Before you read this, you should be aware that I am an entrepreneur who has never raised money from VCs. Two of my three companies were bought while we were still closely held. In the third, we were unable to raise money and eventually got acquired before we could raise institutional money. Therefore, if you are looking for advice on how and when to raise money from VCs, I am less qualified than hundreds, perhaps thousands of entrepreneurs who have raised funds from VCs in India.
That said, there were times in my entrepreneurial career when I asked my mentors when is the best time to raise money. Some said that the best time is when you do not need it, and that made a lot of sense at the time. On the other hand, some said I should not raise money unless I needed it, and that made sense as well. However, some of the people who gave me the first advice were the same as the ones who gave me the second advice. And both times, they made sense. There are times I have said the former to an entrepreneur seeking my advice and the latter to another entrepreneur, or to the same one at a different time.
How can two exactly opposite things make sense? Welcome to the world of entrepreneurship. Here’s how!
We are currently in a time when actively raising money is going to be perceived as a sign of weakness. Liquidity is low, markets are volatile, there is a backlash of the hyper-funding of 2014-15, the pendulum is swinging the other way and the momentum is in the opposite direction. It is taking longer to raise money and you have to part with a larger portion of your company for the same money as the same time last year. Trends suggest it might get worse. If you know money is not as cheap anymore, why would you expose yourself to that environment unless you absolutely need the money? And if it is true that you do, investors would obviously have leverage over you and are likely to dictate terms. Therefore, do not raise money unless you really need it. If you need it, force yourself to come up with a plan in which you don’t. And if you still need it, be prepared to dilute.
When markets were up, up and away in 2014-15, there was a lot of new money and liquidity floating around. Tech companies were getting listed, stocks were flying, and money from entrepreneurs and investors was flowing back into the ecosystem. Investments were chasing entrepreneurs. Money was chasing ideas. Lesser so now. It is more likely that investors over-allocated last year and are waiting to sell off some shares at the right price, than investors who are still chasing deals with a fear of missing out on the next big thing. If you are one of the rare startups that is on fire right now and you are being called upon by multiple investors competing to invest in you, it might be worth raising money at your own terms. Because if you do, it would be a bigger competitive advantage than the same time last year. Besides, today’s non-event of raising money quickly would mean you are over-achieving the target and saving time and effort of a planned event in the future. Therefore, raise money when you do not need it.
Hopefully, this context helps understand how two exactly opposite things can both make sense.
Most entrepreneurs reading this would fall into neither category above. Most startups will neither be desperate to raise money nor will they have a bidding war escalating in their parking lot. Then what should their fundraising strategy be? For what it’s worth, my answer is don’t raise money right now. Build your product, build your team, build your user base, build you revenue pipeline, build whatever it is that is most important to your startup right now.
Last year was about putting your mouth where the money was. This is the year of putting your money where your mouth is.
Author: Kashyap Deorah
Kashyap Deorah is the author of recently released book – The Golden Tap, the inside story of hyper-funded Indian startups. Kashyap is a serial entrepreneur who has spent the last 15 years in India and Silicon Valley. During this time he has started and sold three companies. He is an angel investor in over 20 companies in India and Silicon Valley. Deorah founded Chalo, a payments app which was acquired by OpenTable in 2013. Prior to that he founded Chaupaati, a phone commerce marketplace, sold to Future Group in 2010.