely help explain the numerous horror stories that float around in the ecosystem. The investors are also in it to bake the cake, so that they could make some profit, right!
Note: We haven’t discussed about debt financing here, debt financing should ideally come at a later stage of the venture and if taken up at the wrong time, it would
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