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The Dichotomy of Capital & Investment for Startups



image courtesy - http://www.crederity.com

dichotomy contradictory groups, a division or contrast between two things that are or are represented as being opposed or entirely different. 

This one word "dichotomy" summarizes the views of mentors & speakers on the topic of investment.
This is my personal observation after the SLP - 2013 Pune class on "Valuations & Term Sheet"

I have always personally been a contrarian and fascinated by the dichotomy of things esp in regard to capital money to fuel your startup. Here are various statements made at various occasions when I think about valuation & investments in a fledgling startup. They have been said by various people during our SLP interactions.

  • " An institutional investment at early stage in your startup brings in lot of discipline to your strategy and vision..."
  • "Getting funded at an early stage is a validation of your own business model..."
  • "You should always be raising money, because that is the common denominator that makes your startup run apart from customer payments..."
  • "You will be very lucky to get funded, but then only few ones are the chosen ones..."
  • "You should avoid to get funded and bootstrap as long as you can..."
  • "Money (external) brings in lot of opinions and this brings in lot of distractions..."
  • "Investors are there to make you successful and they would help you in every manner to achieve success. as their success depends on yours..."
  • "Few investors are like vultures, beware of dumb money..."
  • "Bootstrap - even if you have to steal your mother's jewels, if you cannot do that then maybe you are not in the right game..."
& my favorite.. 

" Getting funded is like having a marriage, your are in a legal and strategic bond with your investors that will help your startup succeed et all... "

This last one would scare the shit out of any bachelor Entrepreneur :)

Now, you see when I say "Dichotomy of Capital" what I mean. Imagine the plight of a first time entrepreneur like me who is just trying to factor all these diverse inputs to understand what exactly "GETTING FUNDED" means....

Off-course not easy, but then so is Entrepreneurship - the dynamic world of building interesting products and services, with your own sweat, will, vision perseverance & courage.

But, "IS GETTING FUNDED THE ONLY WAY TO DO A STARTUP? IS IT A BADGE OF HONOR or A BAD CHOICE FOR STARTERS ??"

I think the question we should be really asking ourselves is :

Are we as Startups fundable or not??


Now, trying to think about this question with your own startups will allow us a deeper introspection and then beat this horse to death. Now, note that All startups need money, so either its your hard earned or 3F's ( Friends | Family | Fools ) or its an institutional money, but still this questions holds true and good.
I think there are 5 elements which determine this which have come out post our discussions & views at SLP.

1) THE MARKET

Quoting Mukund Mohan again that in a combination of market + team, the large market mostly ends up in the winning side. The question to ask is not that how great / powerful / usable your product is...BUT how big impact it can have by reaching in the hands of many...
Great example is Airbnb - rent your empty spaces across the world for easy accommodations  Done - the market is so huge that you are done even if you build a decent product and figure out rest during the journey.

2) THE PROBLEM YOU ARE SOLVING

Quoting our very own Starbucks coffee enthusiast Dhiraj Khot, if you are in a business of building cars you are doomed once the world runs out of all fossil fuels?? ( Maybe Tesla would save the day...) 
But what if you are in business of transferring people from point a to point b. That is an ubiquitous problem. If you solve an ubiquitous problem that you build something that can last.

3) A CUSTOMERS READY TO BUY ---> NOW

Customers categorize buying behaviors in three categories -
  • shit 
  • good to have 
  • need to have
Now, these parameters are subjected to market conditions etc. A MOOC ( think Cousera or Udacity) is just for the likes of Stanford & MIT's today, but with the falling Student : Teacher ratio its not far that this will be a mandate in every educational enterprise in India and across the world. 
Every teacher has a mandate to publish his/her courses online for wider student adoption anytime & anywhere. Think of this day and think of an opportunity the MOOC product companies will have with this huge market.

Being in the need to have now bracket makes your product / service always in demand.

3) PERSEVERANCE & VISION OF CO-FOUNDERS

This is where the vision, belief, confidence & vision of the Founding Team comes into picture. Maybe they are seeing something which you do not see as an investor but you believe in the individual and team to pivot | persevere and pull it off.
A very good example was InMobi's Naveen Tiwari as quoted by a VC in our session & how the belief of investors in the individual drove this company to glory and success.

4) SUSTAINABILITY OF SOLUTION

This links to point 2 on the problem you are solving. When you are catering to a NEED and not just solving a problem you have built a sustainable business.

A great example is the companies which are built today on concept of sharing economies like Airbnb, Uber etc. The need is to have solutions that leverage resources of people in this globalized world. You nail it then & there and its going to last for a long innings.

5) ABILITY TO ADAPT

Change is one of the most difficult and most essential ability for an entrepreneur & startup to survive. According to a survey more than 92% companies who were successful with a USD 1 million revenue in 2012 were found to pivot in some or the other manner.


When do I need money ? Do I really need money ? Who do I take money from ? What do I spend on ? How much ? For How long ? 

These are questions which each one of us as entrepreneurs will face, will haunt us and we have to come up with our own answers. But I'll end up with the quote of Mr Rajnish Pal when he said :


It sure does !!!

----------------------------------------- ** --------------------------------------------
Some interesting resources that helped a novice like me understand the concepts of Valuation and Funding. These resources allowed me to explain it to my Co-Founder quite a few things with clarity.

How to think about Valuation

Basics 101 of what happens when someone invests

Why raising seed money in India is tough - 

how to approach seed capital in India 

How does someone value a startup

Hope you have found this post useful. If yes please leave a comment & your views. Would really appreciate the dialogue.

Best
Abhi



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