Funding is a big concern for startups and small businesses. Seed round is mainly used by a startup to begin operations, hire a small team of 5-6 people, launch its product or service, and to rent out a small office. Post this stage, a startup needs more cash to improve its technology, hire more people, increase its customer base and for marketing purpose. VC firms and private equity firms typically lead the series A round of financing. However, the process is not a piece of cake. A startup faces many hurdles before raising this round of investment. Given below is a list of 7 of the most significant challenges faced by a startup before their series A round of investment.
1. Efficient Capital Burn
Many a time, startups face difficulty in having a clear vision of deploying the raised capital. Some may give more weightage to team, some to the traction numbers, some to the market sentiments, while others may look for global expansion etc. Hence, prioritizing comes up as a major dilemma at this level.
2. Scalable Cost of Customer Acquisition
The hardest part of building up a startup is figuring out their customer acquisition cost i.e. what are the scalable channels for acquisition, and how much would acquiring each customer cost. Startups use Paid Search models to acquire customers but these models are also drying up, for these channels are too expensive and have saturated already.
3. Talent Acquisition
Hiring the right people is one of the most difficult challenges faced by startups. At times, despite having invested a good amount of money in talent acquisition and employee training, startups fail to get a good ROI. In other words, putting money in hiring employees sometimes backfires as they fail to yield the result that was expected of them. In such cases, startups have to bear heavy losses.
4. Demonstration of a Scalable Business Model
To have a scalable business model is a mandate for a startup for its growth. However, it is also the most demanding factor that a budding enterprise carries. For a startup to evolve, a business model that has the potential of augmenting profit over time, by fueling revenue while eliminating cost is a must have. But given the current scenario, it is extremely onerous to come up with an idea that fulfills the mentioned clauses, and at the same time is unique and original, for the market has already been taken by hundreds of thousands of startups with their individual business models.
5. Incompetency of the Team
The most powerful asset of a startup is its team. In many cases, despite having a good business model, its execution fails. Why? Because the team disappoints in carrying the plan out. The team is the foundation of a company on which rests the company’s future. There are instances when startups have failed to raise funds owing to the incompetency of the team in executing the business ideas.
6. Lack of In-market Validation of the Product
Lack of in-market validation of the startup’s product is also a reason for its decline. Market validation is the base on which a startup raises its first institutional round of funding series A. It is at times difficult to identify ways of applying market validation to their products which thereby increases time to generate revenue and decreases the chance of success.
7. Investor’s Selection
Many a time, startups face difficulty in choosing a right investor who believe in their vision and allow them to execute that vision without getting in their way. Startups come across a variety of situations in their path towards their goal, and in lack of a resourceful investor, it become impossible to crawl out of these situations.
We spoke to a few startup founders and investors to gather this information, a special thanks to Rajesh Sawhney and Ajeet Khurana for their insights. If we missed out anything, please share your thoughts in the comments and we’ll include it here.