The ups and downs of engaging investors

26th Jan 2013
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Sooner or later, many startup founders may need to turn to investors to scale their businesses. This is new terrain for many entrepreneurs, and getting the right advice or mentorship helps in this regard (one of the books I will be reviewing next is “Venture Deals” by Brad Feld and Jason Mendelson).

TiE Bangalore recently hosted a panel discussion on “How to find and close early stage investors,” featuring Samir Kumar, Managing Director, Inventus Capital Partners; Ramesh Radhakrishnan, Founder, Artiman Ventures; Bharati Jacob, Managing Partner, Seedfund; Apoorva Ruparel, Head of Business, iGATE; and Manjiri Bakre, Founder and CEO, OncoStem. The panel was moderated by K. Ganesh, CEO & Founder, TutorVista.

See my article on takeaways from TiE Bangalore’s earlier panel on mentorship for entrepreneurs; here are my Top Ten takeaways from the investor panel.

1. Funding Options

For startups to go ‘from PowerPoint to product,’ they may have to raise funds from the 3 Fs: friends, family, and fools! However they should be cautious of raising funds from friends and family: in case the business does not work out, this may ruin the relationship.

VCs should be approached if rapid scale, new domain insights, management support, and contacts to new customers are needed. Not all angel investors will want to sit on the startup’s board, but VCs will.

2. Entrepreneur perceptions of VCs

The relationship between VCs and startups can be good, but there are many potholes along the way. Many entrepreneurs think the VCs ‘just don’t get it!’ They also think VCs don’t quite understand how hard it is to get customers, and how difficult it is to get new employees to sign up for low pay in exchange for abstract equity.

Some startup founders are puzzled when VCs ask for de-risking strategy, when VCs should be prepared to handle risk! Entrepreneurs also get puzzled when some VCs keep saying they are ‘too early,’ even after repeated meetings where new product versions and customer numbers are presented. What especially disappoints startups is that VCs have very short attention spans, not more than 10 minutes! Some VCs expect the startups to go with buzzwords and trends, only to change their minds later.

3. Entrepreneur mis-perceptions of VCs

Entrepreneurs sometimes think VCs are in with them for the long haul, not realising that VCs will indeed work very closely with them but only till a suitable exit arrives. It is actually a ‘marriage structured for divorce!’

Some entrepreneurs think VCs will help them stabilise their businesses, but VCs are actually looking for rapid scale. Entrepreneurs expect that VCs will give them ‘fuel,’ but they are actually getting ‘rocket fuel’ and may not be able to sustain the blistering pace of orbit.

Entrepreneurs think VCs are sometimes too dismissive of their ideas, but they forget that VCs have seen thousands of business plans and can quickly filter out good ideas from bad. Entrepreneurs are puzzled with the kinds of equity VCs expect, not realising that their company’s success will also pay for the other portfolio companies which fail (an estimated 7 out of 10 startups fail).

4. Pitching and planning

Startup founders should ideally pitch when they have the right team in place (‘lone rangers’ are not preferred by VCs), which includes people who have the potential to one day became CTOs and CEOs. They need to persistently chase VCs if they want to get their attention, since VCs are literally all over the place. Getting the right reference or introduction to a VC greatly helps.

VCs may not fund you if you are a fulltime employee and will quit only with VC funding; VCs will listen to your pitch if you have already quit your day job and especially if you have already put in some of your own money into the company.

Entrepreneurs need to study the VC’s portfolio companies, and even contact those companies for insights into the VC’s track record and philosophy. Chemistry, after all, is a key success factor. Long-term plans sound good in theory, but in practice there have always been huge differences between what a startup initially presents to a VC and the actual plan upon exit.

5. Equity formulas

If entrepreneurs are really passionate (even desperate) about their domain offerings, then they should not be too concerned with giving more equity to the VCs, otherwise their plans may never see the light of day. If they are approaching VCs through intermediaries, they should be prepared to share 1-3% with the intermediaries.

6. Entrepreneur mistakes

Typical mistakes made by entrepreneurs in VC dealings include: not enough evidence of product’s impact, no customer endorsement/testimonials, incomplete teams, not engaging with the VC’s concerns, and not being able to take criticism professionally. A funding refusal from a VC may not be about the founder’s personality, but more about the lack of business opportunity.

7. VCs: US v/s India

More VCs in the US have themselves been entrepreneurs, as compared to India. US VCs may sign NDAs, but Indian VCs usually do not. However, entrepreneurs should not think that VCs steal their ideas, they are not in that business.

8. Not all sectors are equal

It may be possible for IT startups to start small and launch products quickly and only then turn to VCs for funding – but in sectors like healthcare, the requirements for setting up labs and experiments are so large that entrepreneurs may need to get funds even before launch. This is particularly hard in India where there are only a handful of VCs in the domain of healthcare.

9. Silicon Valley still rules

Cities around the world are trying to replicate the success formula of Silicon Valley (see my book review of “Cloning Silicon Valley” by David Rosenberg). But it is very tough to build up its tight relations between world class universities and entrepreneurs, and community networks of startups and investors. Even other cities in the US are struggling to replicate the Silicon Valley model.

10. Outlook for India

India is trying to follow the Silicon Valley path, but quick or immense successes have been hard to come by (perhaps just a handful, such as InMobi, RedBus, TutorVista, MakeMyTrip). More of a risk-taking culture is needed, along with usual requirements of better infrastructure and decent government.

But progress is definitely there; who would have thought 10 years ago that there would be the rise of product companies from India? Today’s entrepreneurs are in some ways more smart and networked than in the past. Momentum is on India’s side, and the next decade should be the one to watch!

Speaker profiles:

Samir Kumar, Managing Director, Inventus Capital Partners

Samir is a founding partner of Inventus Capital Partners, a venture firm for global product and services companies in Silicon Valley & India. Prior to Inventus, Samir led the India investments for Acer Technology Ventures (ATV), investing in technology companies like July Systems, Hellosoft, RelQ & Indecomm Global Services.

Ramesh Radhakrishnan, Founder, Artiman Ventures

Ramesh has been a member of the founding entrepreneurial team in three startups. He has over 20 years of operational and business experience in the high technology industry, including networking, security and wireless companies.

Bharati Jacob, Managing Partner, Seedfund

Bharati Jacob is the Founder- Partner of Seedfund based in Bangalore. She brings over 24 years of diverse and rich experience in venture investing, marketing and financial services. She has been in venture investing since 2000, across three funds.

Apoorva Ruparel, Head of Business, iGATE

Apoorva Ruparel currently heads the India business for iGATE across all their offerings and verticals. He has 13 + years of experience in the IT, Telecommunication and Networking industry at various levels with multinational organisations.

Manjiri Bakre, Founder and CEO, OncoStem

Manjiri Bakre is a member of TiE, who was successful in finding a mentor and an investor in Artiman Ventures, at one of the mentoring forums created by TiE. OncoStem is a startup in the healthcare industry.

K. Ganesh, CEO & Founder, TutorVista

Ganesh is a successful serial entrepreneur with four prosperous green field ventures and exits. He is currently CEO and Founder of TutorVista which was acquired by US and UK listed education leader Pearson for $213 million in January 2011.

[ Follow’s research director Madanmohan Rao]

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