The Art And Science Of Achieving Sustainable Growth For Fund Raising Gun for value, not valuation
By Ratna Mehta •
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One key question which keeps all entrepreneurs awake at night:"How do I fund my venture, how do I fund growth, how do I fund further expansion?"
While there have been innumerable success stories about bootstrapped startups, funding provides an edge to scale up, quick and big. We have seen the "fast and furious' phase for some startupssuch as Byju's(educational content company), OYO(hotel aggregator platform) and Zomato(a food aggregator platform) which have achieved hockey stick growth.
At every stage of the venture, the right funding partner is a key determinant of success. And to attract the right funding partner, entrepreneurs need to focus on two important pillars:strategy to build the business andexecution to achieve what has been strategized.
Funding will follow if these two pillars are cracked.
Since 2015, Indian ecosystem currently has around 40,000 active startups, and only around 3200 have access to funding. Also, with economic cycles and events like the pandemic, the funding avenues dry up, inducing tougher competition amongst startups to gain traction from investors.
The private capital pool (PE+VC) has increased in the past three years; however, the volume and value of new fund commitments have seen a dip.The year 2020 further saw almost 30-40 per cent drop in funding.
Source: VCCEdge
Additionally, we are also seeing a change in the pattern of investing. While traditional businesses in financial services, healthcare and IT have seen funding support, the future of funding is getting diverted to solving key issues/bridging gaps through incorporating latest tech like AI, robotics in areas such as healthtech, retail, fintech and edtech.
What do investors look at?
Investors analyse a potential investment using the "4 Ms model':market, model, management and money.
Market
The top-down approach: Investors are keen to "catch the next bounce'—sectors where there are growth and tailwinds. Emerging areas post the COVID scenario would be those segments which adapt to the new normal: remote accessibility, affordability and adaptability to changing needs of customers. IoT, ML, AI, deep-tech are hotcakes, as these technologies are changing how we perform everyday operations. While robotics is changing how logistics functions, agritech is changing how farmers are able to monitor their farms on a real-time basis and telemedicine is making healthcare affordable and accessible for the rural and semi-urban population.
Business model
Sustainable and scalable: Most investors look for gross margin positive, scalable, flexible models that can operate on low fixed costs and play on volumes to grab customer traction early on. Investors also look at the firm's execution plan to achieving forecasts and targets, strategic partnerships which can be leveraged, whether the firm has understood the consumer psyche, are the products modelled as per consumer preferences and future market needs and how likely is the firm to ride that future growth wave.
Founding pillars
The management:Management team can make or break a business. And thus, quality of management is key for investors, more so for startups. Their commitment, motivation, how they complement each other and their past experience and accomplishments are a few things investors evaluate.
The materialistic accelerator
Money: Funding requirement, the risk-sharing metrics (founder vs investors, investors vs co-investors), and funding utilization plan are some of the key aspects that investors look into before deciding to delve deeper into evaluating a venture.
Entrepreneurial checklist
There is no standardized template of"Do's and Don'ts' carved in stone for building a successful business. Entrepreneurship combines the best of art and science. However, following some guiding principles and adapting them to the situation, can definitely help entrepreneurs make their journey more effective.
Startups need to remain relevant as they movefrom the early-stage hustle to sustainable growth. While the ways and means may differ, but below are some ways to achieve a sustained competitive advantage:
Product innovation:Successful businesses need to ride on the next wave to remain ahead of the competition. Having an ear on the ground to understand consumer behaviour is the key. Case in point: startups in edtech, fintech, e-commerce sectorand healthtech have proliferated because the entrepreneurs were able to anticipate the need gap and customize products to solve existing problems as well as reach new audiences.
Cost innovation:Process innovation and supply chain innovation become essential when competition becomes denser. In sectors where product innovation is limited, cost innovation becomes the winner.
Go-to-market innovation: In a country like India, where the infrastructure is still playing catch-up, reaching the customer is a huge challenge. Around 70 per cent of the population lives in rural areas and to reach these customers, it is important to think of new go-to-market strategies.
Diversification: Ability to diversify and pivot to the need of the hour is an important flexibility that can help survival during tough times; and aid growth when you identify peripheral areas to play.
Good business led by capable management will always find a funder. But one gospel truth which entrepreneurs need to remember while funding raising, "Gun for value and not valuation".
