We are all start-ups in our own little worlds and are constantly trying to achieve equilibrium. While the definition of equilibrium could be different for a variety of people, for start-ups it necessarily means the point where the business is poised to achieve plurality from singularity… in all aspects. In its achievement one plans for multiple activities. This activity could be called budgeting. In case of start-ups the ideas are in abundance, but the funds are scarce. It is one issue that doesn’t get the desired attention when discussing fund raise. So here are my few punchlines on the issue:
- Make three separate plans (optimistic, pessimistic and realistic) – Little theoretical but critical nevertheless. While you may have one excel sheet encompassing the future projections, it might be prudent to have three versions of it. There will be haircuts to your projections by the investor. So it makes more sense to have these plans at the back. Based on your discussions with investors present the plan that best captures your future operational performance. Needless to say playing with a single model could be operationally hazardous (experiential learning), and therefore the need for three separate plans. It will be tedious but trust me it will be worth it.
The obvious fact – Always have a backup…especially to business plans.
- The fund raise amount should be based on next two to three year’s operational scalability – Common modelling error is to consume the entire fund raise in the year subsequent to the raise. Fund raise is like a war chest. You keep the funds ready for any expense in future. Even though you may do the practical way of spending when needed, it needs to necessarily flow in the model. Not doing so doesn’t lend credence to your business model and gives a feeling that you haven’t thought through your expansion plans.
The obvious fact – It’s primarily a modelling error so avoid it while you can.
- Do not budget a secondary exit in your projections – Never plan or have the intent of doing so when you are in a start-up phase. As an idea itself its fool hardy to think of promoters exit at the point of Series A equity raise. It might be possible to fund a secondary exit on the premise of its reinvestment by the promoter. But I believe that is more an exception than a rule. As a rule it’s a bad idea to present to the investors because it raises question marks on the commitment of promoters. Instead you can budget for a higher salary which in most cases is acceptable to investors.
The obvious fact – Investors like to invest funds that are focused on improving company’s productivity.
- Do not peg your fund raise to investors’ “sweet spot” – Fund raise will be a challenge if you are a start-up. Even the most compelling of business ideas do not have the ability to absorb a sizeable amount in its initial stages. As much as there is a science and an art to scalability one must still have a scientific explanation to it. That said do not make the mistake of redesigning your fund raise based on the expectation of an interested investor. Investors will have specific expectations in terms of the company’s and the promoter’s performance and they will not take too kindly if you do not achieve them.
The obvious fact – Try to be absolutely sure that there is no disconnect between you and your incoming investor either on the fund raise or on your future performance.
- Do not forget to budget for key management personnel – At the time of transition from a start-up to a professionally run organization you will need people to hand hold you through the process. With your idea and connect in the market you may be able to attract advisors but you do need permanent management personnel. This is primarily because they understand the ground realities. More importantly their contribution and existence has a direct bearing on the performance of the company. Hence, do ensure to budget for quality personnel in your plans. It need not be in the immediate year but definitely in the next two to three years.
The obvious fact – Even with the pace at which the consumers and companies are moving online you will still need quality people to drive the businesses.
I was reading somewhere that investors tend to prefer promoters who have had much experience in failed business. I agree but that must not be construed as their preference for promoters who have made dubious mistakes like the ones highlighted above.