Essential Truths About Startups and Venture Capital Funding
Truths About Startup Funding — 10 Myths
Startup funding is a very desirable thing. Every startup wants themselves to get funded. But about this funding there are a lot of myths which we will see one by one. Startup would not work without funding. To some extent, it is valid but at an extent it is invalid as well. So, here in this article we will look on all the myths which are extremely important for you to know, before you start searching for funding for your startup.
If you are running a startup or you are planing to start-up then there is one thing that you think is important that is Funding.
Because until startup does not get funded, money would not be there, until money is not there, product would not be there, until product is not there, customers would not be there, until customers are not there, revenue would not be there, until revenue is not there, there will be nothing.
Myth-1 — Every Single Startup Can Get Funding
Every single startup can get a funding. It is a big myth, a big lie.
It actually feels like the moment you get an idea about startup, someone comes to your door and will say, “Here is our funding. We are here for you. You are the person who is late, we have been waiting ever since.”
This is not what heppens. Not every business is fundable. If we are talking about the funding then we are here discussing about institutional funding — Venture Capital funding what we call it.
Not every business gets Venture Capital funding.
Simply Why ?
Because VC funding is made for certain class or for certain startups. That is, High Growth Technology based Startups.
What does this means?
This means, if you want to start a shop or you want to start a small business. So, quite possibly it is evident that you would not be able to get a Venture Capital funding and you should not search for such funding.Because you would not be able to get it.
It will be good for you if you take a loan for small or medium enterprise loan. Take a loan from friends and family, take a loan from bank if you have some profit. But Equity Funding or Venture Capital Funding is very difficult.
Myth-2 — Investors Only Care About Founders And The Startup
Investors loves the startup and their founders. This is not true to some extent but at some extent it is true too.
I would not say investors do not love startups or founders. Because ultimately they are giving their money to them.
But it is necessary to understand what is their fundamental reason of existense, and that is that these investors went to a big investment company, it could be pension fund, it could be university fund, it could be big big companies, it could be high net worth individuals and by going to them they told them that your are putting your money in stocks, you are putting your money in FD, you are putting your money in real estate. Some of this money should be invested in startups as well. Because there is risk in startups but returns are equally high. So they say, alright take our money but you have to give us a minimum returns because we are giving you this money.
So these investors have their own investors, they have their own people who invest in them, from whom they have taken money from to deploy and give to startups.
So their biggest responsibility is for their investors.
It is almost like, if I am lending some money from my dad and invest in Reliance stocks. So, that means I like Mukesh Ambani but till some extent. But my bigger responsibility is towards my dad because I have taken money from him and Mukesh Ambani better make my money work because if the reliance stock does not work the way planned then my dad will be upset and Mukesh Ambani is not nothing to me.
That is very important myth to break.
Myth-3 — When A Startup Is Funded, The Founder Becomes Rich
When company is funded and its valuations is increased then I am rich now.
If you are a founder then your company’s valuation is not making money for you. That wealth is on the paper.
Yes, you own the company, it could be 30%, 60%, 70% or how much ever it be. If you have become a big company, you have become unicorn, it does not mean you are getting the money because when there is a funding then the funding is for the company, not for the founder. The money is credited to company’s bank account and it has to be used for company purposes. So, the company becomes richer, since you are the shareholder of that company as founder, your paper wealth increases.
But the result is not at all that you will get money or you have become richer. It is just paper wealth and not real money.
Myth-4 — Only IIT & IIM Graduates Gets Funding
Only IIT and IIM students get funding. Others are fools. By the way, I am included too. But that is not the truth. There are lots of successful founders in India, in fact the top companies of India, from valuation perspective does not have IIT or IIM graduated founders.
But there is a need to understand that why does IIT and IIM graduates gets funding ofter? Because that is true.
That happens because they have been through certain experience, because of which — may it be exposure, may it be opportunities, may it be network, their ideas surfaces easily in VC world. Also, in VC world there are more people from IIT and IIM background, so there is a natural affinity.
But it will be absolutely unfair to say, that investors only invest in IIT and IIM founders. They invest only in team, idea, market, opportunity, and if that is something that thay are impressed by it does not matter what is tha founders pedigree, with how much marks that founder graduated, which was his college. None of that is material.
What is more important is the conviction of the founder, the strength of the idea, the strength of the product.
Myth-5 — Once You Get Funding, You Do Not Need To Raise More
Once you get a funding then done. Now that you have got funding, you do not have to do it again. Now just run the company.
This is a big myth.
How the VC world works ?
For this we first need to understand how the VC world works. Now these are private companies, which means these are not listed in the stock market. This does not mean you can buy by their stock price.
So one VC funded your startup and they funded on certain valuation. Now it is their responsibility, as they have taken money from investors this valuration of the company should increase. But a valuation of the private company increases when ? Only then when that startup get another valuation.
This means, once you get a funding, you almost sign up to continue raising the money for the rest of the existence of the company because that is the only way you give return to the investor.
A business of the investor is to invest in your business and earn some return from it. That return is only possible if some other investor take their place. Which means if you have taken funding once then you implicitly agreeing to take funding every single time. And that may not be something that you want to do. It may not be something that you wish to sign up for.
But it is necessary to understand because myth that funding should be taken only once is quite prevalent.
Myth-6 — Money Will Solve Every Problem
Once we get the money, every problem will be solved. Just the money was the only thing remaining rest everything was solved.
Money does not solve anything.
Money enables you to solve things, the problems.
Once you get money then yes, may be you will get to hire big team, may be you will get to do marketing, you will get to making investments, you will get to buy a better softeare and better technology.
But that does not mean that everything will be solved. You have to make the product. You have to sell that product. You have to earn the customer’s approval. None of that is something that money can solve for.
There are a lots of examples where even after raising money businesses could not succeed. In fact, 90% of the businesses failed. And it is only because the product did not work, not because they are not able to raise money.
So, money does not solve everyting.
Myth-7 — Fund Raising Is Easy Or Is Difficult
Fund raising is easy of very difficult?
None of two, fund raising is a responsibility.
If you are a founder, so just like it is your responsibility to create the company, create product, sell it and generate profits, likewise it is your responsibility to generate cash in your company. Whether it is by startup funding or VC funding, debt funding or loan or the best way, the revenue that you are making through consumers, can be used to fund the company. But whatever the case may be, funding is a responsibility, it is necessilty because money is needed to grow a business, to run a business.
It is neither easy nor hard. It is almost like saying that it is easy to make a product or hard to make a product. It is necessary to make a product. It is a necessity, it is a way that you conduct.
Myth-8 — Funding Is Free Because You Do Not Have To Return It
Start-up funding or VC funding is free because this money does not have to be returned, because it is an equity, but that is not true.
While it is techincally true that if God forbid your start-up is unsuccessful then whatever funding you have raised, you do not have to return it unlike loan which you will have to pay off.
But psychologically, my friends, it is a burden, it is a loan. That becomes a moral responsibility, it becomes something that if you are unable to pay back it hurts you. It hurts you really bad.
So, physically financially it may not manifest itself but psychologically and emotionally, my friends, it eats you up and it is not an easy thing to be in middle of.
Myth-9 — You Will Get Fuding Basis Of Market And Idea Only
If idea and market is there, then that is enough, you will get funding on this basis.
No. Idea and market are not enough.
Team is very important and your personality as a founder, your conviction, your confidence is very important in this team. It is good to hear that you get funding on the basis of idea and market, it does not matter where the founder is from, how he speaks, what he speaks.
In life, many things are implicit, many things cannot be told or made to understand, but they are visible in action. A founder who speaks confidently, has a strong personality, is a master storyteller, he creates a dream to show how big the start-up can be, how much it can progress, they will find it easier to raise money as against a founder who is under-confident, he does not have total control on what to say, does not have the confidence with which to say it, all these things matters a lot.
Myth-10 — Your Ownership Is Your Wealth Distribution
If we have taken that funding then in whatever price I may sell it, it will be 100% mu upside. Because if suppose, I have 40% of the company and going forward sell this company for 10 million dollars, then will get 4 million dollars.
NO, one of the biggest myths is that whatever is your ownership your wealth distribution will be same. No, there is a thing called Liquidation Preference.
Liquidation Preference means that, whatever money that investors have invested, whenever the company sold, firstly all that money will be drawn out. And then the rest of it will be divided in the ownership.
So, if the company is sold for 10 million dollar and investors have invested 3 million dollars, then first of all they will take back 3 million dollars, rest 7 will be given in the ratio of ownership to you. So, your company ownership does not translate in to your wealth distribution. Very big myth.
Closing Thoughts —
Friends, there are a lot of happy misconceptions about funding and especially in press, news, twitter, there are a lot of praises for companies that are raising millions of dollars, founders are becoming insanely rich and all that is correct but nobody talks about all these facts. Nobody talks about all these truths and it is very important that if you are a start-up founder, if you are a employee in a start-up, the you must know about all these truths, understand them well.
And most importantly ask yourself that — Whether this is what I want to sign up for or this is not what I want to sign up for ?