Start-up conundrum: To fund or not to fund

This article first appeared in DNA India on 20th July, 2017.

Hiring the right talent is critical to the success of most organisations. It is even more critical for start-ups since they do not have the luxury of making mistakes in hiring. They need to make the right choice everytime. While start-ups, in general, are in a disadvantageous position when it comes to hiring talent, bootstrapped start-ups are under still greater pressure since they can’t afford to pay their hires as much as the well-funded start-ups or other large organisations can. This also has a direct bearing on the question that is often asked in the startup world: “When should start-ups go for funding?”.

The accepted wisdom is that start-ups that try to raise funds too early in their life cycle end up parting with significant equity. On the other hand, those that wait too long can see competitors take the cake because they just wouldn’t be able to keep up with the growth rate fueled by a bigger war chest. A recent article in the Harvard Business Review had me thinking about this conundrum. The article quoted research on data from sixteen countries that showed that there was a significant correlation between the gap in productivity between the most productive (top 10%) companies and their less productive brethren and the gap in wages. In other words, the productivity gap is causing a wage gap.

Think of it this way. People tend to join organisations that they view as being at the top which also tend to be more productive. As a result, the wages also increase and this, in turn, attracts some more of the top talent, causing a virtuous cycle. Think Google, Facebook, General Electric, Hindustan Unilever or the Tata Group. This is why some organisations tend to attract a disproportionate share of the top talent, leading to increased productivity.

Let’s transpose this to the start-up world. Well funded start-ups are able to hire the top talent at significantly higher wages than their less endowed counterparts. So does this imply that the answer to the question that I posed earlier is that start-ups need to get funded fast in order to enable hiring the right people to maintain increased productivity levels? Does this also imply that trading a larger share of equity at the very beginning for the ability to hire the right talent can actually work out in the long run? I don’t have any answers for these questions.

What I do believe though is that the last word is yet to be said on the right approach for start-up funding. Perhaps, debt financing, which is seeing a growth even in India could be the answer to the conundrum, where the ability to raise debt funds early on in the life cycle without diluting equity might well be the way for start-ups in India to move forward.

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