Getting investment-ready: considerations for early-stage entrepreneurs
How does the Aavishkaar Group support early-stage entrepreneurs?
The Aavishkaar Group has always been a firm advocate of the enterprise approach to development and has seeded several initiatives to support early stage entrepreneurs. The group, through Intellecap, launched and managed an angel network to work with early stage entrepreneurs, structure their business plans, build out their financial models and present a high impact investment case to potential angel investors. The angel network also supported entrepreneurs with strategic advisory on things such as market entry strategies, marketing, sales. The Group also runs Sankalp Awards, a premier recognition platform for early stage enterprises across India and Africa. The awards have given enterprises the opportunity to network with investors, peers, government, young professionals and other stakeholders. Several Sankalp Awardees have gone on to raise funding from leading impact funds, as well as mainstream investors.
What do entrepreneurs need to do to get investment-ready?
First and foremost, entrepreneurs need to have built sufficient proof of concept and customer validation. The product or service needs to have been tested in the market and some level of revenue traction needs to be demonstrated. Early stage institutional investors, and even angel investors, are all looking for traction to demonstrate that your product or service is likely to continue to be adopted. Of course, in parallel, the enterprise needs to develop the investment collateral—the company pitch deck that details the product/service offering and the strategy for scale up, the financial model with detailed assumptions for the projections, and audited historical financial statements if the company has history of operations. The investment collateral helps investors understand the historical performance and the plan for the future.
What is the difference between debt and equity? Can you offer entrepreneurs some advice about getting the right capital structure in place?
The actual usage of funds, almost by default, determines the nature of capital an enterprise needs. Debt is mostly used to fund investments in Capex (Plant, Machinery, other fixed assets, etc.). Short term loans are usually raised to fund working capital requirements. Debt can only be accessed if the company is EBITDA (earnings before interest, taxes, depreciation and amortisation) positive, so that the interest cost of the debt can be serviced. Equity is usually used to fund growth of the business, hiring for specialised functions, and investments in marketing and advertisements, for example.
The capital structure of the business depends on the nature and stage of the business, for instance, lending businesses need to maintain a healthy Debt to Equity ratio anywhere between 3:1 or 6:1. As a lending business matures, it can typically leverage its equity more and therefore have a higher debt to equity ratio.
What is the difference between ownership and management? What are the opportunities and risks associated with attracting investors?
Ownership relates to the owners of the company, i.e. the individuals and institutions that have shareholding in the company. Ownership at times can be different from management, especially in large companies. The owners, i.e. the shareholders of the company, can choose to hire a professional management team to run the company at CXO positions (CEO or CFO) that may not have shareholding in the company and work for the company as any other professional employee would.
Investors allow you to dream ‘rationally,’ as they give entrepreneurs much needed risk capital to scale up their business and turn a plan into reality. At the same time, they expect this risk to bear fruit and deliver commercial return. Entrepreneurs need to understand this clearly: investors need commercial return on their capital and hence the entrepreneurs should be planning and thinking of ways to deliver that return right at the time of the investment. If the business is incapable of generating commercial return, then it is perhaps best to not raise equity funding in the first place.
Do entrepreneurs need different skills when working with investors than when working with donors?
Irrespective of whom the funder is, entrepreneurs need to establish a clear and open line of communication with the funder. This means sharing up to date financial performance, impact metrics, or whatever the agreed KPIs are. All funders aren’t the same and may have different reporting requirements, so entrepreneurs need to have resources in their teams to deliver these reports. For instance, a donor may request for IRIS-certified impact reports and hence an entrepreneur may require a resource person capable of developing such a report.
What is needed to scale up the inclusive business sector? What’s on the horizon?
The inclusive business sector is slowly moving towards being mainstreamed. Ideas that were championed by inclusive businesses (fair trade, traceability, re-cycling, producer responsibility, and others) have been accepted by mainstream businesses. For impact to be widespread and far reaching, mainstream businesses will need to adopt the business processes and innovations that nimble and agile inclusive businesses have built. Inclusivity should be built into all businesses.
What is the single most important thing that will help inclusive businesses to achieve the Sustainable Development Goals?
Inclusive businesses must remember that they are fundamentally businesses first and must work toward becoming sustainable themselves. Sustained impact outcomes can only be achieved once the business itself is self-sustaining. Hence, inclusive businesses need to consistently strive for product-market fit and ensure commercial viability of their product or service offering to meet development goals.