Growth Capital
Few ventures that make it past the initial months and years. Infant mortality in startups is very high. Contrary to the perception of every entrepreneur, most ventures fail. The longer a business survives, the greater are the chances for longer-term survival. Once a venture has made it past the early hurdles and gets a revenue stream going, the fear of death fades away and attention turns to the future. It is at this stage the entrepreneur faces another crucial decision: to raise growth capital or not.
I too faced a similar decision in 1998-99 when I was running IndiaWorld. We had good momentum in terms of traffic and ad revenues. But the Internet was hot and competition was intensifying. Capital (domestic and international) was more easily available. While I had some surpluses, it was not enough for me to expand the senior management team and spend on marketing as many of the other funded competitors were doing. Every time I saw a full page ad in a newspaper from another Internet player, I missed a beat.
I spent many months trying to raise capital. I travelled often to the US to meet potential investors. I even met some Indian investors. In all meetings, I would state my expected valuation upfront – so as to minimise the how-much-are-you-worth dance that took up a lot of time. And I kept increasing my valuation with every failed meeting! I also did not budge from my valuation. A few months before I sold IndiaWorld for Rs 499 crore, I had got a pre-money valuation of 17 crore. I was stuck at 17.5 crore. Neither of us moved to bridge the gap and the deal did not happen. Sometimes, luck favours the brave!
I could say No because I had money in the bank and the business was profitable. The portals we had built (our product) had a natural virality. I would tell my team: we can advertise and get people for the first time on our website, but after that it will only be the content and the user experience – and not additional ad spend – which will determine whether they returned. So we focused on the product. And a delighted audience spread the word and kept our traffic (and therefore ad revenues) growing. The pressure on me to do a deal to raise capital to fund losses was not there.
This is not to say that one should not talk to potential investors. These meetings are always useful. I would meet interested VCs regularly – in a meeting or two, I would understand the competitive landscape and some of the gaps in my business. This outside-in view and advice (for free) helped me strengthen IndiaWorld without diluting equity on unfavourable terms.
My recommendation to entrepreneurs is to delay raising any external capital as much as possible – and completely avoid it if you can. This will mean much greater thought needs to be applied on how to get the revenues quickly. If one wants to build an enduring business, this has to be solved – so might as well do it early. The best way to fund a business is by generating profits. Instead of spending half one’s time dealing with raising funds or reporting the health of the business, an entrepreneur is better off thinking about the business models and talking to customers.
