Startups - fundraising is just the beginning!

21st Dec 2011
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I and many others would agree that Sehwag never did justice to his talent. He is an entertainer for sure. He plays by every ball bowled to him. Live in the moment and everything. People always believed that if there was any man in world cricket (ok – Indian cricket) who could break the 200 run barrier it would be him. But, no – it was the familiar curly-haired-boy-wonder-now-38 Sachin Tendulkar who was the first man to cross over the threshold. But, then Sehwag finally did it and boy did he do it in style – finally justifying the faith reposed on him by fans and the game of cricket.

A good start is half the job done – but mind you it’s just half the job done. So, you had a great idea, you translated it into a workable business plan, tested pilot and finally proved the model with a couple of years of performance. That’s a great beginning. You paid heed to yours truly and hired a professional investment banker to raise funds. Now the game begins.

By the time the private equity player presents you with a term sheet, following assumptions have already been made about your startup:

  • The company is working in an industry that has a huge potential
  • The company has a proven track record of executing its business plan. Profitability is great but sustainability of the business is critical.
  • The company is run by professionals who understand their business, the markets they are functioning in and more importantly have a vision to make it big
  • The company has a measurable business plan that is feasible, practical and profitable in future

This is really a broad overview of the assumptions that an investor makes before presenting a term sheet. A term sheet is in most case legally “non-binding” and is either subject to further negotiation based on the findings from the due-diligence process or subject to termination of the deal altogether.

So, assuming the DD findings do not raise any red flags and you are down to negotiating the rights and obligations under the shareholder’s agreement. This is where you have to be careful. While a tug-of-war will be fought over who gets how much share of the pie and at what cost, it is important to set the expectations of the investor correct. There is a very famous adage in India, “never refuse the money at your doorstep” (Ghar aayi Lakshmi ko mana nahi karte). I know that it is very difficult to say “no” to funds when you are clear about what that money can do to your business. And unfortunately many entrepreneurs fail to see the big picture while fundraising.

Once the money hits the bank – its time to pop the Champagne – yes … NO. This is actually the time to be more focused and be frugal. Common mistakes that entrepreneurs do when they receive funding:

  • Setting up new infrastructure: It’s a rookie mistake and most entrepreneurs very quickly fall for it. Suddenly post funding most businesses end up spending a good amount of money on new offices, remodeling old offices, purchasing properties, interior designs and what not. I am not saying that these are wasteful expenditure but an entrepreneur must ask this question to himself/ herself – Do I really need this? I mean do I REALLY need this? Will this new infrastructure ensure that the business expands and ensure efficiency?
  • Multiplication of salaries: I must admit that a lot of entrepreneurs will frown on this one. But think about it. The investor invested in the business plan, in the growth of the company. And at the end of the day it’s your own company. Would you rob your own house? Your value appreciation is not in the immediate. A lower salary is also a necessary investment in the company. There is no exact multiplier to your past salaries, it is purely based on what you think would be a fair pay if you hired yourself
  • Hiring new staff: “I need people to grow. I need professionals”. 100% correct. Isn't it obvious? Yes, it is. But how many? The key to growth is not always increasing topline. It is also an ever reducing cost structure aimed at deriving maximum out of your assets – that includes staff. Incessant hiring in pursuit of clocking numbers has never benefited anyone.
  • Filling up the management team lacuna: Again a rookie mistake. CFO, CTO, COO,… the list goes on and on. These are all designations which when translates into people results in significant cash outflow. You need a great management staff to filter out the vision into smaller executable mission statements for all teams. But it is very easy to fall into the trap of hiring “designations” than people who value your business and want to partner you in the growth. Of course, good talent has a cost but the cost must not eat into your sustainability
  • Diversification into newer opportunities makes more money: Colossal mistake. Often we have seen that a sudden opportunity presents itself – it’s seducing you to move into its direction. Don’t fall for it. The investor invested because they believed that the current business model is profitable and sustainable in future. You may convince the investor into such diversification, but more often than not the diversification is a trap. Diversification into newer geographies and products without a clear road map (especially if not already laid out before the investor) can be fatal. It’s important to stay focused on the existing business since there is always significant scope for perfection before branching out to other businesses.

Aren’t these obvious? Yes, they are. But it’s unfortunate that most of the start-ups fail to follow the above. It’s very easy to fall prey to the above temptation which is why very few of the start-ups manage to succeed in the long run. It’s not only important to be cognizant of these mistakes but also to ensure that they are not committed to in the first place. I hate being the devil’s advocate but we have seen many promising startups fall apart after receiving funding.

Jeevan: I think this time, he is going to make 200 (Sehwag was at 156)

Me: I do not think so. He is just too impetuous. Don’t think he will be able to make it.

Within the next half an hour Sehwag was the record holder for scoring the maximum number of runs in an ODI.

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