Ankit Kedia is the founder and lead investor of Capital A. Ankit is a second-gen entrepreneur who took his family business Manjushree Technopack to a leadership position in the plastic packaging industry across the South Asia region. Ankit is a passionate angel investor and Capital-A is the formalization of this very passion, into something bigger and meaningful. After all, business begins with a B, and venture capital begins with Capital-A!
It is often said that adversity brings out the best of opportunities – the current pandemic is no exception. Throughout the Indian startup landscape, new launches, fund-raising rounds and other exciting events are taking place almost on a daily basis. It is quite heartening to see such traction in the market even during the course of a pandemic. However, it also merits a discussion on the various aspects of fund raising, and how raising capital could be a double-edged sword for startups that don’t undertake due diligence. There are also several risks associated with fund-raising which most startup founders don’t factor in. Let’s take a look at both sides of the coin.
Advantages of Venture Funding
Faster scalability – Despite a great idea or a good market entry opportunity, bootstrapping could adversely impact scalability especially if a startup operates in a highly competitive domain. For instance, a bootstrapped startup could be overtaken by another one with deeper pockets and the ability to expand faster. On the other hand, when you have venture capital, you can scale up to a demonstratable size and hire the critical talent required to take the business to the next level. There are always going to be ventures like Naukri.com that the founders managed to sustain for a long time before raising capital. However, companies like that had a first-mover advantage and a model that allowed for lean and scalable operations.
Credibility among investors – Receiving investments from venture capitalist firms lends credibility to a business idea and its growth potential. Any investor, even at the seed or pre-seed stage performs a deep analysis of the company pitch, and backs a business only when there is genuine potential. This is not the dot com era when you get funded on the basis of just an idea but one where investment is done on the merit of the prototype. For instance, we can look at Pharmeasy, a company that has consistently appealed to investors. The online pharmacy has raised $975 million in five funding rounds in 2021 itself. Similarly, B2B commerce startup OfBusiness has raised over half a billion dollars in 4 funding rounds this year.
Access to intangible resources – Going beyond capital infusion, funding will also get you an opportunity to network, and get expert mentoring as well as entrepreneurial support from your investors as well as the network in your sector. Legal guidance, tax advice and introduction to other contacts can go a long way in establishing a business with deeper roots which would otherwise be a challenge for a self-managed entrepreneur.
Greater financial flexibility – Institutional business loans or bootstrapping can put a constant pressure of scheduled repayments and generating cash flow faster on the entrepreneurs. Whereas Venture capital gives a longer rope as far as focusing on business growth and product development strategies are concerned. Therefore, if an entrepreneur has done adequate groundwork and has complete clarity of how to handle the investments, raising capital can give greater financial flexibility to scale.
Need for financial prudence and contingency planning
Now that we have looked at the pluses of fund-raising, and agreed that it is a great way for startups to scale and sustain operations, we also need to look at the potential risks involved. One of the biggest mistakes people make is that they create a business plan, come to conclusion about what will work and design a roadmap to reach their goals. However, as the pandemic has highlighted, there are ample unseen, unpredictable and disruptive scenarios that could hit the business anytime. A pandemic, a war, a natural calamity or social unrest has forced businesses to fold up alongside the lack of financial prudence. There are a lot of startups that failed either because they burned cash faster than they should have or they didn’t have a plan B in place.
Plan B or contingency plan is as important as your original business plan in today’s scenario. There could be delays, things might prove to be costlier than anticipated, or you might struggle to find the right talent or vendors. Doodhwala, Local Banya, Zebpay, and Jabong are some of the most renowned names in the Indian startup sector that failed to keep going despite raising a lot of early-stage capital.
There is no doubt that you don’t want your startup to be listed alongside the failures, and that’s why you must maintain financial accountability and spend only when it is absolutely necessary even if you have raised funds. Typically, companies should have a specific reserve that can take care of their cash burn needs for a lean year or two. Another important thing to do is to keep tracking the progress, not only from the increase in ARR perspective, but on parameters like product awareness, quality and customer service etc.
When a holistic situational awareness and strategy with long-term resilience is followed, businesses are able to make the most of the funds raised, and grow better, faster and stronger. As a founder, you are always going to be the best judge, but keeping these points in mind will help you take better informed decisions!