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Risks Involved in Raising Funds via Venture Capital For Your Startup

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When two friends had taken into their stride that they could not get into good B-schools, they started looking for alternative career ideas. They came up with one of the most successful business plans that revolutionized the momo business in the country.

SagarDaryani and Binod Kumar Homagai thought, “It occurred to us that if we can have places selling pizzas and burgers, why could we not have Momo places?”, and that is how Wow! Momo was born in Kolkata.

They faced issues with the business capital. Therefore, they started with Rs 30000 borrowed from their parents. There are different risks involved in raising funds. Two friends started their business in a garage and took help from Spencers to promote their business and take feedback from people. The chef Ramji KC who started during that time with a meagre salary of Rupees 3000 per month, is now being paid Rs 1.5 lakhs.

Talking about their success mantra, SagarDaryani says, “When You Make Well You will Share well this is the success secret for any business.”

Risks Involved in Raising Funds - Colitco

Image SourceCompany Wow Momo

The startup aspirants, later on, realized the need for a good capital to start their business. The best means to acquire needed funds are through Venture Capitals. The people behind such funds are called Venture Capitalist (VC). It is where the fund takes an enormous risk of investing a lot of money on a new business. There are a lot of perils in associating a startup with a Venture Capitalist.

So in this story we will cover the points and risks involved in raising funds via Venture Capital for your startup.

HIGH SUSCEPTIBILITY TO MERGERS AND ACQUISITIONS

Whenever a Venture Capitalist decides to fund your business, he/she wants to make it profitable from their side. As per the Indian startup scenario, Venture capital is a good idea to earn a basic income.

When your business is gradually improving, chances are high to attract acquisitions and merger compulsions. And the outcome of such a condition would be reduced adaptability, loss of track amidst competitors and eventually shutting down.

No objection that any form of capital investment is going to be competitive (unless your idea is out-of-the-box) for your business. But from the following example, it is a proven statement that ‘venture capital will trigger other competitors from the industry’.

From managing to transacting their processes, the B2B eCommerce platform “Shotang” that was launched in 2013, was once a go-to brand for Indian consumers, when it came to apparels and mobiles. They received a VC funding of $5 million (INR 35.94 crore) and $864 thousand (INR 6.8 crore), from the “Exfinity Venture Partners” and “Patamar Capital” in 2015 and 2018.

But in the long-run, Shotang became an example of ‘failed venture capital startup’ due to 2 main reasons:

1. Fierce competition from Paytm Mall, Flipkart, and Amazon.
2. Funds crunching with a high debt range.

Risks Involved in Raising Funds - Colitco

Image SourceCompany Shotang India

HIGH RISK-TOLERANCE LEVEL FOR FUND-RAISING

The truth is Venture Capital is a double-edged sword, where 1 side is a useful resource, generating your initial income, from YOUR works. On the other side, VCs are a narrow streamlined platform, that will push you to the verge of raising capital (additionally) as the business runs forward. Moreover, it is up to the startup’s revenue to increase its capital and pay/spend as required.

Venture capitalists are usually investors who wanted to raise money only for unique and powerful ideas. That said, it is estimated that 77% of the VCs judge Indian startups as ‘not unique’.

Now, what is the connection between uniqueness and risk of VC? Venturing your startup comes with a high risk of not being able to receive further capital for fund-raising demands.

For instance, Doodhwala was an Indian milk delivery platform that was going good but due to subsequent financial issues and other unknown internal causes, the startup had to shut down their venture.

Hence, raising money with VC has to be your primary option, only if you have a strong instinct that your brand will give at least a decent earning to manage your daily shares and pays. Else, the results are poor business modeling, lack of fund-raising sources, and heavy pressure from the capitalist to showcase your income and financial supports.

DO YOU KNOW THE FAILURE OF A TINMEN?

Tinmen” was a Hyderbad-based platform to provide home-cooked foods to working professionals. The idea was from Mukesh Manda and Chaitanya Degala in 2015. The reason for their failure is a straightforward one – due to the inability to raise necessary capital funding. Since the startup did not posses enough VC funding continuously to sustain its growth, Tinmen was a failed Indian startup in December 2019!

Risks Involved in Raising Funds - Colitco
Profits can come late when the business is in a growth phase and working in a highly competitive market. So, choose your VC wisely.

FAILURE TO FOCUS ON BUSINESS PLANNING

When the startup capital is high, business stakes are higher. Most of the startup founders focus so much on the capital that they tend to get swayed from the business design. You have to match the benchmark of your business with the capital that you have in hand. If you fail to do so, you can at least plan for the first 18 months. And acquire sufficient capital that can provide the necessary flexibility. As Micah Rosenbloom, a popular Venture Capitalist says, “If you raise too much money, you have to swing for the fences.

Too much money at the beginning sets the bar too high for any startup business. This would invite extra scrutiny on the part of the investors. It is better to have adequate money to get to the next level. It would be hard for the business to concentrate on the core issues if they are worried about is capital funding. This hampers proper planning in the medium and long term for the business.

EXAMPLE:-

JAWBONE INDUSTRY IS ONE OF THE BEST EXAMPLES WHICH HAD THE CAPITAL AND THE BACKING OF A LIST OF INVESTORS LIKE KHOSLA VENTURES, SEQUOIA, AND ANDREESSEN HOROWITZ. HOWEVER, THE PROPOSED GROWTH NUMBERS WERE OVER-OPTIMISTIC AND ALARMINGLY HIGH. THIS FURTHER INFLATED THE VALUATION, THUS CALLING IN FOR MORE FUNDS. SUBSEQUENTLY, THE COMPANY THAT ONCE DEALT WITH BLUETOOTH SPEAKERS COULD NOT MATCH UP TO THE COMPETITION PRESENTED BY SAMSUNG. AS A RESULT, THE COMPANY HAD TO ANNOUNCE THE LIQUIDATION OF ALL ITS ASSETS IN 2017.

Risks Involved in Raising Funds - Colitco

Image SourceCompany Jawbone

With the ‘Make in India’ initiative, the country provides apt backing for several booming start-ups. Bengaluru city in southern India has been named the 11th best ‘startup ecosystem’ in the entire world by Economic Times. Stories of successful startups of established companies like Flipkart will boost your morale to plunge into the endeavor. As the great Co-founder and ex-CEO of Apple, late Steve Jobs once said, “Your work is going to fill a large part of your life, and the only way to be truly satisfied is to do what you believe is great work. And the only way to do great work is to love what you do.” Love your work, and your business will thrive! [/vc_column_text][/vc_column][vc_column width=”1/6″][/vc_column][/vc_row]


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