Objective of entrepreneurs should be to maximise capital value and use it for value creation activities.

You are in an enviable position now. Your startup raised $1m in seed money a year or so ago and you are now looking to raise your next round of capital. While the seed money  was raised to validate your idea and build out team and go to market plan, you now need to raise additional capital to fund your growth. You have less than 6 months of cash left in the bank but that's not a real concern as you have started fielding polite "interested" calls from multiple VCs. Things couldn't get any better. The two pilot customer trails are proceeding successfully, conversations with other customers are underway, and revenue inflows are imminent. If only you had the money to execute on all the exciting opportunities!

A month passes by. The mood is almost cocky And there's no sign of the growth in revenues. Some unexpected expenses were incurred. Some of the high powered new hires are proving to be a little difficult to handle. Investor phone calls are still coming in - good sign!

Another month goes by - some key employees have asked you about when the next round will take place. The mood is very positive. You've started meeting VCs formally and presenting your company to them. They all seem excited and interested in your story. Some more expenses have cropped up as some pilot customers required additional support with implementation and integration of a new application. VCs want to know how much you're raising and for what purposes. You've provided all the answers to them. I will spend on sales and marketing for growth.

This month, the VCs come visiting. They meet your team and spend many hours with them. Their experts and consultants come in and grill you and your team on the market, business model, revenue projections, competition, technology, support issues and so on. They ask for due diligence material on the team. They want to speak with your customers. They want to speak with your partners. Things are looking positive. The number of VCs asking for due diligence material is less than a handful. But about twice that number were interested!

VC meetings have got delayed on account of travel and holidays. You receive feedback that VCs have called some of your references and actually called some of the customers. You are excited. A term sheet is imminent. You are doing all you can to keep your pilot customers and partners really happy so that no negative feedback is provided to the VCs. No new customers have been signed but discussions are still underway and proceeding well.

You have less than 2 months cash left. Mild panic hits you. VCs are aware of your financial position. You reduce travel expenses by not going to that conference you had booked yourself for - you had hoped to meet many prospects there. A few engineers have quit - they have not been replaced. You start rationalizing - I don't really need them now because the product is built out. Customer contracts have not fructified as planned. Where are my revenues? The customer pipeline has not grown - cannot afford to spend on sales and marketing. Should I have invested more in this earlier?

Inside the VC firms, the questions they're grappling with include "What've been the fundable events?" "What's the likelihood of this company achieving the revenue projections?"

This question will be asked in many ways and with minor variations.

Transalations could be : "What have you achieved in the past many months? What has been the growth in customers, revenues, employees, technology development, customer pipeline, and what's the outlook ...?" And investors are seeking specific answers to these specific questions. The time for fuzzy qualitatives is over. Investors are looking to see if you have been able to manage the seed capital responsibly and use it for value-creation activities. After all, if you could not manage $1m, how can you manage $5m that you are now proposing to raise?

And therein lie worthwhile lessons for the entrepreneur. Once money has been raised, there needs to be a set of specific objectives. These objectives need to be broken month by month and along functional lines. For example, addition of beta customers, hiring of staff, development of technology, patents filed, customer support, company launch, customer endorsements, alliances established, growth in branch offices, growth in revenues/bottomlines, increase in gross margins, etc etc. These and other metrics need to show positive trends month after month. The fundamental objective of the entrepreneur should be to maximise value in the months between the seed round and the next round. Every action should go towards the achievement of this objective. And creation of value manifests itself in a significantly enhanced valuation during the next round of fund raising. While value and thereby valuation lies in the eye of the beholder, there has to be something to behold. And no one can argue with facts. Good, strong, honest, direct selling of the value proposition of the startup buttressed by irrefutable facts will almost always help achieve the objectives.

Money should always be raised when you don't need it. Once people know you are in dire need of money, the cost of capital shoots up. It also means that you have not planned your cash needs. Raising money when you don't need it implies extremely careful planning. Specific quantifiable objectives on a monthly basis need to be drawn up and monitored. And cash-flow needs to be managed in lock-step as well.

Given the current mood of investors and given the fact that a host of startups are/will be seeking next round financing (after having raised money in headier climes), the notion of "fundable events" is all the more critical right now. And there's no time like "right now" to start focusing on rolling out "fundable events". Else there may not be any event left to fund.

Author is a passionate advocate of entrepreneurship in India; He's involved with Nasscom, TiE, IIM-Bangalore, and INSEAD business school in driving entrepreneurship. He can be reached at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it The views expressed here are his own.

Issue BG81 Dec07

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