For every startup and entrepreneur, earning the interest of an investor or venture capitalist is one of its biggest achievements. But while nearly every startup wants to get funded and raise big money, entrepreneurs, especially first-time founders have several misconceptions about how the whole funding process works.
The News Minute spoke to a few experts, investors, VCs and startup entrepreneurs about what some of these misconceptions are.
Just an idea isn’t enough
This is probably the biggest misconception entrepreneurs have and something every investor agrees with. That merely an idea is not enough to get funded. Sometimes people assume that they have a brilliant idea and try to raise funds for it. But that’s not how it works.
It happens very rarely that an entrepreneur gets funded at an idea stage.
“A few startups might have in the past at the idea stage bur ideally, they should be prepared to be bootstrapped to get the idea to a minimum viable product (MVP) before approaching investors,” says Sanjay Jesrani, founder and CEO of North Ventures, who looks at startups at seed and angel stage.
Vijayananda Reddy, co-founder of LoanYantra agrees to this point. He adds that while this is the biggest misconception, what actually is important is the team and what they are building. “Investors want to see if it is feasible to build the idea and run the business,” he adds.
“The threshold required to elicit interest from investors is, what business problem is this startup solving, is it scalable and is it differentiated,” adds Sanjay.
Do you need the money?
Gagan Goyal, Partner at India Quotient says that very often entrepreneurs are not clear why they want to raise money. Not all businesses require investor money. Some might just need capital from bank and some businesses can be built better by taking money from friends and family.
“Many businesses are good in nature but they are not VC-fundable businesses. The problem is that founders don’t know why they should raise funds, what their aspiration is and if they really should raise money,” he adds.
Another point Gagan raises is of founders not doing their basic homework in terms of which investor to approach. Founders need to know which VC invests in which types of businesses.
“People don’t come prepared. All websites of VCs and investors have detailed information on what our interests are. People don’t read it and send blind mails to 50 VCs at a time. That won’t work,” he says.
The valuation dream
Another thing many founders get a rude shock about is valuation. They must understand that the further up the business is in maturity, the higher is the chance for them to get decent valuation.
“A lot of founders having invested Rs 5-10-15 lakhs, come to investors saying I want to raise Rs 50 lakh to Rs 1 crore and I want a valuation of Rs 7-8 crore. Their basis of valuation is fragile because they haven’t really achieved reasonable enough progress to warrant that valuation,” Sanjay says.
He adds that he has seen a bunch of startups getting beaten down on the value. They raise Rs 1 crore in the early stage and give up 35-40% of the company and by the time they get to a VC stage and they would have had to dilute 60-65% of the company. VCs like to see founders holding at least 60-75% of the company when they come to VC level.
Be in it full-time and for the long haul
Apart from assuming that an idea can get them funding, a number of entrepreneurs also assume that they can work on their idea part time while still keeping their previous jobs, find someone to fund them and when the idea kicks off, quit and dedicate themselves to the idea full time.
But this will never work for investors. An investor will always want to put his money where a founder is fully dedicated to his idea and business. That is why they probably say that the team of the startup really matters.
Another point that experts make is that there are some entrepreneurs that are looking for quick exits. They come, enter the market, get investors, get quick valuations, somehow exit and not care about investor money.
Young entrepreneurs seem to have that impression. But that will not be looked upon positively. An entrepreneur needs to have a long-term mindset and also think from the point of view of an investor. No one will entertain you if you are looking for a quick fix.
The startup side of the story
Mukesh Manda, Co-Founder at TinMen says that most founders tend to be overly optimistic. A lot of them underestimate the amount of time needed and are often not prepared for the scenario where they might not get funding in that much time.
Adding to that, Vijayanand says “Most founders think raising money is very easy. It is not. It is a very long-term process and much planned. You have to plan 3-6 months in advance.”
And from his experience, Manda says that even if you are not looking to raise funds at the moment, you have to keep sending updates on what the business is doing to potential investors. This, Manda says has worked for them in one of their fundraising rounds.
Mukesh Chandra Anchuri, founder and CMO of Paymatrix also adds that things often don't go the way you thought especially when it comes to the timelines of funding.
“Often, you end up seeing everyone getting funded and that puts a lot of pressure on you from various angles as an entrepreneur. It takes a lot deal to handle that and being focused on the core business while just leaving a ear to the funding noise. Because, ultimately, everyone comes to basics of the business either in early stage or later stage. If you are able to focus on that from start, that would be great,” he adds.
And once the investor agrees to fund you, founders often underestimate the time it takes for it to actually reflect in their bank accounts.
“First time founders often don’t know how much time it takes for due diligence. They don’t know the due diligence process and the fact that funds will come into accounts only 1-2 months later,” Manda of TinMen says.
And finally, Mukesh Chandra of Paymatrix puts it rightly that you’ve only solved one of your million problems when you get funded.
“Perception that things will automatically fall in place once you get funded may be not right. You shall have to face tougher challenges such as scaling, customer retention and expectation management which are even tougher and demand resources other than only money,” he says.
This article has been produced with inputs from T-Hub as a part of a partner program.