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Why Startups DO NOT (or DO) Get Funding!

Updated: Feb 22

PSI blog on why startups do or do not get funding
Blog on Startup Funding

PSI Guidelines for Startups:-

One thing that foxes us is the Indian Media. When things are looking great they praise large Indian E-Commerce. When they are going down they criticize them. This is fine; it’s the job of media to report. However one does not understand why they don’t report on innovative things that start-ups do. And there is an over obsession with tech start-ups. There is poor coverage on start-ups that have grown large through bootstrap funding. We know of several Indian Start-ups that have grown without funding. The fact is that funding should be taken only by start-ups who are completely dedicated to the cause, generating revenues & have potential to exponentially scale. Also it should be unique enough. Remember what worked for start-ups in 1995 also works for start-ups today. Note that Amazon was founded in 1994 by a stock broker called Jeff Bezos. It has been 23 years now. And Amazon turned profitable in the year 2015 only; hence it took 21 years. Jeff is richer than Zuckerberg now. Read the Book The Everything Store to understand more. This is why Amazon is so great today thanks to this obsessive man. If you are anything less than obsessive about your start-up; we would request you to rethink!

The Hard Reality about your Start-Up

So you finally decided to start-up. Well congratulations and welcome to hell!

The road to success is extremely steep; and expect no success for at least 1-2 years. There are no short cuts. There are no Brilliant Founders v/s Ordinary Founders. There are only smart & hard working founders v/s inner focused failure self obsessed (Oh, but my start-up is so special!) founders.

There are close to 100,000 start-ups today, we mean established ones - in India. Each start-up requires capital (Hard Cash) in some form or the other. Founder Savings, Family & Friends, Seed Funding etc. can be enough to raise the initial 5-20K $. Thousands of them must have closed. For the remaining who manage to start making revenue about one in 100 get Angel Funding. Out of those about one in 50 get VC funding. Hence when we say 1 in 100 get Angel Funding your chances of getting funding is 1%. Hence the chances of not getting funding is 99% which is why fund raising is a competitive & challenging process

Also remember your goal is never to receive VC funding. That can never be the goal. You should have achieved enough success pointers for you to realize that you need a little cash (from Angel) to scale or a bigger cash bucket (VC Funding) to scale. Also there are many sources of funding besides Angel & VC. When we discuss we will share these with you. Also today, we see VC's becoming more aggressive than Angels. Another key reason for VC growth is the Tax Incentives / Tax Breaks a VC gets, while the poor Angels are under the Income Tax lens for promoting Entrepreneurs. The current government which claims to be startup friendly should take a hard relook at Startup policies and incentives, which are really not going anywhere.

Startup Journey to get funding from Venture capitalists, private equity, angel funding
Startup Journey

PSI Guidelines for Start-Ups we work with

Following are a few guidelines we give Start-Ups expecting to work with us

1.    The fund raising is exclusive for 2 months between PSI & the Startup. This is for your benefit: We help raise the best term sheet for you Example would you rather not get $1M for 10% Equity v/s 20% Equity? Yes of course! But then how does that translate & actually happen? Because PSI can defend our Portfolio Startup's equity during discussions with any investor

2.      The Co-Founders should be open to PSI suggestions e.g. of taking on more Co-Founders. This is of course the Start-Up decision. But let us explain you why this criteria is extremely important: Suppose 2 Co-Founders are both experts in Technology. Or one is Tech Expert and other is Product Sourcing Expert. Then it would be imperative for you to get a Co-Founder for driving Digital Marketing (Note Digital Marketing; not offline Marketing). We can help you find that Co-Founder/ You find on your own. But this is not binding. It is your decision.

3.      The start-up must accept the reality that even to qualify for angel funding; revenues have to be there. We will be directly involved on increasing/ starting your revenue/ your first few orders etc. When Startup studies our Snapshots of 33 Portfolio Startups (its there on the Linkedin Profile, in the summary); you will note that some start-ups are at concept (PPT) stage but due to nature of business require funding at concept stage. E.g. Bio-Tech companies. However forget esoteric examples like Bio-Tech. Please study the details of Portfolio Startup VFX Studios, which intends to revolutionize Hollywood movies animation. They have the credentials also, have done Fast & Furious 8, Avatar, Bahubali 2 etc.

4.      If the Co-Founders are doing other business along with the start-up we would recommend them to cease this activity; arrange a capital for the start-up and focus full time on the start-up. If you are in a job give it up. The best upsides of a Startup is that it certainly blows away the "benefits" of any job in the world. It also creates a sense of responsibility, as you have to generate your own income within 1-2 years otherwise you are back on the job. Senior Startup Founders have a distinct advantage of having a cash hoarding / savings to survive 1-2 years without income.

What if you are a College Student? Then you are very special especially from PSI point of view. We have spent hundreds of free man hours as a Speaker/ Mentor Startup Contest Judge/ Panelist/ Panel Moderator at IIT Bombay, IIT Madras, BITS Pilani etc. Do see our YouTube Video at IIT Bombay. It covers our passion for College Students and provides lot of tips to any startup. Do Subscribe to our channel as we will add more videos to guide startups. We have seen several engineering colleges (especially the ones charging lacs of rupees from students... please NOTE THIS).... then they start Incubators. Have 50+ Student Startups in the incubator. How many get funding? None! Then what does the student do after engineering? Join a job! To provide funding for Student Startups we would recommend the Startup Committee Student Members or Professors to write to us on our college specific one year incubation program. And it is not "A one size fits all". Its a different program depending on your college/ university.Totally customized.

5.      We would recommend Start-up to have at least 3 Co-Founders e.g. Product Expert, Tech Expert & Marketing Expert. However explicit 100% trust, commitment & understanding is essential between the Founders. This should be written in the Partnership Agreement. We recommend Pvt. Ltd. Structure for Start-up so that Personal Assets of Founders are not affected. Also Family/ Friends/ Investors supporting you at this stage; we recommend them getting a stake against loan payable by you with interest v/s Equity stake for capital. For those with lesser budget can start an LLP.

6.      Founders should have subject matter expertise on the Start-up business. This will be understood in detail by PSI. Our job is to give you a Third Party Capability Assessment of yourself & then give suggestions for building further expertise.

Why Startups do not get funding:-

Lack of Revenue or Traction: Startups with no revenue or no traction should stay away from the fund raising game. Traction Example: 10,000 App Downloads or 30,000 (Minimum) site visitors/ month. However concept stage startups should not feel discouraged. Yes you will get funding at concept stage if you are exceptional. Are you a Bio Scientist whose PPT covers a pill one can take and converts itself into a stent to prevent heart attacks? Well then the investors will come! Now hope you understand what is exceptional! Are you that exceptional at Concept/ PPT Stage? Take a hard look in the mirror.Lack of Competitive Understanding: Most startups claim they have no competition. This is the number one indicator for an Investor to DROP the Startup. And remember, we engage with you the Startup for over 15 days even before introducing you to our Investor Network. Based on past experience, we come to know the competitors do exist and after all this may not be such a unique startup. However it is our job to overcome these issues and still make the startup emerge as a winner.

a) Having a killer product: Imagine Ola Cabs got funding 8 years back. And Bhavish Aggarwal had to knock on Investors doors for one year before he got the princely sum of INR 35 lacs (Just $50,000... but a big amount in those days) as funding from 20 odd investors, including the little known Founder Anupam Mittal! However you think and you tell me: 8 years back, massive cities like Pune & Bangalore didnt have a simple Mumbai equivalent like a yellow taxi! Is this not an obvious market gap? Still imagine Bhavish took one year to raise it! I have heard this myself during Bhavish's interview at IIT Bombay Startup Summit (10,000 Visitors), Bhavish is an Alumni of IIT Bombay. I was also a speaker at IIT Bombay.

Startup product requirement ux design, feature set, value proposition, target market
Startup - Product to Market Journey

b) Having an Innovative Business Model: Our thanks to Michael Skok (then General Partner at Northbridge Capital). He did a series of fantastic tutorials to Harvard students (Harvard Innovation Labs), the video content is for all to see, and you must see all the videos! During one of the Videos, Michael talked about their early stage investment in Symantec (Norton Anti Virus) which was trying to fight the mighty McAfee during dial up internet days. During those days McAfee was the market leader, Symantec an emerging nobody. What did Symantec do? Gave the Anti Virus for free! Then how did they earn? Well Symantec would ship you the CD for free. But optionally you could pay for AV updates which was a novelty during those days. Hence their price was much lower than McAfee and Symantec rapidly rose. By the time McAfee started giving updates, it was too late! Hence simple same product, but with an innovative business model

Business model for startup business success
Innovative business model

c) The third one, to understand, you would have to see the Harvard i-Labs videos!

Lack of Competitive Moat: A competitive moat, is like a castle's moat. These are products features you have developed/ will shortly develop which will take a competitor a year to copy. And by the time they copy it, you would have developed 20 more new features, and will always be ahead of the curve Ordinary yet Extraordinary: Most exceptional startups are simple obvious ideas. E.g. Swiggy which somewhat stole the shine from Zomato. While we really dont want to compare you to a Swiggy, the intention here is all the Swiggys, Flipkarts etc. of the world at an early stage like you were far ahead than anyone else in the market at that time.Mercedes Benz: As mentioned earlier, we at PSI convert a startup's pitch deck from a Maruti Alto (or Small Car) into a world class Mercedes Benz S Class Investor brief and then present it to our 800 Investor Network. However if you don't have a small car, what can PSI do? Nothing! Hence do you have a functional startup like a good fuel economy car? Do you have that planned at least on your road map, if not today?Selling Investors Pipe Dreams: Many startups tell investors: "Sir please fund us, you will see us deliver 50% month-on-month growth during the fund utilization period of 18 months". This makes investors disbelieve the startup projecting these fancy unrealistic numbers. Rather than that observe what PSI does: For any startup we represent, we take the startup's current revenues. E.g. for a Startup doing almost 100% subscription renewal, we took a conservative 50% renewal ratio and a 30% quarter on quarter growth for the 18 months of burn/ fund utilization period, converting the startup's existing revenue to a hockey stick (yet conservative) growth curve, to project exit valuations of between 15-20X in Year 4 / Year 5 for the Investor. All our Exits are an EXCEL CALCULATED Exit Valuation of minimum 15-20X, whereas VC's expect 7-10X return in Year 5. So we usually forecast higher exit returns than the VC's usual expectations