Decoding The First Fundraise: 5 Benchmarks A Startup Should Follow

A startup deluge has swept across India, minting unicorns, listed companies and success stories by the day. From the urban populace in metros to tier 2 and 3 populations, startups have dissolved all divides as everyone jumps on the startup bandwagon. 

In tandem with growing enterprises, investments are flowing like never before. Today, founders have a slew of funding sources — venture capitalists, angel investors, incubators, accelerators and banks. In fact, Indian startups raised a remarkable $42 Bn in funding in 2021 across 1,583 deals with participation from 2,487 unique investors. 

As startup success stories inspire a new generation of founders and young enterprises, certain benchmarks can direct a startup to raise funding easily. A typical startup goes through subsequent rounds of funding that consume a considerable amount of time. Ventures that follow the best practices of fundraising glide through the funding process with ease and secure big bucks to their name. 

Practice Milestone-Based Funding

There are multiple stages of operations a startup goes through. By aligning each stage or milestone with the right source of funding, startups can raise appropriate funding easily. 

For instance, during the ideation phase, the amount of funds required is small and can be self-financed or raised by friends and family. During the seed stage, when the startup needs to conduct proof of concept (POC) preceding the market launch, funds can be sourced from incubators, angel investors or crowdfunding. As a rule of thumb, each funding milestone should last two years: a year for building the business and six months for fundraising. This ensures that the startup is never six months out of funds.  

Pre-Empt Funding Requirements

It is relatively easy to raise funds when the startup does not require capital, when the startup is witnessing exponential growth or the revenue is pouring over. Investors find such opportunities financially rewarding and are ready to jump aboard. 

Additionally, founders can also wait for a few months to raise a large amount of capital from choice investors. But when the startup is relying on the funds to ensure day-to-day operations or for continued growth, it becomes harder to convince investors and secure big funding. Consequently, startups should raise funds before the need arises as securing investments can be a time-consuming process. 

Avoid Over-Raising Funds

Startups should never view the investment as a goal in itself, it is a means to an end. Several founders believe that by raising high early startup investments, the startup will become highly valuable. But what they forget is that at the end of the day that valuation money will be spent, leaving the startup highly valued and without any funding. 

To continue business survival and growth, the startup will need to raise capital through subsequent rounds. But due to an inflated value, it becomes harder for the startup to justify the exaggerated valuation and raise the desired amounts. 

Always Practice Due Diligence

Startups should consider due diligence as a necessary evil of the startup funding process. While founders can afford to be unprepared in the initial funding rounds that involve friends and family but in the subsequent stages where venture capitalists and angel investors join, founders must be duly prepared. 

Most investors seek similar information such as key performance metrics, financial plan, customer acquisition strategy, current cash flows or sale pipeline. By preparing the data in advance, founders can ease the fundraising process and save their own as well as investors’ time. 

Assess The Investors And Their Funds

Finding the ideal investors is a laborious and time-consuming process that most startups don’t have the time or resources for. An average founder reaches out to at least 20-30 investors before closing the funding round. Nonetheless, it is crucial to vet potential investors as they will be involved in the decision-making process of the startup. 

Founders should look for investors who align with their vision and have a suitable investors’ fund. For instance, investors with a large fund will expect a larger exit and hanker after the coveted unicorn status. But investors with a smaller fund will easily accept a modest exit. 

Building a startup is hard and funding a startup is even harder. The majority of startups fail within five years of inception and those that last have a remote possibility of hitting the unicorn status. But between the few billion-dollar giants and the densely populated startup graveyard, is a place for a definite and viable startup success story. By following the best practices of fundraising and avoiding common pitfalls, founders can turn their vision into reality and create companies that touch and transform millions of lives. 

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