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Category Archive : Lessons

The art of how much to raise

In the past several weeks, I have been astonished at the size of seed rounds that founders expect to raise in their first round. My jaw hits the table when a founder blindsides me with requests to raise seed rounds of $1 million to as high as $3-4 million!*

These are the start-ups that have

  • Opened their doors for business within the previous 12-18 months.
  • Have an ARR of less than two crore rupees ($300k).

Surprised at the massive requirement of capital, we go through their financial model. Within a few minutes of looking through the model, the spreadsheet would give out a chilling fact:

The founders first decided the amount they were raising; then, they decided how to utilise the amount that is raised!

It may seem like smart scheme when pitched to novice investors, but it is a foolhardy attempt to do that to an investor with experience.

For instance, to show full utilization of the amount the founders pad certain numbers. So, a close inspection of the fund utilization plan exposes the founder’s true intentions, i.e. that they wanted a reverse calculated an ego-boosting valuation for themselves. To achieve that goal they were willing to misrepresent facts. How does a founder come back from that image?

The good news is that – there is a better way.

My advice for founders that are creating their fundraising plans is to start with a well thought out answer to a famous Peter Thiel question

What is the one thing you know to be correct but very few agree with you?

In simple words, what do you need to prove to your team, your advisors, investors, etc. to elevate their belief in your idea? Whatever you need to do to gain their confidence that is the goal of your fundraising efforts.

For example, if everyone in your inner circle does not think that your company cannot sell x number of your whacky widgets in a specified period – then that is precisely the thing you must prove! Your goal must be specific, measurable, attainable, and realistic, and time-bound so that you aren’t on a wild goose chase.

Second, estimate the time and the resources (servers, people, space, travel, etc) required to achieve your goal. Pay close attention that your estimations do not have un-utilized or under-utilized resources. In fact, I advocate allocating 20% fewer resources than your start-up needs. It forces your team to innovate, after all – scarcity is the mother of innovation!

Third, figure out the exact cost of your resources over the period of their requirements. This exercise is a crucial step. Because if you had correctly estimated the resources and the time they’re required, you will (now) have the EXACT amount you must raise to achieve your goal.  

Fourth, add 25% top of the number you had in the previous step. The extra amount is your buffer, i.e. it is the extra cushion you’ve kept to account for any mistakes you may have made in your calculations. The extra cushion gives you the breathing room to commit errors – an essential fail-safe for an early-stage startup.

Now you have the exact amount your start-up needs, not a paisa more and not a paisa less. Next, go out there and raise this amount!

This proper prior preparation will give you the confidence to answer questions about the “why” behind your fundraising efforts. Your confidence will impress your prospective investors as you come off as a professional founder instead of a novice founder who thought they could pull the wool over the eyes of a seasoned investor.

As an investor that has sat on the other side of the table for almost eight years, this level of preparation and maturity from a founder is rare. But, when I meet a prepared founder it invokes confidence that the founders will utilize my precious and expensive capital judiciously. In fact, I may be swayed to give a premium valuation to such well-prepared founders – exactly what the founder wanted but now he/she earns it with respect!

* – Oddly enough, the high expectations were from founders who spoke in millions of dollars instead of crores of rupees. It ignites the patriotic fervor residing in Vinod – a sight to watch!

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How to deliver bad news to investors

Hey founders, today I’m going to address a crucial topic: When to update your investors with bad news. If you’re an entrepreneur and running a business, you will have to give bad news at some point.

There are many ways to give bad news. One of them is not to give any news at all, let everything go down, and then explain why you have only ruins and not a building on fire. This method isn’t recommended, but some people choose it – I don’t.

There are minor issues or bad news that can be managed in your monthly and quarterly updates. Like missing your quarterly numbers by 3-4%, or if you’re having a tough time recruiting people, or if a particular distributor who was contributing a large part of the business dropped you for reasons unknown or customer complaints. These are the kinds of things you can manage in your monthly and quarterly updates.

However, certain kinds of news shouldn’t be neglected. These should be communicated to the investors immediately. If a co-founder has left, or one of the co-founders has been diagnosed with severe disease and will not be available for the next 6-8 months, or your fundraising efforts are falling through, or a significant client that contributes a substantial chunk of the profit has left. These are the kinds of situations that need to be communicated to the investors immediately, preferably not on e-mail.

What I recommend is organizing a conference call or an in-person meeting. Explain what is going on to the investors face to face, in a way that is direct with no sugar coating. Be humble about the fact that things have gone wrong. Don’t try to play up things to avoid the investors being angry at you. If the situation is terrible, investors have a right to be irritated and will point out things that could have gone better. You should take criticism in your stride as you’re expected to execute successfully. Take responsibility, be direct, and you’ll find that investors will probably come back with solutions for you to manage the mess.

In adverse situations, you should have a turnaround plan. I would recommend having one if you’re going to have a face to face meeting. If you don’t have one, let the investors know and get back to them in a few days or a few weeks. There may be some questions the investors have, for which you may not have the answers. I would recommend not making up turnaround plans on the spot. If you don’t have the answers, tell them. Mention that you’re going to get back to them in 5, 7 or 10 days (or whatever number of days you believe you need) but ensure that you keep those promises.

Delivering bad news should not be difficult. It’s only tricky when you don’t want to give bad news, and you feel hiding is the best way forward. But it doesn’t solve anything. In fact, it only leads to the problem of getting bigger. If hypothetically, the company shuts down, and investors find out that you knew in advance, you could find yourself in a hot legal soup.

I’ll leave you with that, and I would love to know how some of you guys have shared bad news in the past. Also, if you have tips for other entrepreneurs, do share them in the comments.

The failure vortex and how to get out of it

It is easy to figure out when founders have been pitching for investments without any success and for a while. The pitches become nonstop monologues that will end at the allotted time or when abrupted by questions from us.

Naturally, the founders overcompensate to avoid failing on another pitch. They try different tactics to avoid disappointment, but a series of rejections can take its toll on a founder’s psyche, and slowly the tactics become bad habits. Many founders are not aware that these bad habits are creating a vortex that is attracting further rejections. What seems intuitively correct is practically fatal.

So here are a few tips for founders that will help them in their next pitch.

  • Eliminate the problem areas in your pitch deck

If you’re getting stuck at the same point in your presentation, then it may be an excellent time to eliminate that slide. If that is a slide that you cannot eliminate then use an example to get your point across.

Doing the same thing again and again but expecting a different result is the definition of insanity- for a good reason!

  • Speak at a measured space and

The two significant signs of low confidence are speaking in a high pitch and speaking at a fast pace. The good news is that there is an easy fix for this.

  1. Record yourself pitching so that you hear the difference between your regular and confident voice and that you use during pitching.
  2. Do test pitches where you speak in a tone much lower than your standard baritone and speak at slower than your average space.  
  3. Write down, “breathe” at a spot where you can see it during your pitch and breathe.

These exercises may seem stupid to you, but you have to ensure that your message is getting into our heads. When you talk fast at a high pitch and without taking a breath,  the only thing I’m thinking is – something is wrong with this business!

  • Act as if

Yes you may have just enough money left to take the Uber ride home

Yes your core team may be on the verge of quitting

Yes your parents are hounding you to take that job you hate so you can make ends meet and;

Yes all this stress is tearing you apart inside

However, those are your problems that we are not aware of right now. During your pitch, we should not be feeling the weight of the issues we’re inheriting. Instead, we want to dream about the promise your opportunity holds, and we want to know you are the guy that will get us to that promised land.

Therefore, clear your head before you start a presentation. I watch specific videos or listen to particular music that gets me in the right frame a mind before I make my pitch for investment. I force myself into a mental state where all the issues in my personal or professional life don’t get reflected in my pitch for investment. For my investors, I am ‘the guy’ wearing the confidence of the success, and a bank account overflowing with money.

Confidence is infectious and FOMO is not a myth!

  • Do not brag or lie

Asking you to act as if may seem like I am encouraging you to lie or brag but let me be clear that that is far from the truth.

A successful person does not need to stamp their success everwhere, and neither do they have to remind people of their success. Most of the successful people I know underplay their success, displaying palpable confidence that is felt but not witnessed.  

Therefore when founders start bragging about meetings with Saif, Sequoia, Lightspeed or well-known super angels in a feeble effort to create FOMO they are pulling the rug from under them. We can safely estimate at what stage of the start-up’s development these top funds will take an interest in investing in them.

Therefore, bragging about meeting x, y or z, when you don’t have a POC, is a sign of your immaturity in understanding how the venture capital ecosystem works. To misunderstand their interest in taking a meeting is a sign that desperation is getting to you – not something you wish to convey to a potential investor!

Act as if is an attitude, a demeanor, and a mental state. There isn’t any space for lies and show off when you are acting as if.

I Invest in Risky Assets but I am not a Gambler!

A few days ago while rushing into a meeting, I heard someone call out my name. I was in a hurry, but I knew the person, so I politely spoke to him for a few minutes. During the conversation, he reminded me of a venture he had recommended that I almost invested in i.e. I committed capital, but backed down due to serious concerns with the founding team. I am aware (and as he went on to remind me) that that company went onto become quite big and it frequentlty comes up in conversation with people and our prospective LP’s as a part of our “anti-portfolio”, but I do not think that I “missed out” on making the investment, because even if it were offered to me today (under the same conditions), I would stand by my decision and refuse to invest in it.

I have been thinking about why I continue to abide by certain principles because eventually monetary returns are every investor’s ultimate goal, right? I know my reasons for abiding by by certain principles, but it is only today as I was getting ready for my day, that it struck me how to explain it.

I am not a gambler, but an investor in extremely risky early stage companies. Each investment has a thesis behind it. That thesis is validated by my team, my close circle of investor friends, my inner circle, venture partners, the external and internal due diligence teams. They ensure that these theses are in fact not a figment of my own imagination. I also have an independent investment committee (IC) who have to agree with my investment decision (Thesis) for the fund to be able to invest in it. Out of the 8 deals that we have taken to the IC 3 have been rejected. Although it may be disheartening at the time, we have later thanked them later for making those decisions. All these steps and hurdles are taken to mitigate the risks of early stage investing – these are done by design and that design is respected for the risks it mitigates.

That is not to say that I don’t test out new theses or edit my theses from time to time. Last year, I invested in Lyft (through my family office) to test whether the precursor to pre-ipo rounds in tech companies makes investable sense. For the record, even though we’re up 2x, I would’nt do it again.  That being said, these are educated guesses and even though it may look like a gamble to an outsider – it isn’t. Whether that thesis is right or wrong is a different matter.  

Therefore, I believe that when I allow a sense of adventure and gambling in our investment style it can quickly spiral out of control for both me and my team i.e. if the gambling starts to make us money. Our risk mitigations, the paranoia that we could be missing out on something, and the fear of the risk that comes with each investment would quickly dissipate because with gambling success comes a sense of invincibility that encourages taking larger risks. This process ultimately ends (and has) disastrously when the market drops which is inevitable at some point.

Only when the tide goes out do you discover who’s been swimming naked.” – Warren Buffet

So yes I am aware of all those investments that I missed out on that could have made me millions, but it would have been a gamble and gambling is not my business.

38/2019

The Udupi Approach

In many cases, food-tech founders extend their line of products to capture as many customers as possible, if they aren’t convinced about the size of their target market. There is a business case for extending into multiple product lines to provide complementary options to a loyal target market, but the decision to go wide right at the start is like opening a new udupi restaurant in Mumbai  that serves all cuisines to cater to  every guest but loses its core of serving the udupicuisine. Therefore, I jokingly call a ‘go wide’ approach of an early stage founding team as the ‘udupi restaurant approach’ as this approach is harmful whether you are in food-tech or not.

Let’s be honest, sales matter. But when you have limited resources in an increasingly noisy world, the quality of sales matter even more. Therefore, it is important to build a niche and own that space in your target segment. That will make your customers your best salespeople i.e. they will recommend you to their network which will bring in tons of new customers. For example, when I randomly asked people in my network for the best place for South Indian food in South Mumbai the answer was Muthuswamy, for people in Central Mumbai it was Madras Café, in Bangalore it was MTR and in Hyderabad it was Chutneys. These people were willing to advocate why their recommendation was the best.

However, when I asked the same audience for the ‘best food place’s in their vicinity, – they were stumped. They almost immediately questioned me about what my preferred cuisine is, whether I was looking for a family restaurant or a date place, what my budget was etc. They did not know how to answer the question until they had some clearer direction. Can you imagine (now) what happens when your start-up does everything? Even your best and loyal customers will not know what to recommend you for!

What is dangerous is that they could be recommending you for something that isn’t even the path you planned.  More dangerously, the customer who is promoting your product may not even be in your target segment. And most dangerously, they may not be promoting you to people who fall under your target segment. Such a sale is more toxic than beneficial!

I understand that it is scary to be focussed but there is a lot of value in doing so. Customer feedback focussed on a concentrated product line will indicate whether you should pivot or accelerate your build-out. However, when there are multiple product lines catering to several audiences it pollutes the feedback, creating a lot of noise, making it hard for you to tune out the disturbance and assess what’s important in order to drive decisions – much like choosing what to eat at a Udupi restaurant at mealtime!

36/2019

Things Not To Do if You’re in the Entrepreneur’s Inner Circle

I have to admit that after my interaction with Dr Marcel, I have been a little obsessed with researching about entrepreneurial stress. So, over the last weekend, I read the treasure trove of links I had been collecting on Pocket and what I learnt was eye-opening.

Some of the most hard-hitting articles I found were The Psychological Price of Entrepreneurship written by Jessica Bruder, The Quiet Price of Entrepreneurship by Chris Cancialosi and 7 Reasons Entrepreneurs Are Particularly Vulnerable to Mental Health Challenges by The Failure Factor podcaster, Megan Bruneau. All the articles were written from a personal point of view and I could relate to them because not only have I been through what they were talking about (as an entrepreneur) but have also witnessed (and continue to) the emotional turmoil that foundership entails as an investor/mentor/board member. Let me assure you, it’s not all rainbows and butterflies.  I should also admit that the strong urge to write these two posts came from a personal episode, I recently faced.

The last 12 months have been nothing short of roller coaster ride in both my professional and personal life. The stress of operating a new business (read: launching a fund) while handing over the reins of businesses that I was previously managing to other partners was exponentially increased due to the diagnosis of a serious and life-threatening illness to an extremely close confidant and family member. This episode took place when things were just starting to look brighter after another close family member’s life-threatening illness was successfully cured. Just when it looked like there was a light at the end of the tunnel, I realized that it was a freight train coming towards me at full speed.

It helped that things at Artha were on a roll. Everything we were doing, we were doing well, and the recognition of our efforts wasn’t happening only in India, but on a global level. However, my stress levels were increasing unchecked and I was working myself down to the bone. However, I did keep up a strong image that everything was okay, that I could handle all that was being thrown my way, until the day my 25th flight of the year (yes, its been that sort of year!) was about to take off.  

Just as my flight was taxiing out, I got some shocking advice from one of my closest advisors which went completely against Vision 2022 for Artha. Normally, I would have reinforced the vision to my stakeholder, and I have done that several times in the past (and at times, even to myself) but somehow this particular advice upset deeply me, and I couldn’t put a finger on why.

The advisor, who was a part of my inner circle had acted on the advice of a third person who did not have a complete understanding of all the things that were happening at Artha.  Therefore, the advice was an opinion stated as a fact and did not hold up to any scrutiny. It was advice that was both, dangerous to provide and to hear.

That I went through this episode at a time when I was researching the importance of mental health for entrepreneurs made me realise the importance of sensitising the founder’s inner circle and the role they play in deriving peak performance from the founder.

As I had mentioned in my last post, most top creators/performers/founders have tight inner circles which provide a cushion from the noise of the outside world, as though it were a sanitised bubble. This inner circle acts as a sounding board that at most times aids a founder to discover answers for themselves. The members of the inner circle could exist in the background, but they have a vital role to play and their importance can be gauged from examples of people like MS Dhoni, Sachin Tendulkar, Warren Buffet, Virat Kohli, VVS Laxman, Michael Jordan, and many more who have openly spoken about the important roles their inner circle has played.

Therefore, while it is as important for the inner circle to keep a check on who they give access to in order to maintain the cleanliness of this sanitised space, it is also important for them to keep a check on the advice that they provide. I have personally witnessed the destructive power of polluting this sanitised space in the case of the swift destruction of my ex-boss’ legacy and have read about it in the case of Vijay Mallya, Anil Ambani, Vinod Kambli, Amanda Byrnes and several others.

I am quite sure that there need to be some clear guidelines for the inner circle to follow, on the things they should “not do”. Essentially, what I have realized is that just like it takes a village to make a man, and an ecosystem to build a start-up, it takes a strong inner circle to build an entrepreneur. So, if you are a friend, an advisor, a mentor, parent, sibling or a family member to an entrepreneur, this is a list of things you have to stop doing (seldom against your best intentions) because it is causing us ‘entrepreneurial- stress’.

  • Projecting your own doubts onto us

By nature, every successful founder has ton of self-doubt. We doubt the assumptions we’ve made on our business plans, whether we will achieve all the goals we’ve set, whether we will have enough time or money to achieve those goals, whether the market is changing against our expectation or whether our competition is pulling a fast one on us. I could go on for days on these self-doubts, but you get the idea.

We do not need any more doubts added to this list (unless it comes from someone working with us). In fact, we need space to clear our own doubts, therefore, adding additional ones (which sometimes aren’t even well researched) is detrimental, period.

  • Making us focus our attention on results v/s the process

The media judges a company by how fast they achieve results, but it is important to remember that the best businesses are (and will be) the ones that spend time developing the right processes which in turn, deliver consistent results, even if it might take a bit longer. Just like instilling good habits in a child, building the right processes take time and patience.

When our closest network lets outside influences cloud their best judgement and then (they) attempt to colour our lenses, it is going to lead to a long term disappointment. Instead, it is imperative for our support system not to judge us based on results – good or bad.

  • Constantly chirping in our ears about our mistakes

We often make mistakes, tons of them, and we will make tons more. Our failures are scars in our memory and I rarely come across a founder who hasn’t learnt from his/her mistakes. What is important is that we understand the reason for the mistake, learn from it and avoid repeating it. Our inner circle can help by ensuring we do not drown in failures. But it is fatal to consistently chirp in our ears about where we’ve gone wrong causing us to relive that stress yet again.

  • Publicly sharing our failures and privately praising our successes

I have learned that the best way to protect a close relationship with anyone is to praise them publicly and criticize them privately. However, I see many inner circlers doing the exact opposite. This creates an excruciatingly difficult social & personal situation for us.

I simply do not advocate false or effusive praises.  In that case, you can avoid praise altogether. But criticizing us openly (or behind our backs) and putting us in a defenseless position is honestly as good as shoving a knife in our back, and I’d request that you avoid it at all costs. Just speak to us directly in private if you have any criticism whatsoever.  

  • Drawing comparisons

Like there’s an Afridi for every Sachin, a Djokovic for every Federer or a Suarez for every Messi, every business has a competitor or peer that could be performing better or worse than them (at some point in time).

While I agree that it is important to be aware and informed about what our competitors (or compatriots) are doing, our business model and path to success do not need to be the same. I believe in emulating versus imitating, but the choice of whether we should change (or not) should be left to us.

  • Forcing on us the opinions of advisors we have not chosen (most important!)

Maybe you’re at a party or a social gathering and you meet someone who gives you their opinion on our venture (with whatever titbits of information they have). You find their opinion/ judgement to be awesome and it completely changes your outlook towards our business. Now, instead of challenging your newly acquired opinion by first researching the advice you’ve been given or checking the credentials and the experience of your advisor, you blatantly pass that advice on to us and present your acquired opinion as fact.

Our entire business plan that could be moments away from validation, is now asked to be altered because you believed this ‘new advisor’ knows more about our business than us. This causes major stress and can affect our relationship in the long run.

If you have been doing this to the entrepreneur who counts you as their inner circle, please stop. Instead of meaninglessly passing on one person’s opinion, you should either put in time and effort and do some research or discuss it with us with full disclosure on who provided the advice so that both you and I can collectively come up with the right way forward.

Just remember that not all inner circle members are needed for advice on the business and each person plays an important role but as long as they do not try to become what they are not. So just like an expensive car should only be tinkered with by a well-trained technician, business models should only be tinkered with, by people who are or have been deeply involved in the business and have an experience in doing so.

You should adequately challenge any ‘random’ opinion you hear, before uttering it to the entrepreneur. Even then, that suggestion should only be followed if (and only if) the entrepreneur is convinced to take action. After all, it is the founders who have to run the business and not the person whose half-baked advice you have been listening to.  

32/2019

Are entrepreneurs high performance athletes?

While I was in London last week, I was lucky enough to have fish and chips with Dr Marcel Muenster of The Gritti Fund. Marcel has had a unique career path of becoming a fund manager, he studied medicine in Germany, did a Masters from John Hopkins and was an entrepreneur before taking the plunge into becoming a fund manager. Since we were together on a couple of panels for a Family Office conference on alternative investment strategies, we got talking and realized that we have a lot in common despite our career paths having started in wildly different ways. However, when Marcel spoke about utilising his medical knowledge to get the best out of entrepreneurs, I was hooked.

Marcel is setting up a unique accelerator experience for entrepreneurs in the Middle East through The Gritti Fund. One of the important USPs for this accelerator will be that it will require entrepreneurs to work with a psychologist who will mentally condition their minds for peak performance. Marcel believes that entrepreneurs go through similar experiences as high-performance athletes i.e. the performance pressure, a roller coaster of highs and lows and the failures outnumbering successes by a long margin. Therefore, instead of treating the entrepreneurs like a herd of cattle he wants to carefully manage their psyche and bring out the best in each one of them.

I resonate with his thoughts because I have been on the entrepreneurship roller coaster several times as both an entrepreneur and seed investor. I have been through the months and years of sustained pressure and have seen my entrepreneurs facing the same. Many times, I can only watch as the entrepreneur makes a series of blunders due to the pressure that his entire ecosystem has put on him/her; it irks me to be a silent bystander in such situations.

It is serendipity that I am in the middle of reading the autobiographies of two widely successful athletes i.e. Michael Jordan and VVS Laxman. It is clear how the former’s mother and latter’s uncle played instrumental roles in protecting these athletes from parental, societal, friend-related and performance pressures. They built a kind of cocoon around them during their formative years and performing years and continuously steered them to maintain focus on their craft. A similar comparison could be drawn in Warren Buffet’s autobiography where his wife and friends built a cocoon around Warren so that he could remain lost in his world. Marcel had thought through about marrying both these concepts, it was one of the big ‘aha’ moments of my life.

31/2019

Your ‘Growth’ is Hurting Your Job Interviews

Currently, I am in the middle of interviews to fill several positions at Artha and one of the first questions I ask candidates is why they are changing jobs? The common answer I receive is that they are looking for growth.  Most of these people have been at their current jobs for less than 24 months, so it makes me wonder whether the growth they seek is truly in terms of experience or in the size of their pay-check. Usually, it is the latter and their feeble attempt at answering this truly important question hurts their prospects with us as it does with most employers. Allow me to explain.

I have been a part of the workforce since I was 16 years old and the first job I got paid for was in my first year of college at the age of 18. In the next 4 years of college, I went through 4 jobs and ran 2 businesses from my room. One of those jobs was selling retail jewellery which I did throughout my 4 years. In that, I found my calling i.e. sales. My next job was door to door sales, a position I held for 5 years before becoming an entrepreneur within the same organisation. When I came back to India, I went through 3-4 jobs in a (relatively) short span of time before deciding to dive full-time into setting up Artha.

Having cycled through almost 10 jobs I am in no way advocating that a person should not change jobs or look for better salary packages. In a free marketing and capitalist economy this is exactly the type of behaviour that is expected and encouraged. However, I could, as I expect anyone should be able to decide whether they love a company/opportunity/job within the first 6-12 months. Therefore, if I was investing any time beyond that in the company, it meant that I was certain I would make a future for myself there.

It’s not that I didn’t feel like quitting my jobs several, several times. For example, there were times when I felt that I was going to be stuck in my position for ever or that I was getting looked over for promotions or that I was getting jaded, but I stuck it through those times. Then seemingly out of nowhere a new opportunity, office or position would open up and due to the fact that I was there at the right time, as the right person, just like that the juggernaut was rolling again.

So I feel that if temporary situations would have affected my decision to stay with the company, then that should have happened in the first 6-12 months, because in my opinion, that is usually the timeframe when a person should have decided whether they like the job role, the boss and can live with the hygiene factors at their workplace. However, if it takes over 24 months for someone to decide whether their current job will excite them or not, that doesn’t build my confidence in your assessment abilities or more likely questions them.

There could be several situations that could have forced you to change your job (location change, family obligation, bankruptcy) and these might give you a good story to tell that is both convincing and genuine. However, if you are changing jobs for “growth” related issues but it took you more than 24 months to realise it, then you need to have a bloody good story for me to believe you (and my standards are high).

30/2019

How to Secure a Job in Venture Capital

My team and I have been actively looking for 2-3 members to join us at Artha Venture Fund. The excitement around the opportunity to identify high potential business models in India and slew of new funds (including ours) that have been announced in the last 12 months, have created a lot of job opportunities in VC firms. Also, there is something inherently sexy about venture capital. For the fraction of capital that we manage (in relation to the entire world of capital management), we carry a disproportionate amount of media attention and importance.

Therefore, it isn’t surprising that our job openings received hundreds of responses. Our HR head, Jimmy has had his hands so full, that I was forced to call him in on an off-day (when there is relatively less buzz in the office), to sift through the stack of resumes. While Jimmy and I agreed on shortlisting about 10% of the resumes, I was surprised at how little thought the applicants had put in before sending in their applications. I realized that most of the applicants wanted to become venture capitalists without truly understanding the necessities, expectations and restrictions of the job.

Instead of replying to each person with a questionnaire to evaluate their understanding of the job, I read Seth Levine’s posts from 2005 (How to become a venture capitalist), 2008 (How to get a job in venture capital (revisited)) and 2019 (How to Get a Job in Venture Capital); and added my thoughts to create this list.

1. Understand how VCs make money

We make money by charging management fees on the total amount of capital we manage and a carry on the profit we make from the fund’s corpus (some funds charge a carry per deal basis, but I do not agree to that method).

The management fee is paid to the fund’s partners to cover their salaries, rent, travel, etc. Since the management fee is fixed unlike a Mutual Fund (a post on this later), a VC does not encourage (or appreciate) annual increases in salary. As Seth accurately puts it, the partners will (as Seth puts it) hire you if you cost less than the opportunity cost for the partners having to put in their own time. VCs are much more accommodating when it comes to carry and you should expect a large portion of your compensation to come from it.

The simple math for a carry on a VC fund that returns 25% IRR on a $50 million fund over 8 years with a 20% carry would be almost $50 million infused into the carry pool. Most funds distribute 50% of that to the team (in our case it is over 60%) but even a 2% share would make you a millionaire!

It was surprising how little research the people sending in their resumes had done on our fund. This is despite the fact that we have an expansive website, over 100 media mentions in the last 12 months, a daily blog (almost every day) written by yours truly and our CFO, Vinod has the most connections on LinkedIn after Reid Hoffman. If you are clueless about us (or any other fund for that matter), it does not bode well for your job’s prospects since a large part it involves conducting tertiary research!

2. Research the VC before applying

Note: It is mighty important you look at the size of the fund and multiply it by 2% to understand the total pool of resources a fund has to pay out its expenses. If you feel that you need anything beyond 10% of that pool, you will have a tough time getting the job. 

3. Be in it for the long haul

If you tend to switch jobs every 2-3 years for “better prospects” you should not join a VC firm. It takes at least 2-3 years (in my experience) to understand the investment philosophy of a VC firm and if you switch jobs right as you are getting the hang of it, you are committing hara-kiri with your career as well as your pay check, as you will (and should) lose most of their carry.

Your career path, should you choose to persevere would be:

  • 2 years to move from an analyst to associate
  • 2-3 years to move from associate to junior partner/principal and
  • 2-5 years to become a partner

4. Do not expect quick answers but persevere

VCs can easily fit 42 hours of work into a 24-hour day (if it were available) and you are essentially a “cost centre” for us so getting in is very (very!) difficult. In one of his posts, Seth talks about how it took 3 months for a “hot referral” from a fellow VC to even get a first meeting with him. Therefore, do not send in your resume and sit tight for an answer. Keep reminding us that you are someone we should meet (and why) and that will change our view of you into a profit centre instead of a cost centre.

5. Find a way to break-in

Breaking into a VC can be difficult, so you should take whatever opportunity you get and start. You may even need to start as an intern or join one of the companies that the VC is investing in to get started. You may even handle something completely irrelevant to the final position you are seeking but get in there, into the meetings where VC’s evaluate new investment opportunities and portfolio companies. It will be worth the effort IF the goal is to become a partner in a VC fund.

6. Get connected in the ecosystem

To get into a VC fund, you must be noticed and talked about either amongst founders or investors. Find out about the start-up events taking place in your city and try to network at those events. Once you find the VC fund you want to get into, connect with their top brass by giving them good startups that they could look into (make sure you know what they invest in as well) or find a way to help one of their investee companies.

This takes some effort but when your name gets referred through the ecosystem, it carries a lot of weight.

7. Become an angel investor

The best way to display your understanding of venture capital is to become a venture capitalist! It is quite easy to find and invest in companies today, so deploy a little bit of capital, carefully though. This is not the sure shot way of getting a job but if your investments can be held up to intense scrutiny from the partner who might interview you, it would set you above the rest.

8. Get the relevant experience

I am not an MBA from any fancy school. I got my MBA from doing 5 years of door to door sales and 9 years of being an entrepreneur. Therefore, I am staunchly against getting an “empty” MBA i.e. without relevant work experience prior to joining the MBA as well as doing the MBA just because it was the next most logical thing to do. But it does help to open a few doors if you have a fancy MBA school tag. I know there are several funds that almost exclusively hire people that went to an IIM or top 10 schools.

However, what’s really important is that you have on-the-job experience prior to joining a VC fund. So, get an internship at a VC fund or join an investment bank where they will teach you how to create financial models, investment memorandums, etc. Experience in negotiating term sheets, shareholder agreements, etc. is a big plus.

9. Join a startup

Coming from an entrepreneurial background, I have a lot of respect for people who have worked for 2-3 years in a start-up i.e. a company that started from scratch and built itself into something. If you have experience of chaos turning into something, you will have the attention of many a VC (including an early stage fund like us).

As Seth mentions in his blog, if you have management experience from working with a start-up, you could directly walk into an associate’s role. And if you are a founder of even a moderately successful start-up, you could easily get the role of a principal or junior partner with a fund.  

10. Build a social profile

Nowadays, it is common for a VC to go through your social profiles, blogs and articles (if any) to get a better sense of the person you are, and if you are someone they’d want on their team. Therefore, it is important for you to have a blog where you put down your thoughts on the trends in the VC space (or even blog about your problems with finding a job in this space!), comment on the blogs of other VCs and follow them on Twitter and LinkedIn. These efforts will pay off in a big way when you are being researched by your target VC.

It is important for us to understand how you think just like it is important to know what you have done.

11. Make a VC job your Plan B

I differ with Seth here. He recommends having a Plan B while you are on your quest for a VC job. While I believe that despite all these tips, it would be advisable to avoid taking a VC job. It is a tough, tough, tough (I can’t emphasize enough) industry to break into, therefore, you should keep a VC job as your plan B. You can always be a part of the ecosystem without becoming a VC, so why endure the headache? It isn’t a job for everyone, only a few get successful at it.

I became a venture capitalist by accident. But am looking at my foray into fund management as an entrepreneurial opportunity to create multiple funds with several fund managers that can manage money with responsibility and excitement. That’s why I am in this role.

What is your reason?

29/2018

Influencing v/s Incentivizing Customers

I have been reading Drive by Daniel H Pink and not only am I surprised by how little I understood about customer motivation but also have found the answer to why almost any company that has tried to buy customer loyalty has failed (and miserably at that). Yesterday, as I was setting up my newly created family office in Hyderabad, I got into a discussion about the influence versus incentive strategy that startups utilize to gain initial traction utilised by startups with the principal of a newly created family office in Hyderabad.

The discussion started over how Paytm was going to recover the losses it was willing to make to get customers to transact using its platform. Earlier, I would have defended Paytm stating that these incentives were like dangling a carrot to get customers into the habit of using Paytm, but I’d also ask, whether the platform understands that selling its service below cost means that they value their service at zero (or less than that). As I am learning through the research carried out in this book,  using incentives to alter consumer behaviour can have similar effects as addictive drugs have on the human body. For example, in Paytm’s case the massive incentives lead to a sale, but in order to get the customer to transact again, Paytm has to keep increasing the size of these incentives. All the while the platform remains unaware, if the customers would want to transact at all, if the subsidies were taken away. In fact, it could even lead to a situation wherein users that would have used their services regardless, have developed the habit of being incentivized and therefore expect incentives to be doled out each time. In essence, the customer acquisition cost becomes a transaction acquisition cost, a cost that continues to escalate with each interaction – a truly dangerous situation, in my opinion.

I realised that I myself, was guilty of this behaviour last month while searching for the alternatives that were available to buy a new phone. I was willing pay the sticker price to offline stores, but got lured into buying the phone online with Paytm’s offer to give me 8% cash back; a cash back to subsidise the interest on EMIs and money in my PayTm Mall wallet. It was a no brainer for me to choose this option that was giving me the same phone at a deeper discount than any offline retailer was willing to offer. However, when I was looking in the market to buy something for my dog, the lack of any cash back offers from Paytm prevented me from using it, and I chose Amazon instead. With the cash back money in my wallet I should’ve used Paytm, but intuitively only wanted to utilise Paytm if and was getting a deep discount.

This behaviour and its end result remains the same for any venture using an incentive laden customer acquisition model. The customer needs more and more incentives to be loyal and will stop using the product/service the minute the incentives are taken away.

In fact, Ronnie Screwvala had asked this question on twitter a few weeks ago and received a cheeky reply from Vijay Shekhar Sharma but not an answer.

27/2019