SRI Capital’s Shweta Singh on Prioritizing Value-add Over Valuation
There’s a lot more that goes into fundraising than pitch decks and term sheets. Labs mentor Shweta Singh, principal at SRI Capital, held a Labs session all about fundraising, from the type of investors to target to how much equity investors expect founders to retain. Here are six key pieces of advice.
1. If you’re a niche business, seek niche investors
“For traditional business models, and by that I mean companies that are purely tech-leveraged businesses or are tech businesses, my advice is to go with traditional VC investors who’ve been investing in the space for a long time and could bring a lot of value to the table over and above their capital,” Singh says.
“But for niche businesses that are not very well understood, unless you can find an investor who understands what you’re doing, it doesn’t make sense to raise money from them just because they’re giving you a better valuation,” Singh says. “It’s more important to get a strategic partner who fully understands you and worry less about valuation, because valuation only lasts for that particular round anyway. But the right partner could add value that goes beyond multiple rounds of fundraising and actually put you on a much faster trajectory.”
You may get a slightly lower valuation with this approach, but “you should think of that as the additional cost of getting their valuable insights for your business in the long-term,” Singh says. “Because if they really know the space you’re in, the money they bring would be inconsequential to the wealth of knowledge that they could have and the doors that they could open.”
2. Consider seeking funding from family offices
“Family offices can come with deep knowledge of certain industries due to the businesses they run,” Singh says. “And they're also usually very good entrepreneurs in the sense that they typically haven't had to raise a lot of money, or any money, and so they know how to build a business that has a very sound business model. A company that actually makes money—that's how most families made their wealth. They could be fairly valuable investors as long as they have knowledge about your space and bring their operating headset, which they've had the benefit of experiencing through their own family businesses, to the table.”
3. Don’t chase valuation over value-ad
Singh says this is one of the biggest mistakes she sees startups make while fundraising. “Especially at early-stage, what startups don’t realize is that your chances of survival can improve drastically if you get the right advice, which can only come from a seasoned partner,” Singh says.
“If you're a founder who comes with domain expertise and deep networks and that's the space you're building a business in and you're very confident that you can execute, by all means, go ahead and pick the better valuation term sheet, because you're confident that you can go the full route solo,” Singh says. “But I’ve been an entrepreneur myself and I can tell you the path is very lonely and it usually involves multiple heartaches along the way. You think you know everything, but when you start getting down to it, self doubt can creep in. Those are the times when you can really rely upon someone who can give you the right advice.”
“Partner with someone who has knowledge and expertise, but also someone you can talk to and relate to because in a lonely moment, it's your investors and the people you surround yourself with who will help you get through that phase,” Singh says. “Entrepreneurship is a lonely journey. Don't alienate yourself more by surrounding yourself with folks who won’t be there when you need them. I'm a big believer in raising capital from founder-friendly faces.”
4. Know that fundraising will take longer than you imagine it will, and prepare for that
“Entrepreneurs are forever optimistic, and some of them underestimate the amount of time it could take to raise money. You only see success stories of companies raising multi-million dollar rounds, but nobody tells you that it could very well have taken them a year to do it,” Singh says. “They may have gone through 80 rejections before they got their first yes.”
“You might think raising a seed round could be a two or three month process, and for the best startups working under the best market conditions, that’s absolutely possible,” Singh says. “But more likely than not, you find that it's not always an entrepreneur's market. It’s usually someone in the middle between in investor’s market and an entrepreneur’s market. That means funds have more people chasing them than they are chasing themselves. Therefore you need to be prepared that the process could take longer, and you need to make sure that you have the necessary capital to sustain the business the process. I see people give up when fundraising takes longer than they expected and it’s not because they're not good entrepreneurs; it's just that they never got the advice to plan for all these contingencies.”
5. Protect your equity stake in the company
“If I'm an investor looking to invest at a series A round or a pre-series A round, I would like the founders to own vast majority of the company, meaning somewhere in the range of at least 60 to 70 percent,” Singh says. To do that, “make sure you price your round correctly in your earlier stages and don't give up too much equity, because it's just the start.”
The reason why this is so critical is that “if your company does succeed, one of the most heartbreaking things to have to go through is having your company be worth millions, even a billion, and you as a founder have very little skin left in the game,” Singh says. “We’ve actually gone and corrected this problem on the cap table in certain companies because we believe it’s a big issue and should be addressed.”
“But the complete opposite, of not diluting at all and wanting to keep complete control of the business, is also the wrong approach,” Singh says. “It’s a very delicate balance. But as an investor, I like to see my founders owning a large chunk of the business.”
6. Keep your board small to start
“If you’re Pre-Series A or Series A, there really isn’t any reason to have a large board. I come from the school of thought that you should have one or two investor board seats and maybe another two or three either founders or advisors who join the board for balance,” Singh says. “But if there are say three founders, I’m never a fan of having all of them on the board because it slows down decision making. Having balanced, smaller boards keeps you nimble.”
Learn more about fundraising, from exactly what to include in your pitch deck to how to connect with investors once you're in the room, here.
This post is based on content from a WeWork Labs programming session.
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