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Tag Archive : opinion

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!

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How to deliver bad news to investors

Hey founders, today I’m going to address a crucial topic: When to update your investors with bad news. If you’re an entrepreneur and running a business, you will have to give bad news at some point.

There are many ways to give bad news. One of them is not to give any news at all, let everything go down, and then explain why you have only ruins and not a building on fire. This method isn’t recommended, but some people choose it – I don’t.

There are minor issues or bad news that can be managed in your monthly and quarterly updates. Like missing your quarterly numbers by 3-4%, or if you’re having a tough time recruiting people, or if a particular distributor who was contributing a large part of the business dropped you for reasons unknown or customer complaints. These are the kinds of things you can manage in your monthly and quarterly updates.

However, certain kinds of news shouldn’t be neglected. These should be communicated to the investors immediately. If a co-founder has left, or one of the co-founders has been diagnosed with severe disease and will not be available for the next 6-8 months, or your fundraising efforts are falling through, or a significant client that contributes a substantial chunk of the profit has left. These are the kinds of situations that need to be communicated to the investors immediately, preferably not on e-mail.

What I recommend is organizing a conference call or an in-person meeting. Explain what is going on to the investors face to face, in a way that is direct with no sugar coating. Be humble about the fact that things have gone wrong. Don’t try to play up things to avoid the investors being angry at you. If the situation is terrible, investors have a right to be irritated and will point out things that could have gone better. You should take criticism in your stride as you’re expected to execute successfully. Take responsibility, be direct, and you’ll find that investors will probably come back with solutions for you to manage the mess.

In adverse situations, you should have a turnaround plan. I would recommend having one if you’re going to have a face to face meeting. If you don’t have one, let the investors know and get back to them in a few days or a few weeks. There may be some questions the investors have, for which you may not have the answers. I would recommend not making up turnaround plans on the spot. If you don’t have the answers, tell them. Mention that you’re going to get back to them in 5, 7 or 10 days (or whatever number of days you believe you need) but ensure that you keep those promises.

Delivering bad news should not be difficult. It’s only tricky when you don’t want to give bad news, and you feel hiding is the best way forward. But it doesn’t solve anything. In fact, it only leads to the problem of getting bigger. If hypothetically, the company shuts down, and investors find out that you knew in advance, you could find yourself in a hot legal soup.

I’ll leave you with that, and I would love to know how some of you guys have shared bad news in the past. Also, if you have tips for other entrepreneurs, do share them in the comments.

The passionate vs the obstinate founder

Recently, I had a long conversation with someone about the challenges I faced working with an obstinate founder that they referred to me. The person countered that the founder was passionate about their business idea, and I misunderstood their passion. I disagreed with their assessment.

During the week, I have contemplated the difference between obstinate and passionate. I realize that it was difficult to separate the two. Obstinate is often misunderstood to be obsessive; a term often used to describe Mark Zuckerberg, Jeff Bezos, Brian Chesky, Elon Musk or Jack Ma.

I love obsessive founders. I considered myself an obsessive founder. I am probably even more obsessive as an investor. Why VCs love obsessive founders is well explained by Mark Suster in this Medium post titled Why I Look for Obsessive and Competitive Founders. If you are a VC investor, then you should read this post.

Moral: Obsessive is good, but obsessive is not obstinate.

Obstinate is what Oxford defines as stubbornly refusing to change one’s opinion or chosen course of action, despite attempts to persuade one to do so.

Obstinate founders can take a fantastic thing and reduce it to rubble because their need to be right is more important than their need to win. It is the classic winning the battle but losing the war syndrome.

Gordon Tredgold wrote a wonderful article explaining the difference between stubbornness and determination, aptly titled Don’t Confuse Stubbornness with Determination.

In it, he provided a list of signs that can warn a founder whether their stubbornness is becoming an issue.

  • If you never win and you never quit, you’re an idiot
  • Will power vs. Won’t power
  • Remember that your goals must be measurable
  • Think about results
  • Consider adaptability
  • Your goal will remain the same, but your plan for achieving it will be different

His suggestions are absolutely banging on. I encourage you to read the article if you constantly find yourself butting heads with prospective and/or current investors.

3 Reasons Why I Believe OLA Has Lost Its Mojo

Just last year, I was writing praises of Ola’s product mix that allowed it to have the upper hand over Uber. In fact, I was so happy with Ola’s product strategy that not only did I endorse Ola Select’s benefits to all my friends & colleagues and open a corporate account with them but also swore to use OLA exclusively in India. However, in the past few months I have consistently found myself choosing Uber over Ola and (after much deliberation) I can hone it down to 3 main reasons.

1. Ola Select No Longer Offers a Compelling Value Proposition

For those who don’t know, Ola Select offers 4 main benefits:

  1. Ride without Peak Pricing
  2. Skip Booking queue
  3. Prime at Mini-Fares
  4. Free Wi-Fi during the ride

Initially, Ola used to charge Rs. 499 per month to avail Ola Select. Gradually they started increasing this price until it added up to a whopping Rs. 1999 a couple of months ago.

Since my monthly commute costs less than Rs. 5,000, the steep increase in the subscription cost was economically unfeasible. I felt as though Ola’s management was price gouging me and it broke my trust. I heard similar gripes from many who were regular Ola Select customers.

However, when I opened my app today, I found a discounted monthly subscription price had dropped to Rs. 1299, at the cost of capping the surge protection at Rs 75 per ride. It looks like someone at Ola noticed the drop in the subscriptions and attempted to salvage it with this move.

If I assume that Rs 75 equates to a 25% benefit per ride, then it works out to an average bill of Rs. 375 or a 25-kilometre trip which is rare for someone travelling within Mumbai (or most cities except Delhi & Bangalore). Even if I assume that I took those many trips in a month, it would still take 20 rides before the subscription paid for itself and 40 if I wanted to get any additional value out of it. Therefore, Ola Select would make sense to someone who was regularly spending Rs. 15,000 (40 x Rs. 375) on Ola per month – a rarity in Mumbai.

The biggest guffaw of this pricing strategy is that the normal Ola rides are now directly competing with Ubers prices and often, I end up opening both apps to see availability and pricing before I book my ride. This is something I do not recall doing when I was a Select member.

2. Untrained/Greedy Cab Drivers

The quality of Ola drivers has been steadily dropping over the past 12 months, but it has dived off a cliff over the last 3 months. On multiple occasions, drivers have hesitated to arrive unless they know the drop off location or cancelled the trip if it is short or payment isn’t going to be made in cash. Off-late, I observed the most alarming trend in Hyderabad & Bangalore wherein drivers want me to cancel my trip after they arrive and settle with them in cash for a discounted rate below the original trips pricing quote. Clearly, something is going on at Ola that is causing such drivers to be recruited and retained.

3. Filthy Car Quality

Ola’s fleet is ageing rapidly. Their quality assurance teams seem to have gone on vacation since the tablets have stopped working, in-car Wi-Fi is non-existent, the cars are well dented, have their paint scrapped off in many places and have not had their interiors cleaned in months. If Ola assumes that their riders will take 25-kilometre trips in these vehicles, the least they can do is to ensure that their vehicles are providing a comfortable commute.

The overall Ola experience has left a lot to be desired.

The loyal Ola users are now looking for better options and it isn’t a coincidence that Uber has newly launched its Premier vehicles campaign. It assures the rider that they shall enjoy new vehicles and highly recommended drivers for their trip – at no monthly cost at all!

Time to buck up or it’s going to be hasta la vista, Ola!

72/2018

6 Books I’d Recommend to Every Entrepreneur

An entrepreneur’s primary role is to sell. At any given point the entrepreneur is selling whether it is

  1. Selling himself on why he is pursuing this idea.
  2. Selling his employees on why they should join or stay at this venture
  3. Selling his friends and family on supporting him in his new (and often crazy) endeavour
  4. Selling his customers to try out the new product or service he has developed (and to pay for it)
  5. Selling his business as an investment opportunity to potential investors
  6. Selling mentors on why their valuable time will be well invested in him
  7. Selling to investors to continue supporting his business

The list of selling activities can go on for pages… and I still would not have even scratched the surface of the number of selling activities that an entrepreneur is actively involved in. Therefore if there a skill that an entrepreneur should learn is the skill to sell.

I have found that the following 6 books made the maximum impact on my sales, investment and entrepreneurial careers as well as the careers of people whom I have mentored and helped to grow in their respective sales and entrepreneurial roles.

Ideally, you should read these books in chronological order since the level of complexity increases as you progress down the list.

  1. The Greatest Salesman in the World by Og Mandino
  2. How to Sell Anything to Anybody by Joe Girard
  3. The Four Agreements by Don Miguel Ruiz
  4. How to Win Friends and Influence People by Dale Carnegie
  5. How I Raised Myself from Failure to Success in Selling by Frank Bettger
  6. Unlimited Power by Tony Robbins

Have any books helped YOU shape your entrepreneurial career? I would love to know so do share them in the comment section!

11/2018

Keep Calm and Don’t Generalize

Imagine if this elevator pitch was given to you  

“There is a lack of reliable sources for procurement of farm fresh produce & it’s impossible to buy directly from farmers without traveling to farms. High consumer demand of farm fresh produce is hugely under-served.” 

For those of us that have been brought up on a steady stream of Bollywood movies that show farmers as poor, uneducated simpletons, this statement could ring true. However, when I made the effort to dig beneath the surface, the generalizations made in this statement are very misleading.  For example, a simple online google search to buy farm produce in Mumbai provided 4-5 websites that supply farm fresh vegetables. I went ahead and placed orders on a couple of them to test the quality of produce… so that debunks the “impossible to buy” assumption!  

So now…..what do you think are the chances of me calling this founder back? 

When a founder generalises an issue that a few people face and claims that it plagues the entire population that they are addressing, they treading on dangerous waters. Here’s how:  

  1. The target market is actually much smaller than they are estimating  
  2. Sales targets promised to the investor (and the team) are unrealistic  
  3. The product/service requires several customizations to address the customers that fall outside their calculated target market  
  4. Sales growth stagnates as the target market shrinks 
  5. Budgeted spends are overshot thereby reducing the runway to pivot  
  6. The customers, team, investors and eventually the founders lose confidence  

This is a common plot of many companies that I have witnessed shutting their doors (as an investor, employee or even an observer)  

I understand that as a founder with a limited budget, it is difficult to conduct a survey that includes every person in the actual target market, but it is unwarranted to survey a small sample of people in this market and assume that it exemplifies the overall population. Founders bear the brunt of this error when they try to scale their businesses beyond the reach of the market that they have surveyed (geographically or demographically).  

My advice to all the founders out there is to: 

  1. Test your business model in a small geographic area, preferably a home city or an area that can represent what you would call your “target market”  
  2. Build an MVP  
  3. Test the MVP with all the different people (that come under your TAM) in that one area  
  4. Identify the customization that your product requires to serve each member of the audience 
  5. Decide which audience makes most sense to pursue as the primary target (usually the one that is willing to pay the most to solve this problem) 
  6. As you solve the problems of this primary audience start testing out customizations that will solve them for the remaining part of the TAM   
  7. Once you have achieved a level of comfort in understanding your target audience you can take your model beyond the initial area that you started off in 
  8. Finalize your business & revenue model based on the actual knowledge you have received from your testing your product 
  9. Build and roll out a plan for a new geographical area – keeping in mind that you will need to make customizations for regional preferences  

When founders use funky excel formulas to magnify a problem, the people that it affects, the funding needed to address that problem, the sales numbers and so on… all in the hope of getting a higher valuation and a larger round of financing… they become the problem instead of solving one.  

9/2018