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Why we rejected $100k in funding when we had next to nothing in the bank

I started my first business at the age of 16, selling products door to door. Since then, I have acquired over 10+ years of experience in entrepreneurship, marketing, and businesses dev across industries like EdTech, E-commerce, and many others. And now, in 2016, with a renewed focus, me and my team have founded a fashion tech startup, GetNatty, that provides an online platform to represent the creative and hidden talent of young and emerging fashion designers so we can make designer fashion affordable for the masses.Earlier this year, my team was offered US$100 000 (or INR 6 million) in funding with a 1.5 CR convertible note for a one-year-old startup. We had to politely decline.

Wait, what? You must think we are crazy for passing up on such an amazing opportunity when most entrepreneurs probably wouldn’t. But hell yeah, we did! And you haven’t even heard the worst part: after spending almost a year as a bootstrapping startup, we barely had enough money to survive the next month.

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This whole time, our primary goal was to test our hypothesis, improve our MVP, tweak the business model, figure out our acquisition funnel, understand our customers, and try to go above and beyond to turn every customer experience into a positive one and then learn from their feedback. This meant we had to continually experiment, iterate, and optimize. Our new product launch was also scheduled in three months. Despite the turbulence, our team took each day as it came like true warriors with esprit de corps.

You may love us or hate us for making this decision, but we knew deep down what was best for our startup and we made the (right) decision, taking a leap of faith that it’ll work out just fine in the long run.

So what was the reason for such an erroneous (for some) or wise (for us) decision? You can make that call at the end of this article.

Too much or too little money?

Let me go ahead and assure you that no amount of money is too much or too little if you have a solid plan on spending it wisely. This is particularly true when the plan is backed by several months or years of experiments, research, and hypotheses tests using different permutations and combinations. These results can be further evaluated by using various metrics and KPIs to demonstrate that your business can turn operationally profitable even at scale.

While our concern wasn’t with the amount of money being raised, I felt urban startups would have higher chances of survival if they adopted conservative spending. Entrepreneurs have also become familiar with the Cockroach Theory.

Thanks to folks like Shradha from YourStory, Alok from RodinHoods, and many others, including our Marwadi friends (thanks, Rohit) who have been moonlighting with us on how to grow a real business the hard and profitable way and to focus on sustaining our business first, and scaling up second.

No outside investors

We kept all of these in mind when we were dealing with the investors. We never really wanted to raise a single rupee more than 6 million from these (tech-noob) investors. But they imposed a condition for us not to accept any outside money and wanted us to rely solely on their group/pool of investors for our subsequent funding rounds.

This went totally against our long-term goals: getting seasoned and tech-savvy investors who would not just write us a cheque but also give us access to their network and time, so together we could build and scale the profitable way.

Such unwilling behaviour was a big red flag for us because our startup’s growth trajectory could be compromised if we were to follow their way. In a startup, it is the people who bring their rich experience and network to the table that is invaluable. For an early-stage company like ours, it is perhaps even more valuable than raising money.

Too much equity dilution

This is one of the obvious reasons to say no. However, this depends on which stage the startup is raising money, what space they are in, and how much the startup is worth in the eyes of investors.

But in general, an early-stage company like ours (GetNatty) which is currently raising its first investment of US$100,000 should not dilute more than 8-12 percent of its equity. In our particular case, the investors involved were asking for triple that figure—north of 30 percent.

This obviously killed the deal then and there and spoke volumes about the type of investors we were dealing with.

Smart money or inexperienced money?

Though novice investors may seem unthreatening at first, they can be highly dangerous in the long term. Indian startup ecosystem cheerleaders like Inc42’s Pooja or those from YourStory, RodinHoods, and other publications have extensively covered this topic, so I won’t go into the details.

What I’d like to point out is that the offer we received from the investors was actually their first startup and tech investment, as they belonged to a traditional real estate business background. Enough said. We also tried to convince them to do a syndicate, but the idea was altogether dismissed, so we did what we had to do.

Loose operational and financial control

Initially, some investors will tell you that they believe in you, the founder, and not really in the company. They might tell you that they want to be your partner, not just an investor—that they were inspired and mesmerised by you, your vision, and your charm blah blah blah. And that’s exactly what they told me. It may make you feel good for a while, but the reality was that we needed a deal which was in line with our company’s objectives. It was time our team put that first, before everyone and everything else.

The investors offered us money with the caveat of operational and financial control. This meant every penny we would spend, every decision we would make, should first go through them. They also wanted to disburse money every two to three months depending on the requirements, after presenting them a budget.

Yes, welcome to the stone age of doing business where growth is measured decade-on-decade.

Do you still hate us for rejecting the offer?

Although the above five are the main reasons we had to decline their offer, there is also one additional point that I have observed and learned in my four years of working in the startup space.

Purely ROI-driven

While growth and rapid scaling are imperative metrics startups should chase, it should not come at the cost of profitability. A startup needs to learn to strike an optimum balance between the two.

But some investors that we came across were only interested in the numbers and not in the operational hurdles we used to face or our big vision and passion for doing things differently. Clearly, such people are not visionaries and will never bother supporting you in your business operations/growth. It’s better to go for the long haul and persistently try to find the right people rather than carrying the burden of half-baked investors who suck the lifeblood out of your company and don’t let you grow to your full potential.

After pitching to more than 50 investors, thank god we finally found a bunch of believers who have decided to back us.

I hope my experience can help fellow entrepreneurs evaluate their own situations and make suitable decisions, as you are the best judge for yourself—not the world nor the investors!

Cheers and live strong!

This article by Kaizad Hansotia originally appeared on Tech in Asia, a Burn Media publishing partner.

Feature image: Images Money via Flickr.

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