Smarter capital for startups: What founders get wrong about fundraising

Take Dazo, a Bengaluru food-tech startup. It had a fantastic idea: "food on demand" for urban professionals. The firm raised an undisclosed seed round from prominent investors, including those who invested in Amazon early on. But Dazo was unable to raise follow-on capital, as its unit economics didn't support further investment. With no solid financial plan and restricted cash flow, it could not match the deeper-pocketed competitors such as Swiggy and Zomato. It had closed down by 2016, not because individuals did not adore the product, but because it lacked the proper capital structure to make it through a funding war. 

The takeaway is straightforward: funding does not equal survival—financial prudence does.

Also read: Predictability is a big innovation when it comes to VC term sheets

The Real Cost of Equity Financing

If you're an early-stage founder, your first instinct is likely to be raising equity financing. Why? Because it feels like free money. There's no debt to pay back, no interest accumulating—just investors handing you millions in exchange for a piece of your company.

But here's what founders often don't think about:

• Losing Control: Every funding round gives investors more power—board seats, voting rights, and the ability to overrule your decisions.
• Dilution Dilemma: By the time most founders are at Series C—when startups raise capital for aggressive growth, acquisitions, or IPO readiness—they only own less than 10 percent of their own business. Every round of funding takes a huge bite out of founder ownership, leaving them with minimal control over the business they created.
• Pressured Growth: Investors are looking for high returns. Even though the company isn't prepared for it, that entails quick scaling.

Sounds stressful? It is. Just ask the founders who've been pushed out of their own companies because they didn't structure their capital wisely.

Smarter Ways to Fund Your Growth

If raising venture capital isn't the holy grail, what should founders do instead? The best founders don't just ask, "How much money can I raise?" They ask, "What's the smartest way to fund my company?"

1. Debt Isn't Always the Enemy

Most founders fear debt as if it were a ticking time bomb. But when used correctly, venture debt and revenue-based financing can actually be a game-changer. Airbnb took on $1 billion in debt during the pandemic, rather than diluting its stake further at a low valuation. Similarly, Amazon borrowed $1.25 billion in its early years to fund expansion, because even Jeff Bezos knew that dilution isn't always the answer.

The takeaway? Debt can be your ally if you use it wisely.

2. Raise What You Need, Not What You Can

Too many startups raise as much money as possible simply because investors are willing to give it. But more funding often leads to reckless spending. The best founders focus on capital efficiency—ensuring that every dollar raised is actually generating sustainable revenue.

Before raising another round, ask yourself questions such as, Are we spending money just because we have it? Is every dollar being spent on something that actually moves the business forward?

Because funding should fuel growth, not just extend survival.

3. Read the Fine Print Before Signing That Term Sheet

It's easy to get excited about a big funding round, but the investor agreement you sign today could trap you in ways you won't realise until it's too late.

• Liquidation Preferences: Investors get paid first in an exit, meaning you could sell for millions and walk away with almost nothing.
• Drag-Along Rights: Your investors can force you to sell, even if you are not willing to do so.
• Anti-Dilution Protections: If you raise a down round, your ownership gets diluted even further.

For instance, in 2017, Snapdeal's investors had more control over the company's fate than the founders did. When acquisition talks with Flipkart came up, the founders had little say in the matter. This is why structuring your investor agreements properly matters just as much as raising the money itself.

4. Build for Profitability, Not Just Valuation

The "growth at all costs" playbook is dead. Today, investors care about sustainability more than hype. The best founders ask themselves, Are we growing just to impress investors, and can we sustain our business without raising another round?

Because the moment you don't need investors anymore, you gain real leverage over them.

The Bottom Line: Control Your Capital, Control Your Future

Raising millions might feel like winning, but if your capital structure is flawed, losing control is just a matter of time. Snapdeal, Zume, and Dazo all had funding, but not financial sustainability. At the end of the day, it's not about how much you raise—it's about how much of your company you still own when you succeed. And that's the real measure of startup success.

 Neeraj Jain, Assistant Professor of Finance, Great Lakes Institute of Management, Chennai

 Priya Kankariya, PGDM Participant, Great Lakes Institute of Management, Chennai