By- Mr.Nikesh Patadia (Director, Foreign Investments, Business Bug Consulting)
Fundraising can be an exciting and stressful time for any start-up or first-generation entrepreneur. While it is an essential milestone in the success and growth of the company, there are several ambiguous areas which one needs to be aware of, when looking for a PE investor. Apart from the mandatory processes and documentation, there are a few things a start-up founder or first-generation entrepreneur needs to be prepared for, before closing the deal. These can be listed as under:
1. Measurable growth plans:
While the basis of getting funding is for expansion and growth, it is vitally important to have a quantifiable growth plan in mind before getting an investor on board. While most start-up’s tend to show grand plans and also talk of exponential expansions in the next 5-10 years, ideas that are not backed by practical research and considering risk factors, may lead to an under-prepared presentation. Even after the investment has been secured, this can lead to a bad deal or high-handedness and control by the investor when they see the targeted goals are not achieved.
2. Clarity of purpose:
This is the second most important factor when trying to secure funding or approaching a PE investor. Often entrepreneurs are open to ideas and suggestions from PE investors. However, have a clear purpose and goal for the long term is important to ensure one does not end up overindulging investors and losing track of the entire growth trajectory. Worse, investors are wary of entrepreneurs who are too eager to accommodate the demands from investors or lack a sense of purpose themselves, with regards to their business.
3. Benchmarking valuations:
Self-evaluation and benchmarking are vital before approaching investors. Founders and entrepreneurs need to embark on a market research activity to understand the current scenario, how their peers and competitors are faring and compare their stage of growth to come to a benchmark. In the absence of this, there are chances that entrepreneurs and founders may undersell themselves and may accept an unfair deal. Additionally, incorrect valuation can also impact the growth, the share of equity one needs to give away in case of PE funding, as well as for additional rounds of funding.
4. Background Research on Investors:
When raising funds, it’s quite natural to be trusting and accept to partner with an investor, if all said formalities and discussions go smooth. However, it is very important for founders and entrepreneurs to do thorough background research about the investors, before confirming any association. Once shortlisted, it would be helpful to run a few background checks, understand their other investments and their relationships with these businesses and also study their investment and exit patterns. All of the above would help to not only gain a good deal but to also have a long term and beneficial partnership.
5. Relationships matter:
Lastly, in business as in life, everything boils down to relationships. While technicalities, legalities, and financial agreements etc. can be ensured through contracts, the one on one rapport and relationship between a founder and the investor plays a vital role in the overall growth and profitability of the venture. Hence, when choosing to partner, it is important to pay attention to vibes, mutual rapport, feelings of trust and a sense of genuineness before signing on the dotted line.
While investors can be intimidating and fundraising can seem to be an exhaustive and stressful process, the satisfaction of watching the business scale to the next level can be extremely rewarding. However, in line with the above points, it is extremely important to be humble yet assertive and negotiate from a position of power, without arrogance. Professionalism, humility, and a sense of goal-oriented approach towards business can all be beneficial in not just securing but also effectively managing and utilising the investment one has gained.
