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Raising capital · 7 min read
Equity fundraising myths MSME promoters believe, and the reality
Many promoters avoid outside equity, or chase it, because of half-truths. Here is what is usually said, and what the process actually involves.
Raising capital · 7 min read
Many promoters avoid outside equity, or chase it, because of half-truths. Here is what is usually said, and what the process actually involves.
Most myths about raising equity come from two places: stories about a few famous startup deals, and a fear of losing the business you built. The reality for an Indian MSME is quieter. Equity is a negotiated partnership, usually for a minority stake, with conditions you can read in advance, and it suits only some businesses at some stages.
Below are the beliefs we hear most often, with a plain explanation of how each one actually works. None of this is legal or tax advice, and every deal differs, so treat it as a way to ask better questions.
Selling a share of the company does not by itself hand over control. Ownership is divided into percentages, and many investors in MSMEs take a minority holding. Control then depends on the documents, not only the percentage: who appoints directors, which decisions need the investor's consent, and what happens if targets are missed.
That is why the term sheet, the early outline of the deal, deserves close reading. Some investors ask for veto rights over specific matters, such as raising more capital or selling major assets. These are negotiable, and a thoughtful promoter reads each one asking whether it protects the investor's money or restricts everyday management.
The honest summary is that control is shared in some areas and kept in others. You decide, before you start, which decisions you are unwilling to share, and you look for investors comfortable with that.
The loudest announcements involve technology companies, but outside investors also back manufacturing, services, healthcare, logistics and consumer businesses. What they want is a believable path to growth and a reasonable way to exit later, not a particular sector label.
Asset-heavy or slow-growing businesses may attract different kinds of investors from fast-scaling ones. Some funds look for steady earnings and expansion plans, while others look for rapid scaling. Matching the investor's focus with your profile saves months of unproductive meetings.
Be realistic as well. Many perfectly good businesses are not a fit for outside equity because their growth is steady and modest, their margins are thin, or the promoter wants full ownership. For them, debt or retained earnings may serve better, and that is a valid answer.
There is no monthly instalment, true, but the capital is not free. The investor expects a return, usually from the business growing in value and the shares being sold later. Your cost is the share of future value you give away, and that cost can be very large if the business does well.
Think of it as a trade. Debt costs interest and demands repayment on schedule, but when it is repaid, the lender leaves. Equity costs ownership permanently and brings a partner who usually has opinions about strategy, hiring and reporting.
Compare the full cost, not just the cheque
Before choosing, imagine the business three or four years from now doing well. Ask what the investor's share would be worth then and whether you would still be comfortable with the trade. Do the same exercise for debt and compare.
Valuation, meaning the price put on the whole business, is only one term in the deal. A higher headline figure can come with tougher conditions, such as rights that protect the investor if later rounds are cheaper, or targets tied to the release of money. A slightly lower valuation with clean terms may leave you better off.
Valuations are also opinions built on assumptions: your forecasts, comparable businesses and the investor's appetite. They can differ widely between investors without anyone being wrong. Use an independent view of value as a reference, not as a promise of what the market will pay.
| Term | Why it matters |
|---|---|
| Rights on exit | Decides who is paid first and how much when the company is sold |
| Protective consents | Lists decisions that need the investor's approval |
| Staged release | Ties money to milestones rather than paying all at signing |
| Future dilution | Shows what happens to your share if more capital is raised |
A strong deck opens the door, but it rarely closes the deal. Serious investors carry out due diligence, which is a structured check of your financials, legal records, contracts, tax position, operations and people. They compare what you said with what the documents show.
The checks reward preparation. Records that are tidy, numbers that reconcile across statements, and related-party dealings that are properly documented all build trust. Gaps or inconsistencies do not always end a deal, but they slow it down and can reduce the price or add conditions.
So the work that most improves your chances is often unglamorous: clean books, up-to-date statutory filings, written contracts and a clear record of who owns what. Starting that work before you approach anyone is far cheaper than doing it under deadline.
A term sheet is usually a statement of intent that lays out the main commercial terms, and much of it is not legally binding, apart from certain clauses such as confidentiality. The money arrives only after due diligence is satisfactorily completed and definitive agreements are signed. Things change in the gap.
Do not commit spending, hire against the funds or announce the raise until the money is received. Ask your legal adviser which parts of the document bind you, for instance any exclusivity period during which you may not talk to other investors.
The relationship begins at closing. Investors typically expect regular reports, board or review meetings, and prompt notice of important developments. They may also expect you to follow agreed budgets or governance practices.
Used well, this is an advantage. A good partner offers introductions, hiring help and discipline. Used poorly, it becomes friction. A reliable clue to how it will go is how the investor behaves during diligence and negotiation, so notice that, and speak to other founders they have backed if you can.
Equity can be the right tool at the right time, and the wrong one at another. If you would like a second pair of eyes on whether and how to raise, Lalsar Capital can review your case.
Questions
Not automatically. Most MSME deals involve a minority stake, and the promoter remains in charge of day-to-day management. What matters is the detail of the agreement: who appoints directors, which decisions need consent and what happens if targets are missed. Read these terms carefully with a lawyer before agreeing.
Not necessarily. A high headline figure may come with strict exit rights, milestone conditions or protections that cost you later. Compare the whole package, including who gets paid first on a sale and how future dilution works, rather than the valuation alone.
No. It usually records the main commercial terms, and most of it is not binding. Funding depends on satisfactory due diligence and signed final agreements. Avoid spending or committing to others until the money is actually received.
Some can, depending on growth potential, margins, records and the promoter's willingness to share ownership. Investors vary in what they look for. A plain assessment of fit, before any approach, helps you decide whether equity, debt or neither suits you.
Usually yes. Expect agreed periodic reports, review meetings and notice of significant events. The exact requirements are written into the shareholders agreement, so read them before you sign and make sure your team can deliver them.
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