Startups: When Should You Look for an Investor?
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Not only is every Association, Government, Company and Organisation actively promoting startup investment, but the lone voices urging caution have disappeared or are ignored in the investment gold rush! In fact, the few voices that persist against startups raising money from investors are ridiculed as people who have become profitable and have not experienced the pain points of startups. Alternatively, they are also dismissed as people who have a product no-one wants to invest in, and thus are a poster case for ’sour grapes’!. First, let us look at the DNA of investors.
The Nature of Investor Money
What everyone forgets is that all investors from Angels and VC’s to You and Me, are no different from Shylock in the ‘Merchant of Venice’. We all want our pound of flesh. And to be honest, there is nothing wrong in this. The problem lies in the narrative. When Bassanio from the Merchant of Venice took a loan from Shylock, he understood the risks involved.
However, today, the narrative for Startup funding is so optimistic and cloaked in the spectre of large returns, that the general opinion is that getting investors is the next best thing to sliced bread! Forget National Governments. Even small regional authorities are dipping into the family silver to attract startups. And some of them have thought out of the box with innovative schemes like E-Residencies, where a startup can use the countries facilities without actually physically being on location. Unfortunately, the situation looks like a prelude to the Dark Ages that was prevalent in Europe a thousand years ago.
The Dark Ages
The Dark Age was a period when there was no innovation and the world went backwards. To even take it as an example of what is happening today could be construed as insulting and way off the mark. Innovation has never been greater. Opportunity also has never been greater across professions. Dark ages? Ridiculous! But the indicators are there. We don’t see them because it is a different world with a different looking glass. The ‘dark age’ in the 21st century will not mean there will be no innovation or the world will go backwards. Instead, the ‘dark age’ is because we are funding the ‘wrong’ type of products in enormous quantities. Ironically, the wrong type of products are the right type of investment grade products every investor is interested in today
A Video showcased o Linkedin showcases 20 great inventions which will make the world a better place. There were inventions like generators that generate power from wind or water without electricity, diesel or power sources. While inventions like this can get investment, it will be more cosmetic in nature. There is no way they can get multiple rounds of funding like an Uber, Oyo, or the thousands of mass-market products that permeate the market today. And the investment narrative has aligned themselves to cater to the mass market because after all, an investor is there to make money.
So, when does a Startup raise money?
Never, if you are passionate about your product. After all the investor is looking at returns and how fast you can give it to him. Your product is just a means to this end. You may have to dilute your product to cater to economies or scale. Or, you may have to move in a direction which is not conducive to the future for your product. The timescale for an investor and for you are different. If they are not, then you are probably in a me-to field or a very specialised area and funding is difficult. But saying this, the problem of startups running out of money is very real. If you have to raise money or close down, you have to look at the investors very carefully.
At present, it is a one-way street. Investors check you out as thoroughly as the FBI. They look at your background, the colleges and schools you studied, references from friends, and the diligence done on your companies are extensive. Even Angels who are more relaxed than VC's are creating Associations and networks for diligence. And, with the world heading towards economic instability, investor funding is expected to be even more selective. Managing investor expectations has always been a challenge. The way the markets are progressing, it looks like it will start becoming a herculean task for most startups.
What are the Alternatives?
There are always alternatives if you are willing to bite the bullet. Don’t get seduced by the Soft banks of this world. They have negatively impacted the investment market to the extent that other venture capitalists have no choice but to follow to the detriment of all. The first few alternatives that should be explored is to look at Plan B, Plan C and Plan D for your product. If none of these is showing results and you have to go to the investors, then look at investors carefully rather than taking the first ones who offer you money. If you have some revenue, then you have a better choice.
Although the offerings are not many in number, there are authorities set up by various agencies and semi-government authorities that offer schemes with debt at very low to marginal rates of interest. There are also SME exchanges and SME sections of financial institutions who offer debt at low rates of interest. Then there is crowdfunding, but that is an even more difficult area to manage. However, if you analyse the effort needed to get any funding from these agencies or investors, you will realise that it would have been better to spend that effort to get your startup towards monetary independence. That is why an investor should be your last port of call.