Importance of the Right Founding Team and Scalable Business While Raising Capital
You're reading Entrepreneur India, an international franchise of Entrepreneur Media.
The startup economy is booming across the world impacting various sectors. Closer home, there are stories of successful businesses that have disrupted conventionally-driven industries and business models, generated job growth and wealth for many stakeholders. Many successful businesses have often resorted to raising external capital, either through debt or equity, in order to rapidly chart their growth story. Investment decisions are subject to intense scrutiny on multiple levels, with the key intent to recover the expected return on investment.
Without external capital, certain startup businesses might risk stagnation or lesser-than-potential growth. Some startups are successful in capital raise, while some others are not. The fundraising process can be slow and take a long time to complete. It is imperative to delve into some of the most critical aspects that are considered by institutional investors prior to committing capital.
The lack of market need/fitment and a dearth of working capital being the top reasons for startup failure, research reports suggest that a wrong founding team is the next biggest reason.
Founding and running a startup can get extremely stressful at times either due to short-term liquidity concerns, competition or market demands. With a solo entrepreneur at the helm, it requires intellect and emotional maturity to manage these challenges on a day-to-day basis. Not having a sounding board internally can be detrimental when having to take key decisions. While I’m not advocating against solo entrepreneur-led businesses, however having a founding team is quite helpful on multiple accounts. With 2-3 co-founders with complementary skills in leadership, strategic thinking, operational excellence among others, the onus of business growth rests on the team rather than an individual. If the founding team share mutual respect and a strong passion for the business, it will boost the business growth further. In short, the sum of all parts is more likely to be greater than one.
The founders’ hustle, willingness to work in the trenches and go-getter attitude is important as well. While staying true to the core values of the business, the founding teams must possess the ability to battle odds and achieve the desired goals. Mistakes are bound to happen, and the founders must be willing to learn and adapt. Obstinacy can slow poison the startup, and hence it’s important that the core team must be open to new ideas as needed. Other factors that might be considered are the track record in the same industry, prior entrepreneurial experiences, etc.
In addition to the founding team, there are other factors that impact the scalability of any business. Scalability can be evaluated across aspects such as the market opportunity, solution, technology, competition, customer adoption, finances, investment deal terms among others.
It’s crucial for investors to look at the problem being solved by the business and the associated scale of the opportunity. The size of the total addressable market and the serviceable market is indicative of the solution’s reach and scale. The nature of the market opportunity will define the types of investors who are likely to be interested in. Conversely, the nature, stage and location of the start-up’s business should direct efforts in a manner to achieve a greater degree of alignment with the investment thesis of the target investors.
Scale-up capital, which is relevant especially for businesses that have a solid minimum viable product (MVP) and a demonstrable product-market fit (PMF), can be governed by the nature of early adoption of the solution in the market. Having two or three marquee customers early on is a good indicator of the readiness of the solution to scale across the market. Investors willing to deploy capital at early growth stage companies pay very close attention to this aspect.
Instead of starting a business which is a derivative of a similar business model or from one in a different geography, entrepreneurs should be recommended to solve problems that arise out of the personal experience. Furthermore, it is vastly important to understand the sustainable unique advantage demonstrated by the business. With strong defensibility against the current or potential competition, the business stands a greater chance at securing investor capital. Technology-powered businesses need to defend their turf by securing intellectual property with appropriate patients.
Capital management is crucial at all stages of the business. Has the founding team been efficient in deploying capital in the past? This question becomes quite pertinent when external investors are considering investing in the startup. If the business appears to be at a stage that does not look commensurate to the previous rounds of funding, it can alarm the investors. In addition, investors look at understanding the rationale for the use of proceeds such as into product development, sales development or marketing.
Lastly, for any transaction to go through, the terms of the deal are extremely important. It is important that startups don’t give away too much equity, special rights or control, however, they may choose to relax on some of these terms especially for strategic investors. Such investors not only bring capital but also valuable business connections that can open doors to customers and future investors.