Note: The views & opinions expressed in these essays are strictly my own, and not those of any entity I may be associated with as an employee, consultant, promoter, investor, etc.ARCHIVES
Technology Entrepreneurship in India - Teams
Technology Entrepreneurship in India - Generating Revenue
Technology Entrepreneurship in India - Raising Capital
Equities, ETFs, F&O
Oct 2011: Equity Risk Premium for India
Jun 2011: Investing in Indian equities
Technology Enterprises in India
Nov 2010: Technology investment in India - WATER
Aug 2010: Technology enterprises in India - 3 avatars
Risk Capital for MSMEs
Mar 2010: Risk mitigation for investors in MSMEs
Mar 2010: Why don't (Indian) MSMEs get risk capital?
Feb 2010: Angel investing - Will it work for Indian MSMEs?
Feb 2010: What's so special about innovative MSMEs?
Feb 2010: Where do Indian/NRI (V)HNIs invest?
Feb 2010: Funding options for innovative MSMEs in India
Jan 2010: Innovative MSMEs in India
How much money should you raise?
(Last revised Mar-2012, Send comments to firstname.lastname@example.org)
Amid their constant need for capital, entrepreneurs must strike a balance between:
Matters get complicated due to the uncertainties inherent in technology R&D and customer traction. Entrepreneurs - and investors - typically use milestones, burn-rate calculations, capex & HR needs, etc. to estimate capital requirements.
One of the thumb-rules that entrepreneurs can use is capital efficiency; defined as the amount of capital typically required to grow a company to a certain level of sustainable annual revenue. Also, at that revenue level, the company should be profitable enough to (partly) reinvest its earnings.
Obviously, the typical (revenue : capital) ratio varies widely across industries (e.g. Web 2.0 versus drug discovery). Worse, 3-5 year financial projections are usually way off for startups - making it difficult to gauge total capital requirements.
Regardless, by keeping a reasonable range in mind, an entrepreneur can devise a multi-round fund-raising strategy. Such a strategy would include reasonable step-ups in valuation, tied to technology and market milestones.
To arrive at this range, the entrepreneur needs to clearly understand the target market segment, and the company's revenue potential when it turns profitable.
Consider a startup targets the orthopaedic surgical implants market in India - its relevant market is likely to be Rs 50 - 100 crore. Of this segment, the company aims to capture Rs 10 - 15 crore. Such a venture is likely to become profitable when it reaches Rs 3 - 5 crore in annual revenue. The typical capital efficiency ratio of such an enterprise is probably in the range of 2:1 to 3:1, based on similar companies created in the past. Thus, you can now estimate how much capital will be needed:
With a 2 cr target in mind, the entrepreneur can plan a 3-round fund-raising strategy:
Round 1: Rs 20 lakh, Round 2: Rs 50 lakh, and Round 3: Rs 1.3cr.
Clearly, the estimates for break-even/eventual revenue and capital efficiency ratio are different in each company's context. However, the model still applies.