Chasing funding is the easy part

Many businesses often lose track of their main purpose and forget why they started in the first place.

A lot of them get caught up in chasing funding, focusing on investor meetings and financial numbers instead of the customers they're actually trying to help.

It's pretty common to hear founders get fired up about funding opportunities, pitch decks, and potential valuations, but there's something important that often gets overlooked:

Every investor does their homework. Having messy contracts, neglected compliance, or unresolved operations - investors will spot these issues right away.

Instead of moving your company forward, you'll find yourself stuck dealing with past mistakes and trying to fix existing problems.

It’s key to realize that just getting funding won't fix a weak foundation; it usually makes it more obvious.

Investors want to back businesses that are solid and built for the long haul. A company’s ability to last is closely linked to how well it serves its customers.

What Investors Actually Look For

1) Corporate Structure & Legal Foundation

What Investors Check:

- Proper Incorporation: Make sure your business is incorporated under the Companies Act of 2013 and follows all the necessary registrations.

- Clean Capitalization Table: Keep a clear and transparent capitalization table that shows current shareholdings and details of past funding rounds.

- Updated Legal Records: Always have your statutory registers up-to-date, along with thorough board minutes and accurate shareholder records reflecting any changes or agreements.

- Intellectual Property Protection: Safeguard your intellectual property with proper filings and assignments of patents, trademarks, and copyrights, ensuring everything is documented and protected.

Red Flags That Can Derail Deals

- Missing Documentation: Gaps in important incorporation documents or expired registrations can raise alarms for investors.

- Unclear Ownership Structures: Confusion about equity ownership or missing founder agreements can signal trouble ahead.

- Misallocated IP Rights: If IP is owned by individuals instead of the company, it could jeopardize future funding chances.

- Legal Liabilities: Ongoing legal disputes or regulatory issues against the company can turn investors away and shake their confidence.

2) Financial Health & Transparency

What Gets Scrutinized:

- Historical Financial Statements: Investors want to see 3 to 5 years of audited financials, like income statements, balance sheets, and cash flow statements, to figure out if your business is financially solid.

- Revenue Model Validation: It's crucial to clearly explain how your business makes money, breaking it down by customer or product.

- Burn Rate Calculations: Be open about your burn rate, which is how fast you're spending cash, and show how long your current funds will last before you need more investment.

- Realistic Financial Projections: Present realistic financial expectations for the next 3 to 5 years, based on sound market data to give investors confidence in your growth plans.

What Breaks Trust:

- Inconsistent Reporting: If investors find inconsistencies in your financial records or notice missing documents, it could seriously damage their trust.

- Unrealistic Growth Assumptions: If your growth projections are too ambitious and don’t have market backing, it raises concerns about your business’s long-term viability.

- Concealed Debts: Keeping hidden debts or financial obligations under wraps can really shake investor confidence and make them question your transparency.

- Cash Flow Disguises: If you try to pass off cash flow problems as “growth investments,” it might create skepticism and hurt trust in how you manage finances.

3) Regulatory Compliance & Licensing

For Fintech Specifically:

- Documented Licenses: Make sure all essential licenses for your fintech business are in order. You need to have the necessary approvals from regulatory bodies like the Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI), and the Insurance Regulatory and Development Authority of India (IRDAI). Keep them up to date and aligned with the services you offer.

- KYC/AML Compliance: Build good systems for Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations. You should track and record processes for verifying customers and their transactions to maintain credibility in the fintech space.

- Data Protection Compliance: Follow data protection laws like the Information Technology Act of 2000 and the new Digital Personal Data Protection (DPDP) Act of 2023. Make sure you have strong measures in place to protect personal data and allow users to manage their data privacy rights.

- FEMA Compliance: Stay updated on the Foreign Exchange Management Act (FEMA) rules regarding foreign investments, so you have proper reporting in place for any foreign investors in your business.

Compliance Gaps That Scare Investors

- Lack of Regulatory Approvals: Running your fintech business without the necessary regulatory approvals can be a huge red flag for investors and might lead to big problems down the line.

- Inadequate Customer Due Diligence: Having weak customer verification or fraud prevention measures puts your business at risk, which makes it less attractive to investors.

- Data Localization Shortcomings: Not implementing the right frameworks for data localization or privacy can draw regulatory scrutiny and hurt customer trust.

- Sectoral FDI Non-compliance: Ignoring sector-specific Foreign Direct Investment (FDI) rules could lead to fines and hurt future investment chances.

4) Operational Excellence & Risk Management

What Investors Check Out:

- Internal Controls: Set up solid internal controls and a risk management plan to shield the company from different kinds of operational risks.

- Grievance Redressal Mechanisms: Create efficient systems for dealing with customer complaints so that issues get resolved quickly, showing you care about customer service.

- Cybersecurity Policies: Put strong cybersecurity measures and incident response plans in place that get regular updates and testing to keep sensitive information safe.

- Vendor Management: Do thorough checks on your vendor relationships, focusing on managing risks from third parties to avoid problems with outsourcing.

Red Flags to Watch Out For:

- Lack of Documented Processes: Not having documented processes or standard operating procedures can lead to chaos and inefficiencies in operations.

- High Customer Complaint Rates: A lot of unresolved customer complaints could indicate serious service issues, which might scare off potential investors.

- Weak Cybersecurity Posture: A shaky cybersecurity setup or a track record of breaches can seriously harm investor trust.

- Over-reliance on Single Vendors: Relying too much on just a few vendors can create big operational risks if those partnerships go south.

5) Market Position & Growth Potential

What Investors Look For:

- Market Opportunity: Make a strong case for a genuine market opportunity backed by real customer demand, showing you know your market well.

- Competitive Differentiation: Clearly explain what makes your offerings unique and how they stand out from the competition, giving your business a good edge.

- Customer Traction Metrics: Share solid metrics about customer growth, retention rates, and unit economics to prove your business is on the right track.

- Scalable Business Model: Emphasize a business model that can grow easily and has a clear path to making profits, helping investors see potential for expansion.

Final Thoughts

Investors are interested in more than just your business model and financial outlook. They want to see if you can:

- Follow the Rules: Handle all the regulations without getting hit with fines or tarnishing your reputation.

- Create Scalable Systems: Show you can build systems that keep up with growth, even when the founders aren’t involved as much.

- Tell Growth from Sustainability: Understand the key difference between growing quickly and building a business that can stand the test of time, especially when markets change.

Investors often lean towards companies that might not be the fastest-growing but have a solid foundation of reliability, compliance, and a strong market position.

So focus on building a solid operational and compliance framework first, and the funding will likely come your way.