Tasting success in fund raising

Usain Bolt. 2016 Olympics 100 metres Gold Medallist, among several other wins. One of the most globally recognised athletes today. Heard of Trayvon Bromell? Not many of us would offhand. He ran the final race at Rio on August 14, 2016 along with Bolt. The separation between them was just 0.25 seconds. The line separating posterity and obscurity can often be just so thin. Same is the case with angel or early-stage fund raising for entrepreneurs. There is very little that separates those that get funded and those that could not in the early stages of the start-up.

We analysed the number of positives and concerns from the assessment made on the various investment proposals received by Keiretsu Forum, Chennai Chapter. The average number of positives and concerns for start-ups that received investment and those that did not receive investment show that the average count difference between the two groups is just 2. This shows that if the start-ups that did not get funded had managed to increase the number of positives or reduce the concerns even marginally, they would have been successful in their funding efforts. A classic case of so near, yet so far.

So how can start-ups increase the chances of getting funded? Our research points to three important factors.

Investors receive several proposals from different sources – such as events and competitions, directly through the website, or through other investors and networks. The chances of getting funded dramatically improves if the entrepreneur is able to approach the investors through a reference rather than approaching directly. Data from Chennai Angels indicate that 92 per cent of the applications that came through a reference got funding. None of the applications that were directly received through the website could get funded. Message is clear: All things being equal, investors prefer to invest in deals that they get through a known reference. Start-up founders should bear in mind that reference to an investor can be as important as the investor.

As they saying goes, the proof of the pudding is in the eating. Prospective investors get a lot more comfort not from PowerPoint slides, but by the presence of actual customers for the product or service. Data from Chennai Angels showed that among the invested, the ratio of post revenue to pre revenue start-ups was 86:14. That is much of the start-ups had some amount of revenues at the time of angel investment. The same ratio for the group of start-ups that did not get any investment was 54:46. Having customers enhances the confidence of the entrepreneur and also gives better comfort to the investor. Having a customer first can thus be a good route to achieve success in fund raising.

The decision making of angel or venture investors is a very complex process. They look at a variety of factors in their assessment process. Given the heterogeneity among investors, the priority that each investors give to the different factors also differ.

However, an analysis of the data on the assessment of proposals made by members of Keiretsu Forum, Chennai showed that out of a list of 18 different factors, the following emerged as the most commonly cited concerns by the investors: Business model and entry barriers, business processes, operational efficiencies, market size, and margins and profitability. Entrepreneurs should ensure that these aspects are well addressed in their business plans.

Like it or not, it is a winner take all world. In start-up fund raising, the dividing line between those who have succeeded in getting capital and those who have not is thin. Awareness of what factors influence investment decisions can help many more entrepreneurs successfully raise capital. Some of the critical factors that improve the odds of fund raising is to approach the investors through a reference, focus on early revenues, and overcome the common causes of rejection. More importantly, start-up founders should realise that funding landscape continues to change by the day. Investors and other ecosystem players expect more from the start-ups that they would like to support.

For example, data from Axilor show that more than two-thirds of those selected for their Winter 2015 accelerator program were in the concept and prototype stage. Whereas for the Winter 2016 accelerator programme, this proportion was just 18 per cent and more than half of those selected were in the launch stage. With more and more start-ups being founded, investors are getting choosier. It doesn’t matter whether you're the lion or a gazelle-when the sun comes up, you'd better be running.

The writer is Professor, Department of Management Studies, IIT Madras and International Research Affiliate, Coller Institute of Venture, Tel Aviv University, Israel.

COMMENT NOW