What You Must Do When Funding A Start-up

Every start-up entrepreneur with a dream believes he has an excellent idea and raising money should not be a problem. Yet, I have seen that getting adequate money to sustain a project is possibly the single most important challenge faced by any entrepreneur.

A start-up entrepreneur should try and keep sufficient funds to meet at least 12 months of projected burn. Without providing for sufficient funds, the stress on the entrepreneur becomes intense and diverts his energy from the primary task of building his business. Meeting planned business losses becomes a huge challenge.

The safest way to build any business is with your own funds but for most promoters, these funds are finite and not sufficient – especially if your dream is bigger than your savings. I had earned and saved money in my professional life. Before I started out on my own, I set aside some money which I call “drop dead” money. This money, I believed, would be sufficient for my family to continue to maintain their standard of living if something were to happen to me.

After investing all my surplus funds, except the funds I had set aside as my “drop dead” money, I first turned to my family for funds. It is not the quantum of the money that matters, but the confidence one’s family shows in your dream. Nothing shows more commitment to a business enterprise than a family investing its own money.

Once my family had invested the money they were able to, I turned to my friends and a number of them took a decision to invest in my dream. But their investment was driven more by their trust and confidence in me as a person.

As the company started to grow, a number of friends, former colleagues and friends of friends started to contact me to invest some funds. In order to receive their funds into the company, we had to quickly set up systems to manage these funds. A lot of time was spent in preparing presentations to share my dream with these investors.

As the company kept growing, more and more individuals expressed a strong interest in investing their money. Today, Guardian has more than 45 investors and I am grateful to each one of them for the trust and confidence they have reposed in me and my colleagues. So far, they haven’t got returns on their investments, but I am sure they will be able to get substantial returns when we list the company.

Raising money from friends of friends, people whom you have never met, can become a challenge. While I have a moral commitment towards the investment of my friend’s friend, this person looks at the investment differently and I faced a few shareholders who had actually asked me to refund their equity after their share certificates were issued, knowing fully well that under the law, this cannot be done.

It is always good to sign an agreement with each shareholder – so that no differences would arise later on. Also, it is important for the entrepreneur to ensure that he gets the appropriate rights to keep the business of the company moving. Matters such as “tag along rights” and “drag along rights” are best discussed and agreed upon at the time of signing the shareholders’ agreement, rather than leave it as an open issue for discussions and debate at a later date.

About the author: The author is the chairman of Guardian Pharmacies and the writer of the best-selling books, The Corner Office and The Buck Stops Here. Twitter: @gargashutosh