Generally, every business will have their financial ups and downs. So, ‘sooner the better’ is the best time to raise money for startups in India, as the economy and business favouring factors are becoming day-by-day unpredictable. Start-ups need funding, even if their business model is meeting the financial targets and growing in double or triple digits, as companies always need reserve money for unforeseen hard times. But, start-ups should plan precisely on how the funds will help in increasing their profitability and then opt for fund raising. Following are a few tips on when should a start-up opt for funding:
Tip #1 High valuation
When a start-up is growing rapidly with profitable returns from potential customers and has enough cash flow, the start-up can get a high valuation. With the high valuation it is easier for the start-up to raise money, as the valuation of a company is a critical component for the investors. Here, “strike while the iron is hot” is the best policy, i.e., opt for funding while the venture is still profitable.
Tip #2 Scaling
Start-ups have to scale in today’s competitive world to retain their market position and have an edge over their competitors. When a start-up foresees huge market potential for their products/services with a conducive revenue model, it is time for them to expand their business and grow aggressively. With the right business plan for scaling, they can opt for funding, as investors always view new sales as a sign of primary growth.
Tip #3 Just before achieving a major landmark
When a start-up is about to achieve a major milestone, they can attract the investors by promising the impact of the successful achievement of the major landmark E.g. launching of an innovative prhttp://www.gartner.com/newsroom/id/2610015oduct. Giving the investors the message that, once the major milestone of the start-up is achieved, it will attract many other new investors, as they will be more convinced with the start-up’s product/service, revenue model and business plans.
Tip #4 Soon after achieving a major landmark
Even after achieving a major milestone, start-ups can attract investors based on the potential of their new accomplishment. As the new accomplishment takes off, it will portray the predicted success rate of the new product/service and its huge revenue potential and at the same time attract new investors.
Tip #5 Anticipating cash flow issue
When a start-up is foreseeing a cash flow issue within their next two quarters, then it should raise money immediately, irrespective of the valuation of the company. Here, survival is more important than control or dilution of the company.
Tip #6 Credibility
Start-ups can also opt for funding, even if they don’t need it, as it will add credibility to their whole venture and help them in their hard times. Funded companies are highly credible and trusted by customers and also help in garnering potential talents.
Tip #7 Business risk
Start-ups can opt for funding even when they want to take a well-planned business risk. Here, start-ups need to insure their funding and then go ahead with their business risk on trying whether a new product or service is going to be profitable in their target markets.
Lastly, remember that investors will always study the market opportunities, the start-up’s innovative ideas and their business model before investing in the start-up’s venture, irrespective of the claims made in the start-up’s pitch for funding.
About Author: A graduate from IIT Kanpur, Shashwat Kumar is a Partner at Khetal & Agrawal Advisors, and has successfully closed many transactions in IT and technology domain thereby making Khetal & Agrawal Advisors as one of the most sought after Investment Banking firm for mid-sized technology entrepreneurs.
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