Video of the Week: The Crash

Today, exactly 10 years ago a 157-year-old institution, Lehman Brothers, went bankrupt. The reasons behind the Lehman fiasco are well known but this DW documentary focuses its lens on the ripple effects that the unbridled enthusiasm & greed of a few people on Wall Street had on 10,000+ Singaporean small investors.
This documentary is an important reminder that optimism is good but unchecked optimism is a sure-shot recipe for disaster.

There is a historic irony with the 15th September as in 1940 a severely handicapped British RAF turned the tide in the Battle for Britain halting Hitler’s plan for European domination. On that momentous occasion, British Prime Minister, Winston Churchill had famously said, “Never in the field of human conflict was so much owed by so many to so few”
Unfortunately, Winston Churchill could not have imagined that just over half-a-century later so few would owe so much to so many.

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

Angel Networks in India Are Dead

Angel networks have played an important role in developing a robust investment ecosystem for start-ups in India. While the initial networks were small, they were composed of individuals who had known each other for a while, so there was a web of trust that continued to hold the members together. Then as the initial investments of these networks started to pay off and start-ups started becoming an obsession for mainstream media, the networks grew rapidly from a city or regional networks to India-wide or even global networks. What looked like an amazing business was the slow poison of death being gleefully ingested by the network’s administrators. Today, many of these angel networks are dead if not in the terminal stages of death.
What I meant by ‘dead’ is that these networks have morphed into investment banking businesses under the garb of angel networks. Therefore, most of these networks comprise of passive investors that rarely bring in deal flow or can provide time to investees – both important tenets of a successful angel network. Instead of ensuring that the investors know each other and form robust bonds for the future of the investees, the network is gauged by the number of people that have paid the “annual fee”. The value that each angel adds isn’t a metric that is considered– therein lies the problem.
The net result is that the entrepreneurs that approach these networks for funding are treated as “leads” that need to be closed. There aren’t any minimum investment thresholds (eg. size of the cheque, etc) for the investors putting in money which means that the sheer size of these networks coupled with angel’s abilities to write multiple small cheques, almost guarantees that any leads that come to the network won’t go unfunded. The size of the network also causes a hike in the number of investments in order to keep every angel interested. This leads to either relaxing investment standards, investing in rounds that do not conform with network’s objective or most worryingly, investing at valuations that do not make sense thereby killing an entrepreneur’s future chances of raising funds.
A large angel network is harmful to the ecosystem because it lacks the focus and objectivity required of this type of investment group. A smaller, more close-knit angel network that revolves around one investment theme or comprises of individuals from one specific geographic location or investors who only invest in a particular geographic location are all better for the startup ecosystem but not the “angel network business”. Otherwise, this celebrated size of the growing angel network will soon become the tombstone under which the angels’ network will be buried.

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.