The founder’s guide to surviving the Series A crunch

The Indian entrepreneurship and venture capital ecosystem is fast maturing. Today we have more early stage funds than ever. This fund availability will only improve, aside from the temporary blips caused due to macroeconomic ups and downs.

We are in one such ‘crunch’ today, where even though seed and angel funds are writing cheques with relative ease, Series A investors are not as forthcoming to pull the trigger. Several reasons can be cited for this bottleneck in Series A funding, but for the purpose of this column let’s focus on what you, as the founder, can do in such a scenario to improve your chances of securing the next round of funding.

1. Know your Series A milestones

We have often seen cases where a promoter has raised seed capital, but not achieved the milestones on basis of which a Series A investor might judge the future prospects of the business. For example, if you are in a product business, it is not enough to raise capital to just develop the product. You should also be able to show customer adoption and acceptance. If this implies raising more capital at the seed stage, then be prepared to do so, assuming capital is available. Promoters sometimes limit the fund raise for fear of dilution. This leaves them with a half baked idea and no takers when the time comes for Series A funding.

2. Sell, sell, sell

Investors respond most to a strong and growing order book. This is a chicken and egg situation, but the best entrepreneurs do not let capital availability hinder initial client acquisition. As the founder of the business, you are its top salesman, and you need to hustle your way through. This does not imply that you dupe your clients. Even if you are facing a capital crunch, you must have the confidence and the ability to win business from reference-able clients. Such client wins will then act as catalysts to aid in your fundraising by proving that your company’s products or services have seen some initial acceptance. This is not easy, but no one said entrepreneurship is! Starting up can be compared to stage production, where your audience (clients) sees a beautiful set and pretty costumes, and everything seemingly works like clockwork. But behind the scenes, the set and props are held together with ropes and sticky tape!

3. Alternate revenue streams

Sometimes when funds are hard to come by, you will need to look at creating new revenue streams in adjacent opportunities. For example, if you are a software product startup with high development expertise, perhaps you should explore engagements to develop products for third parties too. This may not be ideal, but it will help pay the bills, and hopefully, give you some cushion to keep going till you secure your Series A funding.

4. Be thrifty, very thrifty

If you are facing an uphill task of raising the next round, you need to ensure you can conserve cash as long as possible, while still being able to show progress. Through conversations with investors, identify the gap between your current state and the progress you need to exhibit, in order to ‘excite’ the investment community. Once you are certain of this, focus your energy and resources on bridging this gap with the least resource allocation possible. Again, this is a challenging task, but one that needs to be done. This is more of an art, than science, so one would have to use every trick possible to get it done.

5. Learn and adapt

We have often witnessed that the plan which you set out to build during the seed stage tends to be very different from the company you end up building. There is no harm in this, and the sooner you accept it, the better. In fact, investors appreciate the fact that you are a quick learner and capable of adapting to market dynamics. We have seen this play out in every single company we have invested in, where the plan was altered and adapted based on customer feedback and evolving understanding of the market. Therefore, from very early on, as a founder, you must be able to illustrate your learnings to potential investors.

6. Investor feedback is important

During the course of your discussions with potential investors, listen carefully for the reasons they are hesitating to write you a cheque. This is not to say that investors are always right, but from their experience, they are aware of the pitfalls in scaling a business. You need to know how to filter the advice and course correct as required to be able to illustrate a sound growth strategy, which investors can buy into.

7. Enhance credibility

It can sometimes be a case where your business is esoteric in nature. It would be beneficial to bring aboard well known industry experts as advisors, whose endorsement can provide greater comfort to prospective investors that your business has great potential. This is not a major influencer for investors, but it still improves your chances somewhat.

8. Friends and family to the rescue

When all else fails, turn to those you know you and your abilities best – your friends and family, to provide you additional capital to extend your cash flow a few more months while you continue speaking with investors.

9. Go the debt way

There is also the option of raising debt from banks like SIDBI, which have been specially mandated by the government to provide loans to startups at very favourable terms. This can provide you a slightly longer runway in your quest for Series A.

10. The right fit

Make sure you are talking to the right target investors. It is likely that you may be approaching investors who are not interested in your sector or the size of business you are building. It is sometimes advisable to speak to HNIs (high networth individuals) or corporates who may have a special preference for your sector.

11. Look for the next big idea

Don’t be afraid to call it quits. Failure is part of entrepreneurship. Not every idea clicks, so knowing when to move on is very important. When you learn from your mistakes, and put these to learnings to work in the next venture, you will have greatly enhanced your chances of success.

About the columnist: Gaurav Saraf founded Epiphany Ventures, an early stage venture capital fund in 2008. Prior to Epiphany, he founded and exited a business in the mining sector, served as vice president M&A for the $250 million Facor Group and was a consultant with Diamond Technology Partners, a strategy consulting company headquartered in Chicago where he advised Fortune 500 clients. Saraf is an alumnus of the University of Pennsylvania and City University, London. Connect with him on LinkedIn.