Startup Fundraising

If a founder has personally experienced the pain of not having the solution to a problem, he or she is more likely to come up with an excellent product or service to resolve it. (Location 205)

Business with consistent positive cash-flow (customers’ money) > Business with customers and real revenue > Business with trailing customers > Business with product and team > Business with MVP and demo > Business with an idea         A badly timed ‘great’ idea finds no takers. (Location 354)

Although it’s difficult to estimate, but the ideal number for most technology investors is a product that has a large enough market to return a minimum of 10-100X returns in 5-7 years’ time. (Location 407)

The questions which come to my mind as an investor when I am pitched an idea or business are: Do the founders have the experience and ability to execute their idea – have they done this before? Is there a prototype, Minimum Viable Product (MVP) or the likes which have been tested? Do the founders have any data (well, we are data lovers) to show for how well received the MVP was: for example, market feedback, website hits, interest, likes, orders etc. Have the founders sought feedback on the MVP from their targeted audience? (Location 478)

Written agreements with every individual’s share based on their contribution at a very early stage, before any investor walks in. Vesting clause for equity is essential so that founders earn their shares over time by contributing to value creation for the company. Splitting up roles and responsibilities so they are mutually exclusive but collectively exhaustive. Hiring outside talent for the voids that none of the founders can handle (Location 551)

So here are our rules when it comes to assessing a winning founding team: Humans matter more than the start-up idea. Solo founders are passé, co-founding teams are more likely winners Siblings, spouse or persons related to each other do not necessarily make the best founding teams A flexible, adaptable team that can innovate on the fly is always a winner Democratic values make a founding team successful Attitude is key, not just great education or skillset Experience matters Co-founder conflict is real – written agreement with well-defined deliverables and expectations is a must Work-life balance and financial commitments of founders are key (Location 664)

Here are the some of the key factors that investors consider, to assess the viability of a start-up - Does the product/service address a compelling need of customers? Do the founders have a well thought through business plan? Does the business plan have any sales and financial forecast? Does the start-up have any paying customers/letters of interest? In case there are no paying customers yet, does the start-up have any data such as average return visits by customers/customer queries about product/social media buzz? (Location 728)

What customer pain will your offering resolve? How strong an incentive does a customer have, to give you his or her money? Will the fish rise to the bait at a price that works? (Location 746)

Who, precisely, are the customers who have the pain? Do you have detailed, accurate and current information about who they are, where they live or do business, or what they do? (Location 765)

What benefits does your offering provide that other solutions don’t? (Location 786)

What evidence do you have that customers will buy what you propose to offer? (Location 797)

This is probably the one question that investors want an answer to, as soon as they learn about a start-up idea and I cannot emphasize its importance enough. (Location 801)

What evidence can you provide to show that your target market has the potential to grow? (Location 811)

What other segments exist that could benefit from a related offering? (Location 826)

What sort of business do you want? One with the potential to become a huge business, or a small 'lifestyle' operation servicing a niche market? (Location 849)

How large is the market you are seeking to serve? In what way have you have measured (Location 858)

This is a question most entrepreneurs fumble with, because they take the top-down approach in measuring the size of the market. It is advisable to adopt a bottom up approach instead. The way to go about it is to define who your target customer is, build a persona, and then identify the number of such customers. (Location 862)

Following that, an estimation of the penetration rate based on the nature of product can help arrive at the market size in terms of value and volume. This approach has successfully been adopted by AirBnB in the past. They built a bottom up plan and started operating in a single city or state and expanded globally after initial success. (Location 864)

How fast has it grown in last 1/3/5 years? How quickly will it grow in next 6 months/ 2/5/10 years? (Location 875)

What economic, demographic, sociocultural, technological, regulatory or natural trends can you identify that will affect your market? (Location 882)

Macro-Industry Checklist   Do you possess proprietary elements - Patents, Trademark, trade secrets that other firms cannot replicate or imitate?   Possession of patents, trademarks and the likes, greatly boost the market valuation of a start-up due to the immense potential to be unlocked. It is an assurance of steady future profit margins as there is little or no likelihood of competitors replicating the patented products. But be cautious in including cheeky terms like ‘Patent Pending’ while you know that you will not be able to secure the patent you are talking about – sophisticated investors have seen many such pitches, so be careful and include the real stuff. (Location 978)

Have you (or can you in future) develop superior operations/ company processes? (Location 985)

3.    What is your burn rate? How is your model economically viable? Can you show that the company will not run out of cash quickly? Show the cash burn analysis. (Location 1001)

“We are making the Uber of XYZ” say the founders when they make their first pitch to us. What an awesome opening line! –But to be honest, that’s the first thing that puts off an investor. Founders may find it to be the best and shortest way to suggest what they are building, but ABC of XYZ has become an overkill lately. They must be original and showcase why they are better, faster or cheaper than their competition. (Location 1031)

A founder looking to raise funds will have better chances to be funded if an investor gets a view of how long the sustainable advantage will last and the fall-back plan in case of failure. This brings us to the question of funding. In early stage start-ups, most investors look to be the first investors so that the quantum of return is higher when the eventual acquisition or next round of funding happens. A founder I once met told me he was looking to raise a million dollars. I was surprised because the business did not look cash intensive and the reason offered was – because everyone else he knew was getting the same amount – seems funny, but this is how many founders lose focus and credibility in front of investors. In the next chapter, we will explore how crucial it is to get your funding fundamentals right – how much to raise, when to raise and from whom to raise. (Location 1212)

I would add another factor here – getting funding from the right investor who understands your business or the vertical that you operate in, is also equally important. (Location 1241)

The crucial questions that every investor wants answered before arriving at a yes/no decision for funding are: Have the founders raised funds prior to this? Who are the current investors? How and where were the funds raised? What is the deal? Who else is in the capitalization table? What are the present and future fund-raising plans? How are the founders going to utilize the funds received? How much do they expect to raise and how long do they expect the funds to last before they raise their next round? (Location 1277)

There can be many ways to look for the right investor for your start-up:   Look for investors who share the same vision for your business as you do, is he as excited about the opportunity as you are, what else he can help you with apart from money.  Go through the start-ups they have invested in the past and understand their reasons for doing so, are they on the boards of other companies – research about that.  Do the investors place more weightage on the teams rather than the idea itself, if yes- that’s good news Are the investors familiar with the product or solution you are building and the technology you are deploying? Ask for references (in a polite way) so you can talk to their investee companies where they are (or not) playing a key role. (Location 1296)

few thumb rules to consider before approaching a venture capital and/or an angel investor.   1.      Strong Team – People invest in people (as they buy from and sell to people) – It’s all about the team, no matter how strong an idea the founder has, the fate of the start-up ultimately rests on the shoulders of the team. If you are a single founder with no team around, your chances of getting a serious investor on board are very slim. Co-founders and founding team with complementary skill sets, along with the product is the complete buy-in for the investor at this stage.   2.      Buzzword pitch – Founders who can’t (or want to) explain their business in a simple language but choose to go with fancy buzzwords instead, may lead to investors walking away with an impression that they don’t have great business communication. So, investors end up concluding that the team lacks a member who can lead the business side. A founding team might have great techies, but one cannot run a business with only geeks in the team. 3.      I am not full time yet – Founders who want to keep his/her current full-time job while raising money for the start-up give an impression that they are not fully committed to the idea. The investor doesn’t feel secured about the money he wants to put in. On the contrary, he might consider you as high-risk prospect who may be willing to gamble with his money. When such trust disparities exist, you can expect a negative outcome to even the most brilliant of investment pitches. If the founders are not full time on this, there is no motivation for investors or employees to devote themselves fully. More importantly the question that remains unanswered is: when you are working for running someone else’s company (office), who is running your company? And if you don’t have faith and confidence in your own company then who would? And why would an investor? 4.      I have no competition – If you don’t have...

... any competitor in the market it may mean one of two things – that this product has no need in the market, or you haven’t done enough ground work before arriving at this conclusion. In either case, it may not be considered as an investible business by a serious investor. 5.      Unrealistic assumptions – Optimism and assumptions are two key factors when you start the business, and how you as an entrepreneur differentiate with who you are not, but unrealistic assumptions and over-optimism won’t take you further. Investors see several pitches and business plans daily and they can easily spot when one and one are not making two. 6.      My accountant knows the numbers – For investors, founders who are unable to talk through their financial projections are not to be trusted with handling their money. Be it the business plan or the marketing plan, experienced investors quickly find holes in them. Founders should prepare themselves to discuss and explain any queries that may arise during the pitch. Making mistakes in the planning stage/ documents… (Location 1314)

Convertible debt (or Convertible Note) is a widely-used instrument in early stage rounds which some founders may find very useful. It simply means that the debt can be exchanged for equity upon agreed terms at a future date as per the lenders’ and borrower’s agreement. The lender may receive a discount on the price of a future round while converting its debt to equity. The primary reason, why many investors go for convertible debt is because at an early stage, it is difficult to determine the value of a company based on just an idea, product or prototype. Deferring the valuation for a later round when it has grown further, and more investors are involved, is more likely to result in a fair valuation. Founders can take this route to save time, money and a lot of heartburn of arriving at a valuation number with investors at an early stage.  So, by way of a convertible note – investors and founders agree that a decent and realistic equity will be allocated to the investor (often on a discount) when a big equity round takes place in future or at a given date in the future. (Location 1445)

Convertible debentures are a type of debt which are mostly unsecured by collateral or physical assets. In the event of liquidation, they are paid before anyone as a creditor (based on their priority ranking), before common stockholders and are a hybrid of equity and debt. Investors are usually willing to accept a lower rate of interest in exchange for the liberty to convert to equity. (Location 1461)

Typically, here is the structure of the pitch deck (Short of Long)   - Cover Slide (with Presenter’s name and contact details) - Elevator Pitch slide (clearly defined 2-3 lines that tells about what you do/ value you create) - Problem and existing solutions - Your solution - Team that is building this - credibility / Repo/ what is missing/ Advisors/ Mentors - Traction/ Awards - Market size/ Competition - Business Model - GTM/ Strategies/ Models - Financial projections - The Ask? - Summary slide (Who we are, what we do, why we do it) - Closing slide (with Presenter’s name and contact details) Please click here for a sample pitch deck template. (Location 1541)

Video pitch – This is also one of the most popular means of reaching out to investors, where founders can convey the story in a 30-60 second video. A well-produced video leaves a good impression and can potentially open doors for the next meeting with the investor. There are many examples of pitch videos on YouTube that can be helpful. With the popularity of mobile phones and good internet signals everywhere, a video pitch can be an initial hook for your investor. (Location 1557)

Entrepreneurs will always be entrepreneurs. Most of the entrepreneurs I have met can’t wait to exit their start-up and build a new and improved one with their new idea. Even if they don’t have an exit goal in mind, I encourage start-up founders to think about building a culture and strategy that can survive even without the founders. This can be useful when an acquirer or shareholder wants to assess the health of their business. (Location 1606)

An exit strategy is important because it helps define success in business. Throughout my journey as an investor, I have asked this question of every start-up founder I met: “What is your exit plan for the company in 3-5 years?” (Location 1717)

According to research, 60% of successful high technology start-ups wrote an exit strategy or had a broad idea of their goal before exit. A lot of VC firms map out the exit date with entrepreneurs at the time of every investment they make. (Location 1731)

Regulations that impact your business: Based on the type of business you are in, there can be a bunch of local, state, national and foreign regulations that can impact your business now or in the future. For instance, if you own a fast food chain, there may be health and safety standards prescribed by state and local agencies that you must comply with and be open to routine audits and checks. If you are into financial services, your business may fall into the jurisdiction of 4-6 different agencies based on the exact nature of your business. You need to be aware of all the regulations and ensure you maintain internal checks to stay up-to-date and on top of any changes in the laws.   A risk-based approach: It is important to periodically evaluate your risk profile, so you have an assessment of your vulnerabilities. This give you an opportunity to assign appropriate time and resources to manage those risks. For instance, nearly all businesses today are mandated to follow standard “Know Your Customer” procedures to know who they are dealing with. You must follow those procedures or bear the risk of being non-compliant and the subsequent penalty that results from getting caught by regulatory agencies. Instead, if you perform on-going monitoring of your regulatory compliance risks, you can safeguard your reputation and business.   Build trust by demonstrating intent Maintaining written policies and procedures, establishing a culture of compliance and training employees about risks and internal controls establishes your intent and hold you in good stead with auditors and regulators. Training employees also ensures each of them is consciously protecting your business.   Document key compliance information A well-organized record keeping system is a must for every start-up. Every regulatory approval, certificate, licence and report must be stored and made available for inspection, along with written policies and proce...

...dures, at the time of an audit or query from regulatory agencies.   Scale up As you grow from one city to several, one state to multiple states and even countries, the compliance program must be scaled up so that it is in tune with the growth of the startup. Getting legal counsel to make sense of complex regulations is becoming a widespread practice for startups now since the cost of non-compliance has never been higher. Uber’s fall from grace is the perfect example of what you shouldn’t be doing when it comes to complying with laws. The company is amid trade secret lawsuits, consumer protection lawsuits, and bans from cities. After a former engineer complained of sexual harassment, and their senior vice president also quit after it was discovered that there were sexual harassment claims against him while he had been working at Google, Uber had to apologize for covering up a massive customer data breach and is still transitioning after investors forced out its founder and CEO, Travis Kalanick. What was once the poster boy of tech start-ups… (Location 1771)