How to survive the twists and turns of raising startup capital

By Vinod Murali, SVB India Finance

Optimism levels are currently extremely high in India surrounding the general elections. There’s a clear undercurrent of expectation of a stable and decisive government which makes me wonder about the scenario of a hung parliament with no clear direction.

While that is one of the possible outcomes, in most recent conversations, the positive expectations are discussed with passionate detail. The downside is shrugged off with a sense of inevitability and disdain. It makes me wonder whether as a culture, we prefer to focus on hope and expect that other problems will sort themselves out in due course.

That becomes relevant in my life as a venture debt provider when exciting startups are about to embark on a fundraising exercise. Given that our portfolio predominantly consists of companies that have raised at least one round of institutional capital, these are mostly experienced entrepreneurs who have done the rounds and seen the tricks of the trade. While there is always a business strategy and milestones in place with a view on future funding events, in the real world most of those assumptions go awry.

Sometimes, just sometimes, it is for the better when companies blast through their original assumptions and get to a place where “no one has gone before” (cue: Star Trek theme). In most situations, there is a need for companies to hit the market just as they are getting ready to showcase themselves. In this period, the question always is whether they should rely on the optimistic picture painted by investment bankers or build caution into assumptions on how far their cash will take them.

As with most tricky questions in life, the answer lies somewhere in the middle.

So, what could help entrepreneurs during these periods?

1. Understand the existing VCs: For companies that have been funded at least once, it is key to understand the motivations of their existing investors. This goes beyond mere indicators to truly getting into the details of the nature of support, if any. Will there be any backstop if the company doesn’t get a termsheet within two months? Is the investor comfortable pricing the round without any external input? Is it even part of their mandate to participate in future rounds?

2. Rely on the team: Many a time I have seen founders immerse themselves in the fundraising process. At the same time, they are also leading sales or product development, which makes it tough to drive both. There has to be a higher reliance on the team to rise to the occasion and that also works as a good opportunity for other team members to put up their hands for more responsibility.

3. Cash is king: Keep a very sharp eye on the bank balance. When companies start running on fumes especially when they are in the middle of diligence, there is possibly going to be another round of negotiation.

4. Keep your options open…but decide quickly: Getting five termsheets is a good feeling but keeping everybody hanging may not be very productive. Nobody likes to be part of a bid. It’s a small world and the market can shift very quickly. So, it is preferable to lock-in when an option looks reasonably attractive and focus on quick closure rather than engage in protracted negotiations for five per cent more. Also, in my view it is not often the best price but the best fit which should be the preferred choice.

The Indian VC market has evolved over the last few years and it has perhaps become a bit skewed towards investors. There are fewer transactions being heavily courted compared to a few years ago. There are also fewer serious players across the spectrum. Given that the average time frame to close an equity round is now 8-12 months compared to 4-6 months a few years ago, entrepreneurs surely need to plan to go to the mattresses, if required (cue: Godfather theme).

It is great to push for growth but you need to fundamentally survive through the agonizing twists and turns of a fund-raise!

VinodMurali-SVBAuthor: Vinod Murali is managing director at SVB India Finance. He has successfully led more tha 50 venture debt transactions across sectors such as technology, financial services, media, healthcare, retail and cleantech. Follow @vinodmur