Looking to Raise Funds? Seek these 5 Things before Finalizing your Investor
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Fundraising is one of the most important activities for any startup during the early stage. You don’t just raise funds from a PE, VC or an angel investor, instead, you marry their thought and working culture. This bonding should be like a match made in heaven. And one must also remember - if the move is not made right, this marriage can also lead to a divorce.
Therefore, even though money is coming, entrepreneurs should choose their investor’s wisely. In a conversation with Entrepreneurs India, experts share their tips on what entrepreneurs should look into their investors while raising mullah.
Entrepreneurs are often so happy to close a funding round that they neglect the much-recommended reverse due-diligence on the investors. Gaurav Chopra, Founder & CEO, IndiaLends feels reverse due-diligence is a comparable process whereby the entrepreneur seeks to validate the track record and working style of an investor.
“This could help you notice if the potential investor has any reputational red flags that may come back to haunt you,” he added.
Additionally, investors with a respectable reputation can facilitate more growth through industry connections and business opportunities. They can also enable future rounds of funding.
Look for a Believer
Finding an investor who believes in your passion and vision as well as startups potential to disrupt the market is crucial for a fruitful relationship.
For AyurUniverse, an online health and wellness portal which recently raised its second round of USD 1m from SL Landani, an Air Deccan investor, it was crucial to find someone who believed in the ancient Indian wellness system, with an aim of reviving it and improving the quality of life.
Vijay Karai, Founder and CEO of AyurUniverse opined, “If the investment firm does not seem genuinely excited by, and appreciative of the business idea it is considered to be a red flag.”
Secondly, it is extremely beneficial that the investment firm to be the experienced in the sector it is investing in. Their first-hand knowledge means the VC/PE is able to add much more value to a startup’s operations as well as mentor and guide them in the right direction.
“An investor should be sensitive to the nature of their role in the startup and its members. They should respect the startup's plans for growth and allow the right person to lead the company. They have to also ensure that they intervene only when necessary,” he added.
What is on the Table?
Many founders make a mistake of seeking investors from funds alone. What they often forget is that long after the penny is spent investor will continue to be involved in the business.
“Many investors are able to help their investee company in making the right market connections which add value to the business. Investors take an active role in companies offering wisdom, insights and productive thoughts. However there is a thin line that divides giving constructive advice and telling you what to do," Ravinder Singh, Founder and COO, 1-India Family Mart points out.
Earlier this year, 1-India Family Mart raised USD 6.5mn from Carpediem Capital.
While on the other side, Anupam Jalote, CEO, iCreate thinks very often during a fundraising exercise, the entrepreneur’s own promoter stake may get diluted down to fairly low levels. This is wherein entrepreneurs should aim to find out if there is a way by which their performance will allow them to earn back some equity stake so that if they deliver on stated milestones – would they be able to get some equity share back.
Furthermore, entrepreneurs ever wish to consider monetisation, they should know when and how will they be allowed to sell part of their equity so that they can get some cash rather than just an increasing value from ownership of their own shares.
“In the case of incoming investors wherein investors have certain rights and decision making authority, entrepreneurs should include these terms and conditions which should be included in the memorandum and articles of association of the company. These documents should detail out the rights of the investors and also capture lessening of the flexibility of the promoter to take decisions,” he added.
Future investment potential
While it may be tempting to accept the most financially appealing term-sheet, it is very important to understand how the investor can help you for your future investment needs. Hence, an entrepreneur needs to gauge how much a fund can directly invest in the future. According to Chopra from IndiaLends following are some of the questions that entrepreneurs should seek an answer for -
a) What is the size of the fund?
b) How much of it is already invested?
c) What is the average investment per company that the fund can do?
d) How many follow-up investments has it done before?
Investment Timing and Exit Strategy
A typical fund has a life cycle of 7-10 years, where fund managers invest in first 24 months in order to have sufficient time to generate sufficient returns for the Limited Partners (LPs) who invest in them.
Piyush Jain, Co-Founder and CEO of ImpactGuru.com advices founders to approach at the right time of fund’s lifecycle to maximise one's chance of securing an investment.
While on the other side, he recommends entrepreneurs to review the exit track record of investors to gauge their ability to help companies conduct IPOs or M&A.
“This will be important when it comes time to generating financial returns for founders as well as other shareholders,” Jain pointed out.