By Utkarsh Joshi, Principal, The HR Fund
Headquartered in Gurgaon, The HR Fund is India’s first human resources (HR)-focused private investment company with an objective and vision to transform the HR entrepreneurship in India to a more organized and institutionalized industry.
In the journey of any entrepreneur, fund raising plays a very important role. It is important not only because he/she needs those funds in order to fuel the company, but also because it means a lot of other items such as recognition, validation and growth of the business idea. Do note that there is no right or wrong time to raise funds. The entrepreneur eventually takes that call based on the stage of business and the future growth plans. However with a large number of variables at play, the timing of raising funds becomes crucial to the success of any startup.
Many startups choose to bootstrap (referring to running businesses with minimal/self generated financial resources) or work with just some small initial angel investment for a year or so and then start reaching out to VCs. They of course have to face limited availability of resources and deal with the possibility that in the mean time someone can replicate their idea. The pace with which the economy is currently growing and the startups are burgeoning adds to the pressure. This is one of the reasons why many such startups operate in stealth mode. Normally the investment amounts are lesser at this stage (angel investors usually participate in these rounds). Backing by senior professionals/known industry names, helps out initially with clientele and advice.
A key element while raising capital is regarding the equity that an entrepreneur needs to give away to incoming investors. It is never advisable for any entrepreneur to be rigid when it comes to the share holding pattern (the goal after all is to build the business) – but there is no one answer which suits all. If at a very early stage one looks to raise a big amount, it can mean parting away with a huge portion of equity upfront. While you will not be short of money, it usually translates into pressure on the entrepreneur – pressure to deliver and generate revenues. The bigger the amount raised, more the pressure of ensuring success and returns.
On the other hand if the entrepreneur starts with a smaller amount of angel round or family investment, there is a chance that he/she is able to establish some amount of business/clientele, develop the model in some time till he/she goes to market for the next round. In terms of the equity given away, this would probably be a better deal for the entrepreneur, as the valuation of the company grows as the business is established/clients are acquired. Thus for the same amount of capital raised, lesser equity needs to be given away. Of course, this option is more time consuming.
The above is also a very favorable scenario for investors as they are able to see some proof of concept, clients and a possible backing and initial hand holding by senior folks. It also tells them that the entrepreneur is able to sustain the business, is resourceful and is serious about the whole thing (he/she has run the business up to a certain point after all).Of course if the entrepreneur can continue for a longer period without raising capital, he/she gets a stronger bargaining position.The trend of business growth and revenues makes it easier for the entrepreneur to solidly back his/her growth projections.
With such a large amount of PE or VC capital coming into the ecosystem in search of the next Unicorn, the fears of an investment bubble also become real. Aggressive deal making, limited options and the fear of missing out could lead to a lot of early stage ideas with limited proof of concept being funded. But thankfully the investment scenario is cooling down a little and the investors are becoming more patient. Accordingly, entrepreneurs need to reconsider their strategies on when to start raising capital.