What will you discuss if valuation is not a variable?
I spent most of my Sunday at IIT Bombay as one of the 14 investors in the Ten Minute Miillion event. In its 3rd edition the format is inspired by Shark Tank insomuch that a selected group of investors (and there is a beeline to be part of this panel) hear a 5 minute pitch and are given 5 minutes to do a Q&A with the founders. After which they make a decision to invest between 100k to 1.5 million rupees into the startup. All the investors display their bids on a placard and the organisers total up the bids to announce whether the startup has received enough bids to fulfill the 1.5 million investing round. If the startup gets bids below the 1.5 million minimum the round has failed and they do not get any money.The event is held during IIT Bombay’s E Summit and judging by the presence of well known angel investors, the excellent pitches to a room for 300 that was packed to overcapacity and they received raucous applause when a successful funding went through – it pointed out that this was definitely the place to be on Sunday at the E Summit.
To ensure that the deals committed to, go through, there are number of the investment cycle steps that were completed prior to the pitch namely, the valuation, the share-holders agreement, the amount of the raise and a basic level of DD. The only thing left for the founders and investors to do post the successful raise, is to complete the execution and to adhere to an honor code between the founder and investor to complete this process or risk being black-listed from next year’s edition.
Much of the investors on the panel have been in attendance at this event for the last 2 years, so there was a lot of learning on the best practices and the common pitfalls which an investor should be careful of.
The event went off very well. I saw 6 pitches, bid on 4 startups and 3 of them were successfully oversubscribed. The format is quick and the energy levels remained high throughout the 3.5 hours we were there. The stories from the event will be remembered for months to come and the 3 companies we are investing in are promising startups with excellent potential.
When the valuation is not a variable the quality of interaction between the founders and investors changed dramatically. The investors ask “smarter” & insightful questions to better understand the business and to better understand whether the team can deliver on its execution promise. The event also debunked a common misconception that investors are interested in low share prices and one can entice them by giving them low prices for shares. The words of Sage of Omaha, Warren Buffet, “Price is what you pay and value is what you get” rang true yesterday when on level playing field, all startups that had agreed to the same valuation and the same amount of raise, there were startups that failed in raising even 20% of the 1.5 million rupee mark!
In my personal experience, startups that put up high valuation expectations in their presentations, chop off their own feet by diverting the focus of the investor from “is this startup worth investing in?” to “is this startup worth that much?”. The first scenario it is future potential of the business that is under scrutiny but in the second scenario it is the performance of the startup/founder until today under investigation. For early stage companies the second scenario puts them at a significant disadvantage and it may make sense for early stage platforms to bring deals that have pre-agreed terms (like the kind that existed at VentureNursery) and focus the attention of the investor on the business than on the valuation.