Is funding truly a game-changer for start-ups?

31 Aug, 2016

Start-ups, like all other businesses, require funds to conduct their business activities. While the initial investment, also known as seed-funding, is generally sourced from friends, family and people who have faith in the idea, this fund is mostly used up in bringing the business from the kitchen of thoughts to the practical dissection table of implementation. Besides being used to run a business, its more pivotal use is to enable the business to take its first and most significant steps.

The next option then is to seek investors with a diverse profile and a successful business track record. Investments from business icons provide a great boost to the funding culture in India. It also helps the ventures invested in to gain significant media limelight simply because of the virtue of the involvement of such big names. Furthermore, access to the tremendous amount of business wisdom and insight of experienced business personalities is an invaluable resource for companies taking their first steps in the real world.

But is funding fully desirous? After all, every time you get funding, you give up a piece of your company. The more funding you get, the more control you dilute. This dilution of control in the form of equity ensures, on one hand, the growth of the company, but may also lead to the loss of control and vision that you initially began with.

The key then is to identify sources which provide the required financing along with developing a shared vision of the company. While your uncle's money does not come with a crippling responsibility, you have to realize that a) it' less and b) it might probably dry up in six months, after which you, and the company are on your own.

There are different stages to funding received by a start-up. Once the initial cash has been raised and the business's engines are chugging into motion, it's time to identify sources for the next, and probably the most important, round of funding. The amount generated during this phase will help determine the future course of action. During this round of angel funding, investors would try to seek out maximum personal benefit from a deal. As a result, companies which show their eagerness to avail funds early often end up with the shorter end of the stick, i.e. more equity distributed for lesser investment. The post-money valuation, which calculates the total percentage of shares to be allotted by dividing the amount invested with the post-investment valuation of the company, is a good benchmark to establish the dilution threshold.

Acquiring funding is a continuous game of hide-and-seek. Some days are spent seeking investors, whilst on others, investors will be throwing themselves (rather their money!) at your business. The factors which determine this include timing, creating constant value proposition and opting for long-term beneficial decisions rather than short-term gains. An experienced investor can easily make out whether the entrepreneurs are on an idea only to make hay while the Sun shines or plan to stick with it till its optimum potential is realized. They spend hours in gauging the entrepreneurs' passion, commitment and business strategies and evaluate both long and short term targets. The idea is to ensure that they have bet on the right horse.

Source, amount, timing and the debt-equity distribution of funding generated play a significant role in determining the survival of a business. A small amount of funding from a famous source can work wonders for a firm's credibility, thereby helping it in building a brand image and furthering its market share. However, a healthy balance of maintaining control over the organization while approaching the right investors at the right time will ensure that a start-up always remains ahead of the curve. While no business is hurt by huge funds being invested in it, all start-up owners must have a clear and defined vision of how they wish to leverage the capital being raised and what they are going to allocate it towards. Only then can funding be a real game-changer for the business and do justice to all the excitement it accompanies.

The author is the founder of e-commerce marketplace ShopClues and online automobile transactional marketplace Droom.

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