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The Fund-Raise Conundrum

The Fund-Raise Conundrum

Fundraising is an arduous task. Entrepreneurs, who seek capital, spend almost 50% of their time on the task, without really knowing if they are speaking with the right set of investors. An even more startling fact is that on an average, entrepreneurs usually receive responses  from only about 25% of investors they reach out to. Combine this with the fact that of the investors they do speak with, only about 25% are really interested in the investment, given other variables like the stage of the company and the market trend. To sum up, in order to complete a fundraiser with 2-3 investors on board, entrepreneurs have to reach out to roughly 50 investors.

Investor discussions usually last a few rounds, i.e. if the investor is interested. It takes time for the investment team to dig up the finer details about the company and to gauge if the investment has a prospect for a good Return on Investment (RoI). Industry statistics say that this process typically lasts about 4-6 months if there are synergies between the investor and the opportunity, otherwise the timeline increases to about 12 months. To put things in perspective from the entrepreneur's side, imagine planning your daily schedule a year in advance and then convincing someone about it.

The above scenario is equally applicable to the investors as well. Roughly 90% of companies that reach out to investors aren't the right fit or at the right stage or just don't come under the mandate of the investment firm. Of the 10% that fits in with their mandate, actual conversions are approximately 30-40%. I won't do the math for this one again.

The first 3 paragraphs demonstrated the scale of the problem that we are facing w.r.t Start-up Investments. Let us now look at how this process can be made more efficient thereby drastically reducing time and effort. The suggested approach stands on 3 basic pillars:

  • Transparency: Start-up pitches made for investors are like sales pitches - they tend to be one-sided. However, for an investment to go through, the investors have to be aware of the challenges and the risks involved in the investment, which sometimes takes weeks and multiple conversations to discover. The Solution - create third party investment opportunity reports that cover all aspects of the investment. The document in this case resembles a SWOT Analysis more than a Sales pitch.
  • Investment Bankers: It is virtually impossible to know all the investors from any domain, even if you narrow it down geographically. The probability of landing up with the right strategic investor becomes much higher when the sample size is larger. Investment Bankers usually have a more comprehensive list of investors for defined sectors, than what entrepreneurs can manage to get. Depending on an Investment Banker, therefore, helps save time, effort and increases the probability of investment.
  • Capital Strategy: Most often business owners are not aware of their capital requirement. The primary reason for the failure of most investment conversations is that the offer on the table does not match with investor expectations. This is where Capital Strategy firms add value to the process, as they study and understand the historic capital needs of the company, and extrapolate and fit it into a desired growth curve. Relying on strategists who use data to arrive at the right investment proposal is also crucial for conversion.

Given the existing COVID-19 scenario and the generally volatile market conditions, it is highly recommended that start-ups and even established conglomerates seek the counsel of proven professional financial strategists to ensure best RoI and to optimize business presence irrespective of the prevailing financial environment.

About the Author

Akshay Sasikumar is the Managing Partner at www.82advisory.com, a firm that specializes in Capital Strategy and investment banking services for technology companies.