Venture capital not the only funding option for start-ups

add_main_imageWe are a business incubator hosted at the Indian Institute of Technology, Bombay. Most of the entrepreneurs we incubate are first generation, low on cash, high on optimism and presumably good at technology. Passion, commitment and core expertise are essential ingredients of entrepreneurs, however, many of them lack understanding on what is involved in raising fund from a venture capital firm or an angel investor.

While venture capital can be of tremendous value for start-ups, only a small number of the companies chasing venture capital end up getting it. NextMAds

Venture capital firms themselves raise funds from larger investors for investing in start-ups, and they have to return the money to the investors at the end of the fund life at a certain appreciated value. For this simple reason, venture capital investors are typically looking for investment opportunities in high-growth ventures. Such ventures will offer a liquidity event in next three-four years, which allow investors to exit their investments with a multiplied value. Given such dynamics, before approaching a venture capital firm for funding, entrepreneurs must do a self check to see if their venture profile is relevant for VC investment.

Entrepreneurs, if they want to be taken as serious investment cases, need to do much more than write a business plan. Entrepreneurs need absolute clarity about aspects such as the problem and the solution that they are trying to provide, target customers and its size, approaches to reach them, acquiring paying customers, competition.

Demonstration of real actions on these parameters will make it smooth for them to receive venture fund. Smart entrepreneurs raise just sufficient money to help them achieve a significant business milestone, and so part with a lower equity.

It is equally important that entrepreneurs raise money from investors who also bring other value addition such as industry or market knowledge, strong mentoring for the start-up.

If a start-up’s goal is to build a long-running organisation, it should focus on internal cash flow generation during the initial phase rather than spending time in pursuing venture capital. Start-ups can rely on the famous three “F”s—founders, families and friends—to get starting-up capital. The best source of cash is their own revenue generation for any business. Revenue generation with bootstrapped capital will significantly enhance investibility as also valuation of the ventures.

For start-ups that do not get venture capital, there have been cases of financial or strategic investors investing in ventures. These investors are mostly long-term in nature, and so do not bring pressure on a company to create a liquidity event for their investments. Government initiatives and incubators are some other sources of funds. sixthMAds

Banks look positively at ventures that have either revenue or physical products or are backed by assets.

For instance, several of our companies have achieved a revenue of over ₹ 1 crore in the initial 12-18 months with their own capital, and then leveraged other capital resources like banks or financial investors. A few smart start-ups have timed their spin-outs from technology institutes after completing research and development and product prototype, and thus reduced the capital required for product development cost. For the start-ups that do not qualify for venture capital, it is not an end to their venture journey—if there is no venture capital, there is other capital.

Poyni Bhatt is chief operations officer of the Society for Innovation and Entrepreneurship at IIT Bombay.