Fundraising Basics: Should you be looking to raise institutional (VC/PE) capital…
Fundraising is not an easy task, it requires thorough planning and strategic implementation to achieve the desired goal, but how does one decide whether they need the funding or not or what kind of funding is required for their business. Ash Narain, CEO, and co-founder of Marquee Equity, a SaaS platform for fundraising, shares his experiences and simplifies the basics of fundraising that can help you guide through the stages of funding.
The first step is to evaluate, whether or not you should be raising capital
One of the first things I brainstorm about while discussing companies’ plans to raise, is whether they actually do need to raise or are even VC/PE Compatible. One has to appreciate, there is in most cases, a gap between what founders believe to be a great outcome and what VCs would accept as a great outcome.
A $500,000 a year dividend line for the next 10 years or a $20M exit are very good outcomes for founders but are near-failures from a VC standpoint.
To know why let’s begin at the beginning.
Where do VCs get their money from and what do they want to do with it?
VCs raise capital from Limited Partners (family offices, banks, pension funds, endowments, insurance companies et al). These Limited Partners are large-scale money managers and typically deploy capital into safe investments (stocks, real estate..) and accept 7–8% annualized returns as great outcomes. Their business is more of stable capital preservation than of high growth capital appreciation.
VC investment strategy is a lot more high risk and therefore to attract capital from these low-risk investors, VCs must promise higher returns.
Delivering 3–4x the fund size is the promise.
The fact is, VCs look for companies that can generate huge returns quickly, and for that, they look for companies that operate in large enough markets ($1B+ in Total Addressable Market) and growth trajectories steep enough to be able to achieve $100M in revenues within 5–7 years, for them to be able to generate a “unicorn exit”.
Are you building something that can sell/IPO for $500M-1 Billion — QUICK?
Because that’s what it takes for 2 things to happen:
The VC to generate a return
For you as the entrepreneur (and a common stockholder) to generate significant liquidity for yourself and your team — because given that quick outcomes take multiple funding rounds and each funding round comes with a “liquidation preference” — you’re not actually generating a return for yourself and your team unless you deliver a huge return, quick
Which brings us to.
Selling for 100s of Millions and not making any money?
Yes, this happens a lot (lesser so in the hundreds of millions and often in the tens of millions of exits) and mostly on account of liquidation preferences.
There are hundreds of other unreported examples where a company raises multiple millions, gains traction, and is sold for tens of millions of dollars and where the founders and early team make very little to no money. You will spend the next 5–10 years building your company. That’s a good percentage of your life. The Fanduel example is something you have to bear in mind while considering raising capital.
Does VC fit into your life?
Exits, multiples, and numbers aside — for a lot of us entrepreneurs, our businesses are our lives and our lives are our businesses. We start out because we don’t work well in silos. We’re freedom-loving generalists who fight fires and solve problems, day in day out.
One has to truly ask oneself — would I prefer to strive and fight, and at the end of it, build something that pays me anything north of $1M a year (excellent money in most places, including Silicon Valley) or would I put in the same strive and fight to play the odds (the odds of raising money are low, successfully scaling post raising are lower and being able to be in a situation where you generate a big enough exit for yourself and your investors are in the 0.1% territory).
Whether you bootstrap or raise capital, you will take on the same amount of work, stress, anxiety, and financial pressure. Beyond this active effort, you will think about your company 24/7 — all the time.
What odds would you be willing to play?
If you’re a go big or go home type of person and you’ve started a business then can indeed attract outside capital and that you’d be willing to “almost gamble” the next 5–10 years on, outside capital is for you.
If not, customer-sourced capital is king and there are vast profits to be made levering the internet, new technologies, and the power of mass global distribution in today’s world. This initial choice will determine the outcomes of the next few years for you. Think well!
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About the author: Ash Narain is a CEO and co-founder of Marquee Equity- a Saas platform that connects startups/businesses looking for funding to the right investors, globally. Started in 2016, Marquee has an investor pool of 32000+ investors across the globe with the likes of Capital One, Signal Fire, etc, and has helped establish a lot of business internationally.
