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Entrepreneurship, Investments, Venture Capital

There are very few things that I do not love about venture capital but taking a founder through due diligence is one of them. I have written about the importance of due diligence in the past and a best-case scenario, due diligence should not take

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There are very few things that I do not love about venture capital but taking a founder through due diligence is one of them. I have written about the importance of due diligence in the past and a best-case scenario, due diligence should not take more than 30 days to complete. But realistically it takes anywhere between 90 to 180+ days. The delay is due to minor oversights made by the founder that pile up over a 12-18-month period but majorly it is their overall lack of preparedness for due diligence that delays due diligence.  

The unpreparedness of founders for due diligence is baffling to me. It should be advertised that successfully completing due diligence is more important than the fundraising itself! Because if a start-up loses an investment offer even after advance negotiations, they can recover from that but if they lose an investment offer during due diligence – it is the death knell for them!

This about it – who would want to invest in a company that has failed due diligence with another investor?

Therefore, I stress the importance of “preparing” one’s start-up for due diligence even before beginning the fundraise. Over the last 12 months, I have specifically told each of the founders that raised or attempted to raise money from Artha Venture Fund – to be prepared for due diligence if they want to see our money in the bank account as soon as possible.

For the uninitiated there will be several levels of due diligence like

  • Financial DD – that is carried out by an accounting or audit firm to verify that: –
    • All transactions and its bookkeeping have been done as per standard accounting norms
    • The traction numbers provided by the company are accurate
    • The financial model can be compared to the numbers in the books of accounts.
  • Legal & Compliance DD – that is carried out by a legal firm working in conjunction with a company secretary to verify that: –
    • The company has made all their necessary filings (monthly, quarterly and annually)
    • The commercial relationships that the company has entered have been captured in a proper legal contract that protects the company’s interests
    • All employees and independent contractors have signed contracts for the employment or services with the company – including the founders
    • All registrations, licenses, and permits that are required to operate the business have been procured and are current
  • Valuation – this is something unique to the Indian ecosystem and this usually carried out by a merchant banker to:-
    • Review the financial model for the company and its future projections
    • Deduce a valuation based on the above information
  • Internal DD – this differs from investor to investor but in our case we: –
    • Speak to former employers, associates, references and even your school to get a background on the founder
    • Speak to current or former employees, contractors, advisors, industry experts, suppliers and customers of the company to get their perspective on the company, the founder and the internal working
    • Conduct mystery shopping campaigns to verify/validate that the product/service is of the quality or efficiency that is being promised
    • Conduct on the spot checks on the company and its operations

Unfortunately, due diligence isn’t something that can be wished away by an investor in a sound frame of mind therefore founders would be better prepared if they would just prepare themselves for due diligence. So, if you are someone that is looking at raising money from us here is our standard due diligence checklist – be prepared for this before you send your pitch deck!

40/2019

v36.003

Entrepreneurship, Opinion, Venture Capital

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

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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

39/2019 v36.002

Artha, Brand, Career, Entrepreneurship, Opinion, Venture Capital

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

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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!

37/2019

Entrepreneurship, Learning, Opinion, Philanthropy

Vinod shared an interesting post inspired from a talk he gave at an event in Nagpur, on Sunday: I read the article shared in that post this morning, and it was quite powerful. Let me state that I am not in

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Vinod shared an interesting post inspired from a talk he gave at an event in Nagpur, on Sunday:

I read the article shared in that post this morning, and it was quite powerful. Let me state that I am not in agreement with the massive extrapolation of $1 million in 1878 to a $900m in 1930s. There is a gap of more than 50 years in which many things could have happened. Also, let’s not forget the fact that Sam Andrews died in 1904 so he would not have been around to enjoy his gain!

I do agree with Vinod that an entrepreneur must exude certain confidence, spunk and calmness under pressure. But most people are not born with such qualities so a ‘fake it till you make it’ attitude is required in the early stages which could be shrouded in a fake ego. However, an individual can quickly lose awareness of the fake ego and it can be replaced with a real one when success gets into the place it shouldn’t – the head.

But the one quality that has been consistent in successful entrepreneurs in our portfolio is their ability to drown the ego and ask for advice and help from people that can push them to get better in their role as an entrepreneur, manager or networker. They not only remember the advice given but also provide feedback on whether that advice is working for them or not and ask for pivots.

The creation, nurturing and growth of ego takes the entrepreneur away from the exact qualities that made him/her great in the first place. Therefore, I agree with Vinod that a fake ego is required but the entrepreneur should have a person who can act as their totem and remind them if they have gotten lost in the very thing they created.

16/2019

Entrepreneurship, Learning, Opinion, Venture Capital

In 2 out of the 4 term sheets that we signed last month, founders have acted on legal advice (certainly the worst kind) provided by other founders. To use the legal advice provided by a fellow founder just because he/she

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In 2 out of the 4 term sheets that we signed last month, founders have acted on legal advice (certainly the worst kind) provided by other founders. To use the legal advice provided by a fellow founder just because he/she has previously raised capital is as good as the argument that an astronomer should teach an astronaut how to space-walk, just because he has seen the stars, in space.

After a recent call with founders who argued animatedly on several points that were already in tandem with EXACTLY what they were asking for (they just hadn’t bothered to read carefully), I realised that instead of using the services of a legal firm they were acting on the gyaan (divine knowledge) so generously provided to them by a founder friend. This so-called “expert advice” was given to them without even having read the term sheet! Finally, we ran out of patience in dealing with these founders and the deal fell through.

Founders tend to forget that as Investors, we have an active interest in increasing the value of the company i.e. for all shareholders involved, including the founders. When their share value goes up, so does ours. However, when founders start asking for concessions that are not even granted to the founders/promoters of listed companies, it creates serious doubts about their intentions of raising capital and whether it is being raised for reasons thatare not being revealed.

It pains me to see excellent deals and founders jump off a cliff by acting on advice provided by people who themselves have a limited understanding of the terms. Therefore, I am working with Nikunj on a project to create a series of blog posts or vlogs that will explain the key terms in a term sheet in depth. We are in conversation with a few online publications and video channels to feature this series so that it will reach a wider audience and are considering producing it ourselves.

Until then, to all founders that are raising money, it is my sincerest request to, PLEASE! PLEASE! PLEASE! (please) reach out to an investment banker or a legal professional with prior experience in investment grade paperwork to get advice and not a fellow founder who has raised capital. It won’t cost more than a lakh and I can assure you that it will be money well invested.

97/2018

Entrepreneurship, Investments, Learning, Opinion

I have inculcated a new habit of listening to podcasts during my morning routine replacing my old one of playing loud music to get me charged up for the day.   Today I heard Robin Sharma’s podcast - The Secret of Massively Creative People and loved his suggestion to create a “Menlo Park” i.e. a

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I have inculcated a new habit of listening to podcasts during my morning routine replacing my old one of playing loud music to get me charged up for the day.  
Today I heard Robin Sharma’s podcast – The Secret of Massively Creative People and loved his suggestion to create a “Menlo Park” i.e. a place where one can disconnect from the world and give way for the creative side to express itself.  
When I started thinking about it I realised that my best work, especially the things that require me to concentrate viz. investor updates, blog posts, long emails, developing or understanding complex financial models, etc. have all come while I was completely disconnected from the world. I was either on a long flight or holed up in a hotel room.  
This powerful suggestion has me deeply enveloped in thought and I am strongly motivated (and encouraging entrepreneurs) to schedule a visit to Menlo Park every week. 
Would love to hear if anyone has tried doing this and what results they were able to accomplish.  
92/2018

Entrepreneurship, Learning, Opinion, Venture Capital

It is important that founding teams declare if two of the co-founders are married to each other, blood relatives or cousins. The team can choose to reveal that after the pitch, but I prefer if the team takes the bull

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It is important that founding teams declare if two of the co-founders are married to each other, blood relatives or cousins. The team can choose to reveal that after the pitch, but I prefer if the team takes the bull by the horns and reveals the full extent of the relationship before they start the pitch. Investors that have apprehensions about investing in founding teams where the members are related, should decide if they will be willing to look over those issues before the pitch, not after.
Unfortunately, many founding teams are advised to withhold such information or to mislead investors by playing around with the last names to avoid detection, but such sneaky tactics only reinforce the fear that the founding team with familial ties drown out the ethical voice that should discourage actions that shake investor confidence.
To allay the fear of those investors that have the first-hand experience of watching their investment value destroyed due to factors like, family feuds, withholding important information or the family member opening a competing venture, founding teams should be as communicative as possible so that these fears aren’t allowed to fester.
The investor may still decide not to invest in the company but at least the founding team does not lose face when investors find out that the founding team used diversionary tactics to slip one by them!
85/2018

Artha, Entrepreneurship, Investments, Learning, Opinion, Venture Capital

Time and again, I have warned early-stage founders to steer clear of using the services of a banker to help raise money but unfortunately, that pandemic has overrun our ecosystem. Many bankers have made a comfortable lifestyle out of fleecing

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Time and again, I have warned early-stage founders to steer clear of using the services of a banker to help raise money but unfortunately, that pandemic has overrun our ecosystem. Many bankers have made a comfortable lifestyle out of fleecing unsuspecting founders. The false dream that these 1-star bankers promise founders make my skin crawl, as many of the business models that they push to me aren’t even eligible for venture capital, and the bankers are aware of it.
I would also like to acknowledge that there are many bankers that are doing some excellent work and every penny paid to them is worth their weight in gold. Some of these bankers have worked with our portfolio companies and I have interacted with a few for fundraisers, but NONE aka ZERO were for raising amounts below $5 million (Rs. 35 crores).
Then there are angel networks that reach out to us about their portfolio companies and while I am disillusioned with the concept of angel networks, the angel networks do not (or should not) charge their portfolio companies for connecting them to funds; it is a part of their duties.
Raising outside money is the toughest and most gruelling of exercises (I had to endure this myself while raising $6 million for my fund) and no banker is going to make it easy for you. I too have had investors drop out or reduce commitments at the last moment and while I understand that it can be frustrating, the cold-calling, the rejections, the ‘getting close’, are all part of the process. FYI, I reached out to over 5,000 people for the first close and will be reaching out to 5,000 more for the next one. Every founder must do this; persistence is key.
If you still feel that you need the services of a banker, I have compiled a few articles that could help with the selection process. Eventually, it is up to the founders to decide to ‘banker’ or not but choosing an advisor to delegate the fundraising process without doing the required due diligence to select them is truly just “abdicating” the responsibility, which is simply unrewarding in every sense of the word.
How to Choose the Right Investment Banker
By David Mahmood, Founder, Allegiance Capital
The Art of Selecting an Investment Banker
By Katie May, CEO of ShippingEasy
7 things to consider when choosing an investment banker
By Martin A. Traber, Chairman of Capital Markets Group of Skyway Capital Markets
10 Questions to Ask When Choosing an Investment Banker
By Dan Lee
80/2018

Entrepreneurship, Learning, Opinion, Venture Capital

Yesterday at a luncheon, a fellow angel investor and I were discussing deal flow when the senior editor of a respectable news house introduced herself to us. As many journalists do, she brought up the “high” valuations that are accorded to

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Yesterday at a luncheon, a fellow angel investor and I were discussing deal flow when the senior editor of a respectable news house introduced herself to us. As many journalists do, she brought up the “high” valuations that are accorded to Indian start-ups and inquired as to whether they are “sustainable”. My fellow angel investor immediately asked if the journalist had ever read the agreements that founders sign to qualify for lofty valuations? Just as he had correctly anticipated she hadn’t, and therein lies the reason that befuddles the most astute investors.
What most people do not realize is that any money raised by a start-up could be considered debt on the company. All investors need to do is, decipher the clauses that will protect their investment. In fact, if founders insist on obnoxious valuations, there will be clauses that will not only guarantee the preservation of capital but also promise a return on the investment! Be rest assured that there are stern punishments for the founder’s equity value if things go pear-shaped.
How stern a punishment can be, is best demonstrated by liquidation events, for example, take the cases of CaratLane in 2016 or Tapzo in 2018. In both exits, the proceeds are nearly equal to the amount of money invested, which definitely means that the investors invoked their capital and ROI protection clauses. This ensures that founders, ESOP holders and even the earliest investors will be left with nothing but a story to reminisce with friends in the years to come.
Therefore I strongly advocate reigning in valuations and giving founders the freedom to experiment and make their own mistakes, so they can develop robust businesses. The founder that finds solace in lofty valuations will find that the higher the valuation chair, the sharper the thorns that could cut the butt that sits on it.
77/2018

Investments, Learning, Philanthropy, Venture Capital

On Friday, AIMWI  invited me to be a panellist for their 6th annual Family Office Summit India 2018. One of the perks of being a panellist is the opportunity to listen to the speakers scheduled before my session. I can

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On Friday, AIMWI  invited me to be a panellist for their 6th annual Family Office Summit India 2018. One of the perks of being a panellist is the opportunity to listen to the speakers scheduled before my session. I can point out many instances where the nuggets of wisdom imparted by speakers have led to impactful changes in my entrepreneurial, investing and even personal strategy and/or views. Today was one of those occasions.
I had the privilege of listening to Hexaware Technologies’ founder, Mr Atul Nishar, who shared the wisdom of putting to work, the wealth he gained after selling his stake to Barings PE in 2013. There were 3 key points that will remain etched in my memory:

  1. Putting money into fixed deposits is the riskiest investment one can make
  2. A part of one’s investment portfolio should be earmarked for investing in start-ups
  3. People that believe that 99% of start-ups fail are misinformed

76/2018

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