Chapter 7: Fundraising in a startup

Published on Feb 19, 2022

Fundraising has become one of the important aspects of running a startup. After having spent months in this process, we can confidently say fundraising shouldn’t be for the sake of raising money. Then what is it for? It should be done to address crucial aspects of your startup without which the startup cannot survive.

Didn’t get it? Guess I’ll have to be more clear. Funding is one of the aspects of a startup. The other & most important things include team, product and revenue/traction. You could do fundraising to address your sales channels, improve your product & so on, doing which will take your startup to the next level.

There are various ways to get money to your startup like debt financing, equity issues, crowdfunding, working capital-based loans and so on. The type of financing you choose depends on the sector you are working on, the stage you are at, your targets for the future and the type of people you would like to associate with.

There are various things that happen when you are raising funds. Here we would like to put out a few experiences of ours at Zodhya while raising funds from private investors aka angel investors.

One thing I like about shows like Shark Tank is they have fueled the idea of entrepreneurship. Wish you could convince someone within 5min. Unfortunately, real-life fundraising doesn’t work that way and it is for the better. Think of it as an interview for one of the most important positions in a company. It revolves around the skills you have, your attitude towards work, your experience and background and the passion you work with. Do you think the employer will be able to make a conclusive decision within 5 minutes with such details without knowing you beforehand? So is fundraising. The investor would like to know a lot more about you, your passion, your idea and the path you want to execute before taking such a decision.

Also, when you are thinking about the investor, it is not just the money he/she brings in but also thinking about having someone to work with you for the next 5 years or more. You never know when you go up or down in a startup. Will this person provide feedback/ support irrespective of the situation you face? Also, look closely at the terms with which such money comes in.

Here are a few instances with investors we faced:

Investors asking for fast returns — some investments would require time to realize returns depending on the way your business operates. A decision must be taken considering the worst-case scenario and see if you could still give that return.

Unmatchable demands - There are few investors who ask for complicated terms, a mix of debt and equity, a paycheque every month, appointing their close ones with no business relevance and so on. This is a set of investors you should be wary of.

Buyouts — Some investors might ask for a buyout of your idea. We didn't budge into it. It all depends on your founding team's vision, the path you would like to take and the offer on the table.

Also, here are a few things we learned from our experience:

The investor should be aligned with the passion/ idea you work on. If not it will be a huge struggle on how you carry out the business.

Termsheet offered by the investor doesn’t mean money in the bank. The investor could still pull out anytime before the deal goes through. So, plan things accordingly.

Have a timeline to fundraise — Having a fixed timeline to raise funds works but it may not work always, which was in our case as well. Had to meet 90+ investors over 1 year. It depends on the sector you are in (is it in the Boom stage?), the number of investors available in this sector and at what stage are they investing.

Terms to look at — When you receive a term sheet, you can compare it with a version available online and see if it is standard enough. Do consult a lawyer or CA to understand the terms in terms in detail. Also, closely look at terms like pre-emptive clause, vesting.

Also, the success of your fundraising depends on the investor you are approaching. Look at the sector the investor is into, their interests and past investments before you approach them. Investors with different intentions and interests may not invest in the startup.

Written by Zodhya

About Zodhya

We are Zodhya, a start-up that provides AI-based tech to reduce energy bills and lower emissions for commercial buildings and industries.