Raising the appropriate amount of capital is key

3:48 AM Suvir Sujan 1 Comments

Many times, I run into Indian entrepreneurs who want to raise less capital because they dont want to dilute equity in their company. They feel that they could raise less money initially, cut corners to make the capital last, try and build some traction, and then go out and raise further capital later. Sounds very logical. However the danger with this strategy is that you if don't raise enough initial capital to be able to execute effectively to get some decent traction, raising the next round of capital may become a big challenge!

It is very important to really understand what it will take to take a company from a concept to early growth - people costs, product costs, operating costs, capital equipment costs, marketing costs, etc. It is always good to overestimate costs and underestimate revenues in the early days to really get a sense of cash requirements. More often than not, the best people you want to hire in India will come at a cost that is higher than budgeted. Sales cycles with corporate customers are generally longer than expected. Small missteps in execution can cause unexpected capital outlays.

My advice to entrepreneurs is to raise a bit more capital than you think is required even it is means a little more dilution. The main focus should be on building a successful enterprise and not on immediate ownership levels. Having said that, too much capital is not a good thing either. It can ruin fiscal discipline and dampen the entrepreneurial spirit in a company. The right balance is key.

1 comments:

KB said...

I couldn't agree more... So true in the Indian context where 2nd / 3rd generation entrepreneurs run closely held family businesses.. We come across these all the time.. The business men looking for a "Less for more" exchange..

Not only are they unwilling to dilute much of their equity, but they are even more skeptical of employing professional managers under the advice of investors.

In a globally competitive scenario, if entrepreneurs in India don't "loosen up" (forgive the slang), they are in for a rough ride (If at all they get on the bus!!) .. And THAT is really distressing given the potential we have as an economy..