Three tips for start-ups waiting to be funded

As the funding winter extends into the new year, founders must be prepared to deal with potential challenges in their fundraising efforts. Seasoned founders adopt contingency planning on a regular basis, and this is something every founder would do well to emulate. 

Founders should have a clear understanding of how long they can stay in fundraising mode, the importance of investor relations and the required flexibility on the target amount. Simultaneously they must be prepared to deal with the probability of each of these factors going wrong.  

To be clear, growth capital raised at the right time is more beneficial than waiting for the right valuation or amount. If capital comes from the right set of investors then the signalling value itself can be a massive boost.  

Let us look at some of the basic ways to prepare for contingencies in fundraising:   

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1. Equity vs debt: 

If the business is generating cash or has enough assets to raise debt from banks/ non-banking finance companies (NBFCs)/ venture debt then the founders should opt for working capital credit without dilution. This, of course, depends on the ability to service these obligations and the capital needed. In most cases, this option partly satisfies the capital requirement in the short term. 

2. Flexibility in deal size, valuations 

Deal sizes and valuations are best imagined in ranges. Founders have to remain flexible, especially if the investor could write a bigger cheque either in the current round or the next. Focus on filling at least two buckets during a fund raise.  

One bucket is filled if there is certainty on closing the current round or extending the previous round with the same terms. The other bucket is filled when an investor is identified as a potential candidate for a larger next round. Filling each bucket involves time and effort in keeping investors warm and, of course, following through with the data needs for investors to make informed decisions.  

An ideal founder would regularly report basic MIS to all trusted prospective investors, irrespective of whether or not they commit to invest in the near future. This also means the company should have clear reporting structures and processes. 

3. One co-founder to lead all investor conversations 

This has become a necessity during a funding winter. While founders are hard-pressed for time on sales, operations, product development, and funding, among other tasks, one front-ender is needed to convey progress with data to investors. This ensures continuity and trust. 

During a funding winte, it takes consistent effort to close deals, alongside an overhanging uncertainty of funds being available on time to extend runway for growth. Hence, founders must devise efficient ways to build and leverage investor relations to get capital certainty. 

(The writer is Director of Research, PrivateCircle)