Timing is everything. Evaluating the right timing of VC fundraising is significant for any entrepreneur. But many startups raise money just because it’s readily available in the market.
The startup ecosystem worldwide has been expanding rapidly. It has made entrepreneurs eager to come up with creative and original ideas to make it big. Thus, the venture capital who are the driving force of the startup ecosystem, gain too much control over a startup. Before you take the plunge into the pool of funds, it is imperative to reconsider your decision.
Every Venture capital or VC firm checks a few things before investing in a startup – the business idea or growth potential, insured returns, return should be gained within a maximum period of 10 years and further investment can be made in the startup. And the final decision on whether to raise VC funding is in the hands of the entrepreneurs. They are the ones who have to decide whether they actually need the VC funding or if they’re just going with the flow to join the bandwagon of venture capital funding.
Before raising funds, the founder has to ensure that the team as a whole has a vision. They should be excited about what they do. An entrepreneur’s own vision has to grow bigger and clearer. If you are happy with where you are, how much revenue you are generating, it is better to not deal with any investor pressure to scale or sell out. An entrepreneur shall make out what is healthy for his startup and his employees.
If the startup is not making money yet, it would be a risky bet to raise funds and VCs will want a bigger stake in exchange for their support. We all know that cash is addictive. But if you let investor funding become the driver for your business at the early stage itself, it can become difficult for you in the future. If the expenses grow but revenue doesn’t grow as quickly as anticipated, you will raise more funds further diluting your stake in the business. If this cycle goes on, then the startup is doomed.
Here are a few factors that will help you decide what is the right time to raise VC funding:
1. Business is scaling up at a fast pace
Angel investors or VC firms expect high returns to their investments in a startup within a period of time. The startup has to ensure healthy and fast growth and scale-up within that period. If only the startup is able to generate high returns and profits in accordance with the investor’s expectations, will it be able to pave the future growth path. Having a good and well-developed product is key to growth. Once these factors are evaluated and ensured, VC funding is a good to-go option.
2. Retaining control and autonomy
Investing your own money in your startup i.e. bootstrapping, gives you a lot of freedom and flexibility. But after a VC firm comes into the picture, retaining that level of control and autonomy of decision making goes away with the company’s share. Thus, an entrepreneur should raise funds from VCs only if they are comfortable to compromise with a little of their freedom.
3. Additional Benefits of VC
VC firms not only bring money with them but also additional benefits. Be it the experience, services related to a specific sector, logistics, market expertise or new clients, the benefits that VC firms bring can help the startup grow fast. It can be very helpful for the startup in its nascent stage. Therefore, startups should consider the additional benefits that come as a packaged deal along with the funds and accordingly take the decision.
4. Accountability
Once you raise funding from investors, you become accountable to them for your decisions, mistakes and failures. The investors will evaluate and assess the startup’s business growth and returns from time-to-time. If the startup prefers this accountability in exchange for monetary support, then VC funding is suitable.
Some of the startups that have relied on VC money have experienced tremendous growth in sales as well as the valuation, depending on different sectors in which the startups are operating. If a startup wants to raise funds after seeing such success stories, then they should think again. Not every company is Slack, Uber or Ola. An entrepreneur should evaluate one’s business and consider the above 4 points, and only then decide to go for VC funding or not.
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