09 Jan 2017 13:20 IST

Starting troubles for start-ups

Want more funds? It’s simple. Ensure that you have a strong revenue model

Every start-up begins with little seed capital before it gets the attention of investors. But to raise the first few thousands from friends and families is not an easy job. With many of the start-ups today being founded by youngsters who have to let go of their first jobs to follow their dream, there may not be much savings to fall back on. So, how do they manage? What’s the challenge in raising funds from VCs? BusinessLine spoke to some of the start-ups that have bootstrapped before the investors took notice of them.

Initial hiccups

Parting with your money and investing the same in a business which may or may not give returns is a risk no family or friend would be willing to take unless there is a solid business model. Narayan Babu, founder of Dexetra, a tech company started in 2009 and that works on mobility solutions, says, “Funding was a real struggle for us in the beginning because there were not many start-up companies in the market then. We only looked up to Tech Crunch (the news platform for start-ups), and online magazines to gather ideas on sourcing the funds we needed. We were completely in the dark, but we started anyway...”

Vivek Prabhakar, co-founder of Chumbak, a well-known brand that sells souvenirs, says, “We had to sell our house in 2010 for our initial capital. Then, two years later, we sought out a partner to help us in our next stage of growth...” In the initial years of the business, founders of many start-up companies work without salaries.

CA Kartik Srinivasan, founder of Vannam, a professional painting company which started in 2012, says, “I started this company alone. I had no money initially; so, whatever little I earned from the initial few contracts was put into the company....I didn’t take any salary for the first two years...”

Getting funds

Getting angel or VC investors to put money into the business is difficult in the initial years, as the business size is small. This is because, one, there is no growth track record and, two, the size of the business itself is small. Vannam’s Kartik Srinivasan says, “In the paint sector, big investors don’t come in as they think it is difficult to handle the unorganised guys in this industry. The VCs want us to prove ourselves first before they lend to us. They adopt this stance right at the outset. But we cannot prove our worth without funds. Today our funding requirements are purely for machinery which the banks are ready to lend but we do get offers from many angel investors...” Similarly with Dexetra’s founder Narayan Babu. “VCs were just setting-up base in India in 2012 when we started up and they were very cautious. We presented our business plan to nearly 50 investors and 10 different VC fund houses before we finally got our break with a VC.”

To get funds from financial institutions, 10 to 25 per cent of the total investment has to be contributed by the entrepreneur. According to the guidelines from the Development Commission of MSME, financial institutions will only support start-ups who are willing to put their own money at stake too. The mandatory contribution from the entrepreneur changes, depending on the industry and the risk for the financing institution. “Coming up with a good selling point for the our business is also a challenge. If the entrepreneur doesn’t present the business case properly, VCs may not be convinced,” says Chumbak’s co-founder, Vivek Prabhakar. “Many a time entrepreneurs get stuck in creating a story that they cannot live up to. To be able to build a business case that resonates with the investor and stay true to your goals as a company is difficult.”

What VCs look for

Venture capitalist firms look for start-ups with potential to grow and give them a good return on investment. These firms are more interested in the future growth prospects of the company and evaluate it on the commercial viability of the products or services, competitive advantage and the management strength. The evaluation is also done based on the unit economics and revenue model. So, it will take a few years for a start-up to get a formal funding from a fund house. Saket Modi, founder of Lucideus Tech, says, “Investors were willing to give us money only because we had shown good track record in revenue growth, increase in client base and we started working on the BHIM app...” Chumbak’s Vivek Prabhakar says, “Funds today are becoming increasingly cautious. They want to invest only in businesses that have sound fundamentals and a determination to be profitable”.

Only if you need it

Start-ups should look at raising funds only if it speeds the process of business performance, say experts.

According to Narayan Babu, founder of Dexetra, “A business can go out looking for investors only if it thinks additional funds can help the business reach its targets in a shorter span of time...”

Entrepreneurs should be focussed on building a sustainable business model rather than hunting for investors to spruce up valuations, says Saket Modi.

He adds that valuations are nothing but market perceptions and an entrepreneur should not get worked up about it. “Valuations are based on market conditions. Xiaomi, when it was launched was considered the biggest competitor for Apple and its valuation was $40 billion, but after issues with the patent, the valuations dropped to less than $5 billion...”