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Tag Archive : angel investor

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.

After venture capital, startups taking ‘vendor capital’ for granted


The bloodletting in the Indian startup ecosystem continues with hotel-booking app RoomsTonite shutting shop on the heels of the Stayzilla fiasco, which is still playing out in the media. I have previously said that the startup space in India is safe because of its self-correcting nature. However, I did not expect that startups that failed to raise venture capital will start raising “vendor capital”.

What is vendor capital? It is the money that unsuspecting vendors, suppliers and professionals are owed for services that the startup has consumed, in order to provide its product or service to customers. There is a temporary float between consumption, billing and the payment due to the vendor. A startup that utilises this float for keeping its operations afloat (pun so not intended), with the knowledge that the business is in a death spiral, has raised “vendor capital”.

Startups like ZoRooms, AskMe and Stayzilla are among the many that can be classified as having raised vendor capital — when they went bust, they left in their path a host of companies that could not expand, pay their employees and, in some cases, even put two square meals on the table for their families.

I am particularly critical of companies that have raised millions of dollars in venture capital because they have people who are paid by the company (such as the CFO and his team) and by the investors (the analysts, associates, partners, internal/external auditors and independent valuers) to figure out how much time they have before they run out of money.

These well-qualified and well-paid individuals had to know that the company was running on fumes, and reinvesting the operational cash flows was going to lead to a situation where the company wouldn’t be able to meet its contractual obligations. That information is presented to the CEO or directly to the board, and a decision is taken on how to continue operations. If the founders and funders want us to believe otherwise, then the joke is on them!

As an angel investor and mentor, I have seen my fair share of startups go through tough times, pivot from the brink of disaster and even shut shop, but the entrepreneurs I have the highest regard for are those who devised a plan to: complete customer obligations; pay their employees; take care of vendor debts; and prepare for shutdown/turnaround.

What is interesting is that most of these founders were running startups that were either self-funded or angel-funded (i.e., they hadn’t raised inordinate amounts of venture capital), but were led and mentored by responsible business-owners and investors who understood what was at stake for those investors in the company who didn’t own equity capital (i.e., vendors, customers and employees). All this, when neither the bills ran into crores of rupees, nor the equity raised was in millions.

In fact, the moral compass of VC-driven companies was at full display when Stayzilla co-founder Yogendra Vasupal wrote in his Medium blog:

“I don’t personally owe anybody money and I am wondering how can they get confused on such a basic matter as this was a clear civil case. “

Or defended his non-payment by saying:

“I also pointed out that my company is also owed close to [Rs] 7 crore from various debtors, but I am not going around filing false criminal cases against them.”

I would like to tell Mr Vasupal that the founder/chief executive is, beyond doubt, responsible for the debts of his companies — to convince these vendors, you or a person under your direct instruction personally met them to gain their confidence. To take cover under the law in such a situation shows there is something seriously wrong that no amount of venture capital can fix. In fact, if Vasupal had sought repayment of the money owed to him with the same vigour as his social media outreach, this situation would not have occurred.

Those who are supporting Vasupal in this episode of moral turpitude should defend Mr Vijay Mallya as well — after all it wasn’t he who went bankrupt, Kingfisher Airlines did. So what if it took down its lenders and employees with it, and burnt a gaping hole in the pockets of the government. The law does not change whether the amount is a few crore rupees or a few thousand crores.

But what founders like Vasupal have done, besides burning vendor capital, is hurt vendors’ confidence in startups. They have made it infinitely more difficult for founders starting up today to gain the confidence of vendors, and convince them to extend services to them. They have made it difficult for startups to trust other startups and do business with them. They have made it difficult for employees to leave the security of their “secure” jobs with MNCs or Indian companies to risk their livelihood.

The long-drawn court proceedings and certain provisions in the law might protect such founders for the time being, but the hurt they have caused their vendors, and the startup community in general, will be felt for years to come. To those who support such founders, there is a quote from Ken Ham that best describes how I feel about this.

“If you destroy the foundations of anything, the structure will collapse. If you want to destroy any building, you are guaranteed early success if you destroy the foundations.”

We cannot build a Startup India campaign on the carcasses of old business that have been the foundation of our economy. And nor can such founders — who don’t know when their business will run out of money or how to collect on their debts, and don’t take personal responsibility for the destruction they’ve caused — be the guardians of this edifice.

Note: Artha India Ventures’ investments include Hotels Around You, Roadhouse Hostels, Vista Rooms and OYO Rooms, companies that happened to be Stayzilla’s competitors


Originally published at techcircle.vccircle.com on March 20, 2017

The Olive Tree

As an angel investor and an individual who possesses a serious entrepreneurial streak I sit through atleast 150-200 business pitches in a month. As a fellow entrepreneur I am in awe of all entrepreneurs as they should be complimented and encouraged for having the guts to plunge into what is – the scariest and the most thrilling roller coaster ride of one’s life.

Their energy and belief don’t make it easy for us “angels” investors (who came up with that adjective?) but an entrepreneur should know that it is quite difficult to point out the flaws your business plan and to balance the criticism with an equal amount of positivity and encouragement so as to ensure that the entrepreneur is motivated to go back to the drawing board instead of jumping off a cliff (metaphorically!)

What I find particularly unnerving and confusing is how to deal with an entrepreneur once you have entrusted him/her with your hard earned money? You have placed your trust in the team and the idea but are you planting the seed in a greenhouse, where it requires your care and attention (and a pep talk)? Or in the forest where it has to fend for itself?

On the one you have a school of thought that suggests that angel investors take an activist role in the running of the company, revamping all procedures and plans and replacing them with the experience that they have collectively gained through running businesses of their own. The other school of thought suggests playing the role of mentor or even a helpline operator, giving the entrepreneur their own space and focussing on problem solving by focussing on the results instead of the methods employed to get there.

But which one is right? Whilst grappling with this conundrum I came across the following poem from Sabine Baring-Gould. The message conveyed in the poem is self-explanatory and it definitely inspires me to be a more open minded investor.

In my honest opinion, what got me to invest into the idea was the energy, zeal and the uniqueness of the entrepreneur and his/her idea – so why kill all of that by bringing my (or the lead investor’s) own company running methodology? I am not promoting giving the entrepreneur free reign and let the cattle run wild – but it does make me conclude that an angel investor(s) should decide with the entrepreneur on the KPIs/metrics that they want to track and then actively and periodically track those metrics and any statutory compliances. The investor should get involved in two scenarios – one when a metric starts to move away from the desirable range that was previously agreed to and second if the entrepreneur specifically reaches out for help.

But meanwhile if the entrepreneur is performing and meeting all his/her metrics and he/she wants to have a lasertag game at the office and start an incentive program that offers a cold beer to the staff on Monday evenings – I say go right ahead!

The Olive Tree

Said an ancient hermit bending
Half in prayer upon his knee,
‘Oil I need for midnight watching,
I desire an olive tree.’

Then he took a tender sapling,
Planted it before his cave,
Spread his trembling hands above it,
As his benison he gave.

But he thought, the rain it needeth,
That the root may drink and swell;
‘God! I pray Thee send Thy showers!’
So a gentle shower fell.

‘Lord! I ask for beams of summer
Cherishing this little child.”
Then the dripping clouds divided,
And the sun looked down and smiled.

‘Send it frost to brace its tissues,
O my God!’ the hermit cried.
Then the plant was bright and hoary,
But at evensong it died.

Went the hermit to a brother
Sitting in his rocky cell:
‘Thou an olive tree possessest;
How is this, my brother tell?’

‘I have planted one and prayed,
Now for sunshine, now for rain;
God hath granted each petition,
Yet my olive tree hath slain!’

Said the other, ‘I entrusted
To its God my little tree;
He who made knew what it needed
Better than a man like me
.

Laid I on Him no conditions,
Fixed no ways and means; so I
Wonder not my olive thriveth,
Whilst thy olive tree did die.’

– Sabine Baring-Gould-