Avoid raising too less at the seed stage...

6:12 AM Suvir Sujan 3 Comments

Seed investing in India is garnering a lot of interest. From angel networks to seed funds to individual investors, there is a lot of interest in funding entrepreneurs in India who are starting out. Professional Indians who have made money globally and in India over the last decade are now wanting to allocate some of that towards this high risk and potentially high reward asset class. While this is very good for entrepreneurs looking to do their own thing, one must really understand the capital needs of a company and understand what is the likelihood that there will be follow on capital available if needed once this capital runs out. Let me give you an example. A very solid technology entrepreneur who has build a strong product in the internet space had approached me for financing earlier and I mentioned to him that this space is very difficult to scale beyond a particular limited size due to market restrictions in India and therefore it is unlikely I would look at this company for financing unless he can demonstrate that he could expand the scope of this product offering to cover a larger market opportunity and that potential customers would be interested in that expanded scope. Since he was a really solid guy, there were many angels willing to write him a cheque. My opinion is most angels in India dont really pay attention to how big the opportunity could be and are happy to write a cheque hoping that they will make something if they like the entrpreneur/technology thinking that they will sell out to someone someday. So this entrepreneur raised usd 50-100k from a few angels. 6 months post the financing, he had a few paid customers and now decided that he would like to go for VC funding as his angel capital would be running out soon. When he approached VCs, he got the similar feedback I had given him - market is too small to build a large company and unless there is proof that he could build adjacent products that he can monetize or enter new markets, it will be tough to raise financing. A few months later, he ran out of cash, his angels didnt want to fund him anymore since they were scared they would lose money since the VCs were not interested, and so the entreprenuer had no choice but to close down the company. In this case, had the entrpreneur raised usd 500-700k, he may be in a different place today. Moral of the story - Raise enough cash to get to a milestone that will attract follow on capital or allow the company to be self-sufficient, assuming that you may not have the capital yourself to keep funding the venture yourself. If you are unable to raise enough cash at the seed level to get to the milestone, then may be better to rethink whether you want to start the venture with sub optimal cash. If you are rational about why you need a certain amount of cash to get to a milestone, most angels will understand this and fund the company so long as the cash requirements are not absurdly high.

3 comments:

Harry P said...
This comment has been removed by the author.
Ravi Trivedi said...

Suvir - You raise a very good point, about looking at seed stage financing as a bridge to next milestone.
My own experience has been that Indian startups sometimes raise too less because -
1) They want to reduce dilution in early stage.
2) Culturally, I feel there is a mindset of cost cutting orientation, and making the dollar work, which sometimes leads to different mindset. (not true will all startups).
3) The funds out there focus on the $ amount they can provide, and so entrepreneurs start fitting their plan to that vs. looking at how they reach the next milestone for raise

snehaln said...

At the same time, one wont like to raise more, given that she might go for something far-fetched. A ***wale entrepreneur suggested raise twice your think you will spend, coz in most cases you got your estimates wrong.