How much money should you raise for starting up?

Obviously, this depends on the nature of the business, what is required to be done, your and your team’s capabilities, the competition, etc.

There is no one ‘real number’ on the investment required as that number would be different not just for different businesses but also would be different for different execution strategies for the same business plan.

In fact, there are startups in the online space which have done excellent progress with some angel investments, while there are others which are scaling up nicely with crores in funding, largely for marketing investments.

Broadly speaking, concepts that have been proven and just need great execution + marketing to build a scale business will need to raise larger capital. Concepts that have yet to be proven in the market place could do with lower levels of funding in the initial stages. This is because you don’t need senior employees and huge marketing at pilot or proof-of-concept stages.

What is essential therefore is to have a realistic estimation of the costs and investments required to reach the milestones.

Most often entrepreneurs go wrong in estimating funding needs. They are unrealistically conservative on costs, and impractically optimistic about revenues. Underfunding your venture i.e. raising lesser money that is practically required can have serious consequences as you could run out of cash sooner than expected, thus leaving you without capital to continue the venture… or having to rush to raise another round in a distress situation.

One question investors are most likely to ask you is how much money you need in the round that you have approached them for. While most entrepreneurs give a one-figure reply, my preference is for entrepreneurs to provide a perspective of what can be achieved with different levels of funding. E.g. with INR 50 lacs [USD 100,000] you could develop the solution on a SAAS platform, hire a base team, prove the model in one market and prepare the company for scale. However, if you had INR 200 lacs as a commitment, even if the first tranche was the original INR 50 lacs, you could accelerate the hiring and scale up as soon as the key performance indicators were on the right trajectory. On the other hand, if you got just R. 25 lacs [I.e. USD 50,000] you would just develop the product, outsource the online marketing to an aggregator agency, and prove that the concept works.

You need to bear in mind that if you business is successful, you are most likely to need MORE CAPITAL. Most entrepreneurs assume that very quickly their business will be cash positive and that they are not likely to require more capital beyond the first round.

Working on a realistic business plan is therefore critical in determining how much money you are likely to need for your venture.

 

 

 

 

 

 

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What should be the answer to “What if Google builds the same product as yours tomorrow”?

The right answer for you is the one that YOU have identified for yourself. If there indeed is a possibility of Google doing what you intend doing, then as a part of your own risk evaluation you need to identify what your response could be.

In a few cases, the answer was “Well, if Google really wants to get into this business, they would be the first one that they should try to buy.”. And that would work well with investors !!!

5 mistakes to avoid when pitching to investors

With most VCs, you will get just one chance to present your business case. VCs are usually a skeptical lot because they see a lot of bad presentations.

Here are some mistakes to avoid when pitching to investors

  • Poor assessment of the risks in your venture: All businesses have competition. VCs are not looking for businesses without risks… in the businesses they are in tested in, they are looking for teams who understand the risks and have a plan to manage the risks.
  • Poor assessment of the competition or assuming that there is no competition: If there is no one else doing what you are doing, how are the consumers currently solving the problem? E.g. in a online food ordering business, just because there is no other brand dos not mean that there is no competition. ‘Calling up the restaurants using menu cards available at home’ is your competition.
  • Exaggerating management strengths: Remember, most VCs will do due-diligence… and most are experienced enough to know what is practical and what is fluff. E.g. for a professional with 2-years experience to claim “In my role as Client Services Manager I was responsible for formulating strategy and operations planning for fortune 500 clients” is usually not going to be an accurate representation of your role. However, “was involved with” instead of “was responsible for” is perhaps closer to reality.

Also, giving the right picture of your current skill sets and capabilities helps investors understand what assistance they may need to bring to the table, in case they decide to invest.

Investors are not looking for ‘we know all and we have been there done that’ teams… those are rare to find. Investors are interested in honest teams who are passionate about the domain and are smart enough to learn the things that they currently don’t know.

  • Impractical and unrealistic growth projections: While aspiring for scale is important, planning ‘how’ you are going to achieve it is critical. Without a plan, aspirations of scale are merely a statement of intent. Investors invest in a team with pans… not just on statements of intent.
  • Don’t include names of ‘advisors’ if they are not genuinely involved. Plain show & tell names just because you know a few people don’t impress investors.

 

The process of pitching to investors

Often first-time entrepreneurs underestimate the time it may take to raise funds for your startup. Unless you get seriously lucky or have easy access to a number of investors, it is prudent to estimate anywhere between 3 – 6 months to get funded. And that is if you have a good plan and a great team.

 

Well, its relatively easier with angel investors and much easier with angel groups like the Angel Investors Consortium. That’s primarily because they invest smaller amounts in a wider range of companies but also because individuals are making decisions and hence do not have to go through more complex processes of VC funds.

 

Here are a few steps that are involved and approximate time it could take with institutional investors:

Step 1 Identifying the right investors 2 weeks
Step 2 Getting the first meeting, including time taken for trying to reach someone to get meetings set up 1 – 2 weeks
Step 3 Meetings with the evaluation team 1 week
Step 4 Presentation to Investment committee 2 weeks
Step 5 Term sheet 1 week
Step 6 Term sheet agreements 1 week
Step 7 Due diligence and signing of documents 1 – 2 weeks
Step 8 Funds hit your bank  

Total time

9 – 12 weeks

 

Here are a few steps that are involved and approximate time it could take with institutional investors:

Step 1 Identifying the right investors 2 weeks
Step 2 Getting the first meeting, including time taken for trying to reach someone to get meetings set up 2 – 4 weeks
Step 3 Meetings with the first layer of filtering 2 weeks
Step 4 Meetings with the senior layer 2 weeks
Step 5 Internal presentation to Investment committee 2 – 4 weeks
Step 6 Term sheet 1 week
Step 7 Term sheet agreements 2 weeks
Step 8 Due diligence 2- 4 weeks
Step 9 Signing of documents 1 week
Step 10 Funds hit your bank  

Total time

16 – 20 weeks

And these are fairly optimistic timelines with the investors who finally fund you. There will be several you would meet who may, out of genuine interest to invest, progress the discussions but may not conclude the deal for several reasons. And there will also be many who may decline to invest in the first meeting itself but still it will have taken 4 – 8 weeks to get the “No” as an answer.

 

Given the lengthy process, the entrepreneur should try to be selective about which investors they should approach. Investors, especially VC funds are clear about the kind of companies, the stage and the domains they would invest in, and that information is usually available on their websites.

 

One of the first things that entrepreneurs need to do is make a shortlist of who the ‘right’ investors would be.

  • To begin with, you need to decide if you are ready for angel investors or for VCs. Click here to know more between VCs and Angel Investors.
  • When applying to investors, check their websites and see if they have invested in businesses similar to yours and if your domain is within their interest areas. E.g. if you are a life-sciences company, there is no point in approaching investors whose focus areas are Mobile & Internet and Consumer Businesses.
  • Check if there are synergies between any of their portfolio companies and your business, and if there are, then evaluate highlighting the same during your presentation.
  • From among the many people at the VC, identify who in their team is more likely to be excited about your idea. This is easy to find because most VCs will have profiles of their team members, including details of which companies or domains that person is involved with.

 

Once you have identified the investor, and the person who you are going to connect with, try seeking an appointment by making a call to the office. Most likely, you will be asked to send the presentation to a generic mail id used for receiving business plans. Well, this is not something that you can always avoid. The truth is that investors get so many calls and mails requesting for meetings that it is almost impossible to accept all requests.

In most VC offices, business plans received will be reviewed with some level of seriousness, though most probably by the junior most executives who may not necessarily be experienced at taking a gut feel call on what seems like a good business case. If you are lucky to get past this stage, you will be asked to come and meet an associate. And that’s just fine. This is the first line of filter in a VC fund and an associate is expected to do a thorough evaluation based on their internal criteria, and then if and found suitable, are expected to move the deal up to a partner who can decide if the deal is to be presented to the investment committee.

If you pass the first line of filter in a VC fund, and this can take a few meetings, you would have to present to the next level. This round, depending on the interest of the fund, could take a few meetings with revisions and discussions on strategy, scale, funding needs, etc.

Once there is broad agreement on key areas, and if the deal fits into the internal criteria of the fund, the deal will be discussed at the investment committee meeting where the terms of the term sheet will be outlined.

After presenting the term sheet, the entrepreneur is expected to run it past someone who knows the legal stuff around term sheets…. And when you ask someone’s opinion, the person feels it obligatory to suggest a few changes. It then takes a few meetings and discussions to finalize the term sheet and sign off.

NOTE: some VCs would discuss the terms of the term sheet offline over meetings and dinners, and therefore the draft presented to the entrepreneur on which there is an informal agreement on key points like valuations, control, vesting, rights and downside protection. However, the time taken would still be approximately be the same.

Once the term sheet is signed off, the due-diligence will start. Also, the startup may have to complete some tasks as part of the ‘conditions precedent’ and that could be things like filing for patents, getting an independent director on board, getting customer contracts signed, etc.

After all this is done, the final signing of the documents and receiving the cheque are the logical next steps.

 

Why do early stage investors not invest in a company’s later stage rounds even if the company is successful?

Well, different investors participate in different stages of a venture. These stages carry different risks, apart from being different in the amount of capital consumed.

At the very beginning, which is where angel investors or seed stage investors participate, is the highest risk-stage of the venture. I.e. at this stage the venture carries a concept risk [i.e. will the concept/product/service work, will the business model work] as well as the execution risk [i.e. will the team deliver] and scaling-up risk [i.e. will this model scale and can this team scale it]. Angel Investors work closely with the entrepreneurs complementing the skill set gaps in the current team. The role of the angel investors, apart from providing capital, is to help the team prove the concept and the business model.

As the venture progresses and the concept and business model is proven, the venture needs to prepare for scale and that is when additional capital is required. At this stage, angels usually step back as the venture needs larger capital, which is usually got from institutional investors like VCs.

Institutional investors typically assist the company in building the foundations for scaling up – organization structure, processes resources, infrastructure, etc.

Post this round, capital is usually required for scaling up. This is the stage when growth stage VCs or PEs come in. At this stage, the model is proven, the teams capability to execute is proven and now the capital is required to significantly scale the operations, and perhaps explore new revenue streams, new markets, etc.

Therefore, in each of these three stages of a venture – i.e. concept stage, execution stage and scaling-up stage – different investors participate with different levels of involvement and different inputs required for these three different stages.

 

What do investors think of concepts with competing startups doing exactly the same thing as you?

Investors recognize that most concepts will have direct or indirect competition. In many cases, there will be a few other startups or established companies planning ventures that are fairly similar to what is being presented by a team.

Investors prefer honest answers, and the comfort of knowing that the team has indeed evaluated the competition and have some thoughts around how they intend to be one up in the game.

In some cases even a honest answer saying “Well, they are pretty similar to what we are doing. However, there is room for more than a few payers and we are glad that we do not have to create the market all on our own. We do however see us having a significant edge over them in the quality of the team.”.

What investors are not comfortable with are boastful claims with little substance to back it. We have often heard many entrepreneurs say “Oh, their product is just not as good as ours”. One should remember that while having a great product is certainly an advantage, having a better product is not necessarily a guarantee of success or leadership.

 

How should I pitch if investors don’t understand my domain?

Investors do not have to be domain experts in the companies they invest in.

Investors are keen to understand the business case for the concept/product/service that you want to introduce. Hence, the following steps help in setting the stage for your presentation of your business case:

  • Clearly articulating what problem your are solving or what opportunity you are addressing is important. This helps those who are not familiar with your domain get a sense of the opportunity.
  • Establishing ‘what’ it is specifically that you propose to do is critical. Often, this is the part where entrepreneurs ramble and have long winding speeches for. Instead, it is good to have a sharp, short one/two line pitch about what you intend to do. E.g. We plan to make the vaccination process convenient by creating a ‘vaccines-at-home’ service. Vaccines have a 40-50% gross margin and additionally we plan to charge a premium for home visit and the assured quality of experience.”
  • The next part is explaining ‘how’ you intend to do it. I.e. The implementation plan and what it would take to make this concept work.
  • The potential and the scale of your aspiration: Especially for investors who are not familiar with your domain, it is important for you to explain the size of the opportunity and how large you want your company to be.