Calling All Student Entrepreneurs: Tell Us About Your Startup

When Is The Right Time To Raise Funds For Your Startup?

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Jul 15, 2015

[su_dropcap style="flat" size="5"]T[/su_dropcap]The most common question in the startup community is ‘where do I get money to start?’ and in so many ways this is a wrong question to ask. The startup community that we have is very new and it will take time for it to become mature. However, it is important that we have a clear understanding when it comes to funding. After talking to a few aspiring startups I have found that we have quite a strong misconception about funding. We think money is the only limitation that we have on our way to making the next breakthrough. Yes, money is a problem but not the way we perceive it.

It is true that we don’t have a funding culture yet. However, venture capitalists have already started operations in Bangladesh and informal angels and Accelerators are in play as well. But startups need to understand funding more clearly. So, the question should be - whether you should raise money or not and if you need funds then when is the right time to raise funds for your startup?

As a general rule of thumb, if it’s possible to avoid, don’t take funding if you don’t need it or try to manage in the early days with your own savings and resources and flexible arrangements with family and friends. Funding must be a matter of need.

If you are a first time entrepreneur and doing it all on your own, then things may not go exactly as planned. First time entrepreneurs often make the mistake about when to take funding. As a general rule of thumb, if it’s possible to avoid, don’t take funding if you don’t need it or try to manage in the early days with your own savings and resources and flexible arrangements with family and friends. Funding must be a matter of need.

With funding, many issues arise i.e. valuation, terms, control and so on. Experienced entrepreneurs suggest that fund raising often works in two stages: idea stage and when you have a good traction.

Early stage funding
Early stage funding

[su_dropcap style="flat" size="5"]I[/su_dropcap]Idea stage funding works most successfully for star entrepreneurs. If you have a track record of building successful companies before and turning great ideas into profitable companies, then investors may come forward and invest in your idea on the basis of your track record.

For first time entrepreneurs who don’t have a big name in the team, it is highly unlikely that you will get idea stage investment. Additionally when you take investment at the idea stage you have less control over the business and the progression of that idea and very little control over the expected valuation.

On the other hand you are more likely to be successful in raising funds when you have achieved good traction.

Traction
Traction

[su_dropcap style="flat" size="5"]T[/su_dropcap]Traction is the king. For example, let’s say you started a food delivery business and you have a customer base which is growing everyday, you can show increasing sales and profits, a reliable supplier base, and are maintaining or increasing margins, then you are more likely to find investors interested to invest in your business. Still there will be a valuation and terms etc and this will be a negotiation between you and the potential investor, but with a business with a track record of profitability which has already proved concept, you will be in a stronger negotiating position. If you can get beyond the idea stage and prove concept in your business then you are much more likely to be successful in raising investment and keeping greater control over the business.

The first rule of raising funds is to put yourself in a good negotiating position.

Do you have an experience of raising funds? What you think - when should a startup look for investment? Let us know in the comment.

Thanks to Samantha Morshed for critical feedback & for editing this piece

Image: Elad blog, Gabriel Weinberg blog & Flickr image by uberof202ff


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Ruhul Kader is a technology and business analyst based in Dhaka, Bangladesh. He is also the co-founder and CEO of Future Startup and author of Rethinking Failure: A short guide to living an entrepreneurial life. He writes about internet business, strategy, technology, technology policy, and society. He can be reached at ruhul@futurestartup.com

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