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Category Archive : opinion

Navigating the Indian Seed Landscape

No one can doubt that the Indian PE/VC ecosystem is going through a golden run. The amount of money flowing into the ecosystem is breaking records –records set just the previous year! If I narrow the PE/VC down to just “start-ups” then Indian start-ups have raised $11.3 billion this year – up from $10.5 billion raised last year – the good times are truly here.

This massive influx of money and strong tailwinds make it seem as though raising capital is getting easier. But, with the number of start-ups growing as fast (if not faster) than the money supply, the real picture for a start-up raising money today is – disconcertingly different. The discussion of what metrics does it take to raise a round, what the different stage VCs focus on when you raise, etc. is a polarizing topic. One that I regularly have now with founders who are raising, founders who have raised and with funders of all stages – but there isn’t a silver bullet.

Therefore, when Yuki Kawamura shared Pear VC’s report, aptly titled, Navigating the New Seed Landscape, he could not have sent it at a more opportune time. Mar Hershenson, Managing Partner of Pear VC, created this report analyzing the US VC ecosystem but there are several parallels we can draw for our ecosystem here. For example:  

  • It confirms something that seed investors have long known, i.e., the time, amount and metrics required to raise a Series A round has increased, therefore;
    • The money needed to get a venture ready for Series A has also increased
    • Series A investors want to see positive unit economics and traction before putting in growth rounds
  • Traction has a direct correlation to valuation
  • Second time and successful founders get a premium valuation
  • Where you locate your start-up does affect its initial valuation

There are several other learnings in the report, but the one slide that stuck with me is:

Just replace the names of columns (from the left) with Seed, Pre-Series A (or Angel), Series A, and Public to translate this to our ecosystem’s lingo. However, the vertical order in those columns stays the same
  • A seed investor (like me) backs the team
  • The angel investor backs the traction, and
  • The Series A investor backs the market.

The report then gets into further details as to what your start-up must emphasize when you are raising a new round. It provides a founder the VC view on where your venture must be before attempting to raise that the Seed, Angel, or Series A round. I believe that this presentation is manna for founders. I Whatsapp’d it to my founders in the morning. Now I share it with you!

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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!

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 passionate vs the obstinate founder

Recently, I had a long conversation with someone about the challenges I faced working with an obstinate founder that they referred to me. The person countered that the founder was passionate about their business idea, and I misunderstood their passion. I disagreed with their assessment.

During the week, I have contemplated the difference between obstinate and passionate. I realize that it was difficult to separate the two. Obstinate is often misunderstood to be obsessive; a term often used to describe Mark Zuckerberg, Jeff Bezos, Brian Chesky, Elon Musk or Jack Ma.

I love obsessive founders. I considered myself an obsessive founder. I am probably even more obsessive as an investor. Why VCs love obsessive founders is well explained by Mark Suster in this Medium post titled Why I Look for Obsessive and Competitive Founders. If you are a VC investor, then you should read this post.

Moral: Obsessive is good, but obsessive is not obstinate.

Obstinate is what Oxford defines as stubbornly refusing to change one’s opinion or chosen course of action, despite attempts to persuade one to do so.

Obstinate founders can take a fantastic thing and reduce it to rubble because their need to be right is more important than their need to win. It is the classic winning the battle but losing the war syndrome.

Gordon Tredgold wrote a wonderful article explaining the difference between stubbornness and determination, aptly titled Don’t Confuse Stubbornness with Determination.

In it, he provided a list of signs that can warn a founder whether their stubbornness is becoming an issue.

  • If you never win and you never quit, you’re an idiot
  • Will power vs. Won’t power
  • Remember that your goals must be measurable
  • Think about results
  • Consider adaptability
  • Your goal will remain the same, but your plan for achieving it will be different

His suggestions are absolutely banging on. I encourage you to read the article if you constantly find yourself butting heads with prospective and/or current investors.

The Indo-African perspective on the role of mentors in your startup

Over the weekend, I was a guest of Baljinder Sharma, a serial entrepreneur and a highly respected individual in the India & Africa startup scene. He put together the first India Africa Entrepreneurship & Investment Summit in Mauritius.

The event started as an idea to create a bridge between two ecosystems that houses over 1/3rd of the world’s population. It culminated in a 2-day event attended by over two hundred illustrious participants of the African & Indian early-stage ecosystem.  

The number of close relationships forged at the event is the barometer of success for such an event. On that scale alone – this event was a resounding success. I made several new friends, some from India and many from Africa. I will strongly encourage Baljinder to make the event a permanent annual feature for both ecosystems.

On the first day of the event, I was on a panel with an impressive list of panelists viz, Stephen Newton, Jonathan Mazumdar, Eric Osiakwan. Atim Kabra deftly and expertly moderated the panel channelizing our experiences and energy into a coherent narrative. Our discussion topic – the role of mentors and incubators in our respective ecosystems. Our discussion on mentorship got extremely engaging so much so that we did not enter into any meaningful conversation on incubation.

My co-panelists came up with a host of discussion points, but we unanimously agreed that the title of “the mentor” was thrown around very casually in our respective ecosystems. Often, service providers are self-anointed mentors, and their misrepresentation can have disastrous effects for the founders, their startups, and their investors.

On Sunday night as I boarded the flight back to Mumbai, I put down those discussion points that resonated with me; here is that list.

A mentor should not cost the company money.

This point is not to say that the mentor should work pro-bono. However, mentors that offer hourly/weekly/monthly/annual payment plans are service providers. If your proposed mentor charges money to meet you for an evaluation – please be smart and avoid them. 

A mentor’s role is to guide, not to become the founder.

I have committed this mistake a few times, so it hits home. Many times, founders start abdicating the decision-making role to the mentor, and there are several times the mentor starts getting too deeply involved. The mentor is not the CEO or a co-founder, but neither are they above the CEO or the Founders.

If you have crossed this line in your mentor-mentee relationship already – it is time to scale it back maybe even take a break. 

A mentor’s job is to do /advise you on what is best for you, not to make you happy.

This point is a personal favorite.

The mentor’s role is like that of a coach – they are present for the overall success of your company, not your success alone. Therefore, they must offer advice which is best for the company.

A self-respecting mentor will promptly quit if they get the message that their presence is to be a rubber stamp to your whims.   

A founder should have multiple mentors.

This learning was new to me. A founder should seek out multiple mentors that can help them with different aspects of their business or challenges. As the startup grows, there should be a churn in the mentors with new mentors taking over from the mentors that have finished their role/utility.

A good mentor stands on the side-lines while you make mistakes.

An extension of point 2. Experienced mentors sit on the side-line while you make mistakes even if they could help you avoid them. The lesson of letting you experience failure and learning how to prevent future mistakes is more important than the experience of getting saved by the mentor.

A good mentor will warn the founder of the challenges but leave the final decision on them.

The mentor’s role is to guide the founder through their decisions, but in the end, the founder is the one that must pull the trigger. When a mentor starts making decisions for the founder stops taking responsibility for the results.  

It would be best if you chose mentors that have substantial previous experience in the areas you need help

If you want to learn how to build a billion-dollar startup, who would you go to for help? The founder that built billion-dollar startups a couple of times or the founder struggling to get their startup out of their garage? 

Even though this sounds like a simple point reiterated – I am surprised how many times founders commit this mistake.

The best mentors only take on mentoring projects that challenge them.

Good mentors get sought, but they aren’t running after the money. They are looking for a challenge. A challenge that will stretch them and help them grow thereby (and in most cases) helping the mentor and the mentee.

Mentors that are running after money will accept any project, regardless of whether it intrigues them are not the right choice for you and your startup.  

The very best mentors get involved before the founders know that they need them and leave before the founders question their existence.

An involved mentor that is “in-sync” with their mentee knows precisely when to increase their involvement and when to decrease or terminate their relationship. A mentor that must be asked to leave has stopped paying attention.

It would be best if you convinced the mentor that you are worth their time investment, not the other way around

When a mentor is chasing you, explaining why you “need” their mentoring or pestering you to “sign-up” with them, they are a service provider. Service providers have other motives driving them but they are most likely not in line with your mentoring requirements.

The best mentors are so busy with their projects. They place a high value on their time. Therefore, you must convince them that you are worth the opportunity cost of their time – without using money as the offset.

My takeaway from the panel: Choosing is a mentor isn’t rocket science, but neither is it a game of roulette. Choose wisely through the generous application of common sense.

Let’s talk about entrepreneurial stress

It has been fourteen days since VG Siddhartha took his life. In that time, the entrepreneurial ecosystem has heard arguments from several vantage points to understand the cause of the stress that led to his untimely demise. It is stomach-churning and thought-provoking stuff.

Various arguments attempted to place the cause of VG’s entrepreneurial distress onto a multitude of issues. His close political affiliations, the stress that different business bailouts had put on his balance sheet and even his battles with the income tax department. His balance sheet was funded using debt and private equity; therefore, the private equity guys were to blame as well. However, to place the blame on any one person or phenomenon is to oversimplify a very complex issue i.e., the effects of entrepreneurial stress. 

The one silver lining of this somber episode is that it has got us all talking about entrepreneurial stress. It is a real thing, and there is an excellent chance that an entrepreneur close to you is under this stress right now. Yes, even the most successful ones.

In the Indian ecosystem, a successful start-up founder is treated as a demi-god. The media can quickly relate that entrepreneur into a Tony Stark-type invincible personality – capable of resolving any situation and turning almost anything they touch into gold. The price of this success is steep because the lens of failure is brutal. Ask any of the high-flying entrepreneurs that witness a reversal of fate – the fall from grace can be cruel and lonely. 

The truth is that an entrepreneur undergoes the same level of stress as that of a high-performance athlete. Another reality is that this stress will not vanish. 

The first step to dealing with entrepreneurial stress is to admit its existence. This step is most difficult because it hacks away the cloak of invincibility that entrepreneurs take painstaking effort to build. However, unless we admit that this stress exists, we cannot act on its causes. Ray Zinn wrote a great post on Stress and the Entrepreneur that delves deeper into this.

The next step is to identify the factors causing stress. There are internal factors that the entrepreneur can control and external ones that they cannot. It could be the nature of the business (like running a stockbroking platform), an environmental factor (like the transit time from home to office) or a personality trait (like procrastination and putting off decisions). The factors that can be addressed, should be acted on immediately and earnestly. The factors that cannot be addressed can be overcome through several methods, which high-performance entrepreneurs utilize to channelize their stress positively.

Lastly, once the stress factors have been identified and dealt with, an entrepreneur needs to build a core group of people to fall back on. The people invited to this core (aka inner circle) play a critical role, and they need to be educated on the things not to do.  

This post is one of the toughest blogs I have written because I have had my personal experiences with entrepreneurial stress, which kept clouding my arguments. I kept reverting to the times in my career when I stared from the cliff of despair into the depths of failure. I know today what I did not back then. Even then, I sometimes find myself feeling overwhelmed, overworked, and slightly burnt out. It usually shows up with the burning sensation in my eyes, persistent pain in my back and a marked drop in my physical stamina. 

Initially, I did not know that it was stress. When I could self-diagnose, I took a short vacation, reduced my meetings load or delegated more. The awareness helped with resolution. However, the VG Siddhartha episode has awakened me to change my stance from a reactive one to a proactive one.

So should you.

Why I refuse to promote women’s entrepreneurship

Tomorrow I am judging a start-up competition in Delhi that awards its winner up to Rs. 5 lakhs to start their business. Since the contest is only for women, I have received several messages thanking and congratulating me for promoting women’s entrepreneurship. Unfortunately, I am not a big believer in “women’s” entrepreneurship.

I believe that word entrepreneurship is asexual and to treat someone, mainly because they are a female founder (or entrepreneur), with a different mindset is simply not right. Why should we denigrate a founder, just because she is a woman? Does her X chromosome make her business any less valuable, profitable, or exciting?

Therefore, it irks me that there are events, panels, discussions, specially curated to promote women’s entrepreneurship or female founders, exclusively. Most female founders and executives that I have interacted with see it the same way. We all know that anyone discriminating against a business run by a woman leader or refusing to fund a female founder hurts the person holding the bias much more than it hurts the woman – not only in terms of mindset but also on return on investment. 

When I look at my portfolio, I see amazing founders. It is just an afterthought that over 50% of them have women co-founders like Prerna at Daalchini, Kanika at Jadooz and Dhanya at KabaddiAdda. Even within my family office portfolio, several of our most successful investments are powered by female founders like Shivani at Tala, Avneet at CarveNiche, Mahima at Coutloot, Naiyya at BabyChakra and many more. They have made us several x’s on our investment (and no I do not keep nor intend to keep a separate portfolio performance based on sex), and some of them will turn into unicorns in the future – one of them very soon! 

However, none, nada and zilch, of these founders or their start-ups are in our portfolio because they were women. They earned every bit of the success they have achieved, and I respect them for their blood, sweat, and sacrifice – as an individual. In my interactions with them, I see them as entrepreneurs NOT as women founders, and I hope that they know and feel that they are equals.

Therefore, I do not see any good reason to promote female founders or entrepreneurs, because I have experienced excellent returns on my investments by treating each founder as an individual and backing their businesses based on merit. The moment that I start treating a founder differently because they are women, it means that I do not see them as equals. I will skew my thoughts to cater to my bias, and it will hurt them as much as it will hurt my bank balance.

So I am going to continue to be supportive, critical, effusive, disappointed and elated by my founders without discriminating on them because of their race, age, color, sex, national origin, religion, and physical disability. I believe this approach is the best way to promote any founder.

On whose advice should you pivot?

A founding team must (not shall) display a strong belief and deep commitment to their business. The teams that constantly shift their business model on the feedback of funders eventually find themselves lost at sea. So, there are many times to pivot your business – but a failed attempt at raising a round of capital just isn’t one of them!

As Investors, we evaluate businesses with a limited vision periscope and often, “tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run.”

At Artha, we remind ourselves and founding teams through the disclaimer in our rejection emails.

Please note, these are only recommendations and as venture capitalists, we are only required to be right 20% of the time to be amongst the top VCs in the world. We can be (and are) wrong 80% of the time in our investments, so please do not consider this as the final word for your business.” 

Therefore, it is sane advice to any founding team out there that is currently raising capital.

  • Utilize the funder’s feedback to alter your business’ investment pitch.
  • Utilize the pitches that didn’t result in a sale to alter your business’ sales & marketing pitch BUT
  • Only take your customer capitalist’s (read: paying customers’) feedback into account, to pivot your business

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Would you rather hear me or read me?

Yesterday I was in Lucknow attending SIDBI’s first Investor Day in honor of their foundation’s 29th anniversary. Over 40 fund managers were present, representing thousands of crores in capital available for investment. Considering the dry powder that was going to be available in the room, the SIDBI team sourced 20 start-ups to pitch to the captive audience. The standard of the start-ups, the quality of their pitches, the professionalism and punctuality with which the event was carried out was truly unique. I have congratulated the SIDBI team privately for executing such a well-organized event but would also like to do so once again publicly through my loudspeaker (read: blog).

After the event, a few of us (fund managers) got together to catch up over drinks and hunt for Lucknowi kebabs. Since we rarely get the time or occasion to meet outside events, we took this opportunity to share several things with each other, from the books we were reading to the morning routines we were following. One of the heavily discussed topics was the podcasts that each one of us was listening to. The list includes; Joe Rogan Experience, The Skeptics’ Guide to the Universe, Dan Carlin’s Hardcore History amongst others.

By the time I got back to my room, it was midnight. I had a full stomach and my mind had been stretched in many new directions. All in all, it had been a day well invested!

This morning on my flight back to Mumbai I replayed last night’s conversations about the podcasts that my fellow fund managers were listening to. It got me thinking whether I should move my own blog to a podcast – or have it co-exist with the writing?

There are few (if hardly any) podcasts that capture the perspective of an early stage VC in India. I was wondering if it would be more convenient for the 9,000+ followers of showmedamani.com to hear my podcast instead of reading my blog. The biggest benefit for me (and my team) would be that, it will be easier to project my dry sense of humour (accurately) through voice modulation over prose. So, my question is…

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My PR Experiment

Yesterday was an interesting day. I started off by tasting different blends of single shot coffee made by a start-up that we have been eyeing for a while now. They have been some gaining significant traction and the tasting culminated in the issuance of a term-sheet. In my next appointment, I visited several branches of a food aggregator that provides home cooked meals in an IoT enabled device. The heavy dose of caffeine from the morning helped me stay awake after an extraordinarily heavy lunch, but I really liked what the company was doing, and so we issued them a term-sheet too. In the last meeting of the day, I was with two entrepreneurs who are looking to fill the niche left open by Bira in the beer industry, and so I ended up tasting their different beers. Their product, taste, packaging and brand positioning are all unique and I’ll be honest, we are contemplating issuing them a term-sheet too. But no, this blog isn’t about tasting and issuing term-sheets, it’s about the commonality I observed in all three funding outlays, which I asked the founders to rectify i.e. instead of outsourcing it to an external agency, build an in-house marketing team to manage social media channels, PR and internal-external communication.

I used to erroneously advocate outsourcing PR and media management, but that viewpoint was permanently altered. I conducted a yearlong experiment in which I discontinued the services of our external PR agency and brought those functions in-house. Not only did I gain more control on what Artha (and I) wanted to communicate, but we also got more media mentions, got covered by the top journalists and were invited to renowned events around the globe. We also started publishing separate monthly and quarterly newsletters for our LPs and well-wishers.  All this effort has paid off through a marked increase in business for all the Artha entities, but most importantly, we achieved all these objective at 60% off our previous costs.

All of our PR (yes, all of it) was organic and genuine i.e. unpaid for. We did not sponsor events, pay for advertising in publications or authored articles. Things are moving so well that this year we are expanding the internal team by bringing in a Social Media Head that can move us from prose to video. Since we understand that the entire process isn’t a one-man job, we are allocating him/her a budget to recruit a team to facilitate this transition.

This massive cost saving got me questioning the PR/Media management agency model and whether it really works for an early-stage startup. I am afraid it does not. It takes many months and a lot of effort to get a brand new startup relevant and unpaid media attention. Unfortunately, early stage start-ups do not have the budget to compensate top-level agencies for their effort or even tier 2 or tier 3 players (unless they can secure a strong referral). Therefore, start-ups end up working with PR firms that themselves are starting up.  These PR firms overload their staff with multiple projects, to make ends meet, distributing the employee cost over the projects to make operations profitable. However, that divided cost also means divided time and focus on each project – a situation that does not bode well for start-ups trying to make a dollar for every penny invested in marketing. In fact, I have seen PR agents pitch 4-5 ideas to the same journalist in a single bid hoping to get any of them published. Is that really how you want your start-up to be pitched?

Another issue that works against the interest of the start-up is when a PR agency works hard to meet the KPIs they have promised and manages to do so in the first 15 days of the month. Having met their KPIs, they go radio silent for the rest of the month. This essentially means that their promised KPIs are the limit and not the base on which the agency works – completely opposite to how founders set KPIs for their internal team. After all, you can only create value for your company when you get more value than you pay for, isn’t it?

Therefore, I have come to a conclusion that PR agencies are useful for short sprints or Big Bang announcements, but the marathon work of building an image and brand for your startup should be done by an in-house team. In fact, even the 22 Immutable Laws of Marketing recommends the same!

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