Early Lessons in Fundraising

May 27, 2013Reflections

I often hear investors complaining that ‘investible’ start-ups are rare to find. And similarly hear entrepreneurs say that it is close to impossible to find investors that are willing to invest at such an early stage, when uncertainty is the only constant. I’ve often wondered whose account of this dismal state of affairs is more accurate. After my brief stint at an impact investing firm I tended to favor the investors.

Last year, I switched sides and began working for Artoo, a start-up social enterprise based in Bangalore. Artoo aims to revolutionize field operations at social enterprises through the use of intuitive mobile technology solutions that are customized completely to a company’s unique workflows. I came on board to lead their business development and fundraising efforts.

When we started our journey of fundraising at Artoo, we were handicapped by our own inexperience and naivety and blinded by many misconceptions. After reading numerous blog posts and articles in an attempt to gauge ‘what investors look for’, I was convinced that we had cracked the winning formula just as we were poised to raise our first round. Artoo was well past the ‘idea’ stage; we had many successful pilots to our credit, we had proven without doubt that our technology works, we were earning steady revenues and above all we had a visionary, energetic team. What else could an early stage investor look for, we thought. Yes, there was still so much that we didn’t know, so much that was not working and so much more to learn, but isn’t that common at this stage?

Many seasoned entrepreneurs advised us to carefully select the investors we approached and so we set out to make our checklist. We decided we wanted strategic investors, investors who understand the social enterprise universe, investors who have made technology investments in the past and who are reputed in this space. This we believed would give us credibility.

Excited and confident, we began scheduling meetings and making our pitch. Investors seemed excited about our business and were almost always willing to indulge us with a 2nd meeting. In many cases, they were keen to start looking at some of our documentation to decide if they would start diligence. Meticulously, I began to get all our documents in place. Since we had recently participated in Villgro’s accelerator program — SEED ( http://www.villgro.org/seed), we were already a step ahead. SEED is an intensive 8-month journey designed to help early stage social enterprises sharpen their business model and raise their first round of funding. Over a period of 8 months we worked tirelessly with our mentor and the rest of the SEED cohort to identify gaps in our business model, fix those gaps, conduct lean experiments in the field and really hone in on what worked and what didn’t. We had a plan, one we believed worked!

However after the first couple of meetings, conversations with investors were not progressing as I had envisioned. Very soon in the process, the primary focus of their line of questioning became our 5-year financial projections. Isn’t the 5-year projection just a number at this stage in a company’s life, we asked ourselves. Of course it is based on some very well thought out assumptions. But at the end of the day they still remain assumptions. As a company and as people we have always believed that honesty goes a long way and our financial projections reflected that spirit. They were honest to the core. We put on paper what we truly believed we were capable of achieving in 5 years, and as per our plan we were scheduled to cumulatively break-even in little over 2 years. We could have used unrealistic assumptions and projected a 6-month breakeven as that would have obviously made us look more attractive (on paper) but that was not honest. This provoked questions such as — “Isn’t 3 years too long?” and “Shouldn’t you be charging your clients 5 times the amount you charge them now?” Sure, we would love to become profitable sooner, and would love to make more money of every client but given our current challenges that seems like an unrealistic commitment to make. And truth be told, we didn’t have much clarity beyond 12–18 months.

I spent many days pondering these events. Why are they asking all the wrong questions, I thought? Shouldn’t they ask about our customers, about the market and the demand for our technology, about our barriers to scale and not about our pre-money valuation?

Some investors seemed cynical about the very real challenges we faced and this disillusioned us even further. We were as honest about our challenges as we were about our achievements. We believed that being honest about what was not working for us would allow investors to give us appropriate advice on how to overcome these challenges, but instead it urged accusatory questions such as — “Why are you still targeting this segment?” and “If the business results from using your technology are what you claim they are, why aren’t more companies adopting this, and why aren’t they willing to pay more?” We knew then that we hadn’t yet met the right investor. One who would ask the same question, but differently — “What can you do to make companies understand and feel the impact of Artoo’s technology and more willing to invest in it?” These early experiences made us re-assess our approach to fundraising.

Though we are still newbies to this game of raising institutional money, these past few months have taught us a lot. We have become more resilient and don’t let stray comments upset us. We also realized that when we made our investor checklist we were asking the wrong questions. We didn’t really want the investor whose name would look good on our board of advisors page. We want the investor who most closely understands and feels our pain, the investor who can give most time to guide and mentor us, the investor who believes in the game changing role technology plays in this sector, and most of all the investor who is in it for the ride, who is a partner in our journey to scale!

Luckily for us, we did manage to meet a few investors who fit this bill exactly. That has kept us optimistic and we are now more ready than ever for our journey. I still haven’t made up my mind as to which side of the debate I support, however being on the other side of the table today obviously makes me favor my fellow entrepreneurs!

About the author:

Kavita Nehemiah | COO & Co-founder

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