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.


How Big Hairy Audacious Numbers Hurt Founders

Yesterday, a founder was having a tough time trying to convince me on his business plan. After the umpteenth attempt, he asked out of sheer frustration, “How is it that xxx company with shitty service and many issues gets all kinds of funding but you can you not give me the initial seed capital to prove myself?”

He was right in a sense, many companies like Ola, Oyo, Swiggy, Flipkart etc. went through phases when their products/services were shitty. They had numerous consumers complaining about them on social media sites and there were questions about whether they would survive the horrible reviews. How is it then that they could raise so much money? How could they convince early investors that they will become these massive unicorns?

In my opinion, it was the founder’s ability to convince the investors on the existence of a market segment that was under served, accurately depicting (for the investor) the issues that this targeted segment is facing. Put simply, they were able to showcase the size of the target segment that could be served right away and the potential addressable size. This is usually the most difficult part for investors to believe and the least researched part by founders.

Many investor presentations have Big Hairy Audacious Numbers (BHAN) which ignite wows, oohs and aahs from family and friends, but that number does not hold up to a deeper dive. It quickly shrinks as the investor digs deeper. The easiest way to shrink the BHAN is to ask the founder which customers he will say no to and which ones simply don’t face the problem he is solving. Every founder needs to ask himself/herself the question, “which customers are too small for me and which customers am I too small for?”. Once those boundaries are set, usually the BHAN shrinks to a fraction of the original, in this case it shrunk over 90%.

Even though that sliver of the original number could be huge, it would make me, (or any other investor) doubt whether the founder clearly knows how to get the most bang for the limited budget that an early funding round provides. It also destroys the credibility of the traction that the founder has achieved until that moment because it raises questions as to whether a large chunk of the current customer base include customers that the founders don’t intend to serve!

These doubts cost the founders dearly and while they can come back with better research and understanding, it will require nothing short of a home-run to re-convince me or any other investor.

As far as the questions on the shitty services are concerned it is impossible to have 100% satisfied customers, 100% of the time. There will always be some slippages, but if the new solution is a little better than the old one and the founders demonstrate a culture of constantly evolving their venture to improve this solution, customers will forgive and continue to use their product/service. Therefore OYO, Ola, Swiggy, and Flipkart should be an inspiration and not a point of frustration for founders that are getting rejected.


My Angle on the Angel Tax Notification

Through a flurry of tweets, DIPP announced the changes that were made to alleviate the Angel Tax problem that the early stage ecosystem has been continuously grappling with. In a recent post I had put forth my own views on how the government could resolve these issues by accrediting angel investors, and to my surprise DIPP did accredit angel investors (in a way)  in the notification made on the 16th of January.

There were several reactions to the notifications which ranged from the positive…

….to the cautiously optimistic

I believe that the government’s baby steps toward rectifying the angel tax issue is a good sign. I also believe that there will be more incremental changes on the anvil and the biggest positive take away from these notifications is that the government is listening and (more importantly) acting.

However, I do feel that DIPP could have invited better representation that just the heads of angel groups. Most of them stand on behalf of investors but rarely make angel investments on their own. Instead the angels that are writing cheques, dealing with founders and tax authorities regularly are the ones who should be getting invited to provide their inputs. A minimum criterion of 25 investments in the last 3 years could be a good starting point. These angels’ inputs would be valuable as they would make the next set of changes more acceptable.

A couple of the changes that I would like to propose to DIPP

Let’s see what the next set of changes are going to be!


Your discounting campaign is suffocating your business!

Uber & Ola have finally found out that their long-term discounting campaign only helped in distorting the market. However, markets will eventually come back to normal and the fuel behind the discounting campaign (read: investor cash) will dry up as investors focus on the real numbers that drive a business i.e. profits & margins.
Many founders continue to be inspired by the discounting campaign tactic but the economist in me will tell you that long term discounting will cause more harm than do good for your venture. Therefore, any strategy that involves a discounting tactic should have a clear objective backed by an expiry date.
What is discounting?
Discounting is different than having a pricing advantage i.e. a cheaper cost base for providing a product/service. Discounting means that you have decided to take a cut on the margins that were promised by your business plans to achieve an objective. It could be to get rid of old inventory or to gain significant market share in a short span of time. On the other hand, a cheaper cost base allows the venture to provide the product/services at a cheaper price while maintaining promised margins.
Why are you discounting?
Discounting works best in a market where the product/service offered is homogenous and the customer will be inspired in choosing your offering over the others is a discount. Many founders use this example to defend a long-term discounting campaign but I counter that if your venture is a new entrant and it offers no other significant advantage over your competitors expect its deeply discounted price, then why are you entering that crowded universe when you have no other significant advantage?
Some founders will argue that discounting can also be used for snatching away market share as a new entrant in a crowded market or a market dominated by a few players. I can agree with that view and this may lead to a temporary influx of customers but those initial numbers are irrelevant. Only those customers who come back for a repeat purchase are important because they have made a shift in their buying habits because of what they experienced the first time they bought your product/service at discount and were motivated enough to come back and buy it at a full price.
What happens in most cases with founders is that they get scared of removing the discount because they will reveal the real numbers of the business which they themselves do not know nor want anyone else to know.  Then that discount tactic becomes a strategy to distort investors perception and most importantly their own.
When should you use discounting?
The most important decision before embarking on a discounting campaign is the frequency you expect your customer to engage in the behaviour of buying the product/service whether it was from you or your competitor. Next you can figure out how many times a customer needs to buy from your venture so that initial discount pays for itself from future margins. If the answers to anyone of these questions is over a year, then the discounting strategy shouldn’t be pursued because the return on the investment in discounting is too far out for it to make profitable sense to pursue. Secondly the long period to profitability from discounting a customer has inherent challenges as many new entrants come into the market and the there is a risk of a change in customer behaviour which would lead to the entire investment in discounting becoming a complete loss.
Alternatively, if your average customer has the propensity to make multiple purchases from you in a year such that the initial or interim discounting campaign pays off quickly it makes economic sense to pursue a discounting campaign to attract the customer, gain the customers loyalty and enjoy the temporary increase in revenues.
Unfortunately, I continue to see business models & MIS reports that are pursuing discounting campaigns with scant regard for the economics of the campaign. These founders are revelling in the temporary high that the vanity metrics bring to them, blissfully unaware that the business is dying a slow & painful death as the discounts eat away at the foundations of the business.
If you as a founder are thinking about pursuing a discount campaign, please think through the economics of the campaign viz how will the initial discount pay for itself? how long will that take? what is the return of the investment in the discount? what is the probability of that achieving that return?
Without adequate thought and planning behind a discounting campaign you’re just gambling with your business and if you want to run a gambling business then open a casino.

How to shoo away investors at your next 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”