Fund Raising in the Funding Winter

Most start-ups want external capital to grow their ventures. In the startup fundraising process, Angel investors and Venture Capital (VC) firms are active participants. What about banks? The institution that funds your car loan, home loan, and personal holidays. Would they not be great investors for startups? The answer is NO! Banks may be right for conventional businesses but have limitations in funding start-ups, and if you are a start-up founder, I would advise you to not include banks among their target investors.  Banks may probably give a loan, but why would you want to begin your start-up with the burden of loan repayment, when there are so many other things to take care of?  

I hear you asking – what about government? Today there are several government agencies and policies that support start-ups. Let’s get it clear. The primary role of the government would be to create a policy framework and incentives, and not directly fund businesses. There are simply too many mouths to feed for the government. Education, Social welfare, Health, Police, and so on would continue to be priority areas and direct funding for start-ups would only be a trickle. Governments do fund, but most often, the quantum is too little and too late. My suggestion therefore is, to take it if it comes, but don’t depend on it.

Once we set aside banks and government funding, the primary players left on the stage are the top investors in India, comprising angel investors and VCs, for fueling the growth of startups. A question that invariably pops up in many forums that I have attended recently has been the contraction (either seen, predicted or crystal balling) of these funding sources in recent years. Is it possible to raise funding at all under such circumstances? Here are my 2 cents (well 3 points actually!):

• Funding winter significantly affects the bigger rounds rather than the early rounds. So, if you are looking for pre-seed or seed stage funding, consider “business as usual”, well almost. If you think that you would not be able to raise funding, you would not be able to. Thousands of angel investors are continuing to invest and many of them are “rain or shine” type of investors, i.e., they are passionate about supporting entrepreneurship irrespective of winter or not. Identify and target such “rain or shine” investors

• Adapt. You fasten seat belts when a flight encounters turbulence. On an extremely cold day, we wear another layer of protective clothing and carry on. Similarly, master the art of fundraising to suit the present circumstances. Opt for smaller rounds to maintain your momentum.

• Business and economic cycles are getting shorter. For example, when everyone expected the COVID pandemic to affect start-up funding in Q1 of 2020, the contraction lasted may be for a quarter. Immediately it bounced back to levels that were never before seen. If winter is here, spring cannot be farther. Do you believe in your idea and the impact your start-up would create? Then you must sustain the optimism. I believe, the gloom will lift far quicker than many think it would take. Hold on to it, rather than abandon it.