Raising capital especially for growth is done in one of the most crucial stages of a startup where the startup has a proven product, has initial sales, and is focused on increasing its user base. At this stage, a startup will switch gears from the exploration stage to building a scalable model. These funds will prove to be quite useful for the startup, but along with it comes a lot of risk, responsibility, and loss of control. It’s necessary for founders to understand whether giving up some level of control and stake is really worth raising funds for growth.

There are multiple prerequisites that need to be met by the startup even before it goes for growth capital, i.e. ensuring all the due diligence documents are in place, the startup isn’t involved in any litigation issues, has good performance indicators, has enough runway to deal with the fundraising, etc. However, we are not going to consider them in this article. Considering that most of the base requirements for the startup are already in place, we will try to look at fundamental questions that address the core reason behind raising the capital, i.e. why does the startup really need these funds in the first place? We will list down each of these questions below:

• Is the startup looking for explosive growth, or has the scope of explosive growth?

In general, it is worth getting involved with a venture fund if the startup believes, knows, or has a strategy in place that can bring 30-50% YoY growth in the startup with the help of funds. In other terms, the startup should have an aspiration to grow really fast in a  very short span of time. The startup can either showcase through its lowered Customer Acquisition Cost, increasing lifetime value, improving ratio of CAC/LTV, better gross margins, etc. Otherwise, the founders could have built a scalable model that allows the startup to expand with high velocity at optimal profit margins. If the startup has traits, or aspirations that ensure exponential growth, then securing venture funds is truly worth pursuing.

However, if the founders prefer organic growth or know that the market is small, or have other limiting factors that constrain growth parameters, this might not be the best time to approach for venture funds.

• Is the startup looking for a partner with long term strategic advice?

Sometimes, a startup is successfully able to achieve a product market fit, but it might be struggling to build a model that ensures future profitability. Or, the startup is unable to build a model that can ensure scalability. In such scenarios, venture capitalists can be of huge advantage to the startup.

Many people forget that Venture capitalists aren’t solely limited to funding startups, but along with funds they bring in their decades of experience, expertise, and a huge network. Their network can help founders gain invaluable insights for the growth of your startup. Many venture capitalists even get involved in execution along with founders and do their best to help the team. 

Overall, if the startup wants to address a fundamental problem with their startup, or needs some strategic advice, it’s time to onboard an investor from the same industry and improve your chances of success.

• Do you have new ideas that need investment?

Sometimes, a startup was able to successfully build a product in a specific segment, has consistent revenues, and was able to run at a decent profit margin. However, the founders see that their current product has limited scope of growth, and identifies a new unaddressed need that has a huge potential market and the business can grow exponentially. In that case, the startup might find it easier to work with significant funds at hand, so that it can scale the business fast and capture maximum market share. The startup might also plan to work in new verticals, or has some other strategies in place that might need significant funds. In such a case, a startup should for growth capital.

Although the list isn’t exhaustive, these are some of the primary reasons for which a startup should go for growth capital.  The fundamental driving factor here is, a startup should prefer to go for growth capital only if they see the scope of expanding at a rapid scale, or want to expand at a rapid scale. In general, rapid growth is unavoidable. 

Though this is the usual expectation around growth capital invested by Venture Capitalists, there can always be exceptions. Depending on the type of startup and the focus of the venture capital firm, the requirements might change accordingly.

With so many grey areas to deal with, it will be hard for a first time entrepreneur to venture into fundraising by itself. It might be really helpful if the startup takes assistance from an expert in the industry, investment bankers etc. to assist them in the process. Bayfront Capital has huge expertise in helping startups connect with right investors based on their requirements. We provide support to startups in tailoring their decks based on investors’ expectations, setting a meaningful storyline, market research to showcase an attractive TAM, approach investors, streamline the complete fundraising process, etc. Drop a mail to share your requirements with us and discuss further. 

In the Final Analysis

Fundraising is one of the important stages many startups undergo to grow their startup. As the startup progresses further, the importance of cash reserves increases. Funds are crucial in ensuring that the startup has significant market share and isn’t losing out to competitors.  However, indulging in this activity without having clarity of purpose can be quite costly. The team should ensure that they have good reasons in place for raising funds, choose the best fit for their requirements, and finalise accordingly.