Fund raising
Fundraising, as the name suggests, is the process where a business raises funds, typically used in the context of equity dilution by the founders. Over the past decade or so, fundraising has become a popular option for business to raise money and investors to get better returns. It is a win-win for both and hence has gained popularity over the last few years.
Before approaching investors, one must ensure a viable business model. Usually, during the launch and testing phase, a business is bootstrapped. After the proof of concept, investors are more likely to be associated with a business. The investors on the other hand would like to see a pitch deck, one of the most important document to raise funds. The pitch deck would include the problem the business aims to solve, the solution, the size of market, financial projections, risk mitigation plans etc. One of the most important aspects of business that investors are interested in are the founders and the core team. If the core team does not instil confidence with the investors, the likelihood of investment reduces substantially.
As far as fundraising is concerned, every business is unique and hence needs a customized approach, from idea generation to fund raising. And that is where RBCs “customised template for your success” philosophy helps businesses of all sizes. From creating a business case and financial projections to connecting with investors and pitch days, Racehorse Business Consultation provides assistance at every step.
How does fundraising work?
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The process begins with the reason for the need of funds. The reasons could be many – scaling up, brand building and marketing, increasing the team size, product development, market research, etc.
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Next comes the creation of the pitch deck. The document includes the business and monetisation model, customer segments, scalability and growth avenues, roadmap for product development, projected financials, the core team and so on.
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The next step is to identify potential investors. Not every investor invests in every category or segment of business. For example, if there is a fintech startup, there would be specific investors that would understand the business and hence be more likely to invest. One could use networking events or platforms like Racehorse Business Consultation to shortlist investors. In recent times, social media has also emerged as a very good source for investor contacts.
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Once the investors agree to meet (or on a typical pitch day), it is time for due diligence and answering any questions that they might have. It is critical to know the business very well along with the crucial financial parameters (current and projected) like revenue, EBIDTA, PAT, customer acquisition cost and the justifications for the same.
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The last step before finalising the deal is that of negotiation in terms of the valuation and the debt equity structure of the investment.
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Once these terms are agreed upon, the last step is the actual signing of the agreement formalising the deal between the business and the investor.
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It is also important to maintain continuous contact with the investors and keep the updated about the performance of the business. It is always a good idea to compare the performance with the committed projections to instil confidence and keep them engage for further fund raising rounds.
When should one raise funds?
There is no right or wrong time to raise funds. Typically, the initial prototyping and testing is done using the funds of the founders. Once the product market fit and the business model is established, the investor confidence is higher and hence the likelihood of being able to raise funds is also much better. Premature or desperate fund raising can do more harm than good for any business. Firstly, it adds pressure on the core team to deliver on the financials committed and, in case of higher stakes, might also result in frequent discussions with the investors slowing down the decision making process. With an urge to deploy the funds, one might not be as judicious as one would be otherwise. Also from an investor point of view, the returns are sub par since more funds are being deployed without having the actual need for it. In summary, one must consider the dilution of equity and the ability to achieve significant milestones before approaching investors.
What should the funds raised during fundraising be used for?
Depending on the stage of the startup, the funds can be raised for a wide array of reasons starting from product development, fine tuning the minimum viable product, acquiring new customers and scaling the business, building the team, managing operational expenses, etc. Ideally, the deployment of funds must be in a way that sees a direct correlation with increase in business. This helps improve the valuation and also the return on investment for the investors. It is also critical to have periodic reviews of the financial performance and thereby making corrections to ensure the optimal utilisation of the funds.
How does one prepare a business case?
Business case is like the elevator pitch for the investors. The idea is to make sure it looks enticing enough for the investors to invite the business for the pitch deck. The document will typically be a short presentation or a 2-3 pager document outlining the challenge that the business is trying to overcome, short overview of the product, the USPs, expected benefits, the customer segments, technology to be used, deployment of resources, costs, risks and risk mitigation, revenues and profit margins. It is important to note, that the business case is not the detailed plan, it should showcase the meta form of the information.
Why should investors invest in startups?
In the last 10-12 years, new age investors are looking out for exciting and innovative projects for investment due to it’s higher potential in return and also become a part of a successful venture. Investing in startups offers higher potential returns compared to traditional investment avenues like the stock market, banking bonds, or gold. While these options provide stability and steady returns, startups represent opportunities for exponential growth. Startups often introduce innovative products or services, disrupting industries and creating new markets. This potential for high returns, coupled with the chance to be part of a groundbreaking venture, is a primary draw for investors. However, it’s essential to acknowledge that startup investing is inherently riskier due to the early stage of the companies involved. So each investor should carry out required due diligence, take expert help to ensure that project is identified for further investment.