The first question for startups looking to raise funds: When is a good time?

What you can learn from a startup which raised its first round of funds after 11 years
Atom Startups Monday, June 26, 2017 - 20:13

After 11 years of starting operation, Outcome Health raised over $500 million from investors led by Goldman Sachs and Alphabet, making it one of the only companies to raise such a huge amount in a single round. This is the first time the Chicago-based health tech company has raised funds since it was founded in 2006. It is expected to raise about $600 million more at a valuation of $5.5 billion by the time the deal closes. Big investors chased founders Rishi Shah and Shradha Agarwal offering money, but they turned those investors away until the time was right.

When is the right time for a startup to raise funds? That is the most important question for startups before approaching the moneybags.

Speaking at a panel discussion at T-E Hyderabad and Guardian Angel’s Live Instant Funding event, Sanjay Jesrani, founder & CEO, Go North Ventures says that a startup should not look to raise funds early. It is fundamental for every entrepreneur to understand that funding is not the vehicle but the gas in the vehicle. The business idea is the vehicle.

Before raising funds, a company must first do the market research, put together a strong team, have clarity over the business model and then think of raising funds.

Outcome Health did one other thing – it focused on turnovers and profits. According to a recent profile of the company, he company made $130 million in revenue in 2016 and posted an operating profit margin of around 40%. “Outcome Health doubled its revenue in each of the last two years, and it also grew with its acquisition of AccentHealth last November,” the report said. For ten years, the founders of the company worked towards the best performance they could achieve all by themselves.

This is in line with what investors in India are also proposing.

Ramesh Byrapaneni, president of TiE Hyderabad agrees. He says that founders should have the capacity to hold on for as long as possible, for at least a year or two, till they build a solid product.

“Founders must stretch themselves as much as they can, work with limited capital, beg, borrow from friends and family till they are ready to take it to the next level,” he says.

Raising capital – a time consuming process

From an entrepreneur’s point of view, Prashanth Gowriraju Founder and CEO of Timla Foods says this is something his experience taught him.

When Prashanth wanted to raise funds earlier into his startup, he realised that raising funds takes up a lot of the founder’s time, thus taking his focus away from the business. “That is when I decided that I should instead focus on building the product, build the traction first and then let the product speak for itself,” he adds.

The lengthy process of raising money made him learn to live without it and learn to manage with limited capital. And that is something startups should think about.

Before running behind capital, it is important to ensure the product is strong.

Pavan Adipuram, founder of online marketplace for chitfunds, Chitmonks had a similar experience with his own startup.

He says that it was first very important for them to invest time and capital into market research to understand if the market is ready for something like this.

But Pavan says that before you dive into this journey, it is important to have a support system in place. Be ready to spend from your own pockets, but you must have the survival capacity in place for it.

In a scenario like this, an entrepreneur’s ability to hustle is tested. ‘Jugaad’, as it is often called in India, is a great attribute for any entrepreneur to have. And Sanjay says that if an entrepreneur showcases that he can manage with limited resources and variables in an environment, it is always seen as a big plus for investors when you want to eventually raise funds.

In Chitmonk’s case, raising funds was more of a way of testing the business idea and seeing if it is good enough. This T-Hub startup approached investors to see how the investor community was going to react to it, which would give them a clearer picture of how strong their business idea was.

But how does an entrepreneur know when to raise money for the next stage?

Prashanth says he always has a very clear roadmap of what the business was doing and where it was going. And when it’s time to get into the expansion mode, you will know exactly when and how much capital is required.

A disadvantage of raising too much capital is also that there are several cases where investors strangle the entrepreneur. Since they have invested capital, the VC would expand the startup to expand at the pace the VC wants to or in the direct it in the way it wants them to.

“There have been instances where startups want to go multi-city even before they get traction. And when you ask them they say it because the VC wants them to expand,” says Sanjay.

Build a good startup. When a good startup is ready, you don’t have to look for investors, investors will flock you.

This article has been produced with inputs from T-Hub as a part of a partner program.

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