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Tag Archive : startup

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.

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On whose advice should you pivot?

A founding team must (not shall) display a strong belief and deep commitment to their business. The teams that constantly shift their business model on the feedback of funders eventually find themselves lost at sea. So, there are many times to pivot your business – but a failed attempt at raising a round of capital just isn’t one of them!

As Investors, we evaluate businesses with a limited vision periscope and often, “tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run.”

At Artha, we remind ourselves and founding teams through the disclaimer in our rejection emails.

Please note, these are only recommendations and as venture capitalists, we are only required to be right 20% of the time to be amongst the top VCs in the world. We can be (and are) wrong 80% of the time in our investments, so please do not consider this as the final word for your business.” 

Therefore, it is sane advice to any founding team out there that is currently raising capital.

  • Utilize the funder’s feedback to alter your business’ investment pitch.
  • Utilize the pitches that didn’t result in a sale to alter your business’ sales & marketing pitch BUT
  • Only take your customer capitalist’s (read: paying customers’) feedback into account, to pivot your business

39/2019 v36.002

Nikunj’s Wedding and a Business Idea

Over the last weekend, AVF Associate Nikunj married Chandni in a beautiful and intimate ceremony that took place in Vapi. The newly-wed couple looked like they were made for each other and I wish them the best for their married life together!

A bunch of us from Artha attended the nuptials, witnessed many memorable moments and made some amazing memories that included dancing on the streets of Vapi.

One of the things that struck me during the wedding was the omnipresence of the camera crew during the ceremonies and many other moments. Since they were right in the front, they got the best view of everything that was going on. It caused the people behind them to strain their necks just to get a glimpse or end up with a partial view of what was going on.

The obstruction caused by the camera crew who were capturing moments for future viewing actually took away more from the moment than their work could deliver in the future, because:

  1. There was no way that the camera crew could have covered all the angles
  2. 99% of the people that attended the wedding won’t be watching the wedding video. In fact, many of them were trying to capture the moments on their own cameras!

Camera crews are present at almost all Indian weddings and corporate events. The 3-4-person teams usually charge up to 25-30K per day which shows that there is a large enough budget. I do not need to establish the number of weddings or events that take place in a country of 1.2 billion people that have such video crews – so there is a sizeable market to figure out a better solution for!  

Nowadays, everyone owns a smartphone with a decent camera. Hence, it could be a good idea to find a way to aggregate the photos, classify them based on time and place, curate the best ones and eliminate duplicates to provide a wholesome view of the event.

This collaborative project would lead to an amazing collection of some of the never-before-captured moments. It will also give the guests a feeling of having added a personal touch to the special moment of the bride and groom. Quite a power pull. Lastly, it would ensure that all attendees get a full view of every moment of the event.

I did a simple Google search to see if there were any companies working in this area and I found a list of companies curated by Shutterfly but none of them were building it for the Indian audience… maybe it’s time someone did!

15/2019

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

Video of the Week: The Undisputed King of Bollywood

I must be honest that I was not a big fan of Akshay Kumar through most of my teens. His movies centred around his martial arts abilities and he had typecast himself into a brand of cinema which I did not identify with. Then something happened 10 years ago that altered the actor’s career and this transformation & success formula should be a case study at the top management & entrepreneurial schools in India as it pole-vaulted him to highest paid Bollywood actor (7th highest in the world).

Akshay has been a vocal critic of movie schedules that can take 300-400 days and he adopted a simple success formula which I found is on the lines of the lean start-up mentality.

  1. Akshay completes his movie schedules in 60 days (Housefull 3 was done in 38 days!) which significantly reduces the carrying cost of the movie i.e. the path to profitability is significantly reduced.
  2. He releases 4 movies a year, therefore, increasing the number of shots he has at delivering a hit. Compare that to the competition that does 1-2 movies a year, therefore, has to maintain a near perfect record.
  3. The more releases per year also means that Akshay gets to read the audiences’ pulse regularly and he can adjust/alter/update his next product iteration thereby catering to his customer’s (read: audience) preferences much faster.
  4. The success of this simple success formula can be gauged by the fact that Akshay has delivered 100+ crores in box office collections every single year since 2007

The inspiration to do this research came from two videos wherein the actor provide an insight into his journey, both are must watch videos!

The first one is in Hindi

The second one in English

84/2018

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

80/2018

When is the Right Time to be Acquired?

Yesterday I met a startup that I have been mentoring for the past 18 months. The founders have developed a deep tech product that has a niche in the B2B space. While their sales have not managed to light up the startup world, I can ascertain that they have developed a robust product that services a small but solid customer base.

One of the discussion points on the agenda was an unsolicited acquisition offer from a customer that wanted to develop what they had built and found that it was better to buy them vs build the solution, in-house. They had asked the founding team to discuss the offer with the investors and gauge if there was interest in pursuing such a transaction.

IMHO, the founding team has worked very hard to develop a product that any entrepreneur should be proud of and landed a client most could only dream of. However, it was evident that the limited success beyond the major client had started to eat at the founder’s confidence. So, although they didn’t say it, it was clear that they were in favour of the idea and just wanted to know if I was onboard with their decision.

I know that the founders would respect my opinion if it contradicted their decision but I cannot make this decision for any of my founders. I see my role as that of a guide, showing them the path from where to get the answers for themselves, therefore, my advice to any founding team that is agonising over the decision to get acquired or slug it out is simple.

First, clear the din created by all the advice offered by investors, advisors, mentors, employees, co-founders, parents, siblings and basically anyone that can talk. Secondly, seek an honest answer to these questions:

What will make me/us happier?

If my/our efforts were part of a larger canvas? Or If my/our efforts were the canvas, itself?

75/2018

Don’t Sweep your Failures Under the Carpet

Yesterday, we revamped the pitch book that we share with potential investors interested in Artha Venture Fund. Although the revamp was long overdue, I kept procrastinating until a fund manager in Hong Kong took out an hour from his day to offer me insightful critique for our 35+ slider presentation. He asked me to cut out 35% of the existing presentation but add a slide that initially I was hesitant to do.

Right after the slide that talks about our previous investment performance including the top 6 companies in our portfolio (by valuation), we added a slide that talks about our two biggest investment blunders, why they happened, what the outcome was and what we learnt from it.  It didn’t take me more than a minute to decide which investments I would include on that slide since I discuss them frequently with investors in person, but I was apprehensive of putting them on a presentation that wouldn’t allow me to explain myself.

While reviewing companies, our team always goes through their reviews on Google, Amazon, Flipkart, Zomato, the Play store, Glassdoor, etc. During this process, we don’t look for the best & recent reviews but scour through the list for the 1 & 2-star poor reviews to understand where the company’s product/service is lacking. We do this because 99% of founders will provide snippets of the best feedback in their pitch deck but leave out the bad ones altogether. I believe they do it for the same reasons I did because not being able to explain why there is a big ugly black blot on an otherwise beautiful painting takes away the cloak of invincibility that you work on building throughout a presentation.

In my opinion, after adding the hotly debated slide, we have enhanced our reputation as astute investors. That slide candidly lays out our biggest blunders for potential investors offering a window into how we look at our failures and what we have learnt from them. It makes us relatable, it makes us human.

I recommend that all founders who are currently preparing, reviewing and editing their pitch book should put a slide of their ugliest reviews and explain why it is there, how they resolved the situation with an offended customer/supplier/whoever, whether the guffaw warranted a corrective action within the company, if the corrective action lead to lasting changes (be honest) and what the result of those actions was.

I (now) firmly believe that this is a slide that will stand out in your pitch because it does in mine.

68/2018

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

When Should I Pull the Plug?

When is the right time for an investor to give up working with a venture? 

As an entrepreneur turned investor and very competitive person, I have had to grapple with this question many times in my seven-year career as a startup investor. There have been instances when the decision was as clear as night and day, instances when I have clearly held on for too long and instances where I have given up too early. My team and I have learnt from those experiences and incorporated those lessons in our future investment endeavours. 

However, there is a grey area wherein the venture is doing well, numbers are trending positively, the total addressable market huge but there are certain factors that prevent the venture from achieving the “escape velocity” that separates a good venture from a fantastic one.

Some scenarios include businesses that have transformed into a lifestyle business for the founder, the sector becoming heavily regulated, the inability of the founding team to pitch their business well to new investors or invoke the confidence that can drive bigger cheques. It is these ventures that cause the most heartburn because they have all the ingredients to make a great company but just a few factors make them plateau.  

There may not be a 10-point checklist for an investor to decide whether it is time to pull the plug or not, but I’ll leave you with this insightful piece of advice from AVF’s CFO/Growth Partner that helped me seal the fate for a venture that I have been rolling over hot coals for, for the past 2 years. He said, “if after 2 years, this is how they speak to you, how will they speak to future investors 2+ years from now?” and my decision after that, was just that easy.  

59/2018