You have found your dream company. You have laid the foundation so far, by investing your savings and maybe raising funds from your friends and family. BUT now, the time has come to push your dream further beyond these odd inputs. Pressing the accelerator pedal in a new-found business and putting it into ‘growth’ mode, always brings along financial challenges to the founders.
Entrepreneurs concur that working capital issues can arise abruptly or cash flow can get adversely affected resulting in a cash crunch at multiple stages of the business such as production, hiring or expansion. Besides, the chances of getting a bank loan in the absence of adequate collateral security are practically dismay. And even if there is a slender chance to do so, it may not prudent to build up too much debt at the beginning of a business.
Many founders rely on the community of financiers, I.e. ‘angel investors’ and ‘venture capitalists’ for the necessary funding. Angel investors are wealthy individuals (or a group) who invest their own money into companies. Venture capitalists are venture capital firms that invest other people’s money (which they hold in a fund) into companies, startup or otherwise. Both these financiers bring in money, their rich experience and a widespread contacts network to the table. In return, they expect a share in equity or ownership of the startup company. The advantage of such financing is, the startup founders are not hooked to repay the funding, unlike a bank loan. On the flip side, the founders have to give a certain amount of share from their company to the investors as a return of the favor.
As a founder, you must know, what an investor looks for while investing in any new business. After all, they are risking their investments! Here is what they essentially look at, while evaluating start-ups:
The Business Idea:
What first draws any investor to a business is the ‘idea’ itself. Effectively this means a great ‘market opportunity’ and hence a good ‘return on investment’. If a dynamic market already exists or there is an excellent opportunity potentially available, then definitely it excites the investors and they will be forthcoming to put in their funds. The market opportunity covers the present success of the business as well as the future scope of its expansion. If an existing market is being tapped into, the investors look for the ‘differentiator’ factor whereas, if the market is still emerging, they rely on future ‘growth pivots and drivers’.
The Founders’ engagement and ability to Deliver
Most investors have a keen eye to check for how well positioned is the startup team to drive and expand the business. Some questions that the investor look answers for are –
1) Domain expertise of the core team.
2) Potential to become a market leader
3) Supplementary and complementary skills in the core team that will boost their chances of success.
4) Ability to work and deliver as a Team, collaboratively and cohesively.
Investor-Founder fitment is an important parameter that plays on the mind of the investors. Stage of the startup company, the target industry and investor’s experience in the relevant field are all pieces of the puzzle. When there are mutual connections between the investor and the founder, the investor is more likely to invest. Sometimes factors as simple as affinity based on shared workplace, a common background or a mutually trusted connection can play a vital role in investment.
While the above parameters would qualify as the ‘soft factors’ for decision-making, the investors always look out for hard data to support their decision. A ‘great idea’ by itself is not enough to operate a successful startup business – it has to be followed up thoroughly with an equally effective ‘execution’. And, ‘compliances’ are an extremely important part of the execution.
Compliances are a set of actions that a business takes to comply with certain directives, either by a governing body or as part of the industry practice. The act of obeying a certain order, rule or request is known as compliance. While the set of compliances varies based upon the industry and location, the below list is an absolute must-have that any startup should comply with. Some of these are statutory, while others are regulatory –
1) Register your company: As elementary and fundamental as it may sound, this is an absolute necessity to do any kind of business, hire a team or perform any profit or loss calculations. Depending on the type of venture you are getting into and the projected revenues, it could be a private limited company, an educational trust or a cooperative society. Regardless of the type of business, registering is a prerequisite. You could delay the process, but an investor may not appreciate this as much.
2) Bank account: During the initial phase of a startup, often entrepreneurs pour in their funds or pool it from their family and friends. The source of funds and expenditure incurred to run the startup should be traced to a bank account associated with the registered business entity.
3) Hire auditors, company secretaries and legal advisors: The auditors and company secretaries ensure that the company’s ‘Book of Accounts’ are maintained in an orderly manner per the guidelines while also taking care the relevant returns are filed at the appropriate times throughout the financial year. The legal advisors ensure that all the contracts that the company enters into, are foolproof and safe.
4) A few compliances that are mandatory in an Indian context, after registering the business are:
i. Getting a PAN (Permanent Account Number)
ii. Getting a TAN (Tax Deduction and Collection Account Number)
iii. Getting a GSTIN (Goods and Services Tax Identification Number)
5) Permits and Licenses: The set of permits and licenses relevant to the nature of the business that needs to be taken to ensure compliance with the statutory and regulatory norms. These may include but are not limited to, environment and pollution control, fire and health department permissions, employee protection, waste disposal measures, technology approvals, etc.
Compliance is an investment made to safeguard the business for the future. Ensuring compliance builds a necessary level of trust of the startup with investors, customers, and vendors. Compliance demonstrates the commitment to ‘transparency’ and hence promotes ‘reliability’. Effectively, it helps to build a positive image of the organization which eventually facilitates and ease of investment.
Viability of Business Plan & Exit Strategy
While the Business Plan provides the relevant details about financial numbers, estimation, and valuation, one key aspect that every investor will look for, is the Exit Strategy. Though profits are not just the returns expected by investors, they certainly look for means to reap the benefits of their investment risks. As an exit strategy, they might want to sell their shares back to the founders or even selling the business to future strategic buyers.
Every business is different and so are its needs. However, finance is a common requirement for all businesses. Investors are willing to put their money on the block but they need definite and trustworthy indicators to take appropriate decisions. Startup founders must ensure that they facilitate this trust-building exercise by ensuring, documenting and providing the relevant inputs to the investors.
The Filings.in are experts in the startup field. We can help you set up your startup seamlessly while you focus on your business. Contact us to manage your compliance matter and have it investor ready. [email protected] | 044-46315959