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In the previous editions of this series, we covered two key pillars on which your entrepreneurial venture will grow, viz. business planning for scale up, and managing human capital (leadership transitioning). The third key pillar that determines the sustainable growth of your venture is your financial strategy: the capital. Over the years, I have come to realize that the summation of business+management+financial strategy is equal to the investor strategy.

With a solid business plan, which you are convinced about, you effectively communicate your idea to the investors/financiers. While some sail through, many crumble at this level itself and are not able to see the light of day.

Raising funds for your startup/entrepreneurial venture is a true test of your entrepreneurship ability. Equally critical is to efficiently manage the funds, to ensure ongoing cash flows and maximize returns for the investors/stakeholders.

The investment cycle of a startup begins with personal investment of the entrepreneur characteristically called the 3Fs: Friends, family and fools. This is typically the phase of testing the product/service in the market.

As an entrepreneur, you must utilize this phase to get your firm’s investment plans ready and position it favorably for the next level of growth.
Securing funds for your firm is a highly demanding process, and it becomes imperative for the entrepreneur to get things right from the beginning.

Getting your firm investment-ready and mobilizing funds
The Indian entrepreneurial ecosystem is still at a nascent stage, and access to finance remains a key challenge. With the entry of early stage growth funds, launch of innovation/entrepreneurial funds and entrepreneur-themed competitions, the investment climate is certainly improving, and entrepreneurs are getting a number of opportunities to showcase their business models to the investors.

While you get ready to look for investments, carefully evaluate the quantum and timing of investment that your firm will need, and identify sources and associated risks of various alternatives (banks, angel investors, grants, friends and family).

Funding from friends and family may also be available on easier terms, but it may also cause personal pressures during tough times.

Bank lending comes at a higher cost, and has limited flexibility in terms of repayments that may strain your cash flows. Sharing the risk by getting outside investors to finance your business will also entail sharing of profits and management control. You need to arrive at the right combination of financial alternatives, which is suitable to your business and circumstances.

Your startup pitch needs to be presented successfully to the investors, and should be prepared and delivered from the investors’ perspective covering the value proposition, target market size, likely competition, your management team, key financials, scale up plans, and most importantly exit plan for the investors.

Be prepared to be a hard negotiator on pricing and terms. Many investment offers fall apart at this stage due to inflexibility of the management on pricing. You will be spending a lot of time with your investors over several years. So, be prudent while choosing partners for your firm’s growth.

Ensuring discipline in managing funds
A strong value proposition with a well presented plan and a convincing entrepreneur will help in getting the initial breakthrough to raise capital. With the investors’ capital flowing into your business, comes the next responsibility of efficient allocation and management of funds. Even a healthy business is vulnerable to adversity if cash flows are not suitably tracked and managed.

Forecast your firm’s cash flows
Cash flows run with a business cycle, with money flowing in and out at different stages. Preparing cash flow projections, in line with your firm’s expansion plans, enables you to forecast timeliness of the cash flow mismatches and proactively plan to plug the likely cashflow gaps in future.

Set internal controls
Even with detailed cash flow forecasting, you may at times end up in a cash shortfall situation. It is therefore, important to set up appropriate internal controls that flag the early warning signals by monitoring the accounting ratios, reviewing the cash flow forecasts, working capital cycles etc.

Watch expenses carefully
As a growing firm, the focus of the management is usually on top line growth and cost management sometimes gets ignored in the process. This is not sustainable and you may soon see costs going out of control and eroding margins and returns. Costs should be continuously examined and reduced through payables management, the use of technology, vendor rationalization etc.

Manage exit timing for strategic investors
Investors put in their money in your venture with expectations of timely exit with high returns. The recent Facebook investment deal stirred up a debate on its listing plans. You will face similar pressures from investors on listing, security, next round of funding etc.

Exit timing needs to be meticulously planned considering your expansion plans, market conditions and expectations of various stakeholders.
Every business has a “hockey curve” phase, characterized by significant investments across capital expenditure, brand building and operating losses.
This is also a testing time for the entrepreneur, the management and, most of all, the investors.

The entrepreneur and the management, through prudential financial discipline and the right investment partners, should be able to solicit sufficient confidence in the investors.

Investors in turn need to partner with the management/promoter during the formative phase of the company, by contributing their skills and capital.

Rana Kapoor is the Founder, Managing Director and CEO, YES Bank.
©Entrepreneur February 2011

Tags:
cash flows, maximize returns, Rana Kapoor, YES Bank