How to Get Funding for Your Startup

Starting a business from scratch can be incredibly daunting. If you’ve already made the decision to start your own business, pat yourself on the back for having the courage to step into a world of unknowns. While many believe that passion for what you do is enough to keep you going through the difficult times, there are actually several factors that determine the success or failure of a startup. 

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If you’re reading this, you don’t need to be reminded that you need capital to start a business. Trying to make a profit through your startup without capital is like trying to drive a car without fuel. No matter how hard you try to shift your car into the right gear, it simply will not move! Since most of us don’t have stacks of cash sitting around, we have to find practical ways to gather the resources we need to get our business up and running. 

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Before I jump into giving you practical advice, some of which I have learned the hard way, I must reveal a caveat. These tips that I present here are primarily based on “normal” circumstances which do not involve a global pandemic. It is essential to be aware that any type of pandemic, economic recession, or anything else that affects the world would influence the approach and practicality of fundraising. You would have to adjust your fundraising strategy accordingly. 

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With that out of the way, I would first advise you to look at your financial statements. If you have already started your company, you may be making some revenue. This is vital in keeping your company going. If you have this going for you, then keep doing what you are doing. Depending on your availability and resources, it will also be helpful to take on some other projects over and above what you’re doing, which is one of the most effective ways to fundraise. 

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There may be times when you need to accelerate payments for some of the invoices to support the operations of your business. In this scenario, you could consider liability through government support and alternative financings like bank loans or other FinTech companies. You can also fundraise by Angel, VC, and PE, and there may be other options depending on which sector you’re in. 

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In the early stages of your start-up, you are probably making projections about your financial needs, and you may wonder if you should bootstrap first and see how it goes before raising funds or if you should prioritise fundraising. There is one primary question you should consider when making this decision: Is this a company that you want to take external equity for? 

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Once you take the equity, there is no turning back. Depending on the price of the equity, you must ensure that you maintain a certain level of growth in order for the company to drive up the valuation and make it worthwhile for your early investors. But you should also be aware that not all companies are suitable for fast growth. It all depends on your specific market context. 

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If you decide to take external equity, you can fundraise or look for companies who are willing to invest, even if the market happens to be going through a rough patch. So, fret not, because capital is still available for early-stage companies. The key is to start the process early because you don’t know how long it will take for you to raise your desired amount of capital. 

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“Investors don’t invest in a dot. They invest in a line, which means that you must be able to show them a growing trend.”

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So engage them early so they can see your growth and support you through the process. This will be essential to keeping the investors on your side and building their trust in you and your start-up’s potential.

Fundraise Whether You Like It or Not

Fundraising may not necessarily be everyone’s cup of tea. While some may be energised by socialising and selling their company to investors, others may be intimidated by the mere thought of it. Although you can’t change how you are wired and what makes you uncomfortable, there are times when you just have to step out of your comfort zone. This is one of those times.

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Your approach to fundraising depends less on your personality and more on the sector of the industry. To put it bluntly, you have to fundraise whether you like it or not. There’s no doubt that the process can be pretty demoralising and challenging, but this is simply part of the job that you’ve signed up for. So, you have to deliver if you want your start-up to be successful.

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As far as your approach and strategy to fundraising, the primary aspect you should consider: the urgency and need for capital. In some sectors where the speed to raise capital is extremely important and competition is stiff, there is an urgent need to raise capital quickly. This was the case for us when we first started Funding Societies in 2015.

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Our initial thought was to bootstrap and raise capital much later. But we soon realised that the window for us to build a successful company was relatively short. If we missed the window because we didn’t take advantage of the opportunity, we would lose out to the market and eventually become irrelevant. So, we decided to raise the capital quickly.

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While this worked for us based on our circumstances at the time, this strategy of fundraising may not necessarily work for you. If you’re pioneering a new business model that has relatively low competition and there is less urgency to raise capital, then you can take your time and bootstrap for the time being. You know what works best for you and your company given the resources that you have. Trust your instincts.

Although you most likely know what is best for you and your company, some founders have made the mistake of taking time for granted. Especially if you are new to the market and are uncertain about the nitty-gritty details that go into creating a successful startup, then you may not be aware of how much time it takes to set up your company. 

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The bottom line is: Don’t underestimate the time that it takes to fundraise. It is best to start the process earlier than you’d expect to so that you have time to do your research and gather the resources you need. Although it can be insightful to seek out founders who have raised the round that you are considering, also be equally aware that the requirements for each round may differ.

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Just as you wouldn’t walk into an exam without studying the right material, similarly you shouldn’t walk into a round and expect to come out of it successfully if you haven’t first done your research. Sure, it is important to make a good first impression, but it is more important to have the humility to ask about the requirements for each round. 

Matching Up

Create a list of potential investors for your startup in order of preference. Work your way up to your “dream” investors, so that by the time you make it to the top of the list, you are more experienced and confident in your approach. 

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It is also essential that you stay abreast with the current market so you know how to go about fundraising. In late 2019 and early 2020, quite a few companies have been caught off guard because they were unaware of new criteria. The overall capital markets have shifted from a growth-focused investment environment to a profitability-focused environment. And there’s no knowing how the market will change in the near future. 

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Unfortunately, I haven’t seen many founders who have successfully preempted this well. If you find yourself in the same boat, don’t beat yourself up. Just be sure to do your research and stay updated with market trends and criteria for investors for your future ventures.

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When seeking investors for your start-up, the goal is to get to the point where investors truly want to invest in you. Investors have a good way of making you feel wanted, but don’t count your chickens before they hatch. You can be sure that investors are genuinely interested in what your startup has to offer when the cheque hits your bank account. This mindset will prevent you from getting ahead of yourself. 

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• Reference Checks

If you find yourself in the fortunate position of having three or four offers, start by conducting reference checks on the funds. Spend a lot of time speaking to the companies who have already received investments by the same investors. The key to these reference-check conversations is to ask for specific contributions to get to the root of how the investors could potentially support you in the near future. Most founders will not speak ‘bad’ of their investors, so it is better to get in touch with the founders themselves by InMailing them directly to ask about the investors’ impact in their time of need. Using the STAR interview model, but in a more tactful manner, will be very helpful.

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You probably also have some angel investors on your list, and reference checks wouldn’t apply to angel investors because they are most likely your friends or family who simply want to support you. When it comes to reference checks, you are essentially assessing the reputation of the individual in terms of integrity and helpfulness. A good angel investor may at times be more helpful than other sources, so choose wisely. 

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The chemistry between you and the investor is almost as important as what the investors can offer you monetarily. When you choose an individual or company to be your investor, you should see it as a marriage, not a date. You will most likely be involved with the investors for an extended period of time, so make sure that you actually like the person. Ask yourself if a partnership with this potential investor has other strategic benefits beyond cash e.g., help in setting up tech team overseas,  advice on leadership promotion and crisis management. 

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• Red Flags

Furthermore, when making the final decision about which investors to choose for your company, I usually consider two key aspects. First, the investor must understand your business well enough to ask the right questions. If the potential investor seems to continually ask basic questions,  some of which you may have already answered, then you should be concerned. The investor will not form conviction if they don’t fully understand your business, which means that they will not stick with you during tough times. 

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Second, carefully examine how the investor carries themselves during the negotiation stage. I usually put forth tougher questions upfront in the negotiation because how the investor carries themselves during the negotiation stage is reflective of how they will be as your shareholder. In a negotiation, there are must-have and good-to-have points. I typically would be concerned if the investors are uncompromising on every minor point without valid reason or consistent principle. This part is just like dating. If someone treats you terribly while dating, your relationship will only go downhill after you’re married.

**Carefully Consider Corporate Venture Capital **

One of the common sources of funds is corporate venture capitals (CVCs). There are arguments both for and against this decision, but it all depends on your context. In the early stages of our company, we did not take CVCs because we were worried that no other similar firms would partner up with us. However, we recently accepted an offer from an Indonesian bank only because we were confident that other banks would still be open to working with us, given our established competitive advantages.

 

So if you have an offer from a company or a bank, ask yourself if a partnership with them would hinder potential partnerships with other investors. If this company can help you get to the scale that you need and give you a good headstart without barring you from venturing out after you have reached your goal, then this partnership could be meaningful. 

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Timelines

While I wish I could give you the perfect timeline for fundraising and establishing beneficial partnerships with investors, the truth is the capital you need and the time it takes to get there depends on the market and your specific sector. A rough guideline you could consider is to raise enough money to give you enough time to perform with tangible results so that you can raise the next round. 

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It generally takes about 12 to 18 months to show substantial performance. So if your fundraising process takes 6 months, you’re looking at an 18 to 24-month cycle of fundraising. Some of you may be fortunate enough to avoid the need to fundraise, but fundraising is a necessity for most startups, especially to give your startup enough buffer in case the market hits a rough patch. 

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Most companies in Southeast Asia follow this timeline unless there is an urgent need for capital and competitive pressure in the market. In which case, your timeline might look a lot shorter than 18 to 24 months. So, assess your resources and examine the current market climate and projections to determine the most realistic timeline for your start-up. 

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Some founders may wonder where you should invest your money: operational expenditure or capital expenditure. But the truth is, you should have determined the purpose of fundraising before you even started. Knowing your goal will help you determine how much money you need. Yet, you have to be sensitive to the market climate in order to be successful in fundraising. 

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We were fortunate to start our fundraising process ahead of time. Instead of waiting for the usual 18 months before fundraising, we started the process at the 12-month mark. Although we expected 2020 to be a difficult time to fundraise, we have been fortunate enough to receive cash during this difficult period. Whenever you receive cash, choose to invest in the area that will bring you to profitability sooner. 

**High Valuation is Not the “Be-all, and End-All” **

Most founders are mistakenly concerned about receiving high valuation. In reality, valuation is just a marker of the performance of your company at that point in time, based on fickle market sentiments. Just because your company performed well doesn’t necessarily mean that you will get a high valuation. Similarly, even if you perform badly, there may still be funds that want to invest in you. 

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The success or failure of your company is not completely dependent on valuation. I recently discovered the science behind valuation for early-stage companies when I spoke to a VC. When early investors assess the potential of your company, they are trying to determine the price of the dream. Investors must have enough skin in the game without overly diluting and disincentivizing the founders. 

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Valuation is a criterion but it is the least important one to me. I’d rather focus on maximising the probability of success instead of the dollar value of success. The higher valuation you get now, the harder it will be to raise for the next round unless you are very confident that you can deliver the numbers even with potential market shocks which always happen. So, don’t worry too much about valuation. If you are under-valued in this round, with good performance, you will catch up in the next, but not necessarily vice versa. 

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**Choose the Path that Suits You **

For early-stage entrepreneurs, you must realise that there are two primary strategies for networking during fundraising. You can either choose to sell or market your company. Although we chose the marketing path primarily because I’m an introvert, we also had to develop skills to sell. Based on a marketing approach, we did not approach any of the VCs, but we publicised our company enough to capture the attention of the VCs so that they would come to us. 

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In a way, the marketing approach can save you time because you don’t have to waste your time with any VCs who aren’t interested in you. Instead, you can focus on those who are interested in your space. But this is still a risky game to play because there is always the possibility that good VCs won’t approach you or miss you out. Find a balance between selling and marketing that would best benefit your company. 

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Finally, remember that the investors are ultimately betting on the founder. Early on, there is not much growth or performance to guide the investors in their decision, so their main focus is on you. Hustling to network, even if it means stepping out of your comfort zone, reflects your perseverance and can help you earn brownie points with the investors.

1 Start Fundraising Early 

Some founders who are just getting started with establishing a start-up may take time for granted.  More often than not, it may be tempting to assume that time is on your side or procrastinate, but this mindset may end up hindering your success. Fundraising takes time, so start the process early so that you have time to research potential investors, enquire about the rounds, and gather the resources you need to raise your desired capital. 

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2 Connect with Founders to Gain Insight

Humility is key in the process of fundraising as investors are primarily investing in you. Seek out other founders who have raised your round so that you are not caught off guard by new criteria that are changing with the times without your knowledge. Stay on top of the game by asking the right questions and connecting with the right people. 

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3 Develop a Strategy that Involves Selling and Marketing 

For some of you, the thought of selling or marketing your business may be intimidating because you may be an introvert like I am. Regardless of your personality, starting a business means that you have to step outside of your comfort zone more often than you’d like. So, find a way to market your startup in a way that is beneficial to your success and efficiently maximise your resources.