Category Archives: Funding

Funding

My lead investor experience – a very humbling self realization

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If you are trying to raise a seed or angel round for your startup, one of the most important things you need to do is to find a lead investor. The lead investor is a person who a) trusts you and your team b) believes in your vision and c) is vested in your success and shows that by putting her money and time towards your startup.

Lets talk about me as an example in particular.

I have done a few investments in India, but never have been a lead investor. It is not because I have not tried. When I see a good team and a great market, I have reached out to other investors I know to let them know that the startup is worth investing in. Not one of the companies I have tried to invest in has been able to raise money from the folks I put them in touch with. I have always been a part of a syndicate, where the founder has brought other investors together.

That’s very humbling.

So, if you think I have some “influence” you are off the mark.

My “influence” stops at getting people to take a meeting with you. In India, that’s not worth a lot. Most folks will give you time to setup a meeting and get to know entrepreneurs.

There has not been a single case when I have led an investment and found other investors willing to co-invest because of me.

In many cases I have followed.

So I have stopped referring companies to other angel or seed investors. It is very humbling to know that I am unable to help get companies funded. I can put my money in, but that’s about it.

So I have been giving excuses (some of it is true) that I dont have time for due diligence, or dont have market knowledge in certain areas. They are excuses unfortunately.

So I tried to do some analysis as to why I am unable to get others to rally behind my investment thesis. The answer is simple and complicated at the same time.

The simple answer is I have not made money for anyone other than myself. Once you make money for someone they are more willing to invest in you since you are “proven”. I am only proven to myself.

The complicated answer is that its hard to understand Indian investors and I have not understood the motivations of Indian angel and seed investors yet. Its difficult since I have been here for only 5 years and even though I have a lot of friends, I dont have enough deep relationships built on a consistent theme of doing business and making money.

What’s the takeaway for you?

1. I personally dont think there are more than 5-10 real lead investors in India who are the “taste makers” or the “Pied piper’s” of India. Get them on your side first and then try to have them help you round your angel or seed round.

2. Else be prepared to meet 40-50 “investors” and convince them individually and try to land 3-5 investors to co-invest. This also means you should expect to take 2-3 months to raise a small $100K to $250 round.

3. The alternate strategy is to get one investor who can lead and fill out the round. There are a few folks who can do that, but they are rare and they will be able to write you a check $100 – $250K

Entrepreneurship, Funding, India

Should accelerators in India help entrepreneurs “fail fast”?

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I was at Delhi for the TIE India Internet Day, last Friday. Over 400 entrepreneurs, investors and startup enthusiasts gathered at the Sheraton in Saket for a day long session. There were 8 startups chosen to pitch at the event and there was an investor connect session as well.

Alok Mittal chaired a panel with 4 of us including 2 VC’s (Shekhar Kirani from Accel and Sanjay Nath from Blume) and 2 Accelerators (Sameer Gugalani from Morpheus and myself).

There were 3 slides that Alok presented about the maturity of the Indian startup scene, which were to serve as a backdrop for our discussions.

One particular slide generated a lot of discussion. The slide showed that 20+% of companies went from one accelerator to another and from one seed round to another without progressing, which indicated that they were “surviving” but were “living dead”.

Alok’s question was if we were not helping our entrepreneurs “fail fast”?

First off, let me state my bias – “I dont like the concept of fail fast”. Absolutely detest it. Whether its in the valley or India, failing fast is way overrated is my opinion and an excuse for folks not willing to spend more time learning about markets and drilling deeper into the problems faced by customers.

I think there are multiple reasons and subtleties to  the question, specifically in India.

First, Indian entrepreneurs dont take (or dont get) enough money in each round at the very early (angel, seed) stages, since the cost of money is too high. If you are giving up 10%+ at the angel and 25-30% at the seed stage, that money is ridiculously expensive. So entrepreneurs tend to think they can get liftoff with very little funds, and that ends up hurting them in the long run since they go back and dip into the same set of investors for another round, when they realize they are not ready for a significant up round.

Second, Indian entrepreneurs pay a lot more for talent, since startups are perceived to be risky  and so it is not uncommon to see talent getting 110% of their salary with some stock options, since the options are considered “worthless” in India. I know there are some folks that are the exception.

Thirdly, the cost of startup failure is fairly high in India already. Failed startup entrepreneurs rarely start again in India. According to our own research, over 50% of failed entrepreneurs, head back to a bigger company after their venture to pay of debts, “settle down” or bow to social pressure and get a fat paycheck.

Given these 3 arguments, I think it is absolutely important that we nurture our entrepreneurs and ensure they stay very lean until they find the product-market fit or liftoff. That takes a long time in India, thanks to fewer early adopters or paying customers.

Bottomline, “failing fast” is not a mantra we should support or promote among Indian startups, is my perspective.

Angel investing, Community, Funding

The step function of #changes that are happening in the #Indian #startup scene

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Most everyone believes that startup growth happens in step functions. You work for ages on something and it seems like there is little progress, but as an entrepreneur you are plugging away at it and suddenly one day, the growth is dramatic. Then it plateaus for a while and grows again. That’s the same for startup ecosystems is my opinion (not researched).

Step Function Growth
Step Function Growth

I am starting to see the next step function of growth in the Indian technology startup scene. There are a lot of people (entrepreneurs, investors, etc.) contributing to this growth and its hard to point to why it happened except in hindsight.

First, what metrics should we track so we can really know if there’s a step function or no progress?

Here are a few that we track at the Accelerator.

1. # of startups: How many startups are getting formed, where are they getting started, etc.

2. # of funded startups: Time taken to fund startups, amount of investment into startups, stage the companies are in at the point of angel investment etc.

3. Pace of growth: How quickly are they signing customers, how quickly are they getting VC investment, how quickly is their revenue growing, etc.

The NASSCOM 10K startups initiative is one such forcing function contributing to the growth.

Yesterday in partnership with NextBigWhat they organized the first of several #startuproots event.

A big part of that event was the #sharktank, which had 4 companies out of 200 that applied, that were going to pitch to investors and they had to make a decision on the spot.

For those of you who are not familiar with the sharktank format, the startups get 5-10 minutes to pitch, the investors get 5-10 min to ask questions and 2-5 min to make an offer. The entrepreneurs can then take some time to make their decision and then make a counter offer.

All offers are binding, save for legal and financial due diligence. Which means if and investor gets cold feet later, they cannot back out.

Yesterday, 4 companies presented. I had heard about 2 of those companies before (but did not know they were chosen) and the other two companies were fresh and new.

There were 8 investors who were part of the sharktank, but only 6 were serious. The other 2 seemed more there to critique and provide theoretical knowledge about startups.

Pankaj Jain from 500 startups, Ravi Gururaj from HBS, Ranjan Anandan from Google, Anirudh Suri from India Internet Fund and RK Shah from HBS were on the investors side.

Tookitaki (ad-tech space), Moojic (retail music hardware), Credii (Mid-market IT decision support) and Lumos (solar panels for backpacks to charge your phone), were the presenting companies.

All four got funded at the end of the event. I personally thought 2 of them would definitely get funded, but all 4 getting offers was truly a step function change.

I was personally pleased that Lumos got funded. They are doing something new and innovative that most Indian entrepreneurs wont do – Working on a non-software, difficult to scale hardware business, because of their passion.

I have to call out a special mention to RK Shah. RK is not a technology entrepreneur, (he runs a textile unit) neither is he a professional institutional investor. He wrote 2 checks himself yesterday. We need more RK Shah’s in India.

Finally big kudos to Jaivir, Brijesh and the rest of the NASSCOM 10K startup team. In less than 1 week, they got 850 signups for the event, and 500+ people attending.

Entrepreneurship, Funding, Learning, Venture Capital

What should you expect from an accelerator?

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I have written previously about how to evaluate accelerators and choosing the right accelerator since there are so many of them these days and also about what the goal of an accelerator is.

I wanted to share somethings that entrepreneurs should expect from an accelerator from a perspective of a startup founder. I think the best thing that has happened is that so many accelerators have opened in the last few years. Similar to eCommerce companies in 2010-11, I expect many to close or shut down within the next 2-3 years.

There are 3 top things an entrepreneur needs according to me:

1. Access to customers: Whether it is beta customers for feedback, early adopters for providing traction (paying customers) or larger customer for growth, startups thrive on customers. Depending on the stage of your company, if an accelerator does not help you get customers, they are not doing their job. That’s the first lens I would adopt to judge accelerators. If you have access to customers, you can practically write your own destiny. If all the accelerator does is provide advice on getting customers but does not provide introductions to customers, or have customers be ready to adopt and review your platform, you are not going to get much traction or be “accelerated”.

2. Access to talent: In India, for startups, good development talent is hard to get , marketing & sales talent is harder and design talent is extremely challenging to get on board. If your accelerator does not help you with talent sourcing or provide talent in house to help you tide these critical areas when you need them most, you should run away. I have heard the notion that the graduates of the accelerator will help you, but entrepreneurs helping other entrepreneurs by providing time  is not very sustainable. Most of the very successful startups and their executives are extremely busy. While a sense of pay-it-forward does exist, its just not sustainable is what I have found. There’s no substitute for dedicated people to help you with development issues, help you with User experience and design (mockups, wireframes, HTML/CSS development and information architecture) or marketing talent to roll up their sleeves and run campaigns.

3. Access to capital for growth: While I am personally not a big fan of funding as a metric for accelerators to gauge their success, capital is nonetheless needed to grow and thrive, especially in India, where most founders are not serial, successful entrepreneurs or those that come from a “rich family”. So look for an accelerator that provides you an extensive and wide set of investors from seed to early stage and from venture to growth. If all the accelerator does is “showcase you in front of several investors” but does not actively nudge investors to help take a closer look at your company, I dont think they are doing their job.

There are several other things that matter which include a support system of the existing entrepreneur network from their previous batches, access to meetings internationally that possibly help get some global exposure, and a great space to work from, besides other things. However if you dont have access to customers, talent and capital, there’s no value in joining an accelerator.

Entrepreneurship, Funding, Management

Affirmative action (Qualifying by Quota) for startups does not engender success

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Ed: By now if you have been reading my blog for a while you will know that I tend to try and write controversial headings to generate some reaction from the greater community. My hope is that the heading draws you in and the body of the post actually makes you want to express your opinion (which I am perfectly ok with being different from mine).

I had a very difficult question to answer 3 friends and investors last week who questioned how and why we chose a specific company in our batch at the accelerator. The fault was entirely mine, so it was very challenging to “justify” my position. Any way you looked at the situation, I could not tell them with a straight face that I really believed that the company we chose, would do a great job and they deserved to be picked. If I did, then they would question my judgment, and if I did not they’d question my ethics. Not a great position to be in either way. I would rather be an ethical person with poor judgment than the other way around.

Here’s the situation and the analysis from my standpoint.

As with most companies, institutions and organizations, we really want to be inclusive and diverse in our selection of companies at the accelerator. I dont think anyone would argue that we need to include many more women, students with no experience or entrepreneurs from tier-2 and tier-3 cities in our startup ecosystem.

We do try to keep the bar extremely high and that ensures only the best (according to our criteria) get to participate with us.

The trouble is when we try to meet specific numbers and commitments prescribed by the MBO (Management by objectives) and metrics driven management culture that most of us use as a guiding principle.

While many other accelerators and investors will tell you that they are not compelled to do a single deal if they dont like it or dont believe it will succeed, they also will tell you that they are driven by the same metrics, judged by the same criteria and “scorecard-ed” by the same characteristics as the rest of us. Let me give you an example.

Yesterday I had a chance to talk to an investor from a relatively passive fund. He was bemoaning the fact that they are hardly known in the ecosystem and most entrepreneurs dont even know that they invest in the early stage. Well, the reason most entrepreneurs dont know their fund, is because in 5 years they have invested in 8 companies. Compare that to an active fund, that invests in about 20 over a 5 year period and you can easily understand why this fund is “unknown”. So he was being judged and scorecard-ed by entrepreneurs and the media, and relegated to being a “passive, niche fund”.

We dont want to be a passive, niche accelerator.

That can only mean, that we “compromise” and include companies that serve the diversity mix but end up with a sub optimal set and lower the bar for certain sets of entrepreneurs so we can comply with our affirmative action criteria.

Luckily we know (or at least I think this to be the case) that deserving companies are not being ignored or being cast-aside to make room for those to meet our affirmative action goals.

I have though come to the realization that the amount of work needed to get high quality startups that also moves the ball forward progressively on affirmative action does not generate the returns from those efforts.

The same effort towards helping all high quality companies, generates more if not better returns.

So the question is: should we care only about returns.

Unfortunately while that was not the case a few months ago, it is becoming increasingly the case going forward.

Its disappointing and not a great situation to be in.

I am pained when in a batch of 50+ companies shortlisted we see not a single person who is a woman, or a very young, inexperienced student or a person who has a significant disadvantage relative to entrepreneurs from large metros. I feel its my responsibility to make room for them so we can create a few successes which will motivate more of them to join our “religion”, but I am at loss to figure out how to ensure that the ones we chose dont feel a tinge of disappointment when in doing so we lower the bar somehow.

To be clear, not all companies that are founded by these groups are “lowering the bar”. My issue is that there’s very few of them. If there are more than a handful, I’d be thrilled.

Funding, India, Other

Reverse Pitch 22nd Mar, Fri in Delhi, where Investors pitch entrepreneurs

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If you are an entrepreneur, you know how difficult it is to keep refining your pitch and answer difficult questions about your market, differentiation, target customer, etc.

Now you get to play jury and judge, in Delhi, to investors both seed and VC.

After 3 successful editions of the Reverse pitch, in Bangalore and other locations, we are now bringing it to the NCR region.

The structure of the event would be 5 minutes demo/pitch by investors and 5 minutes Q&A. The pitch would include Operational Experience, Ticket Size, Sectors, Investment Thesis and Portfolio. The pitch sessions will be followed by networking with investors.
Date: Friday, 22nd March 
Time: 3:00p to 7:00p
Venue: 91springboard, B-1/H-3A, Basement, Mohan Cooperative Industrial Estate, Mathura Road, New Delhi – 110 044, India.
 
Please feel free to reach out to Apurv if you have any questions. You can reach him at (+91) 88006 04703. 

 

Confirmed investors include Saif partners, Lightspeed, Seedfund, Microsoft Accelerator, IAN, Blume, Helion and the Hatch.

Angel investing, Community, Funding

Why do investors use boilerplate emails instead of telling you the plain truth?

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Most every day I get 2-3 requests to review companies for investment in the seed stage as an individual investor. Since I keep a fairly open network on both LinkedIn and Twitter, I get many folks sending me an email to review their plans. While I do read all of their emails, and send them a response, only 1 in 10 get me to open their plans.

It tends to be fairly easy to decided not to pursue based on their description of the problem or their background. Although I have put my criteria for investment on my blog, rarely do people read it.

I dont think entrepreneurs have internalized the changed landscape for funding of all types.

I do send a quick email to everyone of the people who I dont intend to invest in with a short 1-2 sentence reason. Either its because I dont like the market, the idea or dont believe it will work.

I used to be brutually honest initially (a few years ago) and have mellowed down over the last year. These days if I say I dont have time, it really is the truth. Its not because I dont like the plan or the entrepreneur or the idea. Its just because I dont have the time to evaluate the company.

The main reason I mellowed down was the feedback I heard from many entrepreneurs who had not developed a thick skin that my response was really disheartening and counter productive.

I read today, Paul Graham’s piece on VC boilerplate that Harj Taggar wrote and was amused initially, but the reality is most entrepreneurs prefer to read emails from investors that have some boiler plate stuff rather than the honest truth. I mention most, not all.

Its hard to find know which entrepreneurs prefer the straight up honest truth versus the ones that prefer to get a pat on the back with some encouragement to keep going.

Practically speaking the email from Harj, has 25 sentences too many. If all the email said was “it’s currently a little early for us to step in here.”, that would suffice. If there was more detail, i.e. the number of users, or too few customers, etc. it might help, but really it rarely does.

Why?

Primarily because you get into a shouting match about why the entrepreneur thinks you should be investing at this stage and why you are not an “angel investor” if you wait longer or that you (as an investor) are very risk averse. See comments on my post earlier on what you should have ready before you approach me to get a sense for that.

I invest in very few deals every year (most likely 2) and so do most VC’s. Like most of us we are all pressed for time. Short email responses with quick no should help, but realistically most entrepreneurs dont like that.

Funding, Tips

How do I close an investor who has shown interest in my startup?

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I had discussions with 2 entrepreneurs who have received angel investor interest thanks to Angel List. They are doing well, getting traction and starting to get interest from potential seed stage investors. The question they had for me was to learn the art of the close. Much as I dislike the word closing a deal, I think its important to achieve the important milestone of completing a round of funding.

First its important to realize that most folks (nearly 95%) of investors do not whip out a check in the first meeting. They may make their decision within the first few minutes, but after that, its the delicate dance.

There are 2 primary strategies that I use to help move the funding round to closure.

First, build the relationship beyond the first meeting. The technique I use is “drip marketing”. Every so often after meeting with them I would send them an email (either every other day or once a week for 2-3 weeks) giving them an update one some progress in the business. The first email would be about a new customer win, the next about some potential partnership or a new press mention, etc. Usually most entrepreneurs send one follow up email and if they receive no response they stop.

I would actually send 2-3 emails and keep sending them an update until they say they’d like no more updates.

The second strategy to get their help or advice on opening a door at one of their portfolio companies. This could work against you if you cant close that opportunity, but usually they appreciate the fact that you followed up. This helps them understand your ability to follow through.

The final strategy takes more time and helps you more than them. I put together an operating plan. An operating plan comprises of 7 unique and distinct plans, each of which cover an aspect of your business – sales, marketing, engineering, hiring, finance, product roadmap and partnership plans. This plan has to document your assumptions as well so you can then have them help you validate those assumptions.

Here is my original BuzzGain operating plan (incomplete) from 2009.

You might think this is a lot of work, just to get their money after they “agreed” to give you money with a verbal commitment, but trust me this works you get things moving faster than if you did not use any or all of these strategies.
Try it and let me know if it does not work.
There is a method and template to each of your 7 areas, but we’ll cover that in a separate post.
Entrepreneurship, Funding, Tips

How to hustle your demo day to get maximum investor interest

Over 300 investors and startup enthusiasts were at the 500 startups demo day yesterday at the Microsoft campus in Mountain View. There is extensive coverage on all the major publications including TC, VB, Forbes, Biz Journals and TNW.

17 of the 30+ companies presenting were from outside the US, which was absolutely awesome. The 5 standout companies from my perspective were CompStak (US), Kickfolio (AUS), WalletKit (IN) and Supply Hog (US) and Gaze Metrix (IN). They represented a combination of great entrepreneurs, going after a large market, where you can make money, and with sufficient barriers given their stage of operation.

There are 3 observations that I had which might be best used by entrepreneurs who are pitching at demo day and want to hustle and help move their funding to closure quickly.

If you are a startup entrepreneur, at the demo day, its important to spend quality time (10-15 min at best is all you’ll get) with folks who you might be able to get follow on meetings in the next few weeks to help close your round. Identifying them and spending enough time with them should be your priority. The question is “Who are they” and “How do you identify them”? Its not easy for the first time entrepreneur, but you should look for seed-stage investors not big name venture investors or large funds.

First, realize that not all of the “investors” are really looking to invest. I had conversations for about 5-12 min with about 30-40 of them and over 50%  were at the event to “check out what’s going on” or “network with other investors”. Typically these were associates and vice presidents at very large funds (any VC firm with over $200 Million raised).  They are hoping to put new promising companies on their “watch list” alone. They rarely make seed stage investments, so dont bother spending too much time with them to “get their feedback”. I know it sounds nice if you say you talked to “investor X at some large and well known VC fund”, but that high wears off faster than the beer served at the event.

Second, since you will have with you a list of potential investors, coming to the demo day. I recommend you spend a few minutes making your target list and doing some research on them so you and your team can make sure you meet them at the event. The best case scenario is if you are interested in an individual and they liked what you said, so they reach out to you during the break or after the event.

The most likely scenario is that there are many others trying to get their attention, so you might miss getting a chance to get their card or setup a conversation for later. The best way to do this research is filter the possible investors attending on  AngelList. Dont just look at their investments, but filter by types of companies, the stage and industry (this you may have to do manually in a spreadsheet).

Third, dont expect to close at the event, but expect a lot of follow on interest via email, angel list and other sources. Realistically most investors (yes, even in the valley, which surprises most people) take between 1 to 3 months after meeting you at the demo day to close – which compares to between 3-6 months in India.

Funding

A new innovation: Angel investors seeking exits by getting a portion of startup’s revenue

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The last week we had over 25 folks who run accelerators, incubators and coworking spaces in India at the Microsoft accelerator. A few of them were individual angel investors as well.

Anyone who has invested in Indian technology startups knows that getting exits is hard. In fact in most of our discussions with entrepreneurs nearly 60% of them have the intention to never sell their company or “exit” but to build a standalone business which generates cash and employment. Given that number, it is not hard to imagine that most angel investors are vary of investing in startups given how many of them end up as “lifestyle businesses”.

Most angel investors, though need exits and returns on their investment. This is so they can redeploy the capital and the gains in other investments.

I have seen many creative ways that angel investors have tried to get exits from their investment in India. Unlike the US, nearly 40% of Indian angel investors (according to Rehan Yar Khan of IAN) usually exit at the series A or series B stage. At this stage either the new investors or the company buys their shares out.

I heard for the first time though, about a new technique adopted by an angel investor. This investor had a preset IRR (Internal rate of return) which they agreed to with the entrepreneur and required that the entrepreneur return the investment with the gain when they start to make a certain amount of revenue.

It seems more like a debt investment than an equity investment, but it seemed to work.

I have seen many investors who put money in non technology companies who put together deals like this one, but its rare for technology companies.

I wonder, how many entrepreneurs are okay with accepting these terms as part of their investment. I suspect that if entrepreneurs get more comfortable with convertible debt to equity instruments with some form of exit criteria tied to revenues, this will become a more viable vehicle for technology startups.