There is a lot of confusion among Startups around Fund Raise. Be it around ways to negotiate with investors or decoding the complex framework of Business Valuation or for that matter understanding the complexities around Term Sheet. To answer all these questions and to bring in some clarity to the entire mechanism I decided to take Taxmantra Advantage Webinar Series – The Art of Fundraising Series where I discuss three important aspect of the the process ie how to get ready for fund raise, tax and legal aspect of fund raising, decoding business valuation for startups with Mr Alok Patnia (Managing Partner, Taxmantra Global).
In this article we shall try to cover the important points of the first session of the Webinar series ie how to get ready for fund raise. Over here we discuss issue pertaining to the stages of funding, quantum of money that one should raise, best way to approach investor, common mistakes while fund raise and various things around it.
Q- Why and when should a Startup go for raise fund?
Ans- You should raise funds when you think that your business can be a a disruptive business in terms of the scale and impact and the only push you require is the availability of the fund. If you really feel that fund raise or money is the only thing that is stopping your business to go the next level then you should raise fund. You should raise fund when you feel that you have the right business model and you need to hire the right people, get the right mentors, have a growth oriented marketing budget post which you can scale your business many folds, only then you should raise fund. No one should look to raise funds for the sake of it but only do it when you have a proper utilization plan in this regard.
Q- How much should a startup look to raise?
Ans- There is no particular answer to this question. Basically there are two method. First says that you should raise fund as much as you can raise because you never know what can happen in the future. However, the second option states that you must raise fund according to your requirement and not more than that. Personally I like the second option. The amount that you want to raise should depend on your future business plan, if you feel that in 18 months you would require 10 crore fund to grow your company then raise that much amount of fund and not more than that. This not only helps to control your spending but also helps to limit too much dilution of your stake in your company.
Q- What are the different stage of Funding?
Ans- Basically there are five stages of funding, they are:-
- Idea stage: In this stage you have an idea to start a business but need some money to start the business, in this stage the main investors are your savings, friends and family members.
- Monetized stage/Angel Fund stage: In this stage your business has now started to generate some revenues and now you can opt for angel funding.
- Bridge round/ Pre-Series A fund round:- In this stage your business is running good and generating good revenue, so now to grow your business you raise fund just prior to VC round.
- VC stage:- In this stage you raise fund from a Venture captal Firm. This usually happen when the business is more matured
- IPO stage:- In this stage the share of the company gets listed in BSE or NSE and thus can raise fund from public.
Q- How to approach an investor and what is the best way to close a deal?
Ans- It is very important for a start-up founder to choose the right investor. For example, if you are a startup you must look for those investors who will not only invest in your company but also bring in their experience and expertise in the company which will help you to grow the business. Choose those investors who can be your guide and thereby help you to take the right business decision for your business.
Q- What is the average time frame to close a deal?
Ans- The average time frame to close a investment deal is 3-5 months depending on how to present yourself in front of the investor.
Q- How to find an ideal mentor for my business?
Ans- An ideal mentor will be the one who will guide in every stage of the company. When the company will be running into losses he should guide you on how to generate revenue or on how to improve your products. An ideal mentor will always bring in their domain expertise and will always look upon improving or growing the company.
Q- What are the common mistakes while raising funds and post receiving it?
Ans- There are various mistakes that a company makes while raising fund. The basic mistake that a company usually makes is that they over estimate the value of their company. The Founders should always be prepared with their business plan and a strategy on how they will be utilizing the money before raising fund. Another common mistake that a company makes is that when the investors ask about the exit strategy they do not have any proper answer to it which suggest that they are unprepared to take care of the investor’s fund.
Post Fund raise too there can be several mistakes made by the Entrepreneurs. The common mistakes in this regard include frequent team parties, going for a hiring spree, spending unnecessary on marketing without measuring the results and renting lavish office space. One should take active measures to avoid the same.
(Write up on two other subjects of the series will be uploaded soon. In case you have any specific requirement on fund raise you can visit our page Global Fund-raise and Due Diligence or write to firstname.lastname@example.org and we shall get back to you accordingly)