After having interacted with various early stage entrepreneurs over the past few years, I am attempting to collate a list of some of my tips for entrepreneurs/promoters who are either in the process of raising or have already raised funds from seed investors, angel investors or VCs.Pre-funding Tips
- Idea is important, but execution is more so. Do not be overtly protective of sharing your idea with potential investors; it actually puts some investors off. When you move to the other side of the table you will find this kind of behavior from a potential investee rather funny! Especially, because most early stage ideas pivot as time passes, but companies with strong promoters still thrive. Remember, the bigger part of the entire early-stage investment philosophy is the promoterwho would be executing the idea, not the idea alone. There could be dozens who could already be working on the same idea that you are, and you may not even be aware! Ideas are nobody’s legacy; but, luckily for you, execution is not every one’s cup of tea!
- Be completely abreast of the competitive scenario. When pitching to investors, always be very-very well prepared to lay threadbare the competitive scenario, preferably in your markets and global, especially in tech/internet-related business. “We don't have any competition” sounds quite hilarious to most investors, so avoid such motherhood statements. You may not have a competitor, doesn't mean you don't have a competition. Remember, we are living in a world when you don't know ‘what’ will become competition in a blink!
- Never ridicule a competitor. Highlight how you are solving/addressing an issue better than they are, but don't be condescending. As also, as to our amusement we discovered in one case – the promoter was rubbishing (and, falsely so) its competitor, which also happened to be our portfolio company!
- Highlight your execution capability. Why should the investor bet on your idea, and also bet on you as the most suitable executor thereof? As mentioned earlier, idea is nobody’s legacy, but execution is. So your pitch to investors should clearly highlight your capabilities to execute your business; albeit without sounding arrogant. In all its simplicity, most pitches falter here – either in being able to highlight the execution capability better than others, or in being modest about it!
- Be candid about the chinks in the armor. Identify the weakness in your organization/business before you approach an investor. This is not admission of guilt, but being abreast of the situation as is! Investors love informed promoters. Only when you acknowledge a problem, will you work towards solving it!
- Be ready with solutions, wherever possible. And preferably, also be ready with an identified solution (outsourced partner/ key co-promoter or employee – even if they join in only post-funding).
- Potential co-promoter tie ups. Do not hesitate to tie up with another person/organization to fill in any potential gaps in the strength of your organisation. Investors will possibly insist on such gaps being filled.
- Truth shall prevail. When presenting to investors never, repeat never, lie -- explicitly or implicitly. Assuming you get through at that point in time (albeit unlikely), the lie may come back to haunt you with far more serious repercussions at a later stage.
- Your skin in the game. Normally the “why should I put in any of my own money; I am coming in with loads of experience” does not sound very enticing and convincing to investors. Unless your skin is in the game, investors will not risk theirs. Not to say that investors never invest when promoters don't put in their own money; they do. But, that's normally when a young promoter is at a very early stage of career, with actually no savings/capital to call his own.
- Keep salary expectations real. Avoid asking for a very high salary (“its barely 50% of what I was drawing at my last job!”) No investor likes to fund a business for the promoter to earn his salary. Most investors prefer that the promoter is motivated (you might wanna say “starved”) enough to perform better and earn his remunerations by way of an increase in valuations. So, agree to a reasonable remuneration (almost like a sustenance allowance) to start with, and include in the agreement, performance-driven salary hikes for the core promoter team. Albeit, bear in mind that it will still be a while before you can reach the ‘50% of what I was drawing at my last job’ stage!
- Value more important than valuation. Do not be obsessed with getting a high valuation; focus more on delivering value to the customers, which in itself will take care of the enterprise valuation. Remember, enterprise value is always a derivative of delivered customer value. Concentrate on delivering value, and valuation will take care of itself.Also bear in mind that it is not in the investor’s interest to invest at a very low valuation; because it will take too much away from the promoter, and will not motivate him enough. Unless the investor rolls up their sleeves and starts taking an operational role (and that rarely, if at all, happens), that's the death knell for the business. Investors are interested in the golden egg, not in choking the hen laying the golden egg..
- Smart vs Dumb money. Assuming you are one of those lucky guys sitting on a couple of term sheets to decide which one to go ahead with. Regardless of valuation offered, the investor offering more leverage in the industry should normally be preferred over the other. The benefits from the intangible support/assistance that an influential investor can provide can be very valuable in the long run.
- Do not try to save on legal costs. Do not hesitate to spend a few (admittedly hard-earned, scarce and hence precious) dollars to hire a good legal mind to vet the agreements you are entering into. These documents, if not tackled reasonably well at the outset, have a way of coming back later to create complications that could have been easily avoided!
- Use/re-use the investor. Do not hesitate to call your investors to help you get a foot in the door. Rather, the investor’s ability to do so would have been one of the primary criteria for you to take them on board in the first place! But restrict your request for nothing more than helping you with a foot in the door.
- Pay heed to their advice. Do not feel compelled to dispel every advice coming from them (yes, yes, this happens reasonably frequently, even if not explicitly). Assuming you have been lucky enough to identify a smart investor for your co., am sure you will agree he is not interested in killing the co. After all, investors are going to make their money only if they let the company grow and grow well! They are, remember, interested in the golden egg..
- Keep ‘em posted. Always send across a periodic (quarterly should be adequate in due course) update letter commenting on the events of the quarter, both hits and misses. Almost a quasi-MD&A. Also include a snapshot of what the next quarter is expected to look like. Nothing lofty, just plain and simple few bullet points explaining the end results expected by the end of the quarter. Always keep them updated of any and every major event, including bad news.
- …including bad news. As a matter of fact, if there is any bad news, don't wait till the end of the quarter; it is better the stakeholders hear it from you (the promoter), than from the external world/grapevine.
- Keep in touch with future potential investors. To the extent possible, include your potential investors too on this mailing list. Albeit, you will have to circumspect what info you are sharing with those who are not your investors.
- The dilution dilemma. Do not fret every time there is a talk about dilution. Dilution is possible only when someone else is putting additional money in your business. And, that is a good sign! Because, it is possible only when your business is doing well, is growing, and needs capital to grow.
Needless to say, this list is only a general and indicative one and can neither be claimed to be exhaustive or sacrosanct. Circumstances can, and do, differ from case to case. The above list is based on my experiences as an i-banker, and (mostly) as an early stage investor, and hence reasonably opinionated to that extent.
About the author:
Pratik Singhi, a member of Mumbai Angels, is the founder-CEO of Lakshya Consulting, a boutique corporate finance advisory services firm. His firm, inter-alia, assists VCs/PEs with their portfolio companies and potential investees; and also assists early stage companies who are in the process of raising funds, or have raised funds. He can be reached at pratiksinghi at gmail.