Tag Archive : early stage

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!


The Investment Banker Pandemic

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


The Paripassu is Killing Investor Interest

A marked increase in the number of angel investors joining the ecosystem has led to a problem of plenty for many angel networks. Most of them boast of having hundreds if not thousands of investors spread across the globe. The problem of too much capital chasing too few deals led to a drop in the quality of deals that were/are getting funded by the networks. I wrote about the ills of investments bankers mongering around as angel networks in a post earlier this year called “Angel Investor Networks in India are Dead”. The other major issues that this problem of too much capital in a single angel network have led to are – oversubscription, pro-ration and low investor participation post-investment.  

I strongly believe that founders that have made a deal with a large group of passive angel investors have made a terrible… terrible mistake. This defeats the entire purpose of raising an angel round, which is to get the “value adds” that the angel investor group will provide i.e. help in business development, recruiting, guidance, sales & marketing and so on. A significant factor that motivates investors to pitch in this help is ensuring that each angel investor has enough “skin in the game” to be obliged to invest their time in addition to the money they’ve put in.   

However, due to a large number of angel investors in the ecosystem and lack of good deals, there are situations where active angel investors have to reduce their commitments to accommodate the neuvo angelsWhile I am sure that this is important for the ecosystem, it is truly detrimental for the startup because a lower investment amount reduces the excitement of the active angel investors to work with the entrepreneur.  

A personal example from my angel investment days is a company where I had committed 15 lakhs (~$25,000) in the seed round but got paripassu’d down to the awesome figure of Rs. 95,000 (~$1500) to accommodate 50 odd other investors that were all committing sub 5 lakh amounts. Since I usually calculate a 3x multiple in the follow-on round, the company should be worth at least 45 lakhs in the new round for me to be interested in putting in my time to work with them. In this case, the startup would have to deliver a 45x return in the next round itself to keep me interested, a figure that just isn’t plausible. Therefore, it was a struggle to convince me and my team to help this startup, because a competing investment where we could invest 15 lakhs would just make a better return for our time.  

I am not in any way endorsing that founders reject passive angel money as long as it is a decent amount per angel, but it is extremely important that the founders set aside a large chunk of equity to be taken up by active & prominent angels with decent sized checks that will keep them motivated them to stay engaged.  

Otherwise, founders might realize that along with their company’s equity they have diluted their investor’s interest in it.  


KISS for Your Customer

Firstly, I want to thank all the people that have taken the time to reach out with words of encouragement for Artha Venture Fund – I. I have been trying my best to reply to each person individually but if I have missed you out, please do know that your encouragement means a lot to me and my team and due to your support we are more motivated than ever to prove to be ‘the’ investor that an Indian startup founder is looking for.

Last week I connected an investee company in the lending space with an investee company in the product space that was coming up with a higher range of products and wanted to provide a financing option for their customers. The objective was to create a symbiotic relationship between the two parties to create more business for both, so it was a no-brainer from my perspective. However, a week after they were introduced, things were moving much slower than anticipated. Therefore, on Monday, I set up a lunch meeting with the founder of the fintech company to understand the roadblocks that were holding things up.

In an attempt to keep things transparent (his intentions were good) the financing company founder sent over a detailed excel sheet to try and educate the product company founder on how his financing model worked and how the interest that was calculated and collected was accounted for. This excel worksheet completely broke down how this product loan worked. Unfortunately keeping things transparent is not the same things as keeping things simple.

The financing excel sheet became the epicentre of confusion for the product startup and its team and no matter how hard they tried to decipher it, were unable to make any sense of it. This is just like how you or I would look bewildered if a Maruti dealership handed us a bunch of bills detailing out the price of each component that went into our car instead of the final price that we are supposed to pay, the spreadsheet led to little panic at the product company HQ.

Therefore, the financing startup founder, the AVF team and I brainstormed over lunch to bring the loan product to a maximum of 4-5 points. Thirty minutes later we were able to achieve our mission in only 2 points. To test out whether a simpler product would move things along quicker, I reached out to the production company founder yesterday and the interaction you see below is self-explanatory.

Founders make the common mistake of overestimating their customer’s sophistication levels and instead of making the decision to purchase easier – they end up making things more complicated without reason. Founders want to “sound” smart and therefore start to make simple things complicated instead of dumbing them down. This leads to a situation where the customer is overloaded with information that he/she cannot process so they are compelled to ask for time to “think about it”. Although the founder may feel that a person asking for time is a good sign, this may be a clear signal that the customer feels overwhelmed with excess information.

Therefore, I believe that any product’s or service’s value proposition (big or small) should be communicated as simply as possible. The other person should understand the proposition clearly enough to make a quick decision whether he/she wants to purchase the product or not. There shouldn’t be a period of pondering over it, wherein the customer is actually just trying to understand the deal. You can sound smart and make your customers feel dumb (no have no sales) or you can sound dumb so that the customer feels that they are making a smart decision. The choice is yours.


It’s Official, AVF-I is Finally Here!!

After what seems like a lifetime, I am happy to announce that Artha Venture Fund-I (AVF-I) is officially an Alternative Investment Fund (AIF) after SEBI’s grant of the approval. Our team is ecstatic about receiving this news and we are currently working on the final leg of processes, i.e. signing up Limited Partners (LPs) that have made soft commitments to the fund.

AVF-I will invest in pre to early revenue startups, preferably where we are the first investor (in India we would be called the seed investor). We will invest between Rs. 1-1.50 crores in each early-stage investment and participate in the follow-on rounds with larger cheques i.e. 3-4 crores in pre-Series A and 6-9 crores in the Series A round. Therefore, once we invest in a company, they can (provided they perform) expect between Rs. 10-14.50 crores over the course of 3 rounds, from us (an institutional investor). This is a significant USP compared to the other seed funds because we have earmarked a portion of the fund corpus to invest in follow-on rounds.

We made this adjustment because we noticed that when the seed fund doesn’t invest in the Series A round, often, these companies are unable to raise ‘the’ round of capital that separates the men from the boys. So, we did some research on developed startup ecosystems and found that the top-performing seed funds wrote significant, if not larger, follow-on cheques for the Series A round. To further strengthen our hypothesis, we analyzed the MCA records of the Indian unicorns (startups with a valuation of $250 million or more) and also conducted research on the Artha India Ventures’ (AIV) portfolio startups that have raised their Series B rounds. This research concluded that it is possible for Series A investors to make as good a return (on an IRR basis) as the seed & pre-series A investors. This in turn also led to an adjustment in AIV’s investment strategy over the past couple of years (we started writing Series A cheques in our portfolio companies) and the results have been very encouraging, to say the least.

Even in my informal conversations with partners, associates & analysts of later stage investors I have noticed that there is a common lack of confidence in startups that come from seed investors who cannot or aren’t willing to write the cheque (that is significant enough) for the Series A round. The more investors I spoke to the stronger my conviction was that AVF-I had to make this an important USP i.e. getting the confidence of later stage investors in AVF-I’s recommendations for Series A investments, thereby catalyzing the decision-making process for new investors. Most later stage funds that knew our strategy started actively engaging with us on deals in the pipeline and even sending us deals that were too early for them to invest in. I see this as their endorsement of our strategy and look forward to working with the many family offices and later stage funds that are looking for high-quality deal flow.

Besides our investment strategy, we also bring our founders a large network that spans across the globe. Many of these connections are part of to the business relationships our sponsors have (more on them below) as well as the ecosystem created by AIV’s investment in 56 startups (10 of them domiciled outside India). The close connection we maintain with our network will give our investees a leg up in whatever help/access they require along the way.

I want to thank the people that played a part in taking this idea from a mere concept to a final business model:

  1. Yash Kela who came up with the original idea of starting AVF. He is more like a brother than a partner and it is his vision has become my mission. He introduced me to a slew of fund managers, venture partners and single-handedly recruited the entire Advisory board for AVF-I.
  2. Madhusudan (Kela) uncle for devising our unique fund strategy that ensures that the fund team will only make money if we deliver outsized earnings for the fund and of course the investors. I also want to thank him for his personal mentorship every step of the way and the endless support from his family office. Yash and I promise to take AVF to a level that will make all his efforts worth it and make him proud.
  3. My chacha, Ramesh Damani who immediately endorsed his commitment to the fund idea and got me all the help I needed to remove myself from the daily responsibilities at the companies under the Artha Group of Companies. It is well understood what an early endorsement can do for an entrepreneur’s confidence, and I have him to thank for that initial boost of confidence.
  4. My brother, Animesh, and sister Apurva who joined Artha when I needed them the most and took over Artha Energy and Artha India Ventures, respectively.
  5. Sanjay Gandhi, the legal head of Artha Group. If it wasn’t for his persistent follow-ups with our advisors and the SEBI officers, this approval could have taken twice as long. (He must be the most relieved as he won’t have to avoid me when I ask why the approval is taking this long!)
  6. Vinod Keni and the entire AVF team – Dhiral, Nikunj, and Karishma for continuing to believe as things moved slowly and working on building out the entire referral ecosystem which will power our deal flow going forward.
  7. Sandesha for managing what can only be described as the most gruelling job that anyone could ever have i.e. managing my travel & meeting schedule and doing it with an alien-like accuracy.
  8. Last, but not the least my family for being understanding & supporting me throughout the emotional turmoil that a founder of an early stage venture fund goes through.

Going forward, we are in the process of issuing term sheets for 2 very exciting startups and have also made a warehoused investment for a third (will announce it shortly). We expect to achieve our first close in the next 3 months.

Therefore, if you are a startup looking for a well-equipped and experienced investor, reach out to us on

If you are interested in investing in the fund you can reach out to us on


Why Artha has Hopped Aboard the Travel Train!

Co-edited by Dhiral & Karishma

Why we want to invest in travel?

Indians love to travel. Whether it was the protagonists in epics like Mahabharata/Ramayana travelling far and wide to fulfil their duties or Mahatma Gandhi travelling across the country to identify and abolish the evils of British rule; India and Indians have travel embedded in their culture.

Post-independence, governments pursued socialist policies to cut spending on expensive leisure travel. Red tape & licensing was extensively used to clamp the airline industry to prevent the outflow of precious foreign exchange to purchase fuel and planes. The hospitality and railway industries weren’t treated much differently. It wasn’t until the liberalisation in the 1990s and infrastructure boom in the late 2000s that the presence of airports, airlines, buses and hotels skyrocketed. Thereafter, the state & central governments actively invested in such projects to make life easier for travellers.

As per the data available from the Ministry of Tourism the number of trips taken by resident Indians for business or leisure (not employment) touched 1.6 billion in 2016 more than doubling from the 748 million trips taken in 2010. The impressive CAGR of 13.6% is more than twice the pace of growth in the overall economy! The ever-increasing internet penetration only made discovering and booking trips worldwide more accessible to consumers and in turn catalysed the growth of this sector. As per an IAMAI report travel makes up 56% of all online transactions in 2016 at Rs.95,200 crores ($14.9 billion) and is estimated to grow almost 50% to $22.5 billion in 2017. The TREND is clear – The fraction of wealth from the Indian wallet allocated to travel has clearly increased and will continue to do so.

aD_Blog_2017_10_23_Investment Thesis for Indian Travel_Chart

Source: CEIC Data

Furthermore, the UDAN scheme that subsidizes air travel in tier 2 & 3 cities will increase the number of mango people that are able to afford flights, therefore increasing airline traffic. This would also allow the impressive CAGR of domestic passenger traffic – 11.8% (2010-2017) to continue on an upward trend.


What are the problems worth solving?

  1. Corporate Travel

According to the Federation of Hotel & Restaurant Associations of India, 59.2% of all hotel bookings are made for business purposes. As any executive or their assistant (who actually books their travel) will tell you, there is no sole platform that understands and resolves every requirement of a business traveller. OTA’s today are solely competing on the basis of who can provide the steepest discount and burning holes in their own pockets in that process.

Corporate travellers however, are more concerned with the efficiency and convenience of platforms that would save even a minute of their precious time. Any EA/PA out there would tell you that booking travel for their bosses is a royal pain in the *** and that they would unquestionably spend the extra $$ to get it done without the headache of having to deal with it themselves. A top executive at Google went to the extent of saying that the main reason his EA/PA’s were quitting was due to the stress of organizing his hectic travel schedule.

I suggest that a set of smart founders sit down with EA/PA’s to study the pain points in the process and design a platform that incrementally solves the problems. This platform would not only be responsible for finding the best route or price, but also do it keeping in mind each individuals preferences, loyalty program memberships and the discounts offered by their credit/debit card companies. The founders can work closely with flight operators, OTAs, hotels, taxi operators, etc to amalgamate the process of organizing travel by making it a stress free procedure.

Initially the platform could promote itself as a free tool for EA/PAs and monetize affiliate commissions. However once it is up and running full swing with additional features like restaurant suggestions & bookings, expense reimbursements, etc. it could switch over to a monthly subscription model. I have no doubt that EA/PAs would convince their bosses to pay the minor fee in exchange for avoiding the million hassles. (read: EA/PAs have a lot of power). I do have other ancillary benefits in mind including revenue streams from data mining, AI and even credit schemes but I’d like to meet a team capable of making this a reality before disclosing more elaborate plans.

  1. Door-to-Door Travel Management & Multi-Modal Travel

It is essential that we create a platform that amalgamates the process of organizing travel from start to finish, from initial planning all the way through the effortlessly executing every logistic along the way to ensure an enjoyable and pleasant experience to every traveller. Pre-travel approval/gathering travel information, poor booking experience and travel debrief with travel departments are amongst the top 5 challenges faced by Asian travellers as per the latest Global Business Travel Association (GBTA) survey conducted in 2017.

Imagine a rome2rio platform that not only allows a user to conduct a meta search amongst all travel options (airlines, buses, trains, taxis, etc) to get a person from point A to point B but also manages the entire process ; from booking the taxi that would  take you to/from bus or train station all the way to checking you in according into your seat preferences 24 hours before your flight.

Such a venture would act as the layer on top of all the current players entirely avoiding any form of competition with them as it would be foolhardy to compete with the incumbents OTAs’ business model where they spend more on promotions than the revenues they make from them.

Why should a founding team in the travel space choose Artha?

A large portion of my previous portfolio at Artha India Ventures was invested in travel. We took early positions in companies like Maximojo, OYO rooms, Repup, Confirmtkt, Roadhouse Hostels and have been a part of their struggles and growth from close quarters. Therefore, our strategies & advice have been refined over time from real experience in the sector. My family also has a vast network in the hospitality industry which would facilitate the opportunity for start-ups to reach out to relevant people and give them the opportunity to test their ideas immediately.

I am convinced that travel as a sector will continue to outperform the economy and I have made a personal commitment to invest in this sector. If you or someone you know wants us to review their business proposal, then ask them to email me on


How much is too much

There is a growing set of investors who believe that their investment has bought them the right to turn the founder into a general manager and the business is now their personal fiefdom where they will apply any tactic they wish to choose without any real strategy behind those tactics. This is possible only because the founder is just a phone call away for the investor. That privilege however, is getting misused, grossly misused.

Let me be clear, I am in no way advocating that newbie founders are let loose with investor money. The new founders need the investors intellectual & experience capital as much as they need the capital provided by the investor’s cheque book. That in no way means that investors get involved in the day to day functioning of the company and delve into each decision of the founder. The investor needs to give them to freedom to make decisions and run the business because eventually the investor makes money if the founders perform and let’s be clear an investor cannot be running the several businesses as a founder as part of a long-term investment strategy.

As an early stage investor, my team at Artha Venture Fund are as hands on as they come. We will review KPIs on a weekly basis with the founders, we audit their bank statements, we get them to prepare MIS presentations, organize quarterly calls with investors and we will review the periodic audit reports with a fine-toothed comb. Does this process look like too much interference? To the naked eye it does but let me explain the thought behind this approach as it achieves two well defined goals for us.

The primary objective behind this approach is to get the founder (and us) to understand the numbers that the business is throwing out and the correlation between those numbers. As we (the founder & our team) start to tweak a certain metric what is the correlation it has to certain other metrics. Eventually over the course of a few weeks we can narrow down all the numbers to 4-5 major metrics define the business.

Initially this exercise can be painful, passionate & heated because just like a MF Husain painting the interpretation of the numbers lies in the eyes of the viewer – where one side can see opportunity the other sees calamity.  We (as investors) fall back on our experience to back our arguments and the founder will back their instinct and many times we will agree to disagree. Whichever strategy the founder chooses to follow the result will show in the new datasets that come up but something bigger is happening now.

The founders have input, discussed and strategized on their numbers for such a long period of time that their instincts start to mature, the mind memorizes the metrics developing in the founders, a knack to choose the right decision and to  course correct without waiting for the next weekly call.

In there we have achieved objective number 2 – developing & setting the correct habits into the founder. The failure rate of businesses can be drastically reduced by a founder who has the correct habits as well as a minute understanding of their business. The correct habits can be explained in an hour but to develop them it takes weeks, sometimes months. So, our handholding remains till we start to see that the founders have inculcated the right habits and can fall back upon themselves to figure out solutions.

At this juncture, we surreptitiously start to scale back our hands-on approach. We purposely cancel or miss the weekly calls and we start doing them once every two weeks, then every three weeks and there comes a juncture where they don’t need us at all. This independent founder utilizes less of our perishable time capital and delivers more to the assets side of our balance sheet – a situation we wanted from the very start.

This is and will always be our goal for any investment we take on but when I see investors playing founders and destroying everything they touch something needs to be said.

It is unacceptable.


Investor Alert: Founders are Using Investor Math Against Us!

Two weeks back I was sitting in on a pitch wherein a healthy snacks company was looking at raising its seed round from us. The company was yet to launch its products in the market, but the team had the requisite experience and plan to get the venture off the ground. The company checked all the boxes on why we should take the deal forward until they opened their “Valuation” slide.

The company expected itself to be valued at an eye-popping Rs. 16 crore ($2.5 million). Now before you point out my Marwari heritage for balking at the valuation this is a company that does not manufacture its own snacks and (as of that moment) hadn’t sold a single chip. Therefore, their expectation of how much they should be valued at was jaw dropping. The founder claimed to have two funds backing that valuation, making the unbelievable situation become completely ridiculous.

As is the norm in a situation like this, we got in touch with the fund managers and inquire on the rationale given for valuing a group of entrepreneurs with huge plans a valuation of a midsized hotel. Their reason – the company wanted to raise Rs. 4 crore and since the fund manager wasn’t comfortable diluting them more than 20%, he reverse calculated the valuation which worked out to the awesome figure of 16 crores.

I agree that this reverse calculation methodology is very often used by us angel investors to come up with a valuation for an early stage start-up, since it is very difficult to decide on a value created in Excel, especially for a venture that is in the pre-revenue or early revenue stage. However, at that very moment I realized that founders have caught on to this methodology. They are using this formula against the investors by increasing the ask, so that the valuation increases for them!

Is it smart? I don’t think so.

When a company asks for a high valuation, the expectation of performance increases multi-fold. As I have mentioned in the past, there is a mathematical logic with which early stage investors invest. If the company gets a high valuation in the first round, the next round will be expected at an even higher number.  To reach that “high” number, the company must perform at a scale which gives them very little room to conduct experiments, make errors and pivot, if needed. Taking away those privileges from early stage founders is seriously detrimental to the health of the venture. That investment (then) is a complete gamble on the founders to find the product market fit and achieve scalability, with an almost-zero chance for errors.

Now armed with the knowledge that founders have caught on to the lazy math utilised by early stage investors, we have decided on a range that a venture should raise based on where it is in their journey to becoming a business.  When their requirement is beyond that range (above or below), we look at the expenses sheet to figure out why. If the expense is justified, we do not raise the valuation but are offering the founders a clawback based on hitting a number that will justify the expenses they need. This in turn, has helped us tamper down the valuations.

However, that healthy snacks company got the “we pass” email because not only was the valuation very high, but also the two well-funded backers of that valuation were committing just 25% of the round, thereby putting the onus on lead investor to make the math work… and I knew that I couldn’t do it.

To Banker or Not To Banker

There is a worrying trend that is growing in my email & linkedIn inbox i.e. the rise of “boutique” investment bankers representing startups that are raising their first round of investment capital.

What use does a banker serve at seed stage?

I am not against the idea of hiring investment bankers to facilitate transactions (Artha has its inhouse renewable IB, Artha Energy Resources) but it is the use of bankers to raise the first round of capital that is worrisome. A banker is useful when the transaction is large enough or complicated enough to requisite the use of their expertise in finding the target investors and facilitating the smooth closure of the transaction. What use does a banker serve at seed stage?

When I see, a banker representing a seed startup it tells me one of five scenarios is in play:

  1. The entrepreneur does not know how to represent his/her venture
  2. The entrepreneur does not know how to negotiate
  3. The entrepreneur has been around the block and no one will fund him/her
  4. The entrepreneur is desperate
  5. The entrepreneur isn’t full time on the venture

As you can imagine not one or even a combination of these reasons is good for the startup and its founding team. The encouragement of getting a banker to represent your startup will quickly dissipate when the experienced and leading early stage investors shun the startup. Today many investors are questioning the role played by angel networks in deal facilitation so the questions for the role of a banker are exponentially bigger.

My own experience with early stage investment bankers has not been encouraging.

My own experience with early stage investment bankers has not been encouraging. First I don’t think any banker worth their weight will pursue the miniscule transaction sizes in early stage fundraising. The effort (fortunately) remains the same for the banker so it makes infinitely better business sense for the banker to pursue larger transaction sizes. As banker’s remuneration is typically a percentage of the transaction, they have an incentive to increase the size of the transaction to increase their fees. However, this does not work well for early stage ventures as the need the funds and network of angel investors as of yesterday and the banker muddies the water in their own pursuit of profit.

Most discouragingly early stage bankers don’t come from the early stage space so they do not understand the valuation ranges for early stage deals, the typical deal sizes, the psyche of early stage investors and even how the entire system works. Their modus operandi as I have seen it is to promise an unearthly raise at a beastly valuation for the startup (yahoo!), draw up a mandate at the valuation, charge a small commitment fee and then start investor hunting with gusto. There is initial success with investors who are new to the early stage ecosystem. Unfortunately, those investors are new but aren’t gullible so they forward these deals to the us and we outright reject the proposition when we see what the banker has done. Eventually the banker runs out of steam (and money) and gives up on the deal blaming the investors who don’t understand the value of the entrepreneur.

There is initial success with investors who are new to the early stage ecosystem.

Unfortunately, what the entrepreneur does not know is that they created a barrier between them and use with an unrequired banker whose own motivation killed the transaction.

The math of early stage venture capital

Today I met with an entrepreneur in the travel space that kept reiterating that they wanted to grow organically and without burning money. The “startup” wanted to take it’s a offline business model of booking air tickets, where it earned a respectable profit – online. 

Coming from a strong referral I spent a couple of hours understanding what they did. I concluded that while their current business model was perfect for a family run business they didn’t realise that early stage venture capital would demand that they show rapid growth in the value of the company.

So, I explained to them the following math:

  1. As an early stage venture capitalist I want to build a portfolio of startups that will yield atleast 60% irr.  
  2. So if I put Rs. 100 in 10 startups I have a total portfolio investment of Rs. 1000 
  3. My holding period for an investment is 7 years 
  4. After 7 years the Rs. 1000 investment at 60% irr would turn into Rs. 26,843.50  
  5. I expect 9 out of 10 startups to fail 
  6. Therefore I expect that the return from a single startup will return the Rs 26,843.50 
  7. So, the single investment of Rs. 100 should to return a 122% irr or 268x in 7 years to grow to Rs. 26,843.50!  

At the end I explained to them if their business lacked the potential to growing a rapid pace then early stage venture capital was the wrong form of capital to raise. I think something clicked in their mind when I drew out these numbers and they left thanking me.

I just hope I didn’t scare them off venture capitalists, forever! 