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Tag Archive : Fundraising

Navigating the Indian Seed Landscape

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

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

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

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

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

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

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

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The art of how much to raise

In the past several weeks, I have been astonished at the size of seed rounds that founders expect to raise in their first round. My jaw hits the table when a founder blindsides me with requests to raise seed rounds of $1 million to as high as $3-4 million!*

These are the start-ups that have

  • Opened their doors for business within the previous 12-18 months.
  • Have an ARR of less than two crore rupees ($300k).

Surprised at the massive requirement of capital, we go through their financial model. Within a few minutes of looking through the model, the spreadsheet would give out a chilling fact:

The founders first decided the amount they were raising; then, they decided how to utilise the amount that is raised!

It may seem like smart scheme when pitched to novice investors, but it is a foolhardy attempt to do that to an investor with experience.

For instance, to show full utilization of the amount the founders pad certain numbers. So, a close inspection of the fund utilization plan exposes the founder’s true intentions, i.e. that they wanted a reverse calculated an ego-boosting valuation for themselves. To achieve that goal they were willing to misrepresent facts. How does a founder come back from that image?

The good news is that – there is a better way.

My advice for founders that are creating their fundraising plans is to start with a well thought out answer to a famous Peter Thiel question

What is the one thing you know to be correct but very few agree with you?

In simple words, what do you need to prove to your team, your advisors, investors, etc. to elevate their belief in your idea? Whatever you need to do to gain their confidence that is the goal of your fundraising efforts.

For example, if everyone in your inner circle does not think that your company cannot sell x number of your whacky widgets in a specified period – then that is precisely the thing you must prove! Your goal must be specific, measurable, attainable, and realistic, and time-bound so that you aren’t on a wild goose chase.

Second, estimate the time and the resources (servers, people, space, travel, etc) required to achieve your goal. Pay close attention that your estimations do not have un-utilized or under-utilized resources. In fact, I advocate allocating 20% fewer resources than your start-up needs. It forces your team to innovate, after all – scarcity is the mother of innovation!

Third, figure out the exact cost of your resources over the period of their requirements. This exercise is a crucial step. Because if you had correctly estimated the resources and the time they’re required, you will (now) have the EXACT amount you must raise to achieve your goal.  

Fourth, add 25% top of the number you had in the previous step. The extra amount is your buffer, i.e. it is the extra cushion you’ve kept to account for any mistakes you may have made in your calculations. The extra cushion gives you the breathing room to commit errors – an essential fail-safe for an early-stage startup.

Now you have the exact amount your start-up needs, not a paisa more and not a paisa less. Next, go out there and raise this amount!

This proper prior preparation will give you the confidence to answer questions about the “why” behind your fundraising efforts. Your confidence will impress your prospective investors as you come off as a professional founder instead of a novice founder who thought they could pull the wool over the eyes of a seasoned investor.

As an investor that has sat on the other side of the table for almost eight years, this level of preparation and maturity from a founder is rare. But, when I meet a prepared founder it invokes confidence that the founders will utilize my precious and expensive capital judiciously. In fact, I may be swayed to give a premium valuation to such well-prepared founders – exactly what the founder wanted but now he/she earns it with respect!

* – Oddly enough, the high expectations were from founders who spoke in millions of dollars instead of crores of rupees. It ignites the patriotic fervor residing in Vinod – a sight to watch!

The failure vortex and how to get out of it

It is easy to figure out when founders have been pitching for investments without any success and for a while. The pitches become nonstop monologues that will end at the allotted time or when abrupted by questions from us.

Naturally, the founders overcompensate to avoid failing on another pitch. They try different tactics to avoid disappointment, but a series of rejections can take its toll on a founder’s psyche, and slowly the tactics become bad habits. Many founders are not aware that these bad habits are creating a vortex that is attracting further rejections. What seems intuitively correct is practically fatal.

So here are a few tips for founders that will help them in their next pitch.

  • Eliminate the problem areas in your pitch deck

If you’re getting stuck at the same point in your presentation, then it may be an excellent time to eliminate that slide. If that is a slide that you cannot eliminate then use an example to get your point across.

Doing the same thing again and again but expecting a different result is the definition of insanity- for a good reason!

  • Speak at a measured space and

The two significant signs of low confidence are speaking in a high pitch and speaking at a fast pace. The good news is that there is an easy fix for this.

  1. Record yourself pitching so that you hear the difference between your regular and confident voice and that you use during pitching.
  2. Do test pitches where you speak in a tone much lower than your standard baritone and speak at slower than your average space.  
  3. Write down, “breathe” at a spot where you can see it during your pitch and breathe.

These exercises may seem stupid to you, but you have to ensure that your message is getting into our heads. When you talk fast at a high pitch and without taking a breath,  the only thing I’m thinking is – something is wrong with this business!

  • Act as if

Yes you may have just enough money left to take the Uber ride home

Yes your core team may be on the verge of quitting

Yes your parents are hounding you to take that job you hate so you can make ends meet and;

Yes all this stress is tearing you apart inside

However, those are your problems that we are not aware of right now. During your pitch, we should not be feeling the weight of the issues we’re inheriting. Instead, we want to dream about the promise your opportunity holds, and we want to know you are the guy that will get us to that promised land.

Therefore, clear your head before you start a presentation. I watch specific videos or listen to particular music that gets me in the right frame a mind before I make my pitch for investment. I force myself into a mental state where all the issues in my personal or professional life don’t get reflected in my pitch for investment. For my investors, I am ‘the guy’ wearing the confidence of the success, and a bank account overflowing with money.

Confidence is infectious and FOMO is not a myth!

  • Do not brag or lie

Asking you to act as if may seem like I am encouraging you to lie or brag but let me be clear that that is far from the truth.

A successful person does not need to stamp their success everwhere, and neither do they have to remind people of their success. Most of the successful people I know underplay their success, displaying palpable confidence that is felt but not witnessed.  

Therefore when founders start bragging about meetings with Saif, Sequoia, Lightspeed or well-known super angels in a feeble effort to create FOMO they are pulling the rug from under them. We can safely estimate at what stage of the start-up’s development these top funds will take an interest in investing in them.

Therefore, bragging about meeting x, y or z, when you don’t have a POC, is a sign of your immaturity in understanding how the venture capital ecosystem works. To misunderstand their interest in taking a meeting is a sign that desperation is getting to you – not something you wish to convey to a potential investor!

Act as if is an attitude, a demeanor, and a mental state. There isn’t any space for lies and show off when you are acting as if.

Be prepared for due diligence BEFORE your fundraising!

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

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Sell the Sizzle in Your Next Pitch

Many things are important towards the success of a start-up pitch but getting the audience to relate to the problem that is being solved can be the difference between a nod or a nay. For many founders this could mean that they must essentially dumb down their pitch, and I would agree with that approach over a technologically complex and “intelligent sounding” presentation any day.  In sales we call this approach, selling the sizzle.

In a nut shell what I am suggesting to the presenter in you, is to hone down on the objective of the first pitch i.e. being relatable enough to warrant further investigation. I would not advise neither expect a presentation to get an investor to write a cheque immediately after the pitch, that is unheard of and nearly impossible. However, if your pitch has the recall value to keep investors thinking for hours, days or even weeks after it – the goal has been achieved.

These are some key ingredients to achieve the desired effect on an investor audience:

  1. Create an image of your target customer
  2. Explain the challenges that the target faces today
  3. Delve into the loss (in time, money, etc.) that this target faces
  4. Elaborate how that loss is hurting the target and how the current solutions aren’t helping
  5. Elucidate how your solution solves these problems (a video case study is recommended)
  6. Calculate the value delivered to the target
  7. Quantify how many such targets exist i.e. TAM, SAM, SOM, etc

Your story should get woven in such a way that the investor finds themselves in the shoes of the target and can visualize the issue, the solution and the value it would provide to them. A great example is this Bhavish Agarwal’s 2011 pitch for Ola.

Notice how Bhavish asks the audience for a show of hands of how many people have had a bad taxi experience. Almost everyone has faced this issue at some point or the other or knows of someone that has, i.e. relatable. Instead of delving into the awesomeness of Ola’s tech stack, he uses ‘you’ multiple times during the presentation to gently put the audience into the shoes of a taxi hailer. He shares just enough pain points to get your creative juices flowing and start looking for a solution to this imaginary problem. Smartly, he chooses to stay out of the techplaining which he understands can (and will) get covered during follow-on conversations with interested investors.

If you think about it, it is easy to argue with an explanation but hard to argue with an experience. Therefore, it makes logical sense to cut out the excess fabulousness of your pitch and focus on only delivering a pitch that is edible, visualizable and recallable. The rest can wait.

19/2019

Keep the Fundraising PPT, Simple

I sat through a pitch call today that went on for 35 mins (but it seemed much longer). The founder kept going through slide after slide of information which harped on the same point (the business model). To move things along I valiantly attempted to summarize the business model for the founder and indicate that I understood what he was saying. However, that energized the founder to ramble on aimlessly until I had to finally close the conversation as there was another founding team waiting to pitch to us on another line.

Unfortunately, at the time I shut the call the founder hadn’t gone beyond explaining his business model and even though they had approached us from a very important referral source we decided to pass on the deal. Does it seem like we acted too fast? I do not think so.

Ultimately it is the founder’s responsibility to simplify their business model in a manner that investors can understand not the other way around. Therefore, founders should be vigilant that an investor’s time is limited, their attention fickle and once the investor has lost interest it is nearly impossible to get it back.

I found a good solution to avoid getting stuck in tangents and it was provided by the folks at Sequoia. Founders utilising this outline will eliminate the unnecessary slides that are elongating their pitches and will also find the outline helpful in providing a simple yet concrete structure for the pitch to move along on so that the founder can get to the more important part of the pitch viz. the Q&A.

86/2018

PS: Here is the SlideShare version

When is the Best Time to Reveal that Your Cofounder is Related to You?

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

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

What Should I do with my Business, while Fundraising?

Last Friday, Siddharth and I were in Bangalore talking to a group of entrepreneurs that were being incubated at NSRCEL. During a Q&A session, an entrepreneur inquired, “how long does it take to get money after presenting to an investor?” Siddharth had the perfect answer, “3 months if everything goes to plan but you should anticipate at least 6 months!”

These questions about funding timelines are commonly asked by most entrepreneurs, but I have yet to come across an entrepreneur who asks me, “what should I be doing with my business during my attempt to raise funds and/or during the due diligence process being conducted by an investor?” Oftentimes, founders let their business stagnate or slide during fundraising.  This trend is disturbing and fatal for the venture as well as its prospect of raising money.

The most important activity that a founder could do during the fundraising process is to continue to drive growth well. The adage that “a rolling stone gathers no moss” can be aptly modified for this situation to point out that “a growing business loseth not investor interest”. Fundraising is an important part of the business but a business that is losing steam will quickly derail the fundraising effort. The dip in business could mean a weak second line of defence, waning customer interest, market saturation or the entry/presence of better competitive products. This opens a Pandora’s box of questions in the investor’s mind that will lead to several uncomfortable conversations and over analysis.

Therefore, a founder can effectively manage their time by responsibly allocating a significant amount to grow the business and similarly a significant amount to fundraise. They should start delegating responsibilities to competent team members and ensure that the business putters along without a glitch during the fundraising process.

61/2018

Are you raising the right type of capital for your venture?

In a May 2017 post, The math of early-stage venture capital, I had explained the aggressive return expectations for an early stage VC (the “impatient capitalist”). One of the biggest mistakes a founder can make is to raise impatient capital for a business model that requires patient capital. The incorrect choice of capital leads to an expectation mismatch on the pace of growth the venture will achieve, between the founders and investors. So, while the founder could be happy with the upwardly inclined growth plane his business is achieving, this rate of growth might not be aggressive enough to command a higher valuation in new funding rounds thereby disappointing the investor. A dissatisfied incumbent investor is toxic to future fundraising plans for the founder.

Patient capital is often misclassified as impact capital which is a grievous error and in my opinion, a leading cause of its low acceptance rate with founders. Unlike impact capital that demands a nominal rate of return and is inclined towards capital preservation and social impact, patient capital has aggressive IRR expectations. In fact, if I drew a vertical line that has impatient capital at the top and impact capital at the bottom, patient capital’s IRR expectation would be in the 65th to 75th percentile of that range. In a nutshell, patient capital is expecting fantastic, market-beating returns. The key difference between patient and inpatient capital is that the patient capitalist is comfortable with long periods between funding rounds and he/she is comfortable (and experienced) in holding investments for very long periods of time.

The patient capitalist reduces the pressure on founders to deliver 30-50% QoQ returns that an impatient capitalist wants (read: The rule of 3x). They refocus both their own and the founder’s energy on enterprise development, sustainable growth and brand building (internally & externally). The obvious sources of patient capital are family offices, corporate venture capital, private equity funds i.e. sources that do not need to return capital for long periods of time.

However, there is a price that a founder pays for raising patient capital. Firstly, patient capitalists do not like giving lofty valuations. Secondly, they do not allow burning of copious sums of money on marketing/PR/recruiting activities that chase runaway growth. Thirdly, (and most importantly) patient capitalists tend to acquire the investee businesses at a certain point in the future. A founder can view these shortcomings as small prices to pay for the freedom that patient capital provides but they will be fools to raise such capital if they possess a business model with explosive growth potential, just for the freedom that it temporarily provides.

Therefore, it is the founder’s duty to classify what type of growth his/her business will provide and align themselves with the type of capital that best suits that business model’s expectations. Are you raising the right type of capital for your venture?

50/2018