My 2 cents on fundraising for your startup

Recently I came across a discussion where a few newbie founders were discussing fundraise for their startups. It brought back a lot of memories of when I started more than 2 years ago. Since then I've explored many ideas, junked many and worked on a few, pitched 3 of those ideas to VCs and I have been rejected countless times. This post is about what not to do in your early days.

These are some things I wish I knew when I started and I think knowing them would help a founder know what exactly to focus on in the inital days of starting up. Some of it relates to investor behaviour and some common mistakes first time founders make.

There are exceptions to everything in life and you'd easily come across cases where these rules didn't apply. So, let your own judgment and personal experience be your compass.

We need to have a talk about the VCs:

Read between the lines:

"We are an early stage investor. We invest across all stages. We have portfolio companies where we have invested when it was just an idea."

You'll hear this from almost all VCs.

There is no clear definition of what "early stage" is and it seems to be by design. A pre-revenue company is also early stage and a seed investment in a company with millions in ARR is also early stage. VCs/Investors want to keep their deal flow pipeline full and want everyone to reach out to them. They'd have their emails publicly displayed, a "pitch us" Google forms link where you can submit information about you and what not. They keep all their channels open.

So should you, as a first time founder, start reaching out to investors and spend your precious time in pitching them if they respond (in most cases they will not, saving your time)?

The answer is NO usually, and you will end up wasting a lot of your time. Here are some hard realities:

Unless you are one of these: (1) An industry veteran, (2) A founder with a previous exit, (3) A well-known expert in an area or are (4) just amazing at convincing people to give you money, it will be very hard to raise money just based on an idea. You are better off getting your company running and focus on building your product, selling and most important of them all: getting real paying customers OR getting thousands of non paying customers. Hopefully, you've also figured out ways to make this customer base grow quickly.

The social media savvy VC

It has become popular for VCs to be popular on social media. They have their own view on how startups should be run and when and how founders should raise money.

The reality is that most VCs in India have never done a startup of their own. Most of them come from a consulting or a banking background and the best view they have of startups is of watching a startup grow from the sidelines. They've never sat in the driver's seat, yet have a lot to comment on how to best drive a car.

If you were a young cricket player trying to break into the national team, who should you listen to for guidance? The chairman of the selection committee/BCCI or a player like Kohli?

Unfortunately in startups, you should ideally listen to neither because you should know what's best for you.

Bashing the bootstrapped

A recent phenomenon I noticed on social media is a few VCs actively posting how bootstrapping is harmful and how the founding team is wasting their time by not trying to raise money from VCs.

This is probably because a lot of startups have in fact bootstrapped successfully and they continue to grow without outside capital. This is very much a possibility and this should definitely be a thing you should explore. Not all businesses are VC fundable, not all businesses are designed to triple their revenue every month, it may even be something you personally prefer, so give it a thought.

The VC with a target metric

If you've gone ahead and pitched your baby company to an investor already and the investor says : "Not right now, but if the X metric reaches Y value, then we may have a look. Let's keep in touch."

If you've started optimizing your startup for that metric, you have very likely signed a death warrant for your startup. You are building your startup for your customers not the VCs. Do what you think matters to your customers and how you can grow your business, the VC might be correct but you should think hard about what you should do and never blindly follow a VCs advice. They have given an hour thinking about your startup at best, you are giving it 100% of your time.

Some practical advice:

Raise as late as possible

One of the questions you will get asked a lot is: Have you raised money yet? It seems like the general public believes all that founders do is pitch and raise money. This public perception is so far away from the reality. If you have the money to keep going and can execute on your idea without outside capital, just go ahead and do it, don't waste your time pitching or worry about raising money. This is very much possible in software related companies but not so much if your startup involves substantial capex. If your idea involves a lot of capex and you don't have easy access to that amount of capital (family, friends, supporters), either you raise outside money fast or your company is going to die soon. A way around this is to think of ways to cut your capital needs by tweaking your idea or the business model you are planning to pursue. It is in your interest to raise money as late as possible as it will give you the best possible terms. You can raise more, dilute less. Don't show up on the VC's doorstep the minute you have an idea.

Cold emails

Most investors don't really read your cold emails, nor they take the pitches that you send via their website or some online form they have floated very seriously. Unfortunately, the warm intro seems like the only way for an investor to take you seriously. Unless you are already well-connected in the ecosystem, it will be hard for you to be taken seriously. Unfortunately, that's how this industry operates. More on this in the next section.

Power dynamics of fundraising

Everyday new founders in India take a leap of faith and start new companies. There are a lot of companies chasing capital and it is only going to become harder for companies to raise investor money.

The power equation in fundraising is almost always on the side of the investor. Demand, supply. However, the equation could be tilted in your favour, and one of the best ways to do it is to get things growing (user base, revenue etc) fast. That's your north star.

I'd love to know what your experience has been.

Alright, back to work.