90% of start-ups fail. To say all of them don’t have valid business cases, professional leadership teams or a strong drive to succeed would be too simple and naïve. Data from thorough market research demonstrates that a majority of start-up leaders believe that their greatest obstacle lies in fundraising. Considering Southeast Asia alone has 79 open Venture Capital funds with over $4.7 billion ready and available, not including alternative sources of funding, this should not be the case. Outlined below are some of the key reasons why fundraising remains a challenge based on the perspective of a regional start-up CFO and VC investment committee board member.
Overwhelming Investor Options
Investment firms have different investment styles, strategic interests and preferences for investing in specific sectors. In the very first stage of fundraising, start-ups don’t often have access to this information and cannot extrapolate which investors to strategically target as a strong fit. With so many available options, identifying the ideal investor can become overwhelming and time consuming. Time and again start-ups make the mistake of approaching misfit investors and this can become very inefficient and costly.
Lack of Resources
Assuming a start-up is able to successfully identify the ideal investors, the next stage of challenges stem from a lack of resources. Data requests from investors can be extensive and require hard core skill sets to gather effectively and efficiently. From legal, to finance, to technical knowledge and unit economic requirements; investors can demand a plethora of diversified information. Because start-ups have constrained budgets, accessing the required skilled labor and resources may not always be an option. While there is an exhaustive list of tools such as cap table management platforms, BI dashboards, data rooms and more that can assist start-ups in this process, these tools have their own shortcomings and can be expensive. Start-up leadership therefore choose to self-study and take on these tasks and responsibilities with limited resources themselves. This impacts the quality and amount of time required to complete the data requests.
Due to the challenges described above, an average fundraising round can take 6-9 months and involve a significant amount of data collection and negotiations. During this period, founders and start-up finance teams find themselves distracted from the primary objective of running their company. The opportunity cost can have a severe impact on the business and this has routinely been amongst the leading causes for start-ups failing.
Unfamiliar Legal Terms
After a start-up is successful in overcoming the challenges highlighted above and arrives at the term sheet negotiation stage, they face yet another hurdle stemming from lack of experience and familiarity. Due to budgeting constraints, while legal teams can assist start-ups with vetting term sheets, more often than not, they are not engaged in negotiating the commercials. For startups, the terminology on a term sheet alone can be a challenge to decipher. Investment firms have far more experience and resources negotiating term sheets and can strong arm inexperienced start-ups to agree to unfair terms. Some of the ways in which this can happen include investors offering overly high valuations, rewarding themselves with higher liquidation preference rights that may lead to founders losing control, KPI based valuations that impact the strategic growth and profitability of the company and restricting access to other potential investors.
Clearly fundraising remains a key challenge for start-ups and can be attributed as a leading cause for their high mortality rate. Start-ups could benefit from assistance in this regard. The WOWS platform, designed by veteran investors and start-up leaders, has been created to tackle the aforementioned problems and help start-ups fundraise smarter and more successfully. It is essentially an end-to-end ecosystem consisting of tools to bolster fundraising and can be an asset for these growing businesses.
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