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.

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.
PS: Here is the SlideShare version

8 Steps to Increase 'Deal Momentum' in your Fundraise

It is a common founder complaint that Indian VCs & angel investors take a long time to close an investment. I believe so too.
However, the reality is that founders expend all their energy preparing their pitch decks and put in very little thought and time in the next steps that an investor will take if they are interested in the venture. It is in these crucial steps that the shine & sheen of the presentations start to wean, communications become sporadic and the “deal momentum” is lost.
Founders should understand that VCs do not have any incentive in extending the deal closure process. We know and realize that raising capital is an expensive affair and each day that is wasted because of some routine issue, is costing us too; in associate salaries, legal fees etc.
Thus, based on some recent experiences, I have prepared a list of 8 actions that founders should take BEFORE hitting the fundraising market.

1. Prepare a detailed financial model for fund utilisation

Founders should be ready to whip out the fund utilisation plan during the pitch and prove that the number they are raising is not pulled out of thin air. The first 2 years of the model should be prepared on a monthly basis and quarterly for the last 3 years. They need to prepare the model themselves and vet the numbers so that they can hold up to independent scrutiny. They can also bring in a financial professional to provide a sanity check on the model, but it is important that founders prepare the model ON THEIR OWN. Ideally, a founder should create at least 3 versions of the fund utilisation model:

                    1 that is based on the amount of capital the venture needs to have
1 that is based on the amount of capital the venture should have
1 that is based on the amount of capital the ventures would love to have

2. Clean up your cap-table

Founders should know the investors they have on their cap table. While pitching to a prospective investor, they should make it a point to clearly announce their cap table. Popping up surprises to the cap-table after a successful pitch will destroy investor confidence and invite additional scrutiny which (by design) will delay deal closure.

A piece of advice – please issue share certificates to all shareholders or demat your shares.

3. Know your numbers

Founders should make sure that their pitch and their financial statements show the same numbers.

A disassociation of 2% is understandable but that is the threshold.

4. Get a legal professional to prepare your company for due diligence

Founders usually spend lakhs of rupees in the process of fundraising for their venture. Therefore, investing 30-50k in hiring a legal professional to prepare an internal due diligence report shouldn’t be a problem. A legal professional can help in providing a long list of legal & compliance issues that need to be addressed. Founders can then start working on resolving those issues so that investor’s due diligence is smooth & hassle free.

5. Organise your files

Organising all the files i.e. employment agreements, manuals, rent agreements, licenses, audited financials, etc into physical and digital folders is essential. Founders need to be well-prepared when asked for records and putting them neatly into dropbox folders that are a click away will impress any investor.

6. Prepare a long list of references

Founders need to think of all the people that can vouch for them professionally, personally and socially. Let these people know that an investor could be calling them for reference. They should be ready with the list of these references for the new investors when they ask for it.

7. Pre-select your team for deal closure

To get an investment in a company, it is required that the company has a team of Company Secretary, a Chartered Accountant, a Merchant Banker and a Lawyer. Founders should pre-select a team of reputed professionals who will work on documentation & file requirements of the fundraise once the investor is on board.

8. Apprise your previous investors, mentors & accelerators of your fundraising plans

If the founders have mentors, if their venture has previous investors, or if it is part of an accelerator, it is imperative that they inform about it to the investor they are pitching to, BEFORE hitting the fundraising circuit. It also helps to get the approval of the board for the fundraise (if they are independent or investor directors) before any official fundraising pitches are made.


Farming as a Service

At a personally & professionally challenging time in the 2nd quarter of 2016, I went out and stayed at Damodar Farms in Vapi for a short while. The serene setting of a farm, farm-fresh vegetables, raw milk and Mahatma Gandhi’s The Story of My Experiments with Truth allowed me to cleanse my soul and reset internally.
In addition, the farm stay made me realize that what I eat, and drink plays an important role in determining how I feel. That awesome feeling got me hooked on an idea. Those who experience the joy of eating high-quality nutritious food will not want to go back consuming the “dumb” calories provided by chemically sprayed, industrially produced or genetically modified food.
Months after returning from the farm, I continued to eat only farm fresh produce. I was so motivated to get the freshest produce that I embarked on a quest to buy farmland, rear cows for milk, grow vegetables and supply the produce to my family, possibly making this my side business. I scoured the internet and my WhatsApp groups to seek advice on where I should buy land and what the infrastructure and setup costs to run a dairy & fresh produce farm would be. The deeper I got into this play, the more I realized that this couldn’t be managed remotely, at least not by me.
What I required was a group of individuals who had farming experience, strong motivation, excellent organizational skills, marketing, and branding experience to educate the audience about the benefits of buying fresh produce. My part would involve investing the capital to buy land and equipment, aid marketing & sales strategies and put together a solid team who would run and scale the business.
However, there was a major glitch in my utopian plan. The growth of the team was directly proportional to the amount of money that I could invest every year and therefore made it necessary to weigh in the team’s aspirations. Since putting a lid on expectations wouldn’t work, I started looking for startups who do farming as a service. The business offering is simple – the venture will identify the land, provide an in-depth ROI analysis and facilitate the investment. The abundance of liquidity in the market coupled with the idea of purchasing profitable real estate would bring onboard many HNI’s with both money to spend and willingness to pay a service fee based on returns.
Nikunj Thakkar from our team is in charge of finding me a startup who does farming as a service startup to invest in. If you know someone that is pursuing this (or you are the one) email us on attn: Nikunj Thakkar.

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.  

The "Waterfall" TAM

“What is your total addressable market?” is a common question asked during a funding pitch. The consistency with which founders bumble through this answer continues to confound me. The most common response is to define it as a sliver of a very large number e.g. “1% of all smartphone users in the Indian subcontinent”. That is almost the same as saying that if I stand under a waterfall with an empty tumbler, my tumbler will be full of water! (besides getting drenched of course) Is that the right way to define TAM ? I’m afraid not.
Waterfall TAM is a lazy founder’s way of defining the customer profile that he/she wants to target. Without defining the target customer, the problems faced by the company won’t be clear. When the problem statement isn’t clear the solution created by the founder to solve it won’t be either… and its obvious how this would unravel quickly for the founder’s fundraising attempts.
I have put together a few links that will help guide founders to create a well-defined TAM, SAM and SOM. My personal favourite is WeWork’s TAM calculation by Alex Graham. Alex doubts WeWork’s $20 billion valuation and this sets him on a quest to find WeWork’s TAM. He begins by defining WeWork’s Serviceable Addressable Market (SAM) & Serviceable Obtainable Market (SOM) and then utilises the top-down approach to calculate the TAM. Although it is used most frequently, this approach is often misunderstood. Alex’s method to find the TAM, SAM & SOM is an example of the right way to use the top-down approach.
Contrarily, Jeff Haden the author of The Motivation Myth, favours the bottom-up approach. In this post you will find that Alon Amar utilises the bottom up approach to find the TAM for an on-demand dog walking service. I prefer that founders use the bottom-up approach as it encourages them to clearly define their target customer profile.
What are the resources that you refer to for TAM calculations?
Let me know by commenting below!

Founders… Don't get Caught with Catch Words! 

Founder: ….then we will provide data analytics to the hotel owners providing an overview of what are the common complaints
Me: Who on your team has experience in data analytics?
Founder: I have management consulting experience
Me: (confused) Do you know how datasets are made & how analytics on them are done? Or has someone on your team done this by themselves before?
Founder: No
Me: (rolling my eyes)… ok continue
Artificial Intelligence, iOT, Data Analytics, Data Mining, Blockchain and a host of “catch” words have been making their way into the presentations of startup decks reviewed every day by investors like myself. In many cases these words are embedded into the deck so that an investor will atleast open the deck and read through it. This is in my opinion one the worst ways to start off a relationship with an investor.
 I will delve deeper into presentation starting with the relevant experience that the team has to execute the programming and implementation of the “catch word technology” that was placed carefully by you into the presentation. On most occasions I find that there is no one on the founding team or the key team that has any experience in the area that the presentation boasts will turn the world on its head.
Now with my initial trust with the founder shattered to bits I start discounting everything the founder says about themselves or their product/service by 80-90% and make my own model of the prospects of success for a business where the founder has limited experience. How many decks do you think make it through an investigation like that?
 I cannot stress the importance of keeping your presentation clear of these catch words if:

  1. The business model did not need it 
  2. You don’t know how or why it is important to your business plan 

There could be a scenario in which you know the business side of an iOT venture but you do not have the experience to develop that technology. In that case, I recommend that you get someone on your team that has hands-on knowledge of the technology, have them validate that that tech can be built to the specifications of your business model and will work as asked and most importantly will be willing to build it. Then make sure that this person is on the call so that I ask them questions about how the tech will be implemented, get insightful & intelligent answers that I can validate with the professionals in my network that have experience in your space. I will not only respect you for having the foresight to bring such a person on board but I will also give your words more importance because you will back-up what you will say.
Do not be like the founder who until that moment had a decent idea worth exploring but his response to my question made him chop of his own feet.

6 ways a founder can get our attention

On a given day there are at least 10-15 investment proposals in my inboxes at LinkedIn, Facebook and Office365. Dhiral and Nikheel have almost the same (or more) flooding their inboxes and in fact even our recently added superstar, Apurva, has her hands full with sifting through the proposals in our pipeline. The team tries very hard to give due justice to each application and each founder wants their venture to be looked at with priority.
If we made everyone a priority, then no one would be a priority! So, until now we typically screened and sorted the applications using an internal scoring system but the flood of proposals has made that system redundant.
I would like to provide some method to the madness by making it open to everyone how we rank for priority the applications that come to us for funding so a founder can help us help them.
A referral/recommendation is the best way to walk into a sale whether you are selling widgets or shares in your company as the buyer is warm lead instead of a cold call. A warm lead brings down the customary wall of distrust and makes the job easier for the seller.
Right below, you will find (in order of preference) the referral (or recommendation) waterfall to get our top priority.

  1. Founder referral

A founder’s referral is gold to us… we take them very seriously!
When we have backed a founder to buy shares in their business and then they vouch that you are the next big thing, we are going to give you a priority pass to the top of the pile. With 51 investments (and 3 in closing) there are over a hundred founders that know us. The founder ecosystem is small so find out how you know them and get them to write an email introducing you to us and why they recommend you.
Our list of investments is updated regularly at this link

  1. Co-investor referral

The next person we trust after our founders are our co-investors. These are the people that been with us on multiple safaris of the startup amazon where we were the hunted or the hunters so we trust their opinion of you and your venture idea.
Our co-investor list runs into the hundreds so there is a good chance that the investor you are speaking to knows us and all you should do is convince them to write an email introducing you to us and you will make it to the top of the pile!

  1. Incubator/Accelerator Referral

Incubators and Accelerators play an important role in our ecosystem by nurturing napkin stage ideas into coherent business models. We respect their opinion and are in regular touch with many incubators and accelerators. If you were part of one of their programs, then you should ask them to recommend you to us and we will be all ears!

  1. Fund Referral

There are many funds that find ventures that do not fit their investment mandate because they are too early or too late for them (or a host of other reasons). In my opinion an entrepreneur is a salesman selling shares so he/she has to make a close at every sales call.
Therefore, if a fund gives you the shaft, ask them to give you a recommendation to Artha… we will gladly nurture you till you are ready for the big boys!

  1. Business Partner or Family referral

Within our extended family and their various businesses, you may find a link to get through to Artha. Be advised that coming through such a referral puts all three of us (you, the referrer and us) in a very awkward situation.
Whilst it isn’t the most preferred avenue for approaching us, it isn’t the least preferred road. If you cannot find favour amongst the top 4 options, you can always bank on our extended family and their business partners! J

  1. Come through an angel network

There was a time where a deal recommendation email from an angel network would make me drop everything. The proliferation of angel networks, the conflict of interests in their recommendations and founders opting to stay away from networks have reduced our reliance on angel networks for deal discovery.
There are still a few good angel networks who we trust so get a good network to recommend you to Artha… it is better than coming in cold!
If you don’t know any (really!) then you can apply to us directly by clicking “Apply Now” on our website but when you claim that no one knows you (or will recommend you) then you can imagine how difficult it would be for us to take you or your sales ability seriously.
Getting a referral is a big deal so take it seriously, get your sales cap on and get someone to recommend you to us!