I wrote this article for the Sepetember 2010 Anniversary Edition of the Entreprenuer Magazine (India Edition). Orginal article can be found here

Money will find you

What is the best way to get funded? This was an important question that Nandini Hirianniah (my co-founder at Madhouse) and I were trying to answer around the beginning of 2005. Madhouse Media (our first startup) was an organized movie rental venture—envisioned to be the Netflix of India. Netflix then was a super hot startup in the U.S.

The following were our thoughts on funding at that time:

• Both of us had returned to India from the Silicon Valley
• I had worked for five years with a couple of Valley startups, both of which had raised $50 million plus in funding
• Nandini had seven-eight years of media experience with many media giants and a few funded media startups
• We had the relevant experience to spearhead Madhouse—Nandini in media and communications, and I in technology
• We had quit our well-paying jobs, withdrawn our PFs and burnt our bridges
• We took the “right” path and prepared an exhaustive B-plan

According to the B-plan, we needed Rs.1 crore to launch the business which would break-even in over two years, and become a Rs.50 crore-Rs.100 crore business in about seven years with subsequent rounds of funding!

It all looked good and we hit the road to raise our Rs.1 crore. The initial step was to find contacts who could connect us to potential investors to pitch for funding. It wasn’t an easy task, but we were confident. We started getting initial meetings in Mumbai/Delhi through our network and more contacts through people who we pitched to.

An initial meeting was never a problem. People spent two hours with us, they seemed to like the idea, asked a lot of questions which we almost always managed to answer; all seemed to go well. But often they would go silent post the first meeting and, in some cases, after a couple of interactions. Follow-ups resulted in them saying, “We’d like to pass on this opportunity.”

We were at it for two months, busy pitching, getting feedback, tweaking the B-plan, following up, but no one wanted to fund us. Now the question was, what next? Should we continue looking for money? Should we get back to our jobs?

That’s when we had our moment of reckoning! While discussing what to do next in our mentor’s office in Mumbai (head of a larger retail chain), Nandini and I had an informative conversation with our mentor, who had been really supportive and had given us access to some of his contacts to pitch to. (The following is an account of the conversation, not the actual one.)

Mentor: Looks like you guys are not going to be able raise money. But are you still passionate about the business?
Us: Yes, of course.
Mentor: How much money can you invest?
Us: If we have to, we can manage around Rs.8 lakh, Rs.4 lakh of our savings and Rs.2 lakh each from our respective parents.
Mentor: In that case, my advice is, go back to Chandigarh and launch a pilot of your service using this money. If you do a good job, money will find you.

After that, we stopped all efforts to raising money, went back to Chandigarh, trashed the Rs.1 crore B-Plan and created a new, simpler Pilot Execution Plan. This new plan had just one goal: Our monthly revenues should be more than our monthly expenses, before the Rs.8 lakh got over!

If we achieved this, Madhouse would be a “customer-funded company.” We were back in Chandigarh at the end of February 2005 and launched our service that May. We had some good initial customer traction. By August, we had a couple of angel investors interested in investing around Rs.25 lakh in Madhouse.

We did not go looking this time, but they found us! How? Execution is better than a business plan. One of the angel investors had heard about Madhouse and the founding team’s passion through a Madhouse employee.

The angel called me and what started off as a casual call turned into long discussions over many calls. But the initial calls were never about funding.
After some days, he just asked, “So how are you guys funding your business?” I said, “We have invested our personal money and have borrowed some from our parents. We are confident that we can make our business profitable.” He said, “I’ll  be interested in investing. I can check with my IIT friends if they want to invest. I can help out part-time and connect you to folks in my IIT network.” About a couple of months after that conversation, we raised Rs.25 lakh from two angels.

Finally, we had found the answer to our question. The best way to get funded is: Figure out how much capital can you raise on your own to get started. Get all your savings, your Provident Fund, all the money that you can get by selling your liquid assets, you credit cards, etc. Also check how much money you can raise from your close friends and family without giving them too much trouble.

Tips for aspiring entrepreneurs:
1. Start by using your own money and if things go in the right direction, then invest money taken from friends and family.
2. Treat the friends and family money as convertible debt. If the venture takes off, give them equity. If not, treat it as debt and return it.
3. Raise around Rs.5 lakh-Rs.10 lakh from the above two sources. It’s not easy but possible.
4. Launch with the goal of becoming profitable before you run out of money.
5. Execute the plan with a lot of passion.