You've started your own startup? Congratulations! The hardest part is to take a decision to begin. Most people fail at this step itself and so, you definitely deserve appreciation.
So what next? Are you looking to raise capital? Here is a guide.
Why do you need to raise Capital?
This is the most important question to ask yourself because when you raise capital, you are inviting external investors to own a part of your company. Which means that you're losing a part of your control. Are you ok with that? Your investors will have their own opinions, thought processes, and ideas for the business. Are you open to hearing them? What if your thought process doesn't align with theirs. How will you handle conflicts?
These are people-related questions that you should ask yourself before you raise funds. Apart from that, there are business-related questions that you should ask. For instance, why can't your business be profitable? Why does it need a capital infusion? What other options do you have apart from raising capital from investors? If it's just a small amount of money, can you put in some money from your savings? Do you have friends and family members who would be willing to invest? Can you take a loan? Basically, what other alternative options do you have to raise funds without giving away ownership of your business.
Here are some guidelines while you think:
- Are you someone who doesn't like to listen to others too much? Your investors will surely want you to listen to them.
- Are you someone who doesn't have a proper business plan in place? Your investors would want to see it. No one wants to spray and pray.
- Is your vision centered around building a Rs. 30 crores revenue and Rs. 5 crores profit business? It might be a large amount of money for you, but for investors, it's not an attractive proposition.
- Does your business require a relatively smaller amount of capital like a few tens of lakhs of rupees? You may consider putting some savings of yours and raising the rest of it from friends and family.
Raising money from Angel Investors
- Wanting to give back to the ecosystem. For instance, Founders like me who have created wealth via an acquisition, have spare money to invest. A lot of people from the ecosystem helped me in building Cogno. So now, I want to pay it forward by helping other founders.
- Understanding new trends in the market. A lot of Founders use Angel Investment as a tool to learn more about the new startups, and technologies active in the market.
- Making returns on their investment. Needless to say, all investors eventually are looking to grow their capital.
- You need to spend time finding so many people.
- You need to manage so many people on your cap table
Raising money from Venture Capitalists
- They'd want to get about 20 - 25% of the company, irrespective of the amount of capital you want to raise. Smaller percentages are not worth it for them in terms of their time and efforts. So, if you want to raise capital from VCs, be mentally prepared for giving away at least a fifth of your company.
- They'd want a 5 - 7 year plan of how you'd take your business to $100M in revenues and $1B in valuation. VCs don't like the story of small profitable businesses. They make money via capital appreciation and not via profits. So, they want a $100M revenue story or they won't be interested.
- For small amounts of capital, it's best to go to Angel investors. Much more convenient.
- For relatively larger amounts of capital, it's worth investing time talking to VCs.