“I made a really bad investment in a startup. How can I recover my losses?”

This was my response to the above question on Quora

The only way to make money as an investor in startups is to have a portfolio of investments. If you invest only in one and hope that it works out well, well, the chance are rather slim.

Startups by design are experiments … a set of assumptions that are being tested in the market by someone who has the conviction about a concept. Sometimes the experiment works, often it does not. But that is the only way new ventures get created… by testing many ideas.

So, if you want to make money by being an investor in startups, think of investing (or better co-investing with other angel investors) in 15–20 startups over a 3–4 year period. Some of the companies you invest in will shut down. Some will struggle to keep afloat, but will amble along. Some will become good businesses for the entrepreneur, but will not give any return (exit) to investors. Only a very few of these investments will give multi-bagger returns making up for the losses incurred in those who did not do well in the market.

Does it matter who invests in the seed stage of a startup?

As with many aspects about business and entrepreneurship, there is no clear ‘yes’ or ‘no’ answer to this question.

It depends on a number of factors. Ideally at the seed stage entrepreneurs should seek investors who will help them in the formative stages of the venture. Individuals who can provide an experienced perspective, or who can provide an experienced opinion to help make choices, or who can make introductions to potential customers, etc. are ideal investors in a startup stage.

Continue reading “Does it matter who invests in the seed stage of a startup?”

Angel investors, VCs and other funding options for startups

While most entrepreneurs think of VC funding as the most obvious way of funding their startups, there are actually many different ways in which you can fund your startup.

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Getting Risk Capital I.E. Angel Investors Or Venture Capitalist – VCs

Angel investors or VCs are investors who give you capital in exchange of equity in the company.

Continue reading “Angel investors, VCs and other funding options for startups”

How angel investors can boost the start-up ecosystem in India

Senior professionals, moderately successful entrepreneurs as well as high net-worth individuals (HNIs) have been expressing an active interest in investing in start-ups. Individuals who are keen to explore start-ups as an asset class, however, have to recognise that investing in them is a high-risk, high-return game.

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They need to get comfortable with the fact that they could lose their entire capital in some of the companies they invest in, and that most of the start-ups they invest in may not succeed.

Anyone who has the ability to spare Rs 5 lakh or above a year — and not lose sleep over it — could look at co-investing in two-three start-ups a year, so that over a two-three-year period, they are able to build a good portfolio.

With a diversified portfolio, investing in start-ups can provide better risk-adjusted returns. Existing angel groups and investors typically invest in start-ups raising upwards of Rs 2-3 crore, as their members do not usually want to write smaller cheques.

Continue reading “How angel investors can boost the start-up ecosystem in India”

Starting your entrepreneurial journey – some food for thought

In my view, easier availability of early-stage capital than ever before, public celebration & adulation of entrepreneurial heroes, a well-deserved respect for entrepreneurism and also society’s willingness to accept failures in entrepreneurial ventures make it easier for younger people to consider entrepreneurship as a career.

I share below some observations that will hopefully provide some food for thought before you embark on your entrepreneurial journey.

A great idea of concept is not the same thing as a great business. Once you identify a concept that has a meaningful value proposition to your potential customers, you have to think of how you can build a strong, sustainable business around that concept. Think hard about concepts like revenue streams, business model, go-to-market strategy, resource requirements, etc. Continue reading “Starting your entrepreneurial journey – some food for thought”

India needs 10,000 more angel investors to build a thriving startup ecosystem

Only a very few aspiring entrepreneurs from among 1000s are able to convert their ideas into a business.  And one of the key reasons for this is the lack of access to capital that is required to start something new.

Out of 1000s of investment-worthy startups, less than 300 are able to get initial capital in India.

The present environment is very conducive for people to think of entrepreneurship as a career option. Entrepreneurship cells, incubation centres in colleges, boot-camps, hackathons, and other forums for entrepreneurship promotion, as well as a vibrant media for startups – all have inspired very few to become entrepreneurs.

Angel investor groups, accelerators, and incubators get over 5,000 applications every year. Nearly 10,000 startups send their profiles to media houses every year. While quite of few of these large numbers may not be serious contenders, there is a significant number of aspiring entrepreneurs with the competence, commitment and concepts that can become strong businesses. And quite a few of these can become profitable investments for angel investors.

Yet, only about 300 or so of these aspirants are able to get initial capital to get started. And mostly those, who require capital between Rs 2 to Rs 5 crore range. That’s the declared ‘sweet spot’ of most angel investor groups and VCs who participate in early-stage deals.

Why are there less than 300 early-stage investments in India?

VCs and Angel investor groups are unable to do smaller deals because their members do not want to write smaller cheques, and the efforts required to review, process and close a Rs 50 lakh deal is as much as it takes to close a Rs 5 crore deal. The largest angel investor network in the country does less than 20 transactions in a year.

The number of startups whose funding requirements are less Rs 50 lakh is significantly higher than the number of startups requiring Rs 2 to Rs 5 crore. In fact, many a businesses can get going with just Rs 25 lakh.

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Significantly, If we don’t find a way of funding 1000s of deserving entrepreneurs, we would end up frustrating that segment.

Continue reading “India needs 10,000 more angel investors to build a thriving startup ecosystem”

What are the differences between angel funding, venture funding and crowd funding? In what scenarios can they be exploited for maximum benefits?

(My response below, to the above question on Quora)

Different investors participate in different stages of a venture. Angel investors invest at the very early stages – when the founders only have an idea or when the idea is being or has been developed into a prototype. They provide enough capital for the idea to be tested and proven in the market, so that another set of investors can bring in more capital after the model is proven and when the venture needs more money to take the proven model to a wider base.

Continue reading “What are the differences between angel funding, venture funding and crowd funding? In what scenarios can they be exploited for maximum benefits?”

Startup Next, the global and top pre-accelerator program comes to Delhi.

Startup Next, the global and top pre-accelerator program – backed by the likes of Techstars, Google for Entrepreneurs, Global Accelerator Network and Startup Weekend – is coming to New Delhi !

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The Startup Next program is designed for startups who plan to apply to accelerators or are pitching to investors for funding.

Startup Next is an intense mentorship program consisting of weekly sessions (one session in a week lasting three hours) for five weeks. The program has a structured curriculum and in-depth engagement with one-on-one mentoring, designed to help startups build the foundation of scalable ventures.

Continue reading “Startup Next, the global and top pre-accelerator program comes to Delhi.”

ESOPs – a powerful tool and valuable currency for startups

Employee Stock Options (ESOPs) is a powerful tool available to startups to attract as well as retain talent. However, often I have seen it being undervalued or under-utilised by startups.

ESOPs are shares that are given to employees so that they can enjoy significant monetary benefits if the startup is successful. Since the monetary value of selling equity of a successful startup can be several times higher than the salary, ESOPs alter the risk-reward equation and makes it attractive for potential employees to consider joining a startups, which otherwise at just salary levels may not be such a lucrative option.

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ESOPs are especially useful when startups or early-growth stage companies have to hire senior talent with experience, and they don’t have monies to pay full market salaries.

In fact, investors too encourage founders to carve out an ESOPs pool – often between 5 – 20% of the equity depending on how well balanced the existing founding team is. If the team has gaps that need to be filled in, it is important to carve out a higher percentage of equity, as that will allow you to hire the right resources to complete the team.

As an entrepreneur, it is important for you to communicate the ‘value’ that your enterprise is likely to create and thus explain to potential employees the potential value of the stock they are getting under the ESOP. If the company is successful, the stock can provide a significant upside to employees.

Not just in hiring, but ESOPs can also be a very useful retention tool. That is because a well-structured ESOPs plan ensures that the equity is vested over a period of time (i.e. it is given to the individual in instalments spread over a period of time), and if the startup is successful, the individual is incentivized to stay on even if there is a matching salary offer from another company.

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First Steps to Funding Your e-Commerce Business

Panel discussion on funding for startups at the e-tailing India summit in Jaipur. While the summit was for e-commerce companies, the conversation on the panel was applicable to all startups.

At the eTailing India Conclave in Jaipur, April 2014.

Bootstrap whenever you can

It is possible to boot strap quite a few concepts into venture. 

However, the perception these days is that if you have to be an entrepreneur, the first option should be to raise funds. (This perception has a lot to do with Business Plan Competitions in B-schools and engineering colleges where VCs are invited as judges).

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My view is that raising external funding should be the last option. If possible, and it is possible in many cases, try to bootstrap a venture.

Bootstrapping necessarily means that you would be frugal. When you are low on cash, you innovate and become more creative in all things – in hiring, in developing the product, in marketing, everything… And you try hard to get to revenues faster. All these are fundamentally good for a business

Communicating your story in a minute

At the pitch session for Microsoft Accelerator’s next batch, more than 35 startups presented at today’s event at 91Springboard in New Delhi ( May 30th 2014).

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I was really impressed to see that the number of high-potential startups – great teams driving meaningful concepts addressing large market opportunities – was much higher than the number of average or not-so-good startups. The startup eco-system in India is certainly moving in the right direction.

Continue reading “Communicating your story in a minute”

What questions should entrepreneurs ask an angel investor to determine if there is a potential fit?

Well, what you want to know about the angel investor are the following:

  • Are you as excited about this as we are – what is your view of the opportunity?
  • What do you think will be the challenges in the journey in achieving the potential?
  • What is your expectation on return on your investment… and in what time period? What kind of an exit are you hoping for?
  • What can you help us with, apart from the money?
  • Why did you decide to invest in us?


In a lot of cases, because they typically invest in several startups, angel investors may have a causal interest in your venture. (Some call it the ‘spray & pray’ model where they invest small amounts in a number of companies that ‘seem’ nice and hope that some of them deliver on the potential promised). Your goal should be to get the angel investor super excited about the opportunity and the potential, and engage him/her as much as you can in helping you in the venture. Often warm introductions and perspectives from past experiences are priceless.

Should all founders present in a pitch presentation?

In a 10-minute pitch, it is best for one person to lead the presentation. Others can chip in in the Q&A, when of course the person presenting has to direct the question to them.

Even in a longer presentation, I suggest startups to let one person lead the pitch with adequate time for each team member to introduce themselves and establish to the audience why they are important to the venture.

Why do I say that? Because for investors a pitch is not about checking if the founders can present well. It is about checking if the story is compelling. Once they are excited about the story, then it becomes important to establish each person’s role in strengthening that story.

What parameters do investors use to decide on an investment?

Different investors will have different criteria for selection, and could vary by not just the amount of capital they invest but also the stage at which they invest and the kind of companies that they invest in.
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Most investor’s decisions are based on the following:

  • Quality of the team: This is our most important criterion. We are not looking for experienced entrepreneurs. But we certainly look for understanding of the domain, business concepts & operations management, and most certainly commitment to the venture.
  • Clarity of the concept/idea: How well has the team been able to articulate what they want to do. You cannot plan it well, if you cannot communicate it well.
  • Size of the potential: Concepts addressing large markets with large potential are obviously better.

If the above two are positive, then the following few areas would be discussed:

  • Scale of aspiration of the team: Does the team have the aspiration and hunger to be a market leader?
  • Business case: Is the business case strong enough? Remember, when pitching to an investor you are competing not just with direct competition from your domain but also with startups with interesting business plans
  • Exit potential: How are we going to get a good return on our investment. I.e. what is the exit option for us.

How do I write a powerful elevator pitch?

An elevator pitch is  – what you describe about your venture in a 1 – 2 minute window. The pitch could  be to a potential investor, or even a potential client/ partner/ employee.

The purpose of an elevator pitch to an investor, is to excite him or her about THE BUSINESS CASE OF YOUR CONCEPT. The business case is about ‘Who will pay how much for what and to whom’.

An elevator pitch is usually a short conversation, which starts with a one-line introduction to your venture. This one-line description is something that should excite the investor to know more.

Once the investor is excited with a one-line descriptor, the follow-up answer should cover a brief overview of the concept, your aspirations, and most importantly, what you expect from the person e.g. possibly a meeting to present your concept.

Here’s an example of an ‘elevator pitch conversation – 

Entrepreneur: “Hi, I am the co-founder of Tune Patrol, an online platform for independent musicians to upload, share and sell their music. We are in beta stage. The results look very good. We are now seeking a USD 100,000 in funding to go to a million users mark. We are currently funded through friends and family, including my ex-boss who invested USD 5,000 in my venture”

Investor: Looks good. Tell me more.

Entrepreneur: Thanks. My name is Saurabh. We launched the platform a month ago. I have two co-founders, one of whom is a techie, the other a music promotion professional. I have 3 years of experience as a marketing professional. The ex-CEO of one of the largest music channels in India is an advisor to us. We have what we think is a good business plan, and a strong business case. Apart from funding we need mentoring and insights to help us convert our dream into a very large company.

Investor: Good. How can I help?

Entrepreneur: Could we come over and meet you someday? We have a presentation and would really appreciate your advice, and of course seek your investment.

Investor: Sure we could meet. Here’s my card. Drop me a mail with a presentation and the link to your platform. I will put you on to someone from our office to set up a meeting. All the best.

Does traction trump revenue (in the short-term)?

Naval Ravikant‘s definition of traction is: ‘Quantitative evidence of market demand.’

Traction,  in my view, is not just about users. It is about users using your product at the price-point that you eventually want them to buy at. Everything else is about users taking advantage of an ‘offer’ with no guarantees that ‘usage during offer’ will translate into ‘traction’.

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But the answer to the question above is that it depends on a variety of factors.

If you are in a business where there is precedence of the revenue model, business model, price-points, etc. working well for others, then there will be less tolerance to, you not having adequate revenues with whatever traction you have.

However, if you are in a category where getting to a reasonable scale to use that as a competitive advantage, then focusing on tactics to get traction, even if that means at the cost of revenues, could be acceptable to some.

What do investors want to know when a startup retires a product?

(This post was my response to a question on Quora: “Dear Investor, …” How should the rest of the email go? Required elements? Bonus points for…? Tone? How different is it from the communications to the press and to customers?)

Hopefully, you will not break the news via e-mail. If that’s the case, the relationship is most likely broken and therefore the e-mail would have in it all that you need to communicate, to keep your side of the story simple and straight.

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Continue reading “What do investors want to know when a startup retires a product?”

Is there a ‘matchmaking’ service between Start-ups and Angel Investors?

In India, there are numerous angel platforms like IAN, Mumbai Angels, Hyderabad Angels, etc, that help start-ups connect with angel investors.

downloadThere are some online platforms as well, like – Let’sVenture | Startup Funding Made Easy.
A number of events organized by TiE, etc.also help entrepreneurs connect with investors.
A number of accelerators & incubators also facilitate interactions with investors, for their start-ups.
Here is a list of some acclaimed international ones-

What is the best way to create a ‘Fear of Missing Out’ in investors?

(This was my answer to a question on Quora)

Do all the things that make your startup a good investment case:

  1. Address a large problem or opportunity
  2. Have a great product/solution/service that addresses that opportunity
  3. Be knowledgeable about the domain … and business in general
  4. Be practical about the assumptions
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Continue reading “What is the best way to create a ‘Fear of Missing Out’ in investors?”

What is the average valuation on an Indian startup with beta product, pre-launch stage, pre-revenue stage?

(This was my response to a question on Quora)

Depends on several factors… could be anywhere between INR 2-5 cr.  – 5cr. (i.e. USD 350,000 –USD 800,000). 

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Valuation range will largely depend on the following factors:

  • Who is doing it : Team – if it is a bunch of college students with no prior business or work experience, it will be in the lower end of the range… if it is a team of experienced professionals or entrepreneurs, it is likely to be at the higher end of the range. Of course, if it is a team os super-star, proven entrepreneurs/professionals with significant domain expertise and experience, the valuation could be much higher…. and actually may not be an angel round.
  • Size of the opportunity: Larger the opportunity, higher the valuation.
  • Does the product/service have a reasonable chance of dominating that market: If the answer is a resounding yes, the valuation will be higher.
I must add here that, if the opportunity is large and the team is competent and committed, the chances of getting funded are higher even if the product is not great. On the other hand, even with a great product and a large market, if the team is weak, they are unlikely to get funded.
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For a Startup, how important is traction for raising funds?

Traction is not a necessary condition, and certainly not a sufficient condition for investors to get excited about your venture.

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The factors that investors will consider, are as follows:

  1. Is the market large enough?
  2. Does your product/concept have a reasonable chance of being a dominant player in that market?
  3. Is the team committed and competent to execute this?

In all the above, if there is a negative on point No.3, then point 1 and  2 become irrelevant.

If you already have traction, all it does is improve the chances of getting funded because traction means that some of the assumptions for that business are proven in the marketplace.

But traction by itself does not mean anything unless supported by the 3 points mentioned above.

Will crowd-funding evolve as a popular funding option for startups?

In my view, crowd funding will continue to evolve. And perhaps someday become a significant asset class for people with a little bit of cash, which they are willing to play around with in a high-risk – high-return investment.

For crowd-funding to mature and become a popular investment option, there will have to a greater awareness of entrepreneurship and that the only way the game can be played is to invest in many, of which only a few would survive and may be one or two would give you disproportionate returns that justify the investment.

As investors start getting more aware and accepting of the failure rates, crowd-funding will start getting wider acceptance.

I do not agree with some comments that a few early successes will drive the growth of crowd-funding. At least I hope that a few early-successes are not the reason for many people jumping in to fund through crowd-funding platforms. Because there will be more failures than successes in startups. Investing in startups because you missed a few success stories is almost always the wrong reason to invest in startups.

What do you do if all you have is an idea? You are unlikely to get funded… so, how does one get started?

Getting funding for a plain idea is going to be virtually impossible. Ideas are a dime a dozen, but unless you are able to convert that idea into a product/service… even a MVP, and unless you are able to have a plan on how you plan to scale that up, investors are unlikely to be interested.

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How then, does a young, first time entrepreneur (perhaps without or very limited work experience) with an idea, get going? Here are some things that you can consider:

  • Find some co-founders – 1 or 2 others who you can take along in your journey. Try selling your idea to potential co-founders. (Remember, an entrepreneur has to sell, sell, sell… not just to customers.. but he/she has to have the passion, conviction and the ability to sell the concept to others too.). When you look for potential co-founders, seek complementary skills… if you are not a techie find techie co-founders… someone who can build a MVP.
  • Study the market –  Speak to potential users every day… Understand what they will like about your product… See how you can further solidify your concept and make it even more powerful. Listen and be open to what potential users tell you about competition and WHY THEY WILL NOT USE YOUR PRODUCT. When customers tell you why they do not want a product, it gives you deep insights on what could go wrong in your business.
  • Join an accelerator and participate in hackathons where you can get the MVP done
  • If you are convinced that this is likely to be a good ‘business case’, then try and raise a bit of money through a friends & family round…. raise ONLY AS MUCH AS YOU NEED TO BUILD A MVP. E.g. if you need Rs.10 lacs… then perhaps you can raise it by getting Rs.50 thousand each from 20 people. Or Rs.25,000 each from 40 people.

All the best. Plan well. Do well.

How much detail do VCs want to see in a biz plan for a Series Seed/A round? I’ve seen projections that show these costs as a % of revenue and also as detailed as six Excel pages for OpEx.

(This was my response to a question on Quora.)

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It depends on what stage of the discussion you are with investors. If it is the first meeting, they are not interested in the details. At that stage they are keen to understand the team, the business overview, your aspirations and plans to meet those aspirations, the market potential, your view of the opportunity, the business traction so far – including quality of product/service, marketing program, sales program, people management, business case at a broad numbers level, etc.

If all of the above seems positive, and if they are keen to pursue this further then they would be keen to understand in detail the numbers behind your plans.

Even in the first meeting, while they may not want to see the numbers in the presentation, the post-presentation conversation will be to assess how well you understand the business case around your concept. Hence, even if you do not present it, you do not have a choice of not preparing it and knowing it well to discuss about it.

If you had only 1 minute and 1 slide to describe your startup to investors, what would you do?

(This was my answer to a question on Quora)

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I would use three lines on that slide:

  • Explain the concept in 1 line
  • Introduce the team behind it (that’s the key reason for them to consider investing in it)
  • Tell them how much money you need and what you will do with it

Example (portal name is real… numbers are for illustration purpose only)

  • Tune Patrol is an online platform for independent bands to upload, share and sell their music to a community of music lovers – Tune Patrol 
  • The team is a great mix of established musicians, music industry professionals, experienced entrepreneurs and professionals
  • We are raising USD 500,000 – this will last us 18 months and will help us get to 1 million users and 500+ bands across India

 

Why do I suggest you cover the three points mentioned above

  • Concept: Because if you describe your business well, most smart investors will be able to make a quick assessment of the size of the market potential, the opportunity (e.g. competitive environment, need gaps, etc.) and the dynamics of the business case (e.g. can we make money, is there an exit, etc.)
  • Team: Because if the answers to the above question are positive, then the quality of the team is the one key thing that the investors are going to bet on. If the team is not strong, passionate, practical, aspirational, aggressive, etc. then no amount of market potential or strong business case will convince investors to invest
  • The ask: Because they need to know what you are asking for and and where it will take you

Is same valuation for next round a down round?

(This was my answer to a question on Quora)

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Well, investors understand that all plans do not go as planned. And therefore you may have had a plan to achieve something with the earlier round you raised but were not able to. Therefore there is no valuation increase in the bridge round you are raising. 

As long as you have a plan to get back on track that helps you develop a sound foundation for a business, in my view, future valuations should not get affected But, as you would agree, valuations are not dependent on any single dimension and there will be several factors to consider whether this will impact future investments.

(Typically, if your earlier round investors have invested in the next round, even if at the same valuation, it is a signal that there is belief in the concept/model/opportunity/value proposition… and faith in you… and that is a strong signal. On the other hand, earlier round investors not participating in the subsequent bridge round, even if it is at the previous valuation usually will trigger some questions.).

What value do angel investors bring to your company?

Angel investors participate in the ‘concept risk’ stage of the venture. i.e. when neither the idea,product/service, business model, operating plans nor the assumptions are proven.

It is also the stage where the startup is most  likely to be resource starved.

Angel investors should assist the founders with everything they can, to help the company go past the concept risk stage. Often, this could also be about providing guidance and perspective to help entrepreneurs take the right decisions. In many cases, introductions to potential customers; partners;employees and mentors etc. at this juncture of the journey is invaluable.

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Often angel investors have to be the adult supervisors, alerting the founders when they seem to go off the mark( read as ‘ strategy’) or when they are trying to do too many things rather than focusing on what is important.

When a startup is not doing well, angel investors have an enormously important role to play in keeping the founders motivated. Failures and challenges in a startup can be demotivating and challenging, making you feel terribly lonely. A good angel investor can make a big difference by  just saying “Its okay.. lets focus on what’s do be done”. Often, testing times are tests of character too.

I often tell entrepreneurs that even when they do not need the money, they should go and raise some funds from good angel investors. Because, it’s not just about the money, it’s about the investor’s involvement in your journey and their support when you need it, that counts and contributes to your success story.

Points to remember when raising funds for your startup

One of the toughest challenges that startups face is to raise capital at the beginning of their entrepreneurial journey.

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  • Raising your first round of funding is probably going to be the toughest part of starting upit certainly is for most startups
  • Break your fund requirements by risk stages as different classes of investors participate in different risk stages of a venture

Angel investors

  • Participate at starting up stage – they invest at a ‘concept risk’ stage i.e. when niether the concept is proven nor the capabilities of the team to execute that concept
  • Investment amount is small – enough to sustain operations till the venture becomes ready for institutional capital
  • Usually take a bet on the entrepreneur – hence the quality of the founding team is critical

Venture Capitalists – VCs

  • VCs typically invest when the concept and business model is proven
  • Funding is usually for growing the business and scaling-up

Hence, in round 1, keep your funding requirements to minimum, enough to prove the concept. In round 2, keep your capital requirements to sufficient, enough to expand to a scalable model. And in round 3, raise capital to fund the growth and for scaling up.

  • Angel investors can help reduce your funding requirements significantly if they assist you with things like customer introductions, partnerships, infrastructure support etc. Often an investor who takes up an active advisory role can fill in a competency gap in the team.
  • Budget at least 3-months for a funding round to close IF YOUR CONCEPT HAS A STRONG BUSINESS CASE AND YOU HAVE A STRONG TEAM
  • Raising too little capital or raising too much capital, both are avoidable – raising too little can keep you strapped for funds while raising much more than required will dilute you more. Also, attempting to raise more than required may make it difficult to get the funding!

Is it better to launch a product and then seek funding or should you get funding based on prototypes and business plan first and then launch?

Both options exist. Both may however NOT exist at the same time. And both options may NOT be relevant to you at all times.

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In certain times, when the startup investing environment is vibrant and investors are looking for investments, there may be some who will bet on a ‘spray and pray’ model i.e. invest in many potential winners at very early stages and hope some of them make it big.

Also, launching and funding are related issues, but are NOT interdependent. You should launch as soon as you have a product that allows you to engage users in a meaningful way. I.e. if you are testing a new concept, a MVP should be good to go. However, if you are the 11th online music platform, the product better be great and awesome.

Now, whether you should raise monies at concept stage (powerpoint stage) or prototype stage or post launch stage, depends on a number of factors –  including when you need the money; what the funding environment is; what the competitive environment is and what the funding is needed for, etc.

Irrespective of the stage you begin to raise the monies in, investors are going to check the following:

  • Does the concept address a large market opportunity
  • Is the product/service good and will it deliver in the marketplace
  • Is this team competent and committed to doing this

If the answer to these three things is a Yes, then everything else can be agreed upon.

Do tech investors care about profits?

This post was in response to a Question on Quora: I always hear that tech investors care about user counts not profits, but I always read that investors care about profitability. Which is it?

Think about it this way… 

An investor can invest money in different kinds of assets… stocks, debt, real-estate, commodities, bonds, etc. Each asset class has a different risk-reward profile. Some are low-risk, low-return investments and some, like stocks, are high-risk, high-return assets. Usually investors invest in different asset classes so that they have a diversified risk-return portfolio. And the goal is to have a balance so that their net returns, over a period of time, are meaningful.

Within this, investing in startups (especially concept or just beyond concept stage startups) is most often the highest risk investment. Therefore, investors who invest in startups look not for nominal returns (e.g. like they would get in fixed deposits) but exponential returns – often 10x + return on the capital invested. I.e. if they invest USD 1mn in a startup, their expectation would NOT be to get a dividend of 15-20% per year, but to increase the value of that investment to say USD 10 million in 4-5 years time.

Why is that: Because of the high-risk nature of the startup investing business, if an investor invests in 10 startups, 6-7 of them will shut down in the first 2-3 years… that means that the investor will lose all invested capital in those. Of the remaining e, may be 1 or 2 will barely return capital if they survive. Therefore, if the investor has to be profitable on his/her investments in startups, the one successful company has to make up for the losses on the other startups AND deliver a profit. Hence, while a 10x return on ONE investment will look like a lot, if at all they get it, the overall portfolio will still make only a decent return… if all all.

Overall, mature investors will have a diversified portfolio so that over a different cycles they have a decent return.

Now, coming to your question on whether investors care about profits. The answer is ‘of course yes’. But investors are keen on the path to profitability and the scaling up of the venture, as only when the FUTURE profitability of the venture is high will the valuation of the venture be high. Hence, investor funded companies will often make a trade off between immediate profitability and scaling up.

In this approach too, there are different kinds of ventures. One example are ventures that need to be profitable at a ‘unit or transaction level’ but may not be at a customer level on the initial transactions e.g. an e-commerce venture that could make a 30$ profit on a USD 100 transaction that a customer makes, but it may have cost the company USD 300 to acquire that customer… and hence, the customer will become profitable only after 10 transactions. So, while the initial phase does look loss making, the view that we need to take is about ‘the lifetime value of a customer’. I.e. if the customer were to buy 4 times a year from the company, and if the customer were to be with the company for 10 years, the company will could make make about USD 1200 from the customer over that 10 year period. (in this case, from the investors point of view, building a large base of customers, even if they are not profitable in each transaction, will be more valuable than doing a small base of customer whom you acquire at very low cost).

Similarly there are other types of ventures…e.g. a community where there is no transaction happening, but the monetization of the community will happen only after a period of time and when there are enough numbers for the monetization to happen (e.g. though advertising, etc.). In this case, while immediate profitability is not the objective, long term business case certainly is important.

 

What are good storytelling techniques for startup pitches?

A startup pitch has to cover three basic areas to get investor interest… 

  1. What are you going to do
  2. How are you going to do it
  3. How do you plan to make money

If this excites them, then the following become important:

  • Why should they bet on you to make this venture work – if the above points excite investors, the quality of the team is usually the key consideration on whether they will invest or not invest
  • Is this likely to become a large business – while you may put your thoughts to the size of the market opportunity, most people can guesstimate whether this concept addresses a small, medium or large market (and the definition of what is small, medium or large may be different for different individuals/funds)
  • Competitive environment
  • Does this look practical or does this seem challenging to do
  • Is this concept/technology/service/product defensible or can others replicate it as well

Is there a template for monthly investor updates for seed-stage startups?

This was my response to a question on Quora:

In my view, a template is clinical and does not allow for the qualitative aspects that are equally critical in a company, especially in a startup. 

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My suggestion is to provide a short summary of the health of the venture, capturing critical aspects that will be relevant to investors. I would suggest the following:

  • Overview – a one-para summary of what has happened since the last interaction (e.g. on product, customers, people, brand, etc.)
  • A para on how the business is progressing as per the plan (including what is working well, and what is not progressing well – could be on customers, pricing, costs, people, cost of servicing, etc.)
  • Highlight challenges or red flag any thing that you see as issues
  • Outline what you wish to achieve in the next month (I have noticed that investors may not pay too much attention to this para, as usually it is transactional and mundane. However, if it is not there, it usually creates discomfort. Just having even the regular stuff in this is reassuring that all seems to be well.)
  • If needed, seek assistance in any area that they can help

 

Another reason why I think a good, crisp report every month is a good idea is because it allows you to also reflect on the progress and helps you identify red flags for yourself earlier too.

 

In most cases, investors want to help. These type of reports provide investors a good view of where they can help, and allows you to seek out their support when and where required.

 

How to Structure the Business Plan of your Startup?

A business plan should essentially cover three aspects – what are you going to do, how are you going to do it and how will you make money. Watch as Prajakt Raut highlights the key components of a good business plan.

“How do I convince investors to invest in my start up?”

This was my response to a question on Quora by an entrepreneur who was planning to pitch his idea to investors.

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Investors will invest in your startup if they are convinced that their investment in your venture will multiply over a 3-5 year period. Therefore, to convince someone to invest in your venture, you need to excite them about the business case underlying your concept or idea.

Of course, the ideas has to be good, it has to address a large market opportunity, the value proposition has to be strong and the product/concept/service has to be (or has to be thought out well enough) to be well delivered. But while these are necessary conditions, they are not sufficient conditions for someone to invest in your venture.

Hence, while presenting, ensure that your pitch focuses on what you intend to do, how you plan to implement it, AND how you will make money from it, what your scale of aspiration is and why you and your team is the one they should bet on.

Most entrepreneurs make the mistake of diluting the pitch with a lot of detail of the operations, which of course will be of interest to investors… but only after and only if they have an interest in participating in your journey.

Investors are interested in the business case… not just details of the concept or the product. A concept and product is different than the business case for the same. (Most first-time entrepreneurs make the mistake of elaborating on the concept as the business). E.g. for someone presenting for a e-tailing venture, the investor would be interested in knowing your competencies or plans on supply chain, warehousing, procurement, customer acquisition, etc. Not just about how cool your web platform is.

Focus on key aspects rather than fluff around your business case. In most cases you will get a 20-30 minute window to present. You will have 10 – 15 minutes to make your case with 10 – 15 minutes for Q&A. In fact, in most cases, you would have either got their attention or lost them in the first few sentences. Rehearse your opening lines… once you get through this, the rest is the easier part. If you don’t get their attention and interest in the first few sentences, the rest really won’t matter that much.

“According to Gartner the market is 8 bn USD globally” type of line has no meaning for investors. At startup stage, investors are interested in knowing what you are going to do in the next few quarters. Of course, they would be keen to know whether the market is large and how large. But in most cases, industry reports on the size of the industry is no indicator of the size of the opportunity you are addressing. You should focus on presenting your plans and what you intend to get to in the next few years.

Happy pitching. 

What’s typically done with un vested equity of a cofounder who leaves?

In cases where there is a vesting clause, the undistributed part of the equity of the leaving founder is available for distribution. How it is distributed and to whom depends on what the founder’s agreement (documented) says. In most cases, it will also be (or should be) captured in the Share Holders Agreement (SHA).
The following options are usually considered, and which of these options or combination of options are relevant for your company are dependent on the company’s individual circumstances :
  1. The shares could be kept aside to give to another individual who could come in to replace the leaving founder – usually done when the skill set that the leaving person had is not present in the team and needs to be added through a new person… and the function that the new person will drive is important enough to ensure longevity of the person
  2. The shares could be distributed to the remaining founders
  3. The shares could be distributed to all shareholders in the percentage of their shore-holding
  4. Part of the shares are distributed (in either of the three ways) and some shares are kept in an ESOPs pool

What do you need to have in place as a Startup in order to be able to successfully raise a seed round?

For raising a seed round, the startup should have laid the foundation to scale up, and validated most of the assumptions that would prove the business case around their concept.

Screen Shot 2013-05-27 at 1.02.39 AMOf course, the basics need to be in place – the product/service needs to be good and solving a relevant problem or addressing a meaningful opportunity, the market potential should be large, the core team needs to have covered between them the key functions of that business, etc. etc. In addition to the basics, the below are some of the things that need to be in place before a seed round.

Concept should have been proven: The startup’s product /service/concept should have been proven in the market. Some initial customers should have bought the product and found the value proposition meaningful. The product should have delivered on the promise. The price-point should have been proven. Also, the challenges that need to be addressed could have been identified in the pre-seed stage.

The ‘business’ around the concept should be clear: In most cases, the business model is tested and adjusted and retested in the pre-seed stage. Before seeking an institutional funding, it is ideal to have tested different revenue streams, honed on to a business model that would be pursued, the price-points should have been proven and the unit economics should be positive.

Validating the assumptions: Before raising a seed round, it is ideal to have tested the assumptions in the business plan (e.g. how many people will convert, cost of customer acquisition, average revenue per customer, repeat purchase rate, etc., etc.). In fact, this is the area in which startups should pay some solid attention to in the pre-seed stage of the venture.

Estimating people needs: Before raising a seed round, the venture should have got a good sense of what competencies are missing in the team, and clarity on how those will be filled in (in some cases, scaling up will require someone to be hired as the CEO too).

Future plans need to be in place: When you start up, you may not have the largeness of vision that will create a scale company. However, as the venture matures, and as you start thinking of an institutional round of funding, it is important for the founders to have a vision for the future and the ability to articulate this vision clearly to all stake holders (investors, employees, customers, partners, etc.).

In many cases, the founders start defining or redefining the addressable market and this usually means thinking of a far larger scale than they would originally have.

The team should have in place, or at the very least identified by now, the elements that they will need to put in play to manage the venture at scale. E.g. sourcing relationships or technology platform in a e-commerce venture.

Jugaad to processes: As the venture moves to secure seed funding, the founders need to recognize the need to shift from a ‘fix on the move’ mode to a process oriented approach. They need to recognize that as the team grows, they will need to rely on processes and matrices and the discipline to measure performance and progress on well-defined parameters.

Identify one among equals: When a few friends or acquaintances start a venture, the usually split equity equally and divide the responsibilities equally, and also designate themselves co-founders. All are therefore deemed equal, and it is possible that they are at the start. However, a ship needs ONE captain. The team has to identify a first among equals to lead the venture. Multiple power centres in a venture leads to confusion and chaos.

Ideally, before the seed round, the team should have decided who the CEO will be. (Most institutional investors will insist on knowing who the CEO will be, and it is not uncommon for founders to fight over this issue.)

Nett: the venture needs to be in a state where all (or at least most) the uncertainties have been dealt with (if not fully addressed) and the venture should seem like a good business case to pursue at scale. This is the time when seed-stage investors would be willing to bet on the founding team’s ability to take the initial learnings and reapply them at a much larger scale. In the process, there will be some new learnings and some new adjustments on the way. That’s the reason why the quality of the team, their passion, their ability to understand the innards of the business, etc. will be key deciding factors for seed-stage investors, even if the rest of the things mentioned above are all positive.

(Of course, this can never be a comprehensive list. I shall keep adding to it, and if you find have any points to suggest, do write to me at prajakt.raut@gmail.com)

 

What should you think about before starting a new venture (especially an e-commerce venture).

But when you are starting a new venture, you need to assess various risks. I have listed some below, but each business and each person’s circumstances will throw up different aspects that you would need to consider.

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Concept risk: Is the value proposition relevant for the intended target audience? (To assess this, you first need to clearly articulate what your value proposition is. ‘What you do’ is NOT the value proposition. What the users/buyers will get out of what you do is the value proposition. Check with your intended target audience if they feel that this is meaningful for them. If it is not, then evaluate if you need to adjust your value proposition (and therefore sometimes your product/service/concept itself) or you need to check if the value proposition is relevant to a different set of audiences (perhaps different age or income bracket or in a different geography or people  in different circumstances than originally intended).

Revenue streams, business model and business case: You have to evaluate if your revenue streams and business model makes a business case that makes the venture worth your while. This is a critical process  in your entrepreneurial journey and you need to take a realistic view of the costs and potential revenues.

In e-commerce businesses, you often have a disproportionately higher spend in acquiring the customer and you make monies on that customer only after a number of repeat purchases (or visits if the customer is not going to pay for services and you have alternate ways of making money – e.g. advertising or referrals)

Operational aspects: Evaluate the challenges around procurement, warehousing, logistics, etc. that you will have to deal with, and evaluate whether it is practical for you to overcome those challenges given your resources and circumstances.

People resources: Hiring people in startups is a challenge. You need to have some thoughts on how you are going to assemble your core team and your initial employees. Evaluate whether you will have some of the important functions in-house or outsource or use existing platforms (e.g. technology)

Marketing and customer acquisition costs: Quite often entrepreneurs do not spend enough time to understand the dynamics of customer acquisition. Especially in e-commerce ventures, you need to be able to get a clear sense of what activities you would do, how much they would cost and what conversions you could expect…. and therefore how much it will cost you to acquire customers.

And remember, the cost of customer acquisition is NOT just the cost of marketing. But the cost of all the direct resources that are involved in the marketing process + cost of marketing itself + a portion of cost of the central office and operations.

Understand the ‘unit economics’ and Capital required: While the ‘business as a whole may not be profitable’ for a while due to the overheads of managing the operations (and that is perfectly OK in most cases), you need to evaluate if your per unit economics are healthy. Are you going to make money on each sale. And how much will you make. And therefore, how many units do you need to sell to cover the cost of operations. And how much time will it take for you to ramp up to that scale. Is that possible? And is it possible within your given resources?

E.g. if your ‘central office’ costs (founders salaries, salaries of central office staff, rent, electricity, etc.) is USD 10,000 per month (using simplistic assumptions for easy of discussion). And your revenue per unit (product or service) is USD 20. And your gross margin is 40%. In this case, you are making USD 8 on each order.

Assume that your cost of customer acquisition was USD 50, and that each customer is likely to buy 4 times in a year (when you assume your numbers, make sure you have it validated with some research or understanding of the market… and is not a random number that is assumed based on your own expectations on how the market will behave), in which case your cost of customer acquisition itself is going to be recovered when the customer buys 6 – 7 times from you.

Now, given your view of the numbers you could ramp up this business to, you need to work out whether the USD 8 that you make from each order is sufficient to sustain you through your initial phase when the costs of USD 10,000 will be there every month + you will have to invest in marketing. (In many cases, the low ticket size of the product/service makes the business unviable. If you are going to make a few dollars from each customer, you need a LOT of customers to make the business case meaningful.).

Evaluate how much money you are going to require to startup. In estimating capital required, I urge you to overestimate costs and underestimate revenues. Do not let your enthusiasm guide your excel sheets. Do not assume that you wil multi-task and therefore save costs. (Even if that is possible for you, it cannot be sustained as you scale up when you need to move from ‘doing’ to ‘managing’). Also, many entrepreneurs make the mistake of assuming that they are smarter than others and therefore would be able to do it for a lesser investment than others before them have attempted (and even if that is true, keep that as a buffer rather than assuming that your smartness will be THE reason for you to do it better, faster, cheaper than others).

When you have a view of what kind of capital is required, evaluate different funding options. (Many entrepreneurs make the mistake of assuming that VCs are the first choice of funding for startups. And that need not be so. Understand what parameters VCs use for evaluating deals they invest in. See if you are ready for VC funding. Most likely, you may not be. In which case evaluate alternate ways of funding – boot strapping, family & friends round, advances from customers, debt, etc.).

 

 

In your pitch deck do you talk about future markets that can be addressed by the product?

Yes. Your business case is based on what the potential for your concept/product/core competencies are for the future. You may have a focus on a particular segment/geography/opportunity/problem at the beginning of your journey, however, the if the possibilities of multiple revenue streams and adjacent or parallel opportunities exist, that should be included in the pitch deck.

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This can be added in the slide about ‘size of the opportunity’, where you can given an overview of what possible opportunities, including new markets and new customer segments, exist for the concept you are currently proposing.

Remember, the market opportunity is different from your plan for your venture. Think of it this way… if you were working in Accenture or Mckinsey and were to present a report on the size of the opportunity to a large multi national company, what would you say? The opportunity is open to all… the MNC may have a better chance of addressing that opportunity, and your plans may be different. But the opportunity is the same, whether you address it or not.