We have the privilege to engage with numerous founders who are building exciting startups, and consequently looking to raise funds.
Since the start of 2020, we have had the pleasure of evaluating over 100 startups. We have also invested in 4 exciting companies at the same time.
Most startups get rejected. This is a well-known fact. It is not a big deal, since rejections are often stepping stones to success. But the worrying sign is the lack of feedback post the rejection that makes founders nervous and frustrated.
More often than not, most founders do not even get reasons for the lack of funding. And at times it is due to the lack of understanding, sheer laziness, and neglect from investors. Let’s not be holier than thou!
In this post, we are trying to highlight five key reasons why we might have declined to participate-
Let's face it, you can be something to everyone, everything to someone, but never everything to everyone! If you take your consumer product to a B2B SaaS fund, you are bound to be rejected! And it’s a good thing, because you want someone who is a specialist in your industry to fund you!
Are you disrupting the industry? Or are you replicating an existing offering? This has implications! Your deck, your business idea, and all your communication should be easy to understand. If its an improvement on an existing service, most likely the incumbents will improve and overtake you - mind you they will have a more established and loyal customer-base than yours! Then what is your right to win in the industry?
There are founders who do not even understand the basic concepts of Revenues vs GMV, Gross contribution, Fixed vs Variable costs, Breakeven points, Working capital! As someone who trusts you to handle our client’s money and hopefully return - we expect founders to understand, improve upon, and be on the same page with us regarding basic financial terms and concepts! Without measuring what matters (i.e. cash in, cash out, and path to profitability) founders risk themselves running out of cash far earlier than expected.
We have encountered founders who want to raise a first cheque of straight 5-7 cr! Unless you have credibility in the market, previous experience, a solid network, and a fantastic product - finding the first big cheque is going to be very difficult! You either need a very developed and mature business model, or a strong on-going relationship to be able to command this sort of dry powder. Most investors are comfortable signing smaller cheques (1-2 cr) and follow up with larger amounts once there is confidence and understanding. Your fundraise should be in accordance with what milestones you want to achieve in the future, and not the other way around!
We have loved a business model to not issue a term sheet in the end! And this is only because of lack of alignment of interest. There needs to be a meeting of the minds in order to stay on this long journey. But do you want to shortchange investors by keeping all the profits and distributing it back to the founding team as commissions? Do you get irritated with frequent queries? Do you want to create a phantom ESOP pool so we are not aware of who gets the options? Do you not want to give your co-founder enough equity? Then why are you happy diluting equity to us? Isn’t your co-founder more of a partner to you than we will ever be?
Today, it has become easier than ever before to start the journey of entrepreneurship in India! Founders with decent enough ideas, confidence, humility, and the ability to work alongside others will always get funding!
Buyer's remorse is the sense of regret after making a purchase, usually associated with big-ticket items. And it is not just limited to the amount of money invested, but also time and effort, and also the opportunity cost. Sometimes you are disappointed with the service, and most of the time this stems from have an expectation mis-match! If you are not clear about what you are getting yourself into, it will result into a buyer's remorse!
The same can be applied to an investing relationship. Between an investor and an entrepreneur.
To word it appropriately in investing, a buyer's remorse is called alignment of interest. If the interests are not aligned by way of expectations, prior agreement on positive/negative outcomes and a general thought process behind an engagement, then the relationship is bound to face hiccups along the road. To solve this problem, we prefer to be aligned, we prefer to be on the same page before we put money in the bank.
We call it Alignment of Interest. Before we agree to the investment, as a part of our Conditions Precedent, we like the entrepreneurs to share a small document or an email that enlists the following in a broad detail:
Company
Fund raise
Growth
People
We are asked, why do you ask for this? Especially because we cover all this during the time of the diligence? The simple reason behind requesting this document is to have a reference material that is created with the intent of honoring the commitment. We also understand that planning is paramount, however no plan works 100%.
We also like to make investments in tranches. Our tranches are based on the achievement of certain milestones that are measurable. This ensures two important things: milestones help measure success, and entrepreneurs have a steady inflow of capital.
We do not like to leave things open ended for the sole reason of avoiding ambiguity in the future. We like to front-end the dirty work by way of diligence and tough conversations so both the entrepreneur and the investor understand where they stand. The easiest way to ruin a relationship is to avoid difficult conversations to the point it can break the very relationship. We enter a relationship with the purpose of playing the long game. And we surely do not like unhappy relationships.
Being on the same page is a fantastic way of maintaining trust, honesty, transparency, and integrity in a relationship.
Everyone should read more. Not only does reading help you learn from the experience and views of others, but it also provides you a perspective to expand your own knowledge and experience.
If we think about it, almost every solution to any problem exists, we just need to find the right book.
As investors, we know what we do not know. And in our quest to find more knowledge and learn from the experiences of others, we read. A lot.
In today's post we will share two books that are close to our heart, and in a way gives people a window into Malpani Ventures.
We will discuss about Company of One by Paul Jarvis, and Measure What Matters by John Doerr.
This gem by Paul Jarvis is a fantastic primer on building sustainable businesses. The author stresses why staying small is the next big thing for businesses. This does not necessarily mean do not grow. This means do not grow without having your foundations secured, and do not grow for the sake of it.
The book is a wonderful short read that helps us understand why overheads can mean death for your business. In a world where capital is shoved down entrepreneur's throats forcing them to grow at any cost, we are witnessing linear growth in revenues with exponential growth in losses. The current COVID-19 pandemic has further excaberated cash burn at many startups.
We are angel investors. And unlike most venture capitalists, we prefer a steady and sustainable way of growing a business, while creating value for all stakeholders - promoters, employees, partners, clients, and finally investors.
Entrepeneurs and Promoters who resonate with this book are ideally the ones we like to fund. If you are one or know someone who is aligned to this thought process, please reach out to us!
John Doerr is an American investor and venture capitalist. OKRs (Objectives & Key Results) which this book is based on, has helped create massive value for Intel & Google. He introduces a revolutionary approach to goal-setting, evaluation, and management that can help small teams as well as big organizations align their goals towards a common cause.
Our organization-wide objective is to fund frugal startups. Hence, every organizational effort goes towards this common objective of helping entrepreneurs build frugal ventures. Our communication to entrepreneurs we fund is simple - have your goals, enlist how you will achieve them, work towards that, and share your progress on a periodic basis.
Without an OKR - how do you understand where do you want to go, how will you get there, and how will you know how far have you reached? Yes, the destination might change - startups pivot many times. Yes, the path taken might change - there are multiple paths to Nirvana. And consequently, the awareness of how far from or near to the destination you are, will also change.
What does not change - is the effort we as investors, and you as founders take in order to keep telling everyone on the plane- where are we headed, and how will we know when we get there. As entrepreneurs in a growing startup, it is very easy to lose track of focus, priorities, alignment with stakeholders, and accountability. It all moves very fast.
This book helps the reader understand goal-setting, productivity, accountability and tracking progress.
We love to invest in sustainable businesses that are run by passionate founders who hold themselves accountable to their objectives! And by writing this blog, we are sending a reverse pitch to founders inviting them to work with us.
Building a board is a very challenging task for a founder. At the same time, a great board can be a fantastic way of setting your roadmap towards success. Irrespective of the stage of the startup, having a sound board of directors will add value to the business!
1. Find a mentor who can be the Chairman
A Chairman should be one who is a coach-cum-mentor to the founders. Someone who has been there, done that. Someone who has the experience, connections, and farsightedness to effectively guide the board. The Chairman can be someone who can suggest plans, find loopholes, offer M&A opportunities, liaise with bankers, warm up the investors, etc. You want a strong and experienced candidate who can have some skin in the game, and whom other stakeholders look up to.
2. Decide on the board size
Too many cooks will spoil the broth. Decide on a size, and stick to it:
3. Restrict the number of Observers
Let's face it, despite the fact that an Observer will be a non-participating and non-voting board member who wants to silently observe, they can inadvertently sway meetings. You do want Observers because that is an engagement of intent rather than being a deadwood. However, limit your Observers to a max of 2 people. If there are a lot of investors who want an Observer seat, ask them to nominate one representative amongst themselves.
4. Avoid people who actively want board seats
Someone who nominates themselves will usually be more interested in their own goals and objectives. You want to choose someone who is an ally, yet is not overly enthusiastic about joining a board. Pick people who are picky about their schedules. This helps in the long run.
5. Look beyond your investors
Remember, your investor syndications should not automatically mean board representations. A board seat is not a right, it is a privilege. Your board should be comprised of people who have built similar successful businesses before, who have a professional edge, and/or someone who is a well-respected professional in the industry.
Building a board requires patience, effort, transparency, and utmost communication! Your board should always have the best interests of the company in mind rather than its representation. In the end, the right board will drive performance and results!
After sharing 10 Interview Questions to Build Your Founding Team, we have come back with 10 more such questions!
Hiring is difficult, and while we can not make it easy, we can help entrepreneurs to make better decisions.
11. Who do you admire? And why?
This question helps uncover a candidate's values. What they admire in others shows you what they feel is important.
12. What is really great about your current role? And why?
This question tells you two things- what the candidate loves, and is important to them; And also understand the logic and rationale behind the same.
13. How did you prepare for this interview?
This helps you understand how proactive, resourceful and passionate the candidate is!
14. Imagine 6 months have passed, what impact have you made on this role?
You want to get the candidate thinking about the future, and also understand whether they are just interviewing for the sake of it or have they really thought this application through!
15. What would your boss/co-workers say about you?
You want to understand whether or not the candidate is open and frank about themself, and also whether they are self-aware about their habits, behaviors, relationships, and performance
16. What part of your previous company's culture do you want to bring onto your next role? What do you absolutely not want?
This helps understand team dynamics and culture, and how they intersect. Do they rant about team-mates? Did they consider some specific issues and really thought about it?
17. Tell me about the lowest point in your career.
Careers will have ups and downs. Do they realize what was a down? Have they learned from it? How did they bounce back?
18. Tell me about the highlight of your career.
What motivates them? What do they feel happy about? What can your organization provide them to top that highlight?
19. Why should we not hire you?
Understand if they can put themselves in another person's shoes! Can they think rationally?
20. What should we know about you that would make us not hire you?
This surprises everyone! This is an opportunity for them to reflect, think things through, and respond.
We always look for advice and learnings that go unanswered or unshared. For us, the learning agenda remains paramount.
Time and again we have seen hiring being top of the mind. How do you ensure your founding team is A1? There is no shortage of challenges in this area, and we could learn from the perspective of others.
Over time, after interacting with our founders, our co-investors, and industry leaders whom we look up to, and the literature we read; We have created a list of the top 10 interview questions to build your founding team!
1. What do you see yourself doing differently in your new role?
You want to understand what they are running towards rather than what they are leaving behind. You want to see if they are excited and motivated about a new opportunity or bitter about the past.
2. Past few companies you've worked with (i) Why did you leave? (ii) How did you select your next opportunity?
This is an important question to understand the thought process behind big decisions in life. Are they winging it? Or did they think it through? Also, do they just give a one-line explanation or do they dig deeper and get into a narrative?
3. Can you share an instance in life where you took an unexpected initiative? Follow up: Can you tell me another one?
Greatest performers are those who take initiative when it is not expected from them. This is a trait that sets consistent performers apart from decent performers. For your founding team, you want someone who makes the effort to independently take initiatives than someone who waits to be nudged or reminded.
4. What is the highlight of your career in the past five years?
This is straight forward. You want to understand their motivations behind the important events. Was it winning a new contract, or getting a salary bump? Were they happy when they got recognition or when they contributed to something?
5. How do you differentiate between someone who is good at a role vs someone who excels at the same role?
Your team should realize the difference between an A performer and an AAA performer. You want them to answer specifics like what are the objectives and how will they measure success?
6. What do you wish to achieve with this role? How does this fit into your career as a whole?
Have they thought out the career progression? Do they understand the role and how they can contribute? Is this role a stepping stone or is it a foundation to build success?
7. Can you share an instance where you very strongly disagreed with someone on your team? How did you settle your differences?
How far can they go to prove what they believe is right? Even at great personal or professional cost? Will they gather support from others? Do they bring cold hard facts?
8. Who is the worst boss you've ever had in your career? And why? And how is your relationship with them today?
Ask for specifics. Then dig deeper. Was it a difference in ideologies? Are they still in touch? Cordial? Has the relationship changed post leaving that job? That shows they can settle differences regarding a particular phase in life.
9. When was the last time you changed your mind about something very important? Can you walk me through the process?
Does the person allow their belief system or core values to evolve over time? How powerful or impactful did the experience have to be to change their views of the world?
10. Tell me about a time when you really screwed something up. How did you handle and address the mistake?
You test for humility, self-reflection, problem-solving, and communication skills in one go. Mistakes are a part of life. How we handle their correction gives us the perspective in life.
We will follow up with more gems!
Every founder who has progressed onto our due diligence knows that we love making reference calls. We like to talk to co-founders, key employees, at least five customers, a handful of business partners or stakeholders, other investors, and even college professors! For us, a reference call is as sacrosanct as a term sheet!
Over the years, we have learned a good deal from our failures, and successes. Knowledge gained is winning half a battle, knowledge shared is winning the world! Being true to our words, we want to share our experience with the world.
What are our 10 tips for making better reference calls?
1. Ask for a minimum of 6 references
The good, the bad, and the ugly: With more emphasis on the bad and the ugly. Why? Because we know differences of opinion will always remain, but it takes strong principles to still be connected to someone who is a negative reference, and even more courage to connect them for a reference call
2. The good references will always give a glowing feedback
The moment you put the phone down, another call will go directly to the candidate telling them everything we spoke about in detail. And this is not necessarily bad. All questions go back to the source!
3. You need to ask for specific examples
Everyone can say "Oh they are a delight to work with", but the devil lies in the detail. Can they share an example? Or three? This helps understand a pattern.
4. You need to seek evidence that is discomforting
This is especially with the bad and the ugly references. You can start with "I have heard glowing references for a couple of people, however, some also said X..." And then wait for the ball to drop, or not. You need to go with the assumption that the candidate or the founder is great, however you do not want to be blindsided by something.
5. Everyone has a negative side
Accept it. Do not fuss over it. Focus on areas of improvement.
6. "Some people said THIS about him"
After a couple of calls, you will understand a pattern, and you can lead calls with that pattern. You can say "Some people said THIS about him, what is your opinion on how it can be improved?" You are not letting them say No, he is not like that. You are asking them to elicit an opinion. This also helps you understand the depth of the relationship and the quality of the reference.
7. Get "other" references
Some of the brilliance in reference calls is getting "other" references. Someone who is not a directly listed reference. Someone who might have nothing to win or lose, and is more likely to be honest. End the call with asking "Hey thank you so much for this call, do did mention X worked with you in a team of 4. Can you please help me speak to someone else in that team as well?". Get ahead of the agenda. Dig deeper. We have found that LinkedIn also helps.
8. Have an accomplice
Many times asking difficult questions that reach back to the source can lead to starting off the relationship in a tricky way. One way to get past this is to have someone trusted on your team do some of the dirty work. Many sophisticated investors or recruiters completely outsource this as well. But we prefer to keep it in our network.
9. Do not enter with a bias
Yes, you are trying to seek discomforting evidence. But do not base your interpretation of the calls based on that one piece of evidence. There are two sides to every coin. Your job is to get reasonable clarifications.
10. You will learn on the job
You will not learn via these tips. The best way to learn is on the job. So go ahead and start making these calls.
Written material is usually sent to investors by entrepreneurs. And this mostly means whatever they could chalk up.
We want more and more entrepreneurs to share one-pagers. Why? Because they are a pain to create. They entail thinking, and crisp writing and ruthless editing!
What purpose does a one-pager serve?
Should all investors insist on a one-pager?
We absolutely believe so. Summaries and one-pagers are akin to currency in the venture capital world. Do you want to invest in a particular company? Summarize in 3 bullet points. You want to pass on an opportunity? Summarize in 3 bullet points. We love the Rule of 3. Who better than an entrepreneur to share 3 bullet points on why their venture is a good fit? A good one-pager is one foot in the door for an entrepreneur. Why?
Slide decks are easy, and once made can be sent as a blast to 100s of investors! A true one-pager is a customized summary showcasing the important pieces of your venture, the value addition that can be provided by the investor, and how it is a good fit for the investor's portfolio.
And more often than not, writing helps to achieve clarity, and make the thoughts and words crisper. Our portfolio company founder Rajan Singh (ConceptOwl & HabitStrong) is a former IPS officer who explains How to write well.
So what do we look for in a one-pager?
The same things as in a slide deck. But shorter, more concise, and crisper! Ideally not more than 500 words or 1 page. And should contain the following:
Condensing all of these on one page is a very difficult task, and that brings the thinking hats out. Often, the entrepreneurs get the utmost clarity about their business while writing the one-pager.
In a way, we want one-pagers to be our value add to the entrepreneurs!
What questions do investors ask during due diligence?
Entrepreneurs need to be prepared before pitching to a VC. They can do this by anticipating questions and having reasonable and thoughtful responses ready. The more you are prepared, the more your odds for success.
These are some of the questions we commonly ask entrepreneurs when we speak to them for the first time
Pitching is daunting. For experienced and inexperienced investors alike!
Most of the confusion and fear arises due to the fact that the fundraising process is opaque and tilted towards the VCs. Founders are bound to feel left out in the process.
We value transparency and clarity in communication and also like to make the founders' lives better.
In this post, we will highlight the most common questions asked by VCs to founders during the fundraising process. Preparation is the key to success.
What is the background of the founding team?
Early-stage startups are more about the potential of the founding team rather than the idea because it is the execution that matters. The background, experience, and ability of the founding team is paramount to the success of the startup.
How big is the market opportunity?
Most investors look for a large market opportunity- because profits maximize at scale. As a founder it is your responsibility to convey either in numbers or in a narrative about the scale of market opportunity available to your startup.
Product or Service
Investors expect founders to articulate the features of their product or service. They need to explain the following-
Competition
Every company has some or the other competition. Any founder that says we do not have competition is going to lose credibility.
What traction do you have at present?
One of the most important factors for an angel investor is finding signs of traction or early customers.
Marketing and customer acquisition
Investors want to understand your strategy to market your product/service and acquire customers-
Scaling and unit economics
Scaling is very important because scale brings sustainability which creates value for investors.
Current funding round and any subsequent rounds
Investors want to understand where you are right now, and how much money do you need to go where you want to.
Risks
There are risks in every business. Answer questions pertaining to risks in a thoughtful manner to show your awareness-
Additional reads
A pitch deck is usually a 10-12 slide presentation created to provide a concise summary of your company, your business model, growth plans, and the vision.
There are different types of pitch decks that serve different purposes, from one for an investor meeting, to one for business development. Every pitch deck has a few slides that are the same for all like your company details, your business model, and your vision. But every pitch deck has to be tailored for the end-user - whether it is an investment you are pitching to a fund, or a business development meeting with a prospective client.
Presentations should be simple, concise, informative, but not loaded on text.
Here are some of the building blocks that we prefer on a pitch deck that provide context to the meeting:
Problem statement & the customer
Even before we open the deck, we have these questions in mind - who is the customer, what problem are they looking to be solved? We expect the entrepreneur to tell us a short story that we can relate to, as this is the logical place to begin. If an entrepreneur can not articulate who the customer is, or what precise problem are they solving, and what insight do they have to solve the problem, then it is difficult to continue
Market
What is the market size? Is the problem large enough to be solved? Is the market fragmented, ripe for disruption, is it growing, does it have tailwinds, does it have large dominant players? We want to know what makes it interesting enough for the entrepreneur to operate in this space
Solution
We want to know how your solution is better. We want you to focus on the pain relief rather than the product. Because that is how we understand how entrenched are you in the minds of the customer. You have to explain what is the solution, not the features of the product.
Product
Now you come to the product. But not just say we have made a product with the following features! Given enough money, anyone can replicate it. What makes your product unique that it can not be replicated easily, and is economically viable?
Plan
How are you going to take your solution to the customer, and solve their problem? What is your strategy and what can be the challenges?
Go to market
Dive a little deeper into your plan. What are your sales channels? How will you specifically reach certain customers? What will it cost to reach the customers?
Team
You have elaborate plans, but do you have the team to execute? Share a bio of the team along with what skills do they bring on board
Growth
Where are you right now, where do you see yourself in the future? How will you reach there? How long will it take? Is it a realistic plan? Do you have or can get the resources to logically reach your destination?
Finances
What does your revenue, expenditure look like right now, how will it evolve over time? What margins do you make? How are you going to grow? How much capital do you need?
Exit options
What happens when your company is 100x? Will you buy back the shares? Will someone else buy your company? Who is that, and why are you so attractive for them to do so? Can you share any similar transactions in your industry/
CTA
Start the dialogue by providing the details of your capital raise, what terms do you want to raise the capital on, and whom should the investor contact?
The idea is to provide a brief snapshot, tell a story, and elucidate interest.
Here are some examples that will help you better
Can your startup afford to ignore these marketing strategies?
SEO - The biggest driver of traffic to a website, but only if you appear higher in search results
SMM - Helps you practically reach the entirety of your audience for free if you play your cards, and strategy right, with the only investment being time
Content - Think traditional, act modern! Replace cold calling and pitching with how-tos and blogs and informative content that your audience derives value from. Combined with SEO & SMM above, this can driver a lot of meaningful engagement
Email marketing - This is a no brainer, in order to be in touch with your customers on a very regular basis without them having to come to you. Yes a lot of people do ignore emails, but with the right structure, and campaign its manageable
Referrals - Can word of mouth ever replace any other forms of marketing? We think not! Word of mouth and referrals are the most direct forms of validation for a new customer to get rid of the barrier to engage with you. Afterall everyone seeks comfort. We are actually working to evaluate fit with a fantastic startup in this space!
There is no right strategy, but a combination of all these can definitely help you!
Wonder why most entrepreneurs are frustrated during their fundraise? Top reasons I can think of: The analyst you meet is not the decision maker, so they don't have an answer The investor does not want to say no blatantly, so keeps saying maybe The investor does not have enough knowledge about the business to say no and provide reasons, so keeps saying maybe let's see in 6 months The investor has a FOMO and does not want to lose an opportunity but doesn't have convicton, and hence plays on the sidelines These are valid reasons, but very very frustrating for the entrepreneur! As an entrepreneur, you must understand most Maybe's will turn into No's and its in your best interest to hear it as soon as possible This will save time and disappointment later on!
Why do entrepreneurs approach investors only when they need money?
Does it really make sense?
It is hard for an investor to assess an entrepreneurs character, ability, and thought process in a short period of time.
It is difficult for an investor to analyze your product, traction and market in a couple of meetings
The best relationships in life develop over a period of time, and by mutual trust and respect, not by having FOMO
Start spending small amounts of time from today, so you have a list of primed up investors ready to fund you if/when you need capital in the future
You need to sow to harvest!