What you need to know BEFORE raising funds for your startup

Photo credit: Fabian Blank

The number of budding entrepreneurs looking to launch their own startup has certainly increased. No longer doctor, lawyer & engineer are default career favorites. Running a startup isn’t still as profitable but it is certainly much cooler! Frankly, there has never been a better time to be an entrepreneur in Sri Lank than now.

Every business requires money. Simple mathematics can tell you how much is needed. But can mathematics alone answer the question, why do you need funding? Your funding need depends on many factors such as growth/scale, marketing, development etc. But, we believe that ‘why you need funding’ also depends on what type of a startup the founders want to build. And depending on the type of startup, the funding source will differ.

First things first, keep in mind that ‘startup’ is a generic word used to describe a new business. Our scope in this vast space is on technology startups and technology enabled startups. The foundation of these startups are very different and is largely defined by an exit, at some point in time. Hence, knowing where you want to go and how fast you want to get there is important. In other words, to launch your entrepreneurial journey, you need to define your point of departure(POD) and point of arrival (POA).

So the first question you need to answer as a founder is what type of startup you wish to build. Below are the 6 types of startups as explained by Steve Blank. We are not going to explain each type, but we will state the obvious by saying that we (and most angel investors, HNI’s, etc.) are focused on the two types to the right.

Steve Blank — 6 Types of Startups

You find tech entrepreneurs running Lifestyle Startups, there is nothing wrong with this! Freelancers who take on projects (web dev) are a prime example. But, raising money from angel investors for such venture would be next to impossible. Unless your angel investors are family and friends. Those who are successful, go on to hire more developers and convert their lifestyle startup into a Small Business Startup. Scaling is still tough as you are limited by the number of people within your startup. If you, however, build a platform for freelancers to accept jobs, this it’s a different scenario.

As a founder, before approaching angel investors or institutional funding, there are a couple of things you need to consider;

  • Open to external inputs-: remember, you cannot and should not just raise money. Your angel investors need to be able to support the business growth. Without their support, guidance and mentoring, it is difficult to build a buyable or a scalable startup. The funding is not to just cover your burn rate, it’s to scale! Angels can connect you with potential customers, partners, etc. but it is your job to follow-up! Set-up monthly update emailer which highlights the good, the bad & and the ugly. Have communication channels on Slack or WhatsApp.
  • Talent over friendship-: the hardest part of running a startup is execution. With that said, investors are keen to see a talented team. If the initial team is comprised of friends and they fail to deliver expected results, you as the founder need to address the situation. You will have to fire your ‘friends’ IF they are not delivering results. Avoid assigning designations based on a friendship. Always have a vesting schedule binding those with interest to at least 3 years.
  • Growth mindset/culture-: the culture you build and adapt play a significant role the growth of your company. Culture at Netflix is a very good source which highlights this. Furthermore, being funded does not mean you should spend your cash lavishly. Always try to keep your burn as low as possible as you grow. Avoid hiring too many people before optimising your processes, two heads aren’t better than one!

Finally, being an entrepreneur (in the above two types of startups) is not a short cut to becoming a CEO. Regardless whether you start your own company or join one, you’ll start at the bottom of the pyramid. The only difference is that in a startup, it is an inverse pyramid!

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