India is home to thousands of startups that have emerged with incredible ideas and shot to fame within a short span of time. For instance, Ola got venture capital funding that led to its rapid growth and elevated the company to a huge valuation very early on. Ecommerce startup Snapdeal also raised funding and grew quickly to become one of the largest online marketplaces in India, but the stories of Ola and Snapdeal diverge on the revenue and growth front. This holds a lesson for startups who wish to raise VC funding.
This massive success rate, on one hand, has made entrepreneurs eager to come up with innovative ideas to make it big, and on the other, has made venture capitals (VC) the steering wheel of the startup ecosystem, perhaps giving VCs too much control over a startup. So if you are a budding entrepreneur with a great startup idea, it is extremely necessary to evaluate when to raise VC funding, before you take the plunge.
Venture capital or VC firms invest in a startup even accounting for risks, looking forward to earning a return as big as 30x the fund within 8-10 years. This amount of return is required by the VC firm to earn profit for itself after paying back to the actual investors of the fund. So while picking up a startup to invest, it is necessary for the firm to check a few things:
- The business idea or growth potential has to be big enough so that a big fund can invest and returns are ensured,
- This huge return should be gained within a maximum period of 10 years,
- Further investment can be made in the startup in subsequent rounds
On the other hand, the entrepreneur or startup has to take a decision on whether to raise VC funding. While it is of foremost priority to identify the right time to raise VC funding, the entrepreneur has to decide whether they actually need the VC funding or if they’re just going with the flow to join the bandwagon of venture capital funding.
To find an answer to this basic question, an entrepreneur needs to have a clear idea of some factors.
- Scaling up the business at breakneck speed
Angel investors or VC firms investing in a startup look forward to high returns within a stipulated period, compensating the risk they take. So, within that period, the startup not only has to scale up and grow fast but ensure high returns that suffice the investor’s expectations as well as earn profit or pave the future growth path. Scaling up the business at a quick pace requires the startup’s product to be a crowd-puller. It also needs the assurance that adding new clients won’t lead to complexities or additional cost. If all these factors are ensured, it is good for an entrepreneur to opt for VC funding.
- The package deals
VC firms often come up with a package of additional benefits, along with the money they invest. While some firms offer expertise or services related to the sector in which the startup operates, some share logistics, market knowledge and analytics to help the startup grow fast. This support is often helpful for the startup in its nascent stage and growth phase thereafter. Hence, depending on what additional benefits are offered, picking the right investors or VC firm can be profitable for the entrepreneur.
- Control and autonomy of decisions
Funding a startup with own money, i.e. bootstrapping, gives the entrepreneur the freedom of strategising the business, choosing the level of effort so that they can be flexible about their goals, as and when required. But when a VC firm comes into the picture, it takes over a big chunk of the company’s share, against the money invested. This, in turn, gives the VC firm control over the startup’s functioning and a say in its business strategies. Thus, the autonomy of the entrepreneur is lost, and often, one is forced to put in more effort and work for longer hours to ensure fast and higher returns. So, relying on venture capital is wise only if the entrepreneur is okay with his freedom compromised.
- Accountability to the investors
Another major concern in the case of VC funding is the entrepreneur’s accountability towards the investor or the VC firm. The entrepreneur is answerable to them for all the mistakes, plan failures, strategy goof-ups and held responsible for the ups and downs in the business. At different stages of venture capital funding process, the VC firm evaluates and assesses the business growth, returns and seeks report, data and information from time-to-time. If this accountability is preferred by an entrepreneur in exchange for monetary support, VC funding can be a suitable option.
Once the entrepreneur has brainstormed and analysed each of these issues and still finds it best to raise a venture capital funding for his startup, they must go ahead. It is then time to decide when to raise VC funding. The right time to pick a VC firm, get the venture capital funding and put the fund to work are often debatable. While some say the right time for raising a VC funding is only when you really need the money, others say that it is appropriate to get into the VC funding process when you actually don’t need it.
Though this sounds paradoxical, still, in a way, both the views are true.
The first logic seems pretty straight. With the downturns of global economic growth, there is a rise in inflation. Hence, a big amount of venture capital funding will take away a larger share of the company from the entrepreneur, along with the autonomy of decision. So, it is logical to not opt for this if one has enough money for bootstrapping the startup. One should raise VC funding only if one actually needs it.
But if the startup idea is something unique and has a huge possibility of earning massive returns within a very short time, investors or VC firms might flock in to offer venture capital investment into the business, even if the entrepreneur doesn’t need it. At this point, the entrepreneur might deem it appropriate to get into the venture capital process and provide secured growth and stability, ensuring higher returns and better profitability in the future during the next stages of VC funding. This is the ideal case where venture capital funding is a good choice, even if the entrepreneur doesn’t need the money.
What Startups Can Do If Unable To Raise VC Funding?
There might be cases when it is not the right time to raise VC money. The entrepreneur may not be comfortable losing control over his own business, the business idea may pertain to operating in a crowded market, or the vision of the entrepreneur may be to build a stable and profitable business instead of rapid developments.
In such cases, it is not the right time to raise VC money. Instead, the entrepreneur can fund his business through his own money or bootstrap his startup. Here, they would be able to retain autonomy over business decisions, choose to take baby steps, and earn revenue and grow slowly and steadily into a profitable venture. But this requires the founder of the business to risk his money, and it is not the usual case.
Hence, the primary factor that decides when to raise VC funding is whether the entrepreneur is ready to get into the venture capital framework. Like the rest of the world, raising a venture capital fund has become a popular source of investment and funding for startups in India.
With the notable success of some of the startups that relied on VC money, venture capital investors in India have clear examples to follow. Depending on different sectors in which the startups are operating, VC firms and angel investors of the country have emerged with specialisations in various fields and are choosing the VC investment portfolio accordingly. Seeing these success stories, many wealthy citizens are investing in venture capital firms to enjoy massive returns, as well as to be a part of the journey to fame.