How to Raise Capital for Your Startup
Financing your idea can be a challenging part of your entrepreneurial journey. There are numerous methods to get seed money and as many instances where they are best suited. An Investment Manager helps you make the right decisions to ease the way for you.
Raising seed money for your startup is a bit like hiring a new employee. Before hiring you need to make sure that their skill sets and values are aligned with those of the company. Like any employee, money raised also has certain characteristics and strings attached to it. For a startup, money that can be raised or hired can basically be characterized as debt, equity or grants. Before knocking on doors to raise capital, a startup entrepreneur needs to understand that the source of funding will define their probability of success, scalability, and the long term relationship between the venture and the founder. In Nepal, despite recent efforts to build a vibrant entrepreneurial ecosystem, sources of early stage capital are still anemic. Financial institutions that provide debt hardly invest in the early stages of a company without collateral.
Even if the entrepreneur has the luxury to put in collateral, the high startup premium and floating nature of the commercial interest rates make the cost of debt extremely high. This either makes entrepreneurs reluctant to take loans or in the case of borrowing – interest paid is so high that it limits the flexibility of future cash flow to contribute towards the company’s sustainability and scalability. Considering the current debt finance situation for startups from financial institutions, Nepali startup entrepreneurs should start looking for alternatives and arrive at the right combination of financial alternatives suitable to them. There are four different routes an early stage entrepreneur can take to finance their venture.
Self Finance Your Venture
Boot strapping – defined as self-financing your own venture — it is not going to be as easy or as exciting as financing your venture with external sources but it obviously can be both financially and intuitively rewarding in the long term. For early stage capital, entrepreneurs can tap in to their personal savings to pay initial bills. Another option could be to continue your full time job or take up a freelance project and work on your startup activates after working hours and during weekends. This will be challenging; your social life – both virtual and real will literally wither but it will help you pay the bills. Bootstrapping also gives you the freedom and flexibility to run your business your way and lets you keep control of your company. It also gives entrepreneurs the flexibility to pivot their business model, which is often required in an uncertain environment where startups flourish.
2Fs – Family and Friends
If you don’t have deep pockets or personal savings to finance your own startup then it is better to take money from people who trust you and your half baked idea. When taking money from family and friends, it is important to be as disciplined as you would be while taking money from an external investor. Ask for low or zero interest loans rather than equity from them. People who know you might not demand for sophisticated and stringent business and financial planning as a commercial investor would, but they do expect to get their money back. For aspiring entrepreneurs in Nepal, crowdfunding from friends and family members who’ve migrated to foreign countries can be great resources.
Grants and Subsidies
Grants and subsidies can be resourceful revenue sources. If exploited and deployed efficiently, entrepreneurs have tremendous opportunities to tap into a plethora of foreign aid coming into Nepal. Increasing awareness amongst the donor community and the government that private sector-led growth and entrepreneurship can be a crucial driving force has opened doors for entrepreneurs to utilize grants and subsidies to scale up their ventures. Considering the current “aid” scenario, chances of getting grants and subsidies are higher among entrepreneurs involved in clean technology and agriculture sector. Even though grants are considered “free money”, there are numerous strings attached. Majority of these institutions have demanding reporting and monitoring procedures resulting in entrepreneurs spending lots of time writing reports than focusing on work. In recent years many Nepali entrepreneurs have also started looking for grant financing opportunities beyond Nepal with leveraging platforms like Kickstarter.
VC – Venture Capital Fund
The fourth method is pitching for money to venture capital funds. The concept of raising money from intuitional investors other than banks is pretty new in Nepal. Emergence of business incubators and venture funds like Biruwa Ventures and Business Oxygen have definitely paved a way for startups to seek risk and growth capital from institutional equity investors. The objective of VCs is to inject equity capital in the startup or early stage venture in return to partial long term ownership of the venture. The VCs also provide their investees with hands-on expertise in critical areas like operations, financial management and legal marketing. One thing entrepreneurs seeking VC funding need to understand is that in general, VCs are very choosy when selecting a potential investee. When VC funds are skimming proposals to look for potential investees, they generally look for four vital things – quality and the passion of the team members; top line growth and scale potential of the venture; earning before income taxation, depreciation and amortization (EBITDA) margins and; fourth potential exit routes. VC funds are usually active investors and will intervene in day to day operations of their investee companies to make sure that their capital is being prudently utilized.
While access to finance plays an important role for starting a venture, it is only one part of the puzzle. Starting a venture is essentially an experiment with lots of assumptions to begin with. An entrepreneur starts her venture as an experiment to validate and invalidate the assumptions. In addition to finance, to establish a successful venture, an entrepreneur requires a strong team, a well define long term strategy and most importantly passion for its venture to survive the unavoidable highs and lows on the rough road to success.