Experiment Capital Efficiently before Scaling up!
For the last year, I have met hundreds of smart entrepreneurs with various ideas in the consumer internet, mostly sounding alike - "I want to raise usd 5m and focus on promoting my service aggressively and then go for the larger round of financing in 12 months"
When asked "Why not build the company step by step and focus iterating on a solution capital efficiently?", the answer is that is what the so called Indian Unicorns have done (ie marketed aggressively and negative gross margins ) and hedge funds, corporate biggies have rewarded them for it by financing them with large cheques. Rewarded who? A financing is not the sale of the company. A financing is largely not a liquidity event. Unless someone is building a real company with a path to real profits, a Unicorn valuation may not be worth the paper of its shares. And it is good to raise capital if needed to grow once a business model is proven out capital efficiently first. Expensive experimentation at the early days can prove to be fatal as if it doesn't work, there is no money to manoeuvre into adjacent business models and the shareholders are over diluted to be able to attracted new money at any valuation.
As an entrepreneur and investor, I have seen many situations where a company has exited for a lot less than the last round valuation. My advice to many of the entrepreneurs is that experiment capital efficiently and once there is a proven model, then raise capital to scale.
We have companies in our portfolio in consumer internet where entrepreneurs have experimented with little discounting and have witnessed healthy growth in their business. And have then gone out and raised capital to scale. It can be done.
When asked "Why not build the company step by step and focus iterating on a solution capital efficiently?", the answer is that is what the so called Indian Unicorns have done (ie marketed aggressively and negative gross margins ) and hedge funds, corporate biggies have rewarded them for it by financing them with large cheques. Rewarded who? A financing is not the sale of the company. A financing is largely not a liquidity event. Unless someone is building a real company with a path to real profits, a Unicorn valuation may not be worth the paper of its shares. And it is good to raise capital if needed to grow once a business model is proven out capital efficiently first. Expensive experimentation at the early days can prove to be fatal as if it doesn't work, there is no money to manoeuvre into adjacent business models and the shareholders are over diluted to be able to attracted new money at any valuation.
As an entrepreneur and investor, I have seen many situations where a company has exited for a lot less than the last round valuation. My advice to many of the entrepreneurs is that experiment capital efficiently and once there is a proven model, then raise capital to scale.
We have companies in our portfolio in consumer internet where entrepreneurs have experimented with little discounting and have witnessed healthy growth in their business. And have then gone out and raised capital to scale. It can be done.
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