How do I fund my Startup?

Most startups today are launched with only one objective in mind “Getting Funding”. Let it be seed capital or venture funding, Series A or direct equity, it’s a rat race to get funding with no horizon to give returns to investors. Many finance professionals are perplexed with businesses shifting focus from product sales to getting funding. Raising own funds and infusing own equity has taken the back seat. Making news by getting funds from an established house has become the dream of every startup. Becoming a “Unicorn” is a dream come true for any startup. Valuation of businesses is being done ignoring basic accounting guidelines and all this is leading to a practice of funding based on expectations and presentations.

If you are a owner of a startup and are looking to join the bandwagon, then, there are a few dos and don’t’s to trump the funding scenario. These steps in initial days of conceptualizing your idea will take care of getting the best valuation for your idea.

The first step is to start with a detailed concept note. Most businesses struggle to put their thoughts on paper and are in hurry to launch the product in the market for some instinctive advantage that they seem to assume they have. Writing a concept note will give shape to the business that you plan to have.

Next step is to form a team that shares your vision. Most startups commit the mistake of starting the business with only one expertise. Eg if you are a software engineer, you would start the business with like-minded developers without adding any finance expert in your team. This is the costliest mistake one can make in starting your own business. Having only one line of vision while starting may result in you being blindsided later on in the business.

Next step is to make a preliminary business plan and a beta product. This would be to make a proforma cashflow, income statement, product specifications, target market identification and their related costs. These should be projected with utmost detail to ensure a game plan is in place to navigate the business to eventual success. There should be adequate research in shaping the business and predicting costs of doing anything and everything you plan to do.  The Business plan should predict a business cycle of atleast 5 years. The Market research done inhouse or externally for your product should form a integral part of the business plan. Explain the gap in the market you are trying to fill and how your product/ app/ solution or service plugs it.  When a business plan is documented make sure it becomes the DNA of your startup. If you are spending any money, which in initial days will be your own, it should be as per the business plan. Review the actual spend with predicted spend every month and document the variance. Document the difference in spend and in revenues and record the reasons for variance.

This documentation of business plan and recording its variances will help you prove your prospective funding partner that the product is performing per plan or outperforming it, the commitment that you as a business owner have to follow systems and also shows the prudence in use of own funds. This later translates into faith that borrowed funds will be treasured by your business.

It is important to ensure that you stick to your plan and not of your funding partner. When funds are invested by a funding partner they bring in much more than just their money. Depending the source you have approached for funds the way your business is handled varies. It can be a known uncle who puts in money and advises you to pitch the product to his golf buddies or a fund house which directs you to change the nature of your product to match more of your competitor. To provide any such unwanted dilution of your idea, draft a detailed funding contract. Read the fine print. Understand from a professional what are reasonable controls and what are not. If we have learnt anything from successful startups is that the entrepreneurs need to stay true to their busines idea. A finance partner should be given freedom to monitor not to intrude.

Judicious use of borrowed funds is what separates a successful startup from a failed one. Expenses like extensive marketing campaigns with full page advertisements just to increase brand value without any addition to your business numbers, should be avoided. Most startups forget to provision for the most important cost for the stability of their businesses- Salary. Judicious use of such funding will make you reach a level where you can claim a valuation that you rightly deserve.  Don’t forget the age old principle of borrowing ratio and leverages. Considering the attraction in startups today, funding may be readily offered but you should evaluate the interest rate or IRR carefully before accepting any investment.

Do not get into the structure of offering ESOPS to your valuable employees in the initial days. This can cost you a great deal when your structured funding partner comes on board. Dilution of shares and control of your business is very easily possible when such ESOPS offered are not inline with long term strategy of the company.

As a Professional I firmly believe that funding should always be the last option. Generating funds from sales should be your primary goal.  Keep working hard because your discipline will ensure great success of your business.

Article by :
CA Saransh Dey
LL.B, B.Com
for comments, suggestions or discussions: Saransh.s.dey@gmail.com