Learnings from Shark Tank

Following the investor pitch, their outcome, and subsequent progress of those who receive funding on Shark Tank reiterates some fundamentals of entrepreneurship.

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I’ve been an avid follower of Shark Tank. Apart from its entertainment value, I’ve found Shark Tank to be instructive about some fundamentals of entrepreneurship, and of pitching to investors. The deal making and deal structuring also provides us a range of possibilities beyond just equity based venture capital funding for startups.

Here are some things I learnt from Shark Tank:’

Gimmicks and showmanship doesn’t impress investors: Passion, commitment and conviction does. 
 
Setting the context right is super important in helping investors appreciate that what you are doing has a strong market potential. Clarity of communicating what you do gets investor attention.
 
Having clarity on who you will target as customers (even if your product is relevant for everyone), how you will reach them, what your sales pitch  to them will be, how you will deliver the product/service and how you will provide after-sales support are as important, if not more important, than a good product or service 
 
Know your numbers: Entrepreneurs with a good understanding of market dynamics, and what their fully loaded costs will be and how the numbers stack up have a much better chance of getting investor attention…. and better valuation. 
 
Resourcefulness is about leveraging all your current resources to overcome current constraints. Get things done. Somehow. 
 
Apart from other learnings outlined above, one observation that stands out is that good sales numbers shuts everyone up. Else, everyone has an opinion on how you should go about your business.
 
Having an idea is not the same thing as having a plan. At Applyifi we urge entrepreneurs to develop a comprehensive business plan, and then execute it well.
 
If someone you know could benefit from what we do, please direct them to www.applyifi.com.

 

By Prajakt Raut – Founder Applyifi

Applyifi helps startups refine their business plans and investor pitch deck [www.applyifi.com].

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What makes a good mentor-mentee relationship

A good mentor-mentee relationship can be game-changing for a startup, and therefore it is important that both – mentor and mentee – understand how they can make the engagement meaningful, productive, rewarding and fulfilling.

A good mentor can make significant contribution in not just the success of a startup, but also in the personal and professional growth of an entrepreneur. And therefore, I advise entrepreneurs to not give the tag of a ‘mentor’ loosely to anyone whose advice you seek regularly.

Mentoring is way beyond business advice and expertise sharing, and hence entrepreneurs and experts should be very, very careful when initiating a mentor-mentee relationship.

Who is a good mentor for your venture? Continue reading “What makes a good mentor-mentee relationship”

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”

Startup Showcase – Meedo

Here’s the story of Meedo – One stop solution for Customised Lifestyle products like T-shirts, Bags, Jewellery, Perfumes…

Catch them on –http://www.meedo.in/

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In conversation with Vinoth Kumar of Meedo – 

Tell us about the story of your startup – Why did you start this, how did you start, when did you start?

I used to run a retail outlet for the last 4 years, the idea of customised stuff struck when I was running the retail outlet in a very small place to validate the market in that particular locality. In our first year of operation, we missed sales because customers want a lot of options, but as a retailer it is very difficult to stock each and everything. For a business like mine, there isn’t any window shopping, rather business happens with regular & loyal customers. So we identified that there is some real problem to be addressed. We also did a small market survey among the retail owners and majority of them showed interest in launching customised service in their outlets. Thus, we decided to go with it. And, to take one thing at a time, we selected tees.

Continue reading “Startup Showcase – Meedo”

Changing dynamics in India’s startup eco-system

2014 was a defining year for the Indian startup ecosystem. Compared to the rest of the decade, a number of significant events and activities had changed the very nature of the startup world. Companies like Flipkart,Snapdeal, PayTm, Zomato, etc had redefined ‘scale’ and investors had started placing big bets on them. These companies darted ahead of the pack, to not just dominate their markets, but to grow it too. Of course, they were helped by a conducive environment – mobile phones, internet connectivity etc – but they also built infrastructure, people and processes that could handle a different order of scale than what they themselves could have imagined a few years ago. These startups demonstrated the potential and the competence to build world-scale companies and created new goalposts for entrepreneurs to aspire for.

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As a result of e-commerce, a number of enabling technology and service companies started becoming more meaningful. Analytics, online engagement platforms, delivery companies etc found a much larger market to address their business case, and therefore their investment-worthiness became stronger. What remains to be seen is how effectively the e-commerce industry will retain customers once the discounting era is over and customers have to buy on the fundamental value proposition of e-commerce i.e. ease of access and choice. We may see some changed market dynamics at that stage, and the transition phase may throw up some new, unexpected leaders.

Continue reading “Changing dynamics in India’s startup eco-system”

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?”

My advice to students aspiring to be entrepreneurs

During my talks at engineering colleges and business schools I often come across students who are clear that they want to be entrepreneurs, but they cannot do so immediately because they have student loans or other financial commitments to take care of. And that is a perfectly understandable reason for deferring your entrepreneurial ambition.

My advice to such aspiring entrepreneurs is to keep their entrepreneurial ambition as the key focus on their lives. Sure, go ahead and take up a job because you need to. BUT NO MATTER HOW MUCH SALARY YOU GET, KEEP YOUR EXPENSES AND LIFESTYLE WITHIN RS.25000 – RS.30,000 (USD 500). Continue reading “My advice to students aspiring to be entrepreneurs”

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.”

Guest Post – Why less than 1% of incubated start-ups get VC funding

Over the last 5 years or so, India has seen the emergence of a number of private and government-supported accelerators and incubators. Many of them have run a few cycles and have now fine-tuned their models and programs. Quite a few of them have very good and solid programs.

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Yet, if we were to measure the success of start-ups from all these programs in terms of them raising growth-capital, the report card is not very encouraging. If some industry numbers are to be believed, less than 1 per cent of start-ups that go through various incubation and accelerator programs in the country receive institutional funding. This number probably includes incubators in academic institutions, most of which have not been able to run meaningful programs to help entrepreneurs build fundable ventures.

Why is this number so low? Why the start-ups who join accelerator or incubator program with the hope of getting mentored for accelerating their journey towards growth are not able to get growth-capital? Continue reading “Guest Post – Why less than 1% of incubated start-ups get VC funding”

M&A: Why small exits matter? The big value of small exits (#iSPIRT-OEQ)

iSPIRT Open Ecosystem Questions(OEQ) Series. The conversation around this exciting session was lead by Sanat Rao (iSPIRT) and the speakers were Jay Pullur (Pramati Technologies), Sanjay Shah (Invensys Skelta), Pari Natarajan (Zinnov), Karthik Reddy (Blume Ventures) & Vijay Anand (The Startup Centre).

Sanat initiated the conversation with an observation that it was only the bigger exits that are picked up by the media. Smaller exits do not get any media attention at all. , We all hear about the big bang “home runs”: WhatsApp sold for 19 billion USD to Facebook, Google acquires Nest for 3.2 billion USD, etc. However, studies show that 65% of VC funded companies in the US return 0-1x to their investors. Even among the remaining 35%, the exit valuations are relatively small: since 2010, the average M&A deal size in the US/Israel is 100 million USD. Only a small 0.1% of VC-funded companies are home runs (50X returns). And not just in India. In Israel too, from 2010-14, out of the 88 exits, two deals on Viber and Waze accounted for a whopping 25% of the total M & A value.

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Given these statistics, why do we promote the myth of a multi-billon $$ exit? Why don’t we recognize the value of these smaller exits? Should we not be promoting and helping product startups to find an exit at an earlier point in their lifecycle, rather than treating these exits as a worst case scenario? Continue reading “M&A: Why small exits matter? The big value of small exits (#iSPIRT-OEQ)”

Bootstrapping – Boon or Bane for Product Startups?

On August 14th, 2014 iSPIRT, the industry enabler that is creating a vibrant eco-system for promoting, encouraging, supporting and enabling product companies out of India, organised a very useful online discussion on the concept of bootstrapping. Titled  ‘Bootstrapping – Boon or Bane’, the discussion explored various facets of bootstrapping, including its relevance, benefits, limitations, and challenges.

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Sharad Sharma, founder of iSPIRT kicked off the conversation with a very incisive observation that the startup community, largely driven by the media, tends to celebrate and showcase startups only when they receive angel or institutional funding. How true is that!!! There are a number of very successful and modestly successful startups, many of who are deserving of the praise and showcase, but they get reported about only when they close an investment round. (I am not sure if the media is to blame entirely. I suspect companies too reach out to media only after they have received an investment round, perhaps because they believe that funding makes the ‘story saleable’ for the media.).

Continue reading “Bootstrapping – Boon or Bane for Product Startups?”

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.

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.

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.

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 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)

 

Pitching your idea in ONE minute

Often entrepreneurs attend conferences and industry meetings where they have an opportunity to network with and meet investors. But, often these opportunities are not well utilized and entrepreneurs fail to get the complete attention of the investors.

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Here’s why:

Through the day, investors are flooded with proposals, calls, mails and face-to-face interactions, where entrepreneurs request for meetings.

It is impractical for investors to accept all requests, and therefore, they end up using some criteria to filter and select, who they would like to meet. And, in the absence of any other criteria during one-on-one interactions in business conferences, the criteria used is the entrepreneur’s ability to clearly articulate the concept and the degree of passion driving that concept. For example, during the brief interactions at conferences, investors tend to seek more information, either through a longer conversation (rather than just giving a card and saying “Send me a mail and we will see” ) or calling for a follow-up meeting, from those who leave them with the feeling “Ah, this seems like a good concept, a good business case and this person seems to be sensible and smart enough to build a business”.

Here’s a list of things you may want to consider, when attending networking meetings where you may meet investors. The key message here is that you need to PREPARE a brief pitch, practice it and deliver it as if it is extempore.

  • Keep a 1-line descriptor about your company ready. When someone asks you what you do, rather than going into a long story, you should be ready with a one-line answer. (e.g. the descriptor of The Hub is – we help startups build sharper business plans).
  • Convert this statement into an introduction. e.g. “Hi, I am Prajakt, co-founder of The Hub for Startups. We help startups build sharper business plans. We conduct a 3-Day Boot Camp and a 1-Month Business Plan Builder Program”. Pause. Wait for the other person to respond. Add on more information, only if, there is build-up of interest and the conversation continues. Else, it becomes a monologue with just meaningless and disinterested nods. Not all investors attend conferences to seek entrepreneurs and hence, even if your concept is interesting, they may not be receptive at that forum. In such cases, it is best to leave your business card and move on with an email as a follow up.
  • At the back of your business card, put a 2-3 line descriptor of what you do. Because investors meet with a number of entrepreneurs, it is difficult for them to remember who you were, especially if the name of your company does not explain your business. e.g. if the name of your company was Travel Guru, you may not need a one line descriptor. But if it were 5 Clove, you will need to put a descriptor, so that the investor later remembers you as that ‘interesting’ person whom they would like to have a follow-up meeting with.
  • If there is interest in continuing the conversation, then provide additional information. E.g. “Our programs are quite popular with aspiring and recent entrepreneurs and we have had several success stories. We are now in our expansion phase, and that’s why I am at this conference… to present our business case to potential investors”. From here onwards, see how the conversation goes. But be prepared with the list of things YOU want to discuss and want to highlight.
  • Make a list of the key messages and highlight what you want to mention during your conversation e.g.
    • Entrepreneurs background (if it is relevant to what you do e.g. If you have worked at e-bay before and are now starting an e-commerce company, it makes sense to state that. However, if you were working with a healthcare company, and now starting an e-commerce venture, that may not be the most important point to state at the first meeting).
    • What have you done so far –  This could be about the background research you have done, the prototype you have built, the concept validation you may have done, the traction you may have got, the initial feedback or orders from a few initial customers. Essentially, it means, you may want to be prepared in your mind with a list of things that you have done in your entrepreneurial journey. (And remember, the journey begins not from the moment you start your company, but from the moment you decide to be an entrepreneur).
    • What are your aspirations and goals – Investors like startups with large aspirations. But when stating your aspirations and goals, be as specific as possible. E.g. Saying “We want to be the leading e-commerce company in the school supplies segment” is not a good enough statement for anyone. You may want to say “In the next 3 years, we aim to be among the top 3 school supplies businesses online. And our plan is to get to about USD 10 million in 3 years, and in the next 10 years or so we aspire to be anywhere upwards of USD 250mn in revenues. We believe the market potential in India itself to be about USD 1 billion”. Sounds better, doesn’t it ?
    • How much funding are you looking for and what will the monies be used for – the key to this answer is specificity. Different investors invest in different stages of a venture and hence it is important for them to assess whether your stage is right for them, and if the amount of investment you seek, is within the range that they want to invest in. (Often entrepreneurs end up asking for angel/seed-stage funding sums, which are often much lower, from VCs who typically invest higher sums of money. If you need USD 50,000 to get going, there is no point in seeking that from an investor who typically invests upwards of USD 1 – 2 million. Therefore, do research on different investors so that you are well aware of whom to target.).

Be specific about how much money you need e.g. “We are currently past our concept stage. The model is proven and we are now ready to go beyond the pilot stage. We are now looking for USD 250,000. This will be used for building our team for expanding our reach to 5 more cities and marketing. This money will last us for 18 months, after which we plan to raise another round for growth.”

Most importantly, after attending business conferences and industry events, be disciplined about writing to those you interacted with. Keep the mail message short and personal. DO NOT CUT-AND-PASTE A STANDARD MESSAGE ABOUT YOUR ORGANIZATION. No one reads through that. The intention of the follow-up e-mail is NOT to spread information about your company. It is to gain their attention and establish a relationship, or at least get an opportunity for a follow-up meeting.

Happy networking.

 

 

 

 

 

Crowd-funding for startups. Is it a good idea?

Crowd-funding is certainly gaining popularity in certain markets. However, for crowd-funding to work well for all parties, it is important that the entrepreneurial eco-system in that market is mature and has investors & entrepreneurs who have seen some cycles of ups and downs.

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Here’s why: Funding startups carries the highest level of risk. The percentage of startups that become successful AND are able to provide a exit and good return to an investor are very low. Hence, unless the ‘crowd’ comprises of folks who understand the underlying risks (or unless the investor group managers educate the investors well in advance), there is likely to be too much friction due to mismatch of expectations of returns on individual deals.

Inexperienced investors who invest because they have ‘heard’ or read in media of sky high valuations for some startups, often are not aware of the risk ratio in investing in startups. They may often not be aware that investors most likely lose money in 6-7 of the 10 companies they invest in. May be one or two out of 10 companies may return the money invested, may be with some modest returns. And, probably one of the 10 may provide a decent return to make up for the losses but also provide the surplus to deliver a decent return on the total capital invested. Given this kind of stacking of successes and failures, over a 4-5 period most investors, if lucky, are not likely to make signinficantly more money than they would have on their overall portfolio of investments (stock markets, commodities, real-estate, etc.). A far cry from the ‘solid valuations and handsome & quick returns’ in startups they read about in the media. (What one sees in media are exceptions and one cannot plan life assuming exceptions to work in your favour… and certainly not consistently).

Now, in many cases, when inexperienced investors are expecting breakout results, and are instead faced with losing capital in a company, they may start getting anxious and therefore pose challenges of investor expectation management for the founders of the startup. They could get interfering and imposing their views. These are real challenges, and certainly an unwanted distraction.

However, that does not mean that crowd-funding per se is not a good option. It just means that you need to take care of a few basics before you accept ‘crowd-funding’:

  • Make sure that the investors in your startup understand the underlying risks. If you are accepting money for individual investors (friends & family included), be sure that you draft clear and understandable agreements. Make sure that you explain to them the risks associated. (Do explain to them that they should not invest in startups unless they have an appetite to invest in at least 10  deals over a 12 – 18 month period. AND that they should invest only as much as they are willing & able to lose without losing sleep.)
  • Be clear and honest about the plans, milestones and plan B in case the original pans do not work out as planned (they usually don’t). Giving investors the confidence that you are in control even when things are not going right is often comforting for them.
  • Keep them posted of all developments – monthly reports and quarterly calls with all investors are good. Inform them about bad news before they ask. Provide them a view of what you plan to do to address the issues. Be transparent. Be direct.
  • Define clear proceses for communication between investors & entrepreneurs. Define how and through whom the interaction will be routed. A good option is to agree that one or two members from the investor group represent the group on the board or act as the ONLY communication & interaction point. Individual investors should route their queries or suggestions only through this/these designate individual(s). Only during the quarterly calls should all individual investors be invited to participate in direct interactions with the team. Even then, individual suggestions should not be binding and it should be made clear to the suggestion giving investor that the suggestion will be considered by the management and discussed with the board before taking a decision. This should be the standard procedure.

Hope you have a great experience in crowd funding your startup. Do let me know about your experiences, and any additional suggestions and learnings that you may want to share.

What should pre-seed money be spent on?

Generally, the reason for raising funds at any stage is to be able to take the company to the next ‘phase’ of its evolution.

Most startups would go through the following phases in their journey:

  1. Concept stage – i.e. when the idea is not yet developed into a product or service, but the founders may have done a fair bit of thinking on the concept and understanding the business dynamics surrounding that idea. This is the stage where the business case is being evaluated and assumptions are made and validated – hopefully by understanding the market and speaking to customers, etc.
  2. Prototype development stage – when the concept – either a product or service – is ready for testing with a limited audience – the startup may have a few initial employees.
  3. Early-stage – when the product or service has started gaining some traction – there are a few early customers/consumers, the product and processes are being refined and fine-tuned and the building blocks for growth are being built – a small team is getting formed
  4. Growth stage – when the startup has started getting more customers, processes are getting developed, an organization structure is getting into place and the company is in an expansion mode – this is probably the time when most companies would start getting profitable

Pre-seed money would typically be raised at concept stage, and should ideally last a little beyond the prototype stage. In most cases, pre-seed stage money is used for the things that will prepare the company to attract seed capital from angel investors or from early-stage VCs i.e.

  • Understanding the business case by validating assumptions
  • In building the prototype or the first version of the product – what is called the MVP or Minimum Viable Product which will allow you to test your assumptions in the market i.e. check if your customers find the value proposition meaningful, if they feel that this product / service does fulfill their needs, etc.

At pre-seed funding stage, a startup should keep capital expenses very low – i.e. rent ACs, furniture, etc. rather than buying. Operating expenses should also be kept low – take lower salaries, work out of a shared office, multi-task, etc. This is also in your interest because the valuations are likely be very low at this stage, and hence the lower the amount you raise, the lesser your equity dilution at this stge.

 

 

Should there be a ‘Plan B’ for a B-Plan?

Plan B is already built into a good B Plan. 

When you are thinking about your venture, you are going to think about multiple scenarios, including very pessimistic ones and what you would do to mitigate the risks and the challenges in the journey. This should include what matrices you would use to track progress, and at stage you would take corrective action, including aborting the journey. It will be important to have an advisory board, or a real board, which will guide you through your decision making in good times as well as tough times.

Anyway, a business plan should take into account possibilities of failure, and hopefully the course correction that you might take in case the journey is not as you plan it to be.

In planning your business, including plan B, it is important to ensure that your assumptions are closer to reality. Wrong assumptions are more likely to kill a business than poor implementation.

A business plan is nothing but a plan for your business. While there are fancy templates, a business plan is nothing more than a story about
(a) what you are going to do i.e. concept
(b) how you are going to do it i.e. operations planning
(c) how you will make money i.e. business model

Of course, each has to be very detailed when thinking through a business plan. The excel sheet is nothing more than a summary of costs and revenues associated with your story. The power-point version of this story includes context i.e. why is there a need for this concept, who is your competition, the team who is doing this, etc.

Also remember that a business plan is a ‘process’ and not a product. And hence, while it provides direction, the route has to be constantly adjusted according to how the venture progresses. This process of evolving the B Plan is in a way also about working on Plan B.

 

What value do angel investors bring to your company?

Angel investors participate in the ‘concept risk’ stage of the venture. I.e. when the idea, the product/service, the business model, the operating plans and the assumptions are yet to be proven. 

It is also the stage where the startups is 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 be about providing guidance and perspective to help entrepreneurs take the right decisions. In many cases, introductions to potential customers, potential partners, potential employees, potential mentors, etc. is invaluable.

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Often angel investors have to be the adult supervisor, alerting the founders when they seem to go off the strategy or when they are trying to do too many things rather than focusing on what is important.

When a startups is not doing well, angel investors have a enormously important role to play in keeping the founders motivated. Failures and challenges in a startup can be a horrible feeling making you feel terribly lonely. A good angel investor can make a big difference by even just saying “its ok.. lets focus on what’s do be done”. Often character is tested in these kinds of situations.

That’s why 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 is not just about the money. It is about the person’s involvement in your journey, and their support when you need it that matters.

What are some warning signs to look for in dealings with VC firms and individual investors?

Ian Jeffrey of Founderfuel Accelerator Program

Ian is the General Manager of FounderFuel and Venture Partner at Real Ventures. Originally from Montreal, Ian spent the last few years of his career in Silicon Valley. It was there in 2006 when he was VP of Marketing at Tiny Pictures that he helped launch Radar, the first mobile photo sharing social network. Following the acquisition of Tiny Pictures by Shutterfly, Ian acted as Director of Marketing of the mobile and social media team. There he launched Wink, a mobile service that lets users create photobooth-style prints directly from their iPhone. Ian started his career in 2002 as half of the two-man team behind Nomad, the now defunct Street Intelligence Agency of Cossette Communications. Specialized in word-of-mouth marketing and insight generation, Nike, Coca-Cola and McDonald’s were among Nomad’s major clients.

 

When to Seek Funding For Startup

Mark MacLeod is one of Canada’s leading startup finance experts. Mark spent twelve years as CFO for a number of highly successful venture-backed startups including Shopify and Tungle. He then spent three years as a General Partner at Real Ventures, Canada’s largest and most active seed venture fund, where he remains a Venture Partner. Mark now leads business and corporate development for FreshBooks, the #1 cloud accounting specialist. Mark is a frequent blogger on funding, growing and exiting startups at startupcfo.ca

 

How to build a startup without angel or VC investments

A lot of entrepreneurs think they need piles of money to make their startup a success, but that’s not always the case.

Know your Speaker:
Shiven Malhotra, Angel investor & mentor for startups
Shiven’s career has spanned three continents having worked with KPMG auditing technology in the US, in Goldman Sachs’s stock trading desk in the UK and in India as part of the start-up team for Kotak Commodities trading desk.

Shiven was born and raised in New Delhi. He finished his schooling from the The Doon School and then studied Economics at the University of California at Santa Cruz.

Shiven is also a semi-professional photographer and an avid trekker. His big plan for the future is to trek to the Everest base camp.

7 simple steps for writing a business plan:

 

  1. Start with a ‘story’ – ‘See the film in your mind’ about your venture – what do you want to do, how large do you want it to be, what will make you happy, what are your aspirations, etc. Imagine it as a business a few years down. This gives you a good view of ‘what you want to aim for’
  2. Work out rough milestones and goals: Your long-terms goals and aspirations should then be broken into short-term and long-term milestones, which are the stepping stones to your eventual destination.
  3. Think deeply of how you will implement it: This is the critical aspect of planning your implementation. This also gives you a view of the cost structures, the infrastructure & people needs, processes, etc.
  4. Work out the ‘structure’ of an excel sheet: Now, after you have done the thinking, it is time to use an excel sheet to evaluate if there is a business case in what you plan to do. Before you start entering numbers, work out the ‘structure’ detailing every cost head and revenue stream.
  5. Start working in the excel sheet – assumptions are critical: An excel sheet exercise with the wrong assumptions is going to give you a very wrong direction, and perhaps wrong hopes. Be realistic. Be conservative.
  6. Work on multiple ‘scenarios’: Life does not play out the way you plan it. Real life situation will be different than your excel sheet plans. It is therefore essential for entrepreneurs to work out multiple scenarios to see how the business will pan out under different outcomes.
  7. Finally, articulate it into the ‘presentations’: Once your ‘Business plan’ is ready, you then articulate it into different presentations. Even an executive summary is one articulation of the B-plan. You can have an executive summary for introductions, a 8-10 slide ppt for first meetings and more detailed documents and presentations for follow-up meetings where specific details are going to be discussed.

Selecting your investors

Startups are usually not in a position to be choosy about whom they can accept funding from, and quite often after a number of rejections end up taking money from whoever willing to fund them.

 

However, while signing up your investors, it is critical to check the following:

  • Will you enjoy working with them? While this is a difficult one to take an objective view on when you really, really need their money, it is a critical question to ask. Attitudes to investee companies, style of working, matching of personalities are critical components in ensuring that investor & investees enjoy working with each other. In startups, in my view, it is ideal that the founders and investors can have a friendly relationship. And this does not mean not being professional… but an easy going, non-formal style of working is helpful in a startup stage when things are not going to be as predictable as they are in a growth stage company.

 

  • Is the personality, ethics, value system, aggression, compassion, etc. of the investors in line with the personality of what I want to build. Different people have different styles of operating and if these styles are in conflict, it may lead to disagreements in how you handle the business, especially how you tough situations.

 

  • What’s their outlook to your business and are they willing to wait out the difficult times? While your investors and you may agree with the potential, some investors have a ‘spray and pray’ approach. I.e. they invest in many companies, especially in emerging sectors, and see which ones quickly show signs of success. They are quite happy then to disengage with the slow movers and back the early-successes. In such situations, if your startups does not really take off as expected, and most don’t, you may be left in a corner.

 

  • Do they have experience of working with startups at your stage. There are clearly different investor groups who specialize in different stages of the company. Angel investors will invest in the concept stage, early-stage VCs will invest in the post proof-of-concept stage and VCs/PEs will participate in the scaling-up stage. Different stages of a company require different competencies and therefore different interventions from the investors. Investors who usually deal with growth stage companies may not have the patience or experience in dealing with the nimbleness and direction changes that a startup may have.

 

Of course, it helps to connect with companies that the investors have funded and understand about their experiences with the investors.

 

 

 

 

 

Managing investor relationships

Companies with a healthy relationship with their investors are happier companies. Unhealthy relationship between investors and founders can be quite stressful. That’s why it is critical for startups and their investors to work as a team and be on one side of the table.

While some responsibility of ensuring a healthy relationship is obviously with the investors, founders have a critical role to play in this process.

Clarity on goals and objectives

The starting point of course is to ensure that your investors and founders are aligned on the goals & milestones and objectives of the company, and the parameters on which progress is to be measured.

Agree on the communication and intervention processes

Getting investor agreements on the periodicity and format of reporting and engagement is helpful in ensuring that the intervention is structured and planned. A monthly review is suggested for startups, though in concept stage companies founders may benefit from the experience and the business relationships of investors and hence may engage more frequently.

Communicate early on challenges and issues

No one expects to have a smooth journey and challenges and roadblocks are part of the journey. Your investors are critical stakeholders in your progress. Hence, if there are challenges and issues, often investors can assist with solutions. Communicate early and be transparent.

Reporting and templates

Investors and founders should agree on the format for reporting progress. Information that captures the key parameters should be drawn and presented every month to investors.

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.

 

Have formal board meetings, including structured meetings with your advisory board members

Apart from it being mandatory governance requirements, quarterly board meetings are a good forum to engage with a wider group of stakeholders where progress, challenges, issues and direction changes, if any, can be discussed.

Understanding valuations

Simply put, valuation is about how much the shares of your company are valued at.

In a private limited company, ownership is decided on the basis of equity shares. The % of shares you own defines the % of your ownership of the company. 

Let us understand with an example. I am of course over simplifying for the purpose of ease of explaining and understanding.

 

Ramesh and Suresh start a company. They both own 50% each of the company.

 

A few months later, Ramesh and Suresh approach an angel investor who decides to invest Rs.50,00,000 [INR 50 lacs / USD 100,000] in their company for which he takes 20% of the company. In this scenario, the post-money valuation of the company would be Rs.250,00,000 or Rs.2.5 cr [USD 500,000]. This is because Rs.50 lacs got the investor 20% equity, so the value of 100% is Rs.250 lacs or Rs.2.5 cr.

 

Stated differently, the company got a pre-money valuation of Rs200,00,000 or Rs.2cr [USD 300,000]. In this scenario, Ramesh and Suresh now own 40% each in the company, with 20% being owned by the investor.

 

Later, the company decides to raise Rs.10 cr [USD 2 mn] from a VC who takes 20% of the company. In this scenario, the post money valuation of the company is Rs.50cr [USD 10 mn]. Stated differently, the company raised Rs 10 cr at a pre-money valuation of Rs.40 cr [USD 8 mn]. With this round, Ramesh, Suresh and the angel investor each get diluted by 20% and hence the capital structure or cap table stands as follows:

Ramesh                       32%

Suresh                        32%

Angel Investor             16%

VC                             20%

 

In both the rounds, the money invested by the angel investor and the VC has gone into the company and not to Ramesh and Suresh.

 

Going further, the company does well and the VC decides to increase their holding to 26% and offers to buy 6% of the shares held by the angel investor for Rs. 10 cr. [USD 2 mn]. Now, the valuation of the company is Rs.166 cr or USD 33mn. Even at this stage, when the valuation of the company is Rs 166 cr, Ramesh and Suresh have not made any money. However, the angel investor has had a successful exit with a 20x return on his original investment, and still retains 10% in the company.

 

At this stage, the capital table will look like this:

Ramesh                       32%

Suresh                        32%

Angel Investor             10%

VC                             26%

 

At a later stage, Ramesh and Suresh decide to dilute their holding and decide to sell 5% equity each to another VC for which each get Rs.20 cr [USD 4mn]. At this stage, the 2nd VC decides to also buy the 10% held by the angel investor for Rs.20 cr. Hence, now the valuation of the company therefore is Rs.200cr or USD 40mn, and the cap table will look as follows:

Ramesh                       27%

Suresh                        27%%

Angel Investor             —-%

VC                               26%

VC 2                            20%

 

This of course is a rather simplified version of reality, but done only to illustrate the concept.

 

 

What are preference shares and convertible notes with reference to angel investing?

Preference shares typically have attributes of both debt and equity instruments.

It resembles equity in the following ways :

  • Dividend on these shares are payable out of distributable profits
  • Dividends are not an obligatory payment and are entirely at the discretion of the directors
  • Dividends are not tax deductible payment

 

Preference shares are similar to debt in many ways :

  • Dividend rates are fixed similar to any debt instrument
  • In case the company goes into liquidation, the claim of preference share holders precede the claims of equity share holder
  • Preference share holders normally do not enjoy the right to vote

 

From the perspective of angel investors, investing through the preference share route provides the investor certain benefits without directly exposing to the risk of the equity shareholders who normally are the promoters. The investors have the comfort of getting a minimal return on their investment and a priority over the equity shareholders out of the liquidation proceeds.

From the perspective of the promoters of the company, the burden of servicing high cost debt is not there as the dividend on preference shares are typically not guaranteed and often lower than the cost of debt for an early stage company and in the absence of voting right, the promoters face minimal interference from the financiers in the regular management and operation of the company.

One can structure the instrument to include additional features such as accumulation of dividends, call option, convertibility to normal equity shares, redeemable such as in any debt instrument and power to vote.

 

Convertible notes on the other hand are structured as a debt instrument but comes with an option for it to be converted into equity shares on a given future date or within a specified time frame at a pre-specified price.

Angel investors find comfort in this instrument as it comes with certain advantages which are :

  • A fixed interest payment till conversion which is assured
  • The conversion price is normally at a discount to the estimated value of the company, hence the investor can take part in the upside
  • The conversion is normally at the option of the investor which gives the investor a protection from the downside

 

From the perspective of the company the promoters enjoy the following advantages :

  • The interest payment are at rates lower than a regular debenture because of the convertible feature which offers upside to the investor
  • As there are no voting rights attached, the company can operate with minimal external intervention.

 

How is the valuation decided for a startup?

Valuation is decided between the investor and the entrepreneur. At the early-stage/concept stage, there is no science or formula to arrive at a valuation. Hence, you go by generally accepted benchmarks in your country, and eventually conclude a deal at what the entrepreneur and investor feel is a fair valuation.

What valuation investors may offer for the same plan depends on a variety of factors, including the quality & experience of the team, the investors view of the potential of the concept, the competition, how easy or difficult it is for other competitors to enter the market, is there any IP or competitive advantage which this team has, etc.

In all this, the quality of the team is he most important consideration for investments at the concept stage or early-stages. The same business plan, with exactly the same details could get a very different valuation for a team of college students executing it than what an experienced team would get for the same plan.

 

Raising funds from angel investors

Angel investors are individuals who invest their own funds in early stage companies or startups, unlike VCs who manage the pooled money of others in a professionally managed fund.

 

Angel investors typically invest at the power-point or paper concept stage i.e. at the very concept stage of a company. In effect, they are taking a bet on the team and on their belief that the concept would work.

Angels would most likely invest smaller amounts, which is usually sufficient to cover the fund requirements for going past the proof-of-concept stage. Angel rounds will most likely be followed by rounds of institutional funding like VC and strategic investment or acquisition.

At the stage at which angel investors invest, the risk is the highest. This is because neither is the concept proven, nor the business model nor the team’s capability to deliver proven. Moreover, because angel rounds are usually followed by further rounds to fund the capital requirements for growth, angel investor’s equity in the company gets diluted in further rounds of investments.

Because their investments carry their highest risk and dilution,  the valuation offered by angel investors will be the lower than those offered by VCs in the subsequent rounds when the business has been significantly de-risked.

Often, angel investors invest in domains they are passionate about, and therefore bring invaluable experience to the startup through their participation as advisors and/or board members. Angel investors, apart from capital, are expected to help startups with advice, networking & introductions and oversight of business. Some angel investors also go to the extent of representing the startup in PR or meeting important customers or in interviewing potential senior employees. Most certainly, angel investors are expected to assist the startup in accessing institutional capital for subsequent rounds of funding.

How to find the right angel investors?

Apart from individuals who invest in startups, many angel investors are part of an angel investor network.

Angel networks help angel investor members co-invest in startups that have been shortlisted for presentation to angel investors. Angel groups not just review and shortlist startups from many proposals received, but they also help startups fine-tune their business plans, rework strategy and make the business case more compelling.

As angel investors, maturity in understanding the investment process, especially while dealing with challenging times during for the startup, is invaluable. Hence, even when you get investments from angels who are investing for the first time, it is prudent to have a co-investment from a more experienced angel.

 

Some points to remember when selecting angel investors:

  • Evaluate what the angel investor gets to the table in addition to capital: How willing is the angel investor / angel investor group willing to assist you in your entrepreneurial journey. But do remember that this can be a double-edged sword. You want the advice and guidance, but do not need operational interference.
  • Does the angel investor’s vision match your vision, aspirations and goals: This is critical as a mismatch in goals and vision could lead to conflict on the direction the company could take.
  • How ready is the investor to lose his investment: This is a critical point. Angel investments carry the highest risk, and most angel investments are not even able to recover their capital. While you would aim for the best outcome, the angel has to be prepared for his capital to be fully wiped out. Hence, it is important that the angel investor understands that they should invest only as much as they can comfortably lose.
  • What is the network of the angel investor with the institutional investors i.e. VCs: Angel investors with deep connections with investor groups and investors are great help while raising the next round of capital
  • Do the paperwork well: even if it is limited paperwork, and significantly lesser documentation than would be required in an institutional funding round, do evaluate the term sheet carefully. Even if the angel is not keen on proper documentation, do insist on completing the paperwork. This is especially true in the case of a friends & family round when the paper work tends to get ignored.

 

 

WHAT SHOULD A BUSINESS PLAN COVER?

A business plan is a ‘Plan for your Business’. It is not a document that you make for the investors. It is a document that you should prepare for yourself. Writing down your business plan helps you think through the assumptions clearly, and often writing helps you identify impracticalities in the through process.

businessplan

 

 

 

 

 

 

 

 

Yes, for investor presentations too, a business plan is necessary. Broadly speaking, a business plan should communicate the following to an investor:

  • What are you selling and to whom?
  • How large do you see the company growing to – what is your own aspiration for the company?
  • How are you going to implement it?
  • How are you going to make money?
  • Why are you the right team for the investors to invest in ?

Your goal in the first presentation to an investor should be to help investors understand why your venture is a good case for investment.

The initial pitch presentation (this could be a ppt or a word document) should not be more than 12- 15 slides, covering the points mentioned below. At this stage, details and numbers are not necessary. At the preliminary stage the review committee, as well as investors, are keen to understand if the concept addresses a real opportunity, if the business case is strong, if the team is well rounded & competent & committed and the traction that the team has been able to achieve so far.

Components of a Business Plan

1) Cover slide

  • Company name and logo
  • Contact details (city, e-mail, mobile)
  • Url
  • One line that clearly describes the concept/product/service

2) Team

  • Highlight what will each member of the team do in the venture, and why he/she is best suited for the role
  • Indicate if the person is a co-founder or founding team member or an employee – against each, indicate the % of equity held (currently or planned if not yet distributed)

3)  What is the issue / pain point that your product / solution addresses

  • Explain why your customers need your solution
  • Mention what they are currently doing and how your product/service is a better solution

4) Product / Technology Overview

  • Highlight the uniqueness of the product or service or technology and NOT the technical details of list of features of the solution 

5) Business model

  • This is about how you will make money from this business opportunity.
  • This is NOT the excel sheet. In simple terms, this is about who will pay how much and to whom for you product

6) What is the size of the market opportunity?

  • Be clear about who and where is going to buy your product/service and how much they would pay for it.
  • Mention the size of the opportunity in the markets you are planning to address (e.g. In India, there are ____ number of parents who will buy our service at Rs/$_____ per year. This translates into a market potential of Rs/$_____ per year. In year 3, we plan to tap US and Canada, and the size of the opportunity there is Rs/$_______ (No. of parents ______ x Price per year_____)
  • This section is NOT about what your plans are, but about what the size of the market is. This section should therefore give a sense about how many customers are there in your target market and at the price that you are selling your product at, what is the revenue potential if all of them were to buy (not that they will, but this is to give an indication of what the size of the market is) 

7) Current traction

  • What have you achieved so far – product, customers, revenues, etc.
  • If you have, include photographs (e.g. if you have physical stores or products that you manufacture or office pictures). 

8) Competitive landscape

  • Who are you currently or in future likely to compete against and what is your plan to win this battle?
  • Explain why this is better than competition (a comparison chart is usually not seen seriously by investors because all presentations tend to show a comparison chart that will be favorable to your solutions/product)

9) Financials current and projections

  • Summary of your business plan excel sheet for 3 years (Note: the detailed excel sheet is NOT required. Just key figures at annual level for 3 years is sufficient for the preliminary evaluation. If there is sufficient interest from investors in the venture, then we will evaluate your excel sheet and business case in detail)
  • Break up your costs into Capex and Opex (In Opex highlight major cost components – salaries, marketing, etc.)
  • Cover the unit economics i.e. how much revenue do you get per transaction/customer, how much does it cost you to service that customer/order

10) Funding needs, use of funds and proposed valuation

  • Describe how much money you want to raise and what these funds will be used for
  • Mention if there are other co-investors (or others who have already committed)
  • Clearly indicate how long these funds will last and what you will be able to achieve with these funds (E.g. This investment of $______ will last us for _____ months. With this, we will be able to get to _______ customers and _______ in revenues)
  • Clearly mention if you are going to require follow on capita, and if so, how much (e.g. post this, we will raise a Series A round of $ _______ )
  • What is the valuation you are seeking for this round

11) Current equity structure, fundraising history and investors

  • Table of current equity holding (cap table)
  • How much money have you invested
  • Mention previous investment history including year, amount and investors.

12) Exit options

  • How do you think the investors can exit (i.e. who will buy their equity or do you feel that this can be an IPO)
  • IF you can, give examples of exits in your industry (or comparable examples)

 

Understanding the concept of Exit Options

Exit Options is nothing but different ways through which investors can ‘cash out’ of an investment. To understand the concept of exit options, let us understand how Venture Capital works.

Angel investors, VCs and Private Equity Funds buy equity in a company when they make an investment. I.e. they buy shares of the company at an agreed price. Let us say they buy 100,000 the shares of the company as a per share price of Rs.100. Investors make this investment NOT to earn dividend but to have substantial gain through increase in the value  of the shares that they have bought.

Over a period of a few years, depending on the outlook of the investor, the investor would want to ‘cash out’ of their investment. For this, they will have to sell their shares to someone else. Who all they can sell the shares to are what is called the exit options.

Typically, there is a hierarchy of exit possibilities. i.e. angel investors, who invest in the earliest stage of the company, typically seek an exit by selling their shares to VCs who invest when the company’s concept and business model is proven. Often VCs would get complete or partial exits by selling shares to another VC who invests in the company after the company has gained some traction and needs further capital to scale up.

 

In addition to selling shares to the next round of investors, the following exit options are available:

  • Sale to a strategic partner e.g. a travel services company may sell stake or be acquired by a large travel portal
  • Sale to a bigger brand in the space: e.g. a local online food ordering site may be acquired by a global brand when they want to enter that market
  • Of course, going IPO is an aspirational exit option for many
  • Buy back: When the promoters or company buys back the shares of the investors. This is the least preferred option for investors and is usually used when the company is not able to provide any other exit option to the investors.