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To fund or not to fund – that seems to be the question which frequently confronts entrepreneurs spearheading angelbacked start-ups. The dilemma is justified too. After all, most of these ventures have already managed to secure decent seed investments from angel investors and are just about on the verge of achieving balanced operations. So why take on more investments, and all the added pressure it entails?
The answer to that lies in growth. Even if an angel-funded start-up has achieved comfortable operations and decent market traction, there is a very high possibility that the venture is restricted to one or two key geographies and has a low brand visibility in its chosen market segment, which might be inundated with similar ventures. As such, breaking the mould and going after scale can be extremely tough and time-consuming without an injection of fresh funds. This is where venture capital investments come in. The injection of fresh investments can help them replicate the success their business has achieved on a much larger scale and become a major industry player.
Consider the current investment scenario for a moment. Out of 100-odd start-ups that apply for funding, hardly one or two ever secure the backing of VCs. This means that, at present, almost 98-99 percent start-ups are rejected by VCs on one ground or the other – the concept might not be novel, the team behind the start-up might not be experienced enough, or the revenue model might not be sustainable at scale. The investment landscape has achieved a new normal after the prolific initial investment spree. As a result, most VC firms now will only risk their money on ventures that demonstrate the maximum promise and have proven their ability to succeed on a micro level. In such an investment situation, the fact that members of the VC community are interested in a particular start-up and see the venture as a part of the elite 2% not only validates its business approach and operational model, but also the start-up’s potential to scale up to the next level of its evolution.
But access to deeper pockets and the validation of their approach are not the only benefits that angel backed start-ups gain when going for a VC investment. In addition to the capital which gives a major shot in the arm to a start-up’s operations, securing funding from VCs also unlocks a great opportunity for business networking. Entrepreneurs gain a streamlined access to industry connections that have been painstakingly built by their investors over the years.
Start-ups and entrepreneurs chosen for VC funding also gain a chance to be mentored by some of the leading names within the industry segment that they are operating in; this helps them refine their business models and add greater value to their end-user services/products. As a result, their start-ups benefit from the myriad business opportunities and are able to achieve greater operational growth and scale.
Another reason why angel-backed start-ups should opt for VC investments is the possibility of a much better exit, which is something that most entrepreneurs and angel investors associated with a start-up venture pay keen attention to. Startupexits are very common in the industry – entrepreneurs might be looking to move on and take up a different challenge, while angel investors might be looking to make a profit on their initial investments. Securing a funding from well-connected VCs gives a start-up opens up the next level of exit for the incumbent investors. Moreover, the growth that VC funding entails also opens up the possibility of either a successful IPO, which can really boost the start-up’s growth, or a sale to a larger company within the same industry at a decent profit. This makes VC funding a win-win situation for both angels seeking profitable exits and ventures scouting for opportunities to make their way into the ‘big league’ and establish their name in the industry.
This article first appeared in the Indian edition of Entrepreneur magazine (August 2016 Issue).