June 08, 2007

Timing the Fund Raising - by Sanjay Anandaram

Timing is everything. In a startup situation, it is sometimes the only thing! Given that all else is equal (ceteris paribus as the economists like to say in Latin), timing is what makes the big difference. There are two aspects to this. One has to do with “speed of execution” while the other has to do with “executing to schedule”.

Raising money from venture capitalists can take anywhere from 2 to 6 months. It is therefore important to have timing down to a pat. A lot of things can go wrong and they usually will! A few things to keep in mind:

• Don’t raise money when you are down to your last paisa. Start the fund raising process when you have 6 months money in the back and when you don’t really need it
• Plan the fund-raising process and have an answer to the question “when are you closing the round?” VCs will want to know when you plan on closing the fund raising. This is an important question and tells VCs whether you have thought through the process. And if the closing date slips, it tells VCs that you are not on schedule. This can increase pressure during negotiations.
• Make sure that you are making progress on the business front while fund-raising. You must have positive news about the business every time you meet VCs during the fund-raising process. E.g. “we signed two more customers”, “we hired a top class VP Sales”, “we’re launching a mobile marketing campaign next week”.

Research the market and the VCs to make sure that the ones you are talking to have an interest in the space your company is in, can invest the amount of money you are seeking, are comfortable investing in companies that are in the stage you are in and so on. Make sure that you are in regular (not constant!) touch with the VCs you want as investors. It takes time for them to get comfortable enough to invest in your company and the more you can do to facilitate the process, the better. In addition, VCs have their preferences for co-investing and would like to bring in other VCs they are comfortable with. Creation of consortia and syndicates of choice takes time and patience.

If you are on your first startup, don’t waste time on excessive analysis and negotiating to death. It is better to get going with your funding and on building your company than on worrying about a few percentage points. The reason is simple. The longer discussions drag on, the greater the risk. Markets change, priorities change. The investment area may become crowded and the VCs may lose interest in your venture. For example, other similar ventures could get funded by other VCs while you are in discussions. This may reduce the attractiveness of funding your venture. Or, the VCs you are in discussions with may find other more interesting opportunities and therefore lose interest. Or, travel schedules and ill-health can upset plans.

If however discussions keep dragging on and on, you should start worrying and looking around for other VCs. Or, start implementing a plan B.

Therefore, you should develop the ability to move in quickly and close a deal. While it is all very well to deal with amorphousness and ambiguity and a startup offers enormous opportunities to deal with both such situations, there needs to be a clear laser like focus on achieving milestones. You should be the person controlling the pace of the negotiations and discussions and for that you need to have a very good understanding of timing. Timing of when you need the money, what you should have achieved and will achieve over the fund-raising cycle, timing regarding when you want the money in the bank.

What do you think?

Sanjay Anandaram is a passionate advocate of entrepreneurship in India; He brings close to two decades of experience as an entrepreneur, corporate executive, venture investor, faculty member, advisor and mentor. He’s involved with Nasscom, TiE, IIM-Bangalore, and INSEAD business school in driving entrepreneurship. He can be reached at sanjay@jumpstartup.net. The views expressed here are his own.