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Tag Archive : entrepreneurs

Why Should the Investor Connect the Dots?

A comment on my post yesterday inspired my post for today.

Sachin alluded that the investor “might just be…. unable to comprehend the idea in the spirit that it actually existed” and that “Some of the times, people who propose the idea are unable to defend it they think that the other person is more credible so he might be right.” These points are fair, but I disagree.

The intelligence/understanding/smartness of the investor being pitched to, can be utilized to enhance a founder’s pitch, but cannot be blamed for the founder failing to effectively communicate his/her idea. Expecting the investor to connect the dots could work sometimes, but it could just as likely go off-course. Therefore, it is a good habit for founders to err on the side of overcommunicating and utilize effective check-backs during the presentation to ensure that the investor is following the line of thought that they wanted to convey i.e. the founder should always maintain control over the room that he/she is presenting to.

One way for the founder to gauge how effective (or ineffective) his/her pitch has been, is to pay close attention to the questions raised by investors during the presentation or Q&A. If similar questions are repeatedly asked during/after their pitch, founders should realize that some part of their presentation is leading to a reaction in the investors’ mind that prompts them to ask these questions. The foundation of preparing a great sales pitch is if the founder/s is/are able to back-track that train of thought, identify the point(s) that triggered those questions and answer them (in the presentation itself) before the questions are verbalized.

In sales presentations, it is also important to remember that the customer (read: investor) is never wrong. The customer has only understood, analysed and decided on the pitch that was presented to him/her. To expect the customer (read: investor) to understand what has not been effectively communicated is self-defeating – neither will it improve your pitch nor will it change the customer’s (read: investor’s) mind.

23/2019

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Entrepreneurial Ego…a Necessary Evil?

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

Do You Have The Right Capital Mix?

One of my favourites from all the meetings I have, is my monthly morning coffee with Mr Narendra Karnavat. Mr Karnavat is one of the most active and passionate angel investors based out of India. Moreover, he is an entrepreneur turned investor, which gives him the privilege of looking at investment opportunities from the entrepreneur’s perspective. For obvious reasons, I also feel like this quality makes him more admirable and charismatic to me.  He quickly identifies if an entrepreneur understands the true meaning of dhanda and debunks the “wannabe” entrepreneur or as my favourite shark calls it, wantrepreneur.

His entrepreneurial zeal and energy are such that every meeting with him is a lesson in itself. We have invested in multiple companies together and he was also one of the first people to come onboard as an LP in Artha Venture Fund-I.

Yesterday, we met at my office to discuss some deals that AVF has in its pipeline. One of the topics that came up during our discussion was ‘how entrepreneurs usually make the mistake of misallocating venture capital’. Since the utilisation (and mis-utilisation) of venture capital has been a topic that I love to write about we ended up discussing this at length. 

Venture capital is expensive $$$ and can be measured from its high expectations of returns. It is (or should be) the first lesson in finance: one should deploy capital only when the returns from that deployment will exceed the cost of deployed capital. In simpler terms, it does not make sense to take a loan at a 10% interest rate to put it into a fixed deposit yielding 7% interest, does it? Similarly, a smart founder should not be deploying venture capital in areas that cannot provide disproportionate returns.

In my opinion the 2 worst places to deploy venture capital are:

  • Heavy capital expenditures like constructing a factory etc.
  • Working capital requirements

Capital for these requirements is best borrowed from banks and NBFCs and that too, only if the interest rate is below the ROI/IRR that the deployment is offering. This would be a prudent financial decision even if the interest rates were substantially higher than what is generally available but only until it is below the ROI/IRR that that capital deployment is offering.

It is imperative for founders with start-ups in execution/capex heavy spaces to do a crash course in finance and bring a finance professional onto the team early. This professional would help match the right type of capital to its deployment purposes and protect the erosion of the founder’s equity holding due to a mis-allocation.   

As for Narendraji, until next time! 😊                 

100/2018                     

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.  

64/2018

Dont Let The Customer Lead Your Product Development

Many people will tell you to “put the customer first” or that the “customer is always right”. While they are correct, these are invariably techniques to deal with customer conflict resolution i.e. to pacify or aid a dissatisfied customer get what they want. Recently, I have encountered many founders who have extended these strategies to their entire product development process. This has led to a complete disaster, resulting in the unnecessary expansion of the bouquet of products and services being offered – massively scaling both, the size of the team and the processes that the venture is following. Unfortunately, expansion isn’t the answer, since a larger pool of products & services only means that there are fewer winners, many mediocre products and some downright losers.

With so many permutations and combinations to play with and a business to run, the founders’ bandwidth gets spread out too thin and the hawkish attention they should be paying to their target customer is lost. This leads to a new conundrum, which products or services should the venture discontinue? How can the founder gauge whether that move will further alienate the venture from their target audience or bring them closer? To be this confused at an early stage of the venture building process is pure suicide. Alternatively, a smaller bouquet with a focussed attention is much more appreciated.

Take for example the original OYO rooms offer which only offered 4 things to their customer

    1. 1. An affordable price
    1. 2. A clean room
    1. 3. Free Wi-Fi
    1. 4. Free breakfast

Although, offering only these thing, may have alienated larger sections of the market, it catered very specifically to the target audience that they were after. Today they are expanding their product portfolio and catering to different segments, but that wasn’t the case at the outset and yes, of course, today they have $250 million sitting in the bank that gives them to flexibility to expand their portfolio.

It is clear, that I advise founders against trying to cater to every customer’s demands so early in the venture development process. There isn’t a single venture that has successfully been able to satisfy all the people in the world. This has been proven time and again by all the start-ups who have attempted it, and regardless of sufficient funding and prestigious global networks, either died or learnt their lesson and chosen to scale down to stay afloat. If you are reading this and realising that you are in the trap of catering to everyone and no longer addressing the market you had originally intended to cater to – then this is the time that you scaled down

40/2018

Develop the Entrepreneur Within You 

I recommend the E-Myth by Michael E Gerber to anyone who is contemplating taking the plunge into entrepreneurship. The book lays out why most businesses fail and talk about the important pillars needed to build a business, self-funded or otherwise. The book emphasizes 3 personalities that are required to run a successful business i.e. the entrepreneur, the manager and the technician.

When I analysed the founders that I have interacted with in the past i.e. our investees, the new startups and the businesses we procure our goods & services from, I see that they are all able to easily fill the managerial and technician roles from within the founding team or from the first few hires that are made. These two personality types are the ones that get the job done. However, these two personalities can also come together to suffocate the entrepreneurial personality which needs to be potent in order for any business to prosper & innovate.

What is the entrepreneurial personality?

The entrepreneur personality turns the most trivial condition into an exceptional opportunity.

The dreamer. The energy behind every human activity.

The imagination that sparks the fire of the future. The catalyst for change. The way he usually chooses is to bully, harass, excoriate, flatter, cajole, scream, and finally, when all else fails, promise whatever he must to keep the project moving.”

The entrepreneurial personality consistently challenges the existing status quo, pushes boundaries and tries to create new horizons.

Unfortunately, this personality is a nightmare for the technician & manager who are prone to saying “no, we can’t” instead of figuring out a way to say “yes, we can”.

The technician resists as he/she must change and retrain himself/herself and his/her team on the new processes abandoning everything they are currently comfortable with (and even good at) accomplishing. The manager gets nightmares with each new idea that the entrepreneur has because he/she is now responsible for implementing the moon-shot goals with revised SOPs, KPIs, retooling, and retraining of his/her people. These changes take time, require an immense amount of effort and cost a lot of money which end up affecting the profitability of the company in the short term.

I am not advocating that an entrepreneurial personality should be let loose with the reigns in any organization. It isn’t a secret that more entrepreneurs have been wrong than right and if left unchecked can be as destructive to the organization. Therefore, it is important to have naysayers (the technician and manager) to help ground an otherwise unstoppable force. A proper balance of all 3 personality types in a business isn’t just important but essential for its growth and survival.

Far too often the entrepreneurial instinct within a founder or an organization dies, as it is neglected due to the abundance of “other things” take up time. The day to day grind of running a business tends to take away the freedom of time and expression to innovate new products and service to replace the old and new technologies to replace archaic processes. Founders are also dissuaded by the risk involved in altering products/services that currently provide steady revenues. These lies and other stories that the founders tell to convince themselves to avoid innovation, convert a startup that is capable of changing the world into another mundane organization that runs on processes that might produce results but are definitely eating up ambition.

So, before you say no to the next business opportunity that comes to you think about “how you can make it happen” before doting on all the reasons “why you cannot make it happen”. Carve out a few hours every week to sit with your inner circle (or even by yourself) to map out what should and could be and how you can go about making it happen. These precious hours will revive the entrepreneur within you and ensure it remains alive!

35/2018

Why do you need my money?

I posted one of the Q&A interaction answers from a founder on all my social media channels yesterday. Some people took it as a joke about founders (it wasn’t) and quite a few asked what investors expect a founder to say when they’re asked, “how would your plans change if you did not raise this money?”

Why do you need my money?

Firstly, there isn’t one correct answer to that question. So, I don’t have a perfectly worded response for founders to read and parrot to other VCs. The underlying question that the founder should be answering in this question is, “why (do I need) am I raising outside capital to run my business?”

If the founding team has given careful thought to that question at the genesis of the fundraise then the pitch deck, elevator pitch, financial model and the responses to our detailed questions will clearly answer reflect that. The founders will not be saying things like their sustainability (or lack thereof) is dependent on outside capital. The apathetic attitude towards investor capital is a sign of entrepreneurial immaturity if not malicious intent, and the latter is obviously worse.

When founder’s do not understand that the risk capital invested must be returned with massive multiples, (read: investor math) they ask for extravagant market rate salaries, fancy offices or other shenanigans that have sunk many a startup ship. Therefore, when the founder says that they will run their business sustainably without VC money instead of pointing out how the growth plans would be hampered without the investment, it clearly indicates the motive of the founder… and let me be clear, they aren’t good.

34/2018

Venture Idea: Putting the Custom in Customer Service

One of my favourite entrepreneurial movies is Rocket Singh: Salesman of the Year. The movie has a dialogue that goes, “customer ke toh naam mein hi mer likha hai” (the word customer has mer (pronounced “marr” – the Hindi word for ‘to die’) embedded in it). This single dialogue aptly defines the treatment meted out to the billion Indian consumer/customers every single day.

All one has to do is go through the Facebook page of any Indian brand and it will not be hard to find the abundant record of horrific complaints and the apathy awarded by these brands to their customers. Although I have been on a crusade against JetAirways for the ad hoc changes to its Frequent Flyer experience, I have seen very little progress in brands making an effort to improve how they treat their customers. Despite the government’s attempt to provide adequate protection to the consumer by allocating a separate consumer court to resolve consumer grievances and penalize erring brands… the problems are only continuing to mount.

I believe that the next ten years will be the golden age of Indian consumerism. With this thesis in mind, I strongly believe that there is going to be a need for a service that goes beyond allowing a customer to air their grievances but actively take control to resolve these complaints. For a small fee, this service provider can engage with brands to resolve customer’s problems. If that route doesn’t work they should also be able to prepare the legal documentation required to take the brand to consumer court. They can even go a step further to provide the contact details for competent lawyers who can file & fight these cases. As India marches to 1,000,000,000 online via mobile – the market potential will be massive!

I have been on the wrong side of several bad consumer experiences in India. There used to be a company called myakosha.com that was solving my problem. They played the role of a service provider who resolved these issues directly with Idea, Jet, AMEX and other companies I was facing issues with. I simply loved their service and the way they made these brands come running to me to solve their errors, was an experience worth living through. However, for reasons best known to the MyAkosha team they pivoted to another business model leaving a gaping hole in the ecosystem. Now, I am personally motivated to be that agent of change for the way Indian brands treat their customers. I have a design team ready to develop the front end, know a law firm who can provide the infrastructure & know-how for this service and am willing to fund this project out of AVF.

I am seeking individuals who have a strong background in social media marketing, customer complaint management, and a strong tech background. I am also looking for a person with a strong background in data analytics to build out this venture.

Do you know someone or a team that fits this bill?

Email prospects@artha.vc with a cc to karishma@artha.vc.

25/2018

You are NOT an Angel Investor!

96% of all startups shutdown within 10 years of “starting-up.” Investing in early stage startups is a very risky business. Let this be a disclaimer for all those that want to enter this business seriously or for fun – be ready to go home empty-handed and red-faced. An angel investor or VC’s success can be attributed to several factors: understanding the space, the network, their own genius, diversification of portfolio and almost all the time – a good slice of luck.

The angel investor (or early stage VC) has the potential for generating a large amount of wealth in a short period. So let me be clear that this article does NOT provide gyaan on how to be successful at angel investing. This article is about whether you should participate in angel investing. Many developed countries define venture capital investors as sophisticated or accredited investors that have a significant net worth or who display enough knowledge to participate in this space. In fact, the US requires that you show at least $1 million (Rs 6.8 crore) in networth excluding the value of the primary home to participate to invest in startups.

So why is it important to build such credibility before entering such a risky space?

  1. There is a high probability of a complete loss.
  2. There is a chance that the startup does well (eventually) and you still don’t make good returns because of high dilution.
  3. You cannot exit the investment easily even if the startup is doing well.
  4. There are cases where founders have defrauded the company and investors.

I have personally requested the Start-Up India team to bring in regulations to control the unbridled entry of angel investors, some of whom are betting 30%, 40% and even 100% of their investment portfolio in investments into startups (sometimes even just ONE startup). The Startup India’s inability to regulate the industry (due to various valid reasons) does not mean that we shouldn’t self-regulate. If we don’t, we allow the entry of people who can wipe out their entire net worth and the industry will suffer due to the greed of a few founders and angel investment networks.

Here are some of my requests to the players in this space:

To the founders:

  • Reject investments from individuals who do not investment a minimum of 5 lakhs (~$7500) as those with smaller amounts are most likely passive investors who will not follow-on in later rounds. )They are also a pain to follow up for tranche based payouts)
  • If you are going to accept a Rs. 5 lakh cheque, the investor should bring in at least 10-15 lakhs worth of non-cash benefits.
  • Keep the cap table clean with larger cheques from smaller group of investors instead of the opposite

To angel investment networks:

  • Get your own accreditation standards to review the net worth of members and reject those that do not meet a net worth of Rs. 10 crores ($1.5 million).
  • Charge a decent annual fee so that the cost of investing is high enough to attract larger cheques.

To the incoming investors I request that you:

  • Limit your exposure to 10% of the TOTAL investment portfolio (i.e. your liquid net worth)
  • Have a minimum investment outlay of 50 lakhs per year ($75000) for a minimum of 7 years
  • Have the liquidity to double the amount from years 4-7 to invest in follow-on rounds.

The next time I get a request from someone to join the angel investment space I am forwarding them this link… Will you?

How to shoo away investors at your next pitch..

investors-advice-pitch

Recently, I was on a conference call with experienced investors where our objective was to decide if a startup is fit for further evaluation. The startups get 10 minutes to pitch to us and then there’s a Q&A session before the board decides whether a Startup is fit for further evaluation.

Sitting through 8-10 pitches one could decipher which Startups’ founders were better prepared. In fact, it was quite easy – the pitchers that could confidently & directly answer questions were easily the better ones.

One prime example of a weak pitcher was a founder that kept dodging around a simple question regarding the quality assurance process in his Startup. Instead of directly informing us that there was no process, he wasted precious minutes using every available tactic in the book to wriggle out of a net of his own creation. Honestly, if the founder had just owned up to the fact that they didn’t have enough money to assure quality at this point, or they didn’t have the expertise to do the same, I would have let him off the hook.

However, that didn’t happen, I caught the founder in a lie and he had to own up to what he could have done upfront – do you think we decided to allow further investment?

I find it imperative to jot down my advice on how to engage with investors when pitching your Startup to them. The idea behind this write up is to cover the following critical issues:

  1. How to prepare for questions
  2. How to answer a question
  3. What not to do when you have to answer questions
  4. The importance of answering questions with confidence (and how that confidence is built)

When it comes to the kind of investor, it’s quite clear that you want your investor to be smart, savvy and intelligent. If he is not either of those things, you have picked an investor that you will have to carry and not one that will carry you.

Contrary to popular belief, raising money is not as tough as raising money from a smart and savvy investor. To get smart investors on board, you have to make yourself acceptable to those investors. This means that you have to invest your time in doing the preparation work for your demo/presentation in front of investors.

One of the ways to do that, is to present to your friends and family and ask them to grill you with questions that come to their mind during the presentation.

If your captive audience is asking the same questions you can either, make changes to your presentation to answer those questions in advance i.e. before the investor asks it or, you can prepare an answer for those questions that rolls off your tongue like your own name and get back into the presentation.

Later, when you are presenting to investors you should try to video or voice record your presentation so that the investor questions and your responses to them can be reviewed by you and core team for improvements to the presentation, or to better prepare an answer to that question.

Time and again, you will have questions that completely stumps you. It is absolutely acceptable that you accept that you don’t know the answer right away but, (very important) that you will get back to that investor or investment group with the answer in a week or so.

However, don’t do two of these most often used tactics that were employed by the Startup we rejected

  1. Make up an answer using fancy terms
  2. Beat around the bush expecting the investor to lose momentum and get out of a tricky situation

In both situations, you will get caught by smart and savvy investors. They will either demolish your fancy answer in front of all investors, or demolish your prospect to other investors when you have left the room.

The tactics above never have, nor will end well for any pitching for investment (or even for businesses in general)

In terms of gaining confidence, it is an often used term that “Practice makes perfect” and one can keep practising the same presentation and answers again and again to gain confidence.

However, that approach (though better than doing nothing at all) is only good for winning half your battles because it is-

“Perfect practice that makes perfect”.

After each pitch review the recordings, make the necessary edits to answer questions and get comfortable answering questions. In fact, get comfortable telling investors you don’t know the answer and through planning, practice and performing you will get better.

My mentor during my sales career days made me memorise these 7 P’s for these situations and that you too can use as a mantra for your own success.

“Proper Prior Planning Prevents Piss Poor Performance”