Akshay & Parag received a phone call that they thought would change their lives! A wealthy angel was willing to put in a hefty sum. After much deliberation, they decided not to go ahead because they did not know what to do with all that money. Yes, they could raise the money, sit on it and decide what to do with it later.
"Raise all you can, and then raise a little more. You need a good runway to sleep better at night."
Conventional wisdom told them to do the above. Whereas their own experience suggested otherwise.
A few years ago, during the startup boom in India, the duo was building another promising startup. The sour experience of raising, and later spending almost half a million dollars brought an insane reality check and deep learnings that will stay with them forever.
Capital chases the best ideas, teams, and execution. And this is where execution is so important. The duo raised money thinking it would help them propel their business. However, on the contrary, it led to many distractions during the most important time for their business.
In order to raise the round, the duo spent 12 weeks traveling across the country from Bangalore (their HQ) to Delhi, Bombay, Kolkata among other cities in order to "pitch" to investors, and managed to raise about $500,000. Once they banked the money, they went back to the drawing board in order to decide what to do!
They didn't have a working product, nor did they have any revenues, and since the cash was banked, the clock was ticking.
After raising the money, they ended up bloating their team to about 12 members. They hired business development people, developers, engineers, marketing staff, digital interns, and even an HR person to manage the team! They spent another 12-15 weeks designing job descriptions, and roles, conducting interviews, and onboarding people! All the while, at zero revenues.
It is difficult to see where you are going, and what you need to focus on when you dont have money by way of revenue, but by way of equity - staring at you!
The founders now realized that in order to show their investors "some progress" every month, they invariably did everything they shouldn't have. They grew the team thinking the product will finally click. Only if it works that way. A good product will fix everything else, but a non-existent product cant fix things on its own. It needs TLC!
Growing a team helps you scale something already present, but they did not have anything to scale in the first place. Employees look at the founders for direction, and the founders were flustered with that ticking clock. Also, a team of 12 plus founders with rent and admin and overheads quickly starts depleting the bank balance.
While there are many explanations of a product-market fit, we think of it in very simple terms. A product-market fit happens when you get more customer calls to inquire about your product, than you calling them to pitch your product. When this happens, the team focus shifts from reaching out to people, to managing the people. You need more customer service people than marketing people. More customer service means customer delight, leading to more retention, leading to lower customer acquisition costs, leading to scale!
And this is why having a product-market fit is essential. The business model develops after you achieve product-market fit.
The duo literally showered their team and developers in cash before realizing that:
A. The customer was not going to call because maybe no customer wanted their product
B. In an off-chance someone wanted their product, they did not have the resources to wait until that time
C. They did not have the numbers to even conjure up a bridge
And the company folded in 16 months.
They decided to shut shop before they ran out of money. To save face, credibility, and also investor capital. They managed to return some cash back to their investors. On their last day, they called every single investor who had backed them and apologized for a job not done well. Many were empathetic, some didn't respond, some were angry! They called for lunch from a local dhaba, sat across the deflated team, and thought about every single thing that they did wrong.
A. They raised without a product, on a hope
B. They diverted effort on vanity like team building, than sanity like product building
C. They spoke to investors before speaking to potential customers
"We later realized that if we could sell our vision to investors based on a PowerPoint, we sure could have sold the same vision to customers via an MVP or Prototype. We need not have waited for a final product to start selling, it was too late. Build only after customers Pay!"
And today, despite having some revenues in their current business, and a handful of customers, they are not going to raise cash until their customers start calling them. Until that day comes, they'll fund the company with revenues.
"Until those phone calls, there is no business model."
As an entrepreneur, you probably pitch your business hundreds of times - to yourself while starting up, to customers, team members, investors, more.
When you are in the middle of a pitch, it is essential to grab the attention of your listener very quickly and use that small window to communicate the key messaging of your idea in a very concise and crisp way. In order to do this the pitch format below might help you draft a one-line pitch that can wow everyone you talk to!
We provide (an offering) to (an audience) to help them (solve a problem) with (our secret sauce)!
The offering has to be something that is short, sweet, and simple - something that everyone can understand. It can be a website, or a social network, an application, or a product.
The audience is the group of people to whom you will market your product to. In the case of a consumer product, it can be a group of people between the ages of 25 to 35. In the case of an HR Tech product, it can be recruiters at small & large organizations.
The problem you are solving has to be something that is extremely simple and easy to understand. Examples of this can be 'helps reduce time' or 'improves productivity'.
The secret sauce is your insight and unique way of how you are solving the problem. For example, your application reduces wait times by providing intelligent and automated alerts regarding open check out kiosks at airports!
1. Avoid using adjectives like best, most effective, first, only etc
2. Define your target market to narrow the scope - are you targeting all women in the world or Indian professional women in their 20s!?
3. Eliminate the need to use buzzwords and jargon seen more often in pitch decks like AI, ML, DeepTech etc
4. K.I.S.S. - Keep it simple silly!
So what does Malpani Ventures do?
We provide patient capital to founders of frugal & innovative startups in India to help scale their business with our experience in early-stage startups and unwavering support!
Do you want to try this yourself?
One of the best parts of early-stage investing is when you can instantly connect with the founders! Someone lucky would get to have one such connection in a year. Malpani Ventures had this connection in early 2020, when we met Devang.
One of our former founders Chinmoy (exit from AllizHealth, now building HooLiv) introduced his batchmate at Babson, Devang by saying:
"..what is particularly impressive is the resilience in turning around the business.."
Manish, our CIO, had the chance to munch on the snacks of Fab Box a few months before this introduction, and he quickly agreed to the meeting. Our entire team was at the meeting (something we always do the first time we meet an entrepreneur), and boy are we glad we did!
Devang went on to share his journey of being an entrepreneur in his family business, moving on to school at Babson, and returning back to India with a eureka moment! He first hand created dozens of variations, and kilos of healthy snacks himself in order to find the right ingredients and combinations!
“When some of the people first tasted what I had made, they spat it out!” laughed Devang
But a pivot, years of bootstrapped learnings, and thousands of happy customers later, Fab Box found its feet in the team of Devang, Parag & Ameya- three friends from college! We found this very exciting, and as part of our diligence, we spoke to their college professor Ms Tuli, who fondly remembered them as fantastic students who always took initiative! Mind you, this is over a decade after they graduated! That spoke a lot about how the trio can maintain and build relationships.
We loved the energy Devang brought in the first meeting. And more than that, we loved the box of munchings he brought along. The entire duration of the 90-minute meeting was filled with conversations and crunching noises.
Devang brings with him the strong execution skills required to build a business from the ground up. Parag has been instrumental in setting the distribution and operations strategy at Paperboat. Ameya, most recently the Director of Post Graduate programs at ISME, is a fantastic growth hacker. We believe this team has what it takes to be successful. A sneak-peak of their execution and efficiency was their topline which was almost identical to their nearest competitor, with less than 5% of capital at their disposal.
Fab Box might have been our quickest decision - from introduction to decision in under a week! Fab Box closed their round led by IPV, with participation from Malpani Ventures, and a whole bunch of extremely passionate and supportive angels.
Fab Box is one of the very few consumer businesses in the Malpani Ventures portfolio, but the learnings of initiative, passion, and resilience we get from the team at Fab Box might be second-to-none.
If you are inspired by their journey to making healthy snacking yummy, check them out here!
This post originally appeared on vcble
Running a startup is a lot like meandering through life. You can wing it solo, but it’s sometimes good to have a companion who shares your ideas, passion, and vision.
Just like finding a spouse - finding a co-founder is not as easy as it looks. And just like a divorce, parting ways with your co-founder can also wreak havoc on your baby- the startup!
Having a co-founder has its own set of advantages. How?
Your first sale
Believe it or not, a co-founder is your first sale! This means you were able to sell your idea and vision, something that a founder needs to do day in, day out!
Shared vision
Getting a co-founder means you were not only able to convince someone about your idea and your vision, but also someone who just did not buy your vision - they made it theirs as well. Boy, you really need conviction for that!
Shoulder to lean on
Building a startup is a lonely journey is one with many ups and downs and requires more time and effort than a regular 9-to-5. Having someone whose shoulder you can lean on, and someone who is by your side during both good and bad times.
Better decision making
Put simply, two heads are better than one. Nobody knows everything, and nobody has complete conviction in everything they do. Having someone who can help you find more ideas, come up with better ideas, investigate loopholes in your thinking and question your thoughts - is vital in making better decisions.
Expanding bandwidth
Running a startup is too damn time-consuming. There are hundreds of tasks and responsibilities, especially in the initial stages where there is no structure even. Having someone who can share your responsibilities, and expand your bandwidth is invaluable!
Advisors never become partners
But you say you have strong advisors who can provide entrepreneurial skillsets. The problem with advisors is that you cant call them at 3 am trying to debug a program that is going live tomorrow morning. You can not ask them to fill in for smaller tasks when you’re busy taking your daughter to the doctor! You need a partner to go all the way, and someone for whom you’re willing to go the distance as well!
Investor support
Believe it or not, most investors are more comfortable funding a founding team than founders who run solo. The comfort stems from the knowledge that shared vision, workload, and responsibilities along with a complementary skillset will help the founding team in creating value.
Yes, having a co-founder looks like it's the gold standard, isn’t it? But that does not mean it is easy, or you should partner up with the next acquaintance you find. More often than not, co-founders are long term associates who you might have worked in the past. Or they come from either a client or a vendor or someone in your network who is as passionate about the idea as you are.
Finding a co-founder is sometimes more difficult than finding a spouse, and more so because you might be working with them, and sharing your life 15 hours a day for the coming 10-15 years!
Do not rush into selecting a co-founder, it should come with curiosity, shared values, and a natural progression to a partnership. Until then, do fly solo. For the repercussions of a bad co-founder can be worse than flying solo!
If we remove the commonplace behavior of human beings, many relationships would look absurd - the same way today's normalcy looks absurd to a caveman. Today, we are comfortable with a waiter asking you to pay your bill after a meal, a doctor listening to your heart, or getting into cars with strange people you met on the internet.
But having a VC investor is not very commonplace for most first-time founders - they feel it is intrusive, many exercises feel academic. Many things that an investor asks you to do - like demanding to be on your board, consent for certain matters, going through financials on a monthly basis! Wow! So much for an investor doing the diligence before getting on board! Why do you want to do the same thing again and again? Do you not trust founders?
As an investor, we know why we do certain things. But sadly, founders never got an explanation for the same.
Most information in the monthly MIS that an investor asks is to not be an adversary, but an ally! Your monthly financials give us a sense of how your narrative is turning into numbers. Your highlights tell us what made you happy and what turned out to be good. Your lowlights tell us what made you unhappy, and what are the things that you will most probably focus on in the coming months. Your initiatives show us how you are working towards your vision. Your hiring decisions tell us how much faith you have in the growth that is to come. Your requests tell us where we as investors need to pull up our socks and get our hands dirty!
But maybe, we can just tell founders "We know there is LOT on your plate as a founder, and we do not expect you to be able to look behind every corner. While your business is a bit different, our experience from other companies can probably help you at different points in time. At the same time, having a maker-checker can also help you pass on the burden to someone else for a while. Would you be okay sharing your monthly financials, highlights & lowlights of the month, your current initiatives, hiring plans, and any specific ask for us on the 10th of every month? We can sit on a call by the 17th of every month and I might have solutions to your requests by that time!"
Simple!
But as investors - it is far easier to say "Show me your damn financials!"
At Malpani Ventures, we take pride in working with founders very closely. We like to receive the monthly MIS by the 10th of every month. And at times we have been able to help founders craft better MIS that has helped showcase their business metrics better. Recently, we discovered that one of our companies forgot to add a revenue line item, and the EBITDA was showing an inflated cash burn! When founders wear multiple hats, it is very very easy to lose track of a row or a column on an excel sheet. To err is human. But we believe this is our value add.
From a founder's perspective, we view a monthly MIS as a way to make the investor do some of the work. Why should investors have all the fun? We love it when founders send an MIS with a list of specific asks from us! Please introduce us to XYZ. Can you help us hire a CMO? Can you please find a good marketing agency we can work with? Our budget is X lacs! All work and no play makes founders overworked. Sharing a monthly MIS is a carrot, in order to make the investors work a bit for their privileges.
But maybe only we think like this!
Almost all founders are looking for that elusive investor to work with. The investor that believes in the company's vision, provides unequivocal support to the founders, can tolerate risk and pivots, can help with strategy an execution, takes initiative, and is happy to stay out of the limelight! Superstars come in all shapes and sizes, irrespective of the fund-size or the cheque-size!
After evaluating over a hundred exciting companies a year, and interacting with intelligent and determined founders, we understand from their perspective the top 3 things superstar investors do that separates them from the rest:
Superstar investors do not believe that they must seal the deal before they can offer their inputs. A founder said, "We once had an investor who tantalized our team with the promise of varied ideas they looked forward to exploring once the round is over, but offered no preview." The founders went ahead with the investment, only to realize no ideas that they hadn’t already considered. "It was super naive of us!" the founder sighed.
Strongest investors often realize that even their best ideas are meaningless without execution. And hence, they do not fear "giving away the milk" to a potential founder. Someone who pulls out a notebook and starts jotting down ideas, chalking a plan, or brainstorming a design during the evaluation stage telegraphs a mindset of investment in their work.
Superstar investors understand that facilitating mutually beneficial relationships will strengthen their own reach. In contrast, investors who are cagey or unsure about connecting with other people almost always tend to see success as a zero-sum game: their win will mean my loss! "This always prevents hoarders from reaching superstar status" another founder quipped.
"We were gearing up for our seed round, and meeting prospective investors. An investor said, if we agree to their terms, they would open the round within their network which could help us close the round quickly. We had commitments for half the round, so it was not like we were starving for capital, but many cash-poor startups that really need capital might fall for such behavior! We didn't end up taking their money because they did not have similar companies in their portfolio, and they never made the introductions. But it left a sour taste. They left opportunities open for other investors in their network for whom our company could have been a better fit."
Superstar investors look at the company vision, and the founding team to gauge their interest. Only after vetting these qualitative details, do they dive into numbers. "We like investors checking our round-size and valuation-range beforehand because everyone prefers their ranges. A series A round would not fit an angel, we understand that. But when an investor starts drilling down on valuation before even understanding our business model right in the first meeting, we quickly understand their motivations."
A superstar investor is your teammate, not someone you perform a transaction with! You enter into transactions with vendors or consultants, not with your home team!
Another founder said, "In our first meeting, an investor expertly depicted the competitive landscape, and started discussing strategy. They enquired about our plan for scaling up the supply chain and how we envisioned unit economics to be at scale. From there, they mapped out key variables to track, spelled out how to measure them effectively, and also provided inputs on successes and failures surrounding certain strategies from their experience. In a 45-minute meeting, they also helped enumerate ways to enter revenue-sharing agreements and turn certain costs into variable payments which greatly helped our bootstrapped startup! The investor knew what value they can add, and did not hold back their knowledge. They showed up, helped us without any quid pro quo, and gave us a preview of what was to come in the long run. We were SOLD!" The founders agreed to a lower pre-money valuation with the investor because they KNEW the value the investor could add, would trump a hundred expensive consultants working on sweat equity.
Any entrepreneur that is not in touch with customers - is out of touch with reality. Thinking like a customer enables entrepreneurs to harness the power of thinking differently! Quite literally putting themselves in the customers' shoes!
As an entrepreneur, you also need to think like a customer - and not a manager, sales executive, or anyone else from the company's perspective. For sometimes, the perspective should be solely focused on the customer.
David Quarmby of Sainsbury's used to make it a point to regularly visit stores and talk to at least three customers with full trolleys! The former Joint Managing Director of the supermarket giant wanted to understand the views of serious shoppers with serious views!
Michael Wemms of Tesco used to become a customer as frequently as possible! The former Director of Retail used to frequently use car parks, filling up petrol and using credit cards - to understand what it takes to be a Tesco customer!
As a leader, it is essential for you to put yourself in other people's shoes - whether they are employees, vendors, customers or any other stakeholder! You can understand the business with a great amount of depth if you do this. The key is to not take this as an academic exercise - for it will defy the very purpose.
Thinking like a customer can enable your business to identify the different phases, emotions and processes that a customer goes through will transacting with you. Once you understand how the customer thinks, you will be able to identify areas of improvement, and reach out to them with a better offering. Any organization that is proactively able to do this can create customer delight.
This responsibility starts at the top. The mindset of the leader creates the culture of the organization! And culture eats strategy for breakfast, lunch & dinner!
In order to talk to customers in a better way, check out our perspective on how to conduct productive user interviews.
Think about a world where content creators do not have to worry about their content being downloaded, copied, and shared freely. Content creators work hard to create their own content and earn a decent ROI on it. A content creator is not only a YouTube star, or an Indie artist, but also an educational institution, a yoga or fitness chain, or an OTT platform. All of these persons or organizations create content with the single goal of making decent revenues out of it. The content is their intellectual property. And online piracy violates their intellectual property rights.
Digital video piracy results in between $29 billion to $71 billion of lost revenues annually in the US. On top of that, the economy loses anywhere between 230,000 to 560,000 jobs per year. More than 125 billion views of American-produced TV episodes are pirated digitally every year with ~80% of piracy happening via streaming. Read more here.
While most college kids would thrive on pirated movies and TV shows and take pride in the amount of money saved by watching movies for free, IIT Delhi students Siddhant Jain and Vibhav Sinha made it their mission to reduce, if not eliminate video piracy.
The founders Siddhant and Vibhav met while studying engineering in IIT Delhi in 2015. They experienced the joys (for the students), and despair (for the content creators), and embarked on a journey to create a tool that would take online piracy head-on. And VdoCipher was born.
Having approached top e-learning companies in India like CAClubIndia with a prototype, they got a first-hand account of video piracy being experienced by these behemoths. Almost every company was looking for a better solution. Once their hypothesis got validated, they started building out the product, feature-by-feature, and launched VdoCipher in 2015. By the time they graduated, they already 6 customers paying them for their video encryption and digital rights management (DRM) tool.
Malpani Ventures has had the privilege of investing in and working with the founders since early 2016 when VdoCipher raised an angel round from investors like Solidarity, 91Springboard, and others.
VdoCipher offers a bunch of security features like Hollywood-standard DRM encryption used by the likes of Netflix, screen-blocking, viewer-specific watermarking, optimized coding, and licensing technology for videos that can offer high-quality viewer experience even in low internet connection regions beyond Tier 2 & 3 towns.
Put simply, no internet-based downloader can be used to play, stream, or download videos if the company uses Vdocipher tools. The company uses the same underlying encryption tools used by bigwigs like Netflix, and Hotstar. It is also a direct Google partner for major encryption technology called Google Widevine DRM.
The features that the company has developed ensures that videos can neither be downloaded nor shared illegally from a video platform. A core advantage of using VdoCipher is that an easy to use package combined with cloud hosting helps not only big organizations use the product seamlessly, but also allows a small institution or a single person running a website a user-friendly option to protect their intellectual property.
VdoCipher can be used on websites as well as apps. CDN server hosting, customer video player, analytics, dashboard, APIs are all part of their complete package.
For the uninitiated, VdoCipher also shows how much revenue can a company potentially lose because of online piracy.
Currently, VdoCipher mainly targets education and media space. Numerous Indian companies in UPSC, Entrance exams, K-12, Coding tutorials, and others rely on VdoCipher to provide video playback and security solutions. The company also has edtech customers from Europe, Brazil, and the Middle East in varied spaces like science, marketing, finance, and mathematics.
Not only edtech, even companies in online fitness, music, media and communication, regional movie producers find these services useful. Recently, film festivals in Brazil, Ukraine, and Yugoslavia have also used VdoCipher for video security. With every passing day, the importance of protecting intellectual property rights, and the cost-benefits of using DRM encryption is making more and more companies turn to VdoCipher for its services.
With COVID forcing their hand, most educational institutes have become online providers, and are basking in its glory. VdoCipher has seen more than double the sign-ups for new customers, a more than 50% growth in online viewership, and strong growth in customer base that has since crossed more than 1000 institutions. About 60% of this growth has come from outside India which has solidified its value proposition.
Every month, over 3 million hours of content is played via VdoCipher in 30+ countries around the world!
The offering is a sweet deal for customers that can avail of the best-in-class video security at a completely variable cost. The charges depend on bandwidth, which in turn depends on the number of views, and the number of videos watched.
Video hosting solutions like Vimeo or Youtube offer no-or-low security against video piracy. At the same time, there are a few security technologies available that offer exhaustive services, but the pricing makes it out of reach if you aren't a Netflix, Hotstar, or Disney!
VdoCipher is one of the only players that offers a complete video hosting and security solution that works for all kinds of businesses, effectively democratizing the right to protect intellectual property. It brings the best-in-class technology previously only available to companies with deep pockets, and delivers them to even a mom-and-pop coaching class, or an indie movie platform!
What better number than an Annual Revenue Rate of $1.3 million, and a QoQ growth rate of 20-30% to provide credibility for their services?
We believe that every organization, whether big or small, that produces video content, has a fantastic way of protecting their intellectual property using VdoCipher's solutions thereby greatly increasing the probability of success for this young and promising venture!
We are witnessing entrepreneurs being excessively focussed on entry valuation with little consideration for other, softer aspects. In our experience, we have found that the quality of investors and the terms they offer can significantly enhance the probability of success for a startup. We believe that apart from valuations, an entrepreneur should also evaluate terms, gauge the chemistry between themselves and the investor, and verify the things that an investor can bring to the table that isn't cash!
Entry valuations are meaningless if not evaluated with the terms they came with. We have seen term sheets where Angel investors want a guaranteed exit in 5 years with a minimum guaranteed 15% IRR, and the right to sell founders shares (i.e. drag along) if this preposterous exit is not provided to them.
From an entrepreneurs perspective, these are crazy terms to expect. On one hand, investors want the entrepreneur to think big, and have a long term horizon, and on the other hand, they want venture investing to provide them sure-shot returns. Pretty sure, this is High-Risk Venture Financing, and not High Yield Debt Financing with an Equity kicker. Not to forget, 5 years is a short period in a company's lifetime to build a robust, and sustainable business.
So what should entrepreneurs do? If they do not accept the already scanty offer, they are sometimes left with no offer! It is like being caught between a rock and a hard place.
We believe an entrepreneur should take time to dig a bit deeper and do the following:
Understand the kind of rights and clauses does the investor have in their term sheet. Notice the swiftness in which they respond once you request this. Do they happily provide this to you, or do they refuse to share until a later time? These are all indicators of intent and the kind of investor they are.
Request to speak to at least four founders they have funded. Request the proverbial Good, Bad & Ugly. Do this with a special mention on Bad & Ugly, and make it a point to speak to founders where the relationship is not all hunky-dory! Notice if they provide you with the references happily or grudgingly. Or IF they do at all!
During ref checks, stress on understanding the engagement. Does the investor proactively offer inputs and connections? How do they resolve conflicts among themselves? Does the investor think about their stake more than the benefit of the company?
Ask around, even ask the investor themselves - what can you bring to the table that is not cash? Not in a demanding manner, but as a matter of fact - as an entrepreneur, you deserve to know this. The key is not to select the investor that gives the best answer, it is to select someone who is honest and trustworthy. You want to be on the same page regarding the contribution of people that have the privilege of sitting on your cap table.
The fewer investors, the better. If investors come in as a group, please ensure you are dealing with just one nominee. It is very easy to run around like a headless chicken when there are multiple investors seeking your bandwidth in diverse and opposite directions. This is the shortest route to a catastrophe.
Venture capitalists that have been former entrepreneurs will always be the better investor than a finance guy! Not only will you find more empathy from them, but they will also be more humble than a number-crunching excel gymnast that has not been in the trenches before!
This is a personal choice. An individual investor or family office will be far more flexible and have a longer horizon than a VC fund. However, a VC fund "should" ideally be able to offer far more support.
People are investing to get a return. Do expect hard negotiation on entry valuations, and rights. But in all the cold hard numbers and facts, please remember to look for 'heart'. If the investor only desires to earn money from this engagement without the urge to create a long-lasting business, walk away. Entrepreneurship, like marriage, is a long and difficult journey with many ups and downs.
Find someone you also want to wake up to, not just someone you want to go to bed with.
During my interactions with founders, I often receive this question - "How much do you think we should raise right now?". My answer almost always is the same - "Figure out how much do you really need, and raise a bit more than that!
It is only logical that founders think the more they can raise right now, the more resources at their disposal, the longer their runway, and a bit of war-chest to experiment freely. Fundraising is also a difficult, time-consuming, energy-draining task! No wonder founders want to raise as much as possible for two rounds worth! While there is no science or philosophy behind how much capital to raise, I only consider trade-offs:
It is true. The more resources you have at your disposal, the more liberal you become spending them. You will hire the best talent, the best agencies, the best vendors that money can buy! And consequently, you will work hard to incorporate the best features in your product, test it at length, and bring it to market after the longest feedback drive you can afford - after all you have to justify why you did what you did!
Whatever you have raised, you will probably spend it in 18-24 months. A good rule of thumb to follow is to raise 1.5x the amount of money you need to survive, and budget to spend no more than 75% of it. But only if budgets worked that way!
I've seen numerous pitch decks of early-stage companies that arrive at a fair valuation figure via DCF! Excel gymnastics will only work so far. Early-stage valuation is determined by two things - the cash you raise, and the equity you dilute! A general guideline of early-stage investing is that early investors would want anywhere between 10-20% of your equity for the risk to make it worth their while. There is no science behind this.
Most founders want to raise 5 cr for 15%, meaning a ~30 cr pre-money valuation. I understand the temptation to do so. A 30 cr+ valuation also sounds and looks better than a 15 cr valuation! But we believe a lower valuation, and funding ask leaves you in a better position - why?
If you are in the market to raise 2 cr at 10%, for starters it is far easier to raise 2 cr than it is to raise 5 cr. Many people will lead a 2 cr round, or even take it fully - helping you close faster. For a larger round, many investors would sit on the fence waiting for a lead to take charge - precious time wasted. Raise a smaller round, get your numbers higher, your next round will be bigger and better to raise.
So you've raised 5 cr at 30 cr 18 months ago. And now you're running out of cash. Logically, now you will have to raise at least 10-15 cr, at 100 cr! For you to raise at 100 cr, imagine how should your business look like for you to command that valuation. The hurdles just became 2x the size. Imagine jumping a 60-inch hurdle!
Early investors typically want more than 5x their capital, and some super early angels are gunning for 10x. For you grow 10x from 30 cr is much more difficult than to grow 10x from 15 cr valuation.
Another problem with raising too much too soon is that if the numbers are not up to the mark, you have to raise a scrappy bridge at a down valuation. This has two effects - firstly existing investors hate down rounds, and secondly, it is a bad signal to a prospective VC when you raised a lot of money, but could not deliver. For that VC, there is always another deal to evaluate - why would they want to raise someone else's child?
There is no right or wrong answer here, only trade-offs to consider. Many have opted to fall for the fallacy of 'more capital will mean more freedom and longer runways' only to be in the market within 18 months to raise more money.
We understand fundraising does not bring joy. But we also understand that while having more money makes today easy, lower valuation makes tomorrow easier. It is for the founders to figure out what path they want to choose.
Engaging with customers is vital for every entrepreneur. Good practice should be to start interacting with customers from day 0 irrespective of whether your product is live or in beta, or in the idea stage!
Engaging with customers takes practice. However, practice makes perfect. A simple trait we need to learn is to seek wisdom through questions.
It is not just as simple as making the customer/prospect talk, it is getting them to answer questions that open possibilities.
Here is a list of questions that you can ask your customers/ prospects while engaging with them-
a. What is your business? 🏫
This helps you understand which industry you cater to, and what kind of a business model you have. Different industries have different needs, and knowing the end-user will help you address their queries more proactively.
b. How big is your team? And what is your role?👫👫
It helps understand who you are speaking to. Are they the founder? Or a salesperson? Or a tech person? Knowing more about the team also helps you get an idea of how your product/service fits their organization.
c. How did you find out about us?🤔
This helps you develop the best-performing marketing funnel! If they googled you, it helps you work more on SEO. If they came across your blog, you need to invest in better quality content. If they came across a post on Facebook, you need to engage more online.
d. Why problem are you looking to solve? And why is that a problem for you?🧐
This is essential. Here, you are trying to get into the psyche of the person to understand the pain point or need of using your company. There is no correct answer, and sometimes there might be no specific answer. However, this helps you better place the value addition of your product/service.
e. What were you using before? Why are you replacing it? What better solution are you looking for? What is not working for you?😖
You need to understand what you are potentially replacing. Either they are thinking of replacing an existing system with your product, or they were doing it manually. In any case, helps you understand their thought process and helps you pitch your value proposition.
f. What value do you derive from your current solution? And how much do you spend on solving this problem?💵
This is key. This establishes that the customer is currently paying for something- the willingness and ability. You do not have to deal with ‘why would I pay you for this?’. The customer has thought about cost-benefit analysis, and has an idea of their budget before scouting. This helps in highlighting and reducing friction between why should I pay and how much should I pay?
g. What do you like about our product?🎯
This reinforces the value proposition of your product which the customer likes. The customer needs to say on their own, what do they like about you rather than you highlighting it.
h. Why would you want to switch to our product?⚓
Every customer knows there are switching costs associated with migrating. If they still want to switch, there has to be something really compelling for them to bear the costs. This is the point where you can offer a seamless transition that will not disrupt their operations.
i. What are your views on our pricing?🤝
Here, you are trying to understand will the customer swing? Besides, helps you understand their expectations, their willingness or ability to pay, and reservations they have. Continuous feedback loops will enable you to price more dynamically.
Founders need to start talking to customers very early in their business. Preferably from the ideation stage. Additionally, making a habit out of this will not only create a continuous feedback loop, but also get you large sets of data points to analyze and create better products!
Bootstrapping is a term used in business that refers to the process of using only existing resources like personal savings, personal equipment, and other resources to start and grow a company.
Talk to anyone who has started with a shoestring budget, they will be adept at working with a limited bandwidth and resources. Simply put, bootstrapping means the company operations mandate them to grow using highly effective and inexpensive ways towards positive cash flows.
We are firm believers in working with bootstrapped entrepreneurs. Additionally, as a part of our mandate, we prefer working with entrepreneurs who embody the 'frugal' mindset. After all, we want to fund frugal innovation in India. And there lies our love, and respect for bootstrapped entrepreneurs!
Since bootstrapped ventures do not have access to outside capital, they are forced to become hyper-efficient. Founders are forced to develop scrappy instincts and a 'can-do' attitude irrespective of the task or problem in front of them. How?
Bootstrapping is actually also a fantastic way of finding the right people. We understand the allure of working at a well-funded startup - generous salary, ESOPs actually have a value ascribed to them, relative job security, and an assumption of growth. However, one needs madly passionate people to work with, when the 'office' is just a spare bedroom where the CEO and intern share a table, with bring-your-own-devices, and perks mean chai made by the same founder's parent. A bootstrapped founder might not attract the best talent, but will surely work with a bunch of like-minded people who believe in them.
Not having enough cash in the bank creates a strong sense of urgency and efficiency. Bootstrapped companies tend to get their MVP to the market faster, develop product updates quicker, and move towards monetization sooner. This improves the fundamentals of the business leading it towards a sustainability.
At Malpani Ventures, we want to provide capital for businesses that have a fair degree of product-market fit and a minimum base-line revenue that showcases their ability to build a business model. In turn, we support such ventures with unwavering support and provide capital to really scale up from that base. Our capital is strictly for scaling, and not for concept-stage or prototyping.
We have found that the founders of bootstrapped companies have a stronger sense of accountability. Afterall without external capital stakeholders, they become the de-facto judge and executioner. Good, bad, or ugly - they have to make all the decisions themselves. Having said that, we do not want to discount the importance of having experienced investors on board. But the sense of accountability knowing there is nobody else to show you the mirror, makes entrepreneurs wear multiple hats, keep finger on the pulse, and develop a willingness to roll up their sleeves.
Please read our perspective on How to be an accountable entrepreneur?
There is no room for vanity metrics and showboating in a bootstrapped company. Every single metric matters. Founders develop a newfound sense of clarity to go from planning to execution to outcome to (more) cash in bank. After all, that more cash is the difference between a going concern and a bankrupt venture. Not having an external investor ask you about your MIS reports, and cash positions puts the onus completely on the founder to be aware of where they stand in the business. Do they have a sufficient runway? Do they need to start approaching inactive users again? Do they need to reduce their burn? A bootstrapped founder is the CEO, CFO, CMO, CTO, and Board Member all-in-one.
There are so many more lessons to learn from bootstrapped companies. In a way, every company we evaluate, and eventually fund - makes us more aware of efficiency, productivity, and innovation.
We are always on the lookout for exciting companies to work with. If your company fits our investment thesis, please say Hi! to Siddharth on his email.
There is no rationale behind the valuation of any seed, angel, or Series A round companies based on any financial metrics. Put simply, there isn't enough historical evidence of the company's performance, or its business model to justify a 'right' number. At this point in the company's life, the business model itself is unstable or immature to project the terminal value.
It is simple to the point of being illogical. The entrepreneur decides the amount of capital they require to take the company from point A to point B (which is the usually the next stop before raising another round), they arbitrarily decide what is the kind of dilution they will be happy with, and negotiate with the investor to come up to a number that everyone is largely alright with. Fair enough.
But we have had real conversations with quite a few people who are very uncomfortable agreeing to a number upfront.
We are not big fans of convertible notes. This is a fantastic way of prolonging the pain of negotiations to a later date when everyone is on-board, but might not be on the same page.
How?
Say, for example, you raise 1 cr from F&F at a 20% discount to the next round. And you raise your next round at 150 cr valuation - very good for you. But your F&F will be seriously pissed when they find out how much they'll end up owning despite backing you when nobody did.
So now, you raise 1 cr in convertible from an angel with a cap of 25 cr. The 25 cr is just a cap, your floor price is largely undetermined. There is also a possibility of converting the round at 10 cr. Good for them, catastrophic for you!
Alright, a smarter entrepreneur will now say "I will also specify a floor of 15 cr in the above." But if you can come up with a cap and a floor, and you can largely determine a band. Why not just put a number and get it done with?
Many people who are ardent believers of a convertible tend to be super early-stage investors and accelerators. Some of whom have never had the privilege of leading a round. The key reasonings that we get are:
It's faster
It's easier
It's cheaper
Probe a bit further, and you come to the bottom of the reasoning, "It is a good thing because we do not have to negotiate the terms today, we can always do it later! In the future, we will have a better performance to negotiate better terms for ourselves."
What a great way to begin a relationship with the most important stakeholder that fuels your business, by not being aware or aligned with their expectations? Isn't it possible that you might still not agree to a number in the future for when you actually negotiate?
"The best part of a convertible is that I do not need a lead investor."
It is true. But what is also true is that a lead investor will usually set the terms, and bring in co-investors from his network, or by their reputation so you do not have to worry about doing the groundwork yourself. Not having a lead means you will be fighting most of the battles on your own when you actually start negotiating the terms.
The convertibles that we prefer have four wheels and a roaring engine!
When you put money in tranches.
We recently agreed to terms with an entrepreneur wherein we put in half the money at a certain valuation and offered a good upside kicker to the entrepreneur for the rest of cash at a higher valuation upon meeting certain pre-determined milestones.
And even then, the agreement has to be with utmost clarity, pre-determined milestones, and the measurement of success, pre-determined valuation in the future, and pre-determined upside. Thus, leaving no chance for ambiguity in the future.
There has to be a meeting of the minds before a relationship starts. We can't half-ass relationships, and prolong important issues. After all, if you are looking to marry someone, you also need to know whether you both want kids or not. The same goes for a funder-founder relationship.
At Malpani Ventures, we exclusively focus on and invest in startups that we believe can create long term value for all its stakeholders. We look forward to discovering, engaging, and backing entrepreneurs who want to build sustainable businesses.
We love a large market. We want to back entrepreneurs who have a right to win in their area of focus. And we are firm believers in doing simple things consistently, at scale. The reason why we prefer large addressable markets is because we want the entrepreneur to be able to operate at 10x or even 100x the scale they were operating in before the capital infusion. Scale brings efficiencies, and economies in operation. Without having a sufficiently large market, it is difficult to attain scale. We do not have any particular number in mind as to how large the market should be in rupee terms, but we understand that over a period of time, looking at your success, there will be insurgents looking to imitate or disrupt, and incumbents looking to learn from your successes and failures even. And at that point in time, for your position to be dominant, the need for a large market becomes ever so important.
We are strong believers in having a sustainable competitive advantage, and a right to win in your area of focus. We want to back entrepreneurs who have established their business model on the back of a unique technology, or distribution, or components in their offering that can solidify their market proposition. We understand the capital constraints faced by young ventures and know that an offering without a strong value proposition is indefensible in the real world. Capital infusion is not the answer to creating a competitive advantage. We want entrepreneurs to win the market based on their offering first, and then use capital infusion as a medium to scale their business.
Traction by way of a lot of small customers, or a few large customers provides strong credibility to entrepreneurs. Having traction not only reduces the chance of a product-market misfit, but also reduces the friction for adoption for prospective customers. While we may have considered investing in the concept, or pre-revenue stage in the past, today we only invest in revenue-generating companies. While we do not know what is the right amount of traction until we dive a bit deeper into a specific opportunity, we believe a threshold of at least Rs 4 to 5 lacs of monthly revenues is a benchmark for us considering an incoming opportunity.
We want to fund frugal innovation in India. Frugal does not mean cheap, or miserly. Frugal means a mindset to achieve more in less, be super productive in the way you operate your business. Certainly, there are business models that require massive amounts of capital upfront to develop their product first (like defence, deeptech). We are cognizant of the fact that these are the kind of businesses for which we would not be the right kind of investors. Similarly, any business model that relies very heavily on spamming the customers with incessant ads on social media and spent a huge amount of money on customer acquisition will also not be models where we are the right investors for because we do not believe this is a sustainable manner of acquiring customers in the long run. We will be wise to pass such opportunities for investors who can be on the same page with entrepreneurs building their ventures.
We prefer at least two co-founders that have prior startup, or domain experience, and who can complement each other with a diverse skill-set. Having seen the world of startups closely for a long time, combined with our own experience of running our own ventures, we understand that entrepreneurship can sometimes be a lonely affair. With every passing day, the number of responsibilities shouldered by entrepreneurs keep increasing. Entrepreneurs are responsible for their ventures, employees, customers, vendors, their own families, and finally the minority investors. During such times, having the right person in the marriage of running your enterprise, an 'us against the world' helps go a long way. Having more than one founder also helps during the time of raising capital, where one founder focuses on the business, and the other focuses on investor relations. If you believe you can do it all by yourself, imagine what you can do with two such people!
Finally, our sweet spot is the angel stage. We like to come in early and work closely with entrepreneurs who are building their ventures. Our ticket size is anywhere between Rs 50 lacs to 150 lacs depending on the age, maturity of business model, and our comfort level with the entrepreneurs. At the same time, we also provide the entrepreneur with an unwavering support in their quest to grow their venture, and at times also participate in bridge and follow on rounds to show solidarity. Because we like to come in early and bet on yet unproven business models untested at scale, we prefer to have sizeable skin in the game for it to make it worth our while. While we do not like to negotiate with entrepreneurs on the valuation of their ventures and want them to propose the valuation they are comfortable with, we prefer pre-money valuations between Rs 5 cr to 15 cr above which it has to be either an extremely superior business model or very strong credibility of the entrepreneur for us to consider our participation. And until it is time for the startups to learn from professional venture capitalists, we will be happy to handhold them in all walks of life.
We are always looking for exciting new startups to invest in, and bright entrepreneurs to learn from. If your startup fits our investment thesis as mentioned above, we would love to hear from you.
At Malpani Ventures, our investment philosophy is simple - invest in something you really believe in, and do not be afraid to let go of certain opportunities.
Why is our due diligence process exhaustive?
We sometimes engage with prospective founders and their young ventures for up to a year before we decide to invest. When the venture matures enough to meet our thesis, we begin a formal due diligence process that lasts anywhere between four to six weeks.
During the process, we interact with founders, the key employees, key clients, other investors, industry experts, and sometimes even the founders' college professors (yes!). The motivation to do so is very simple - we want to understand the founder's journey and their life before and in the duration of building their venture. We want to understand their experiences, learnings, failures, and successes.
We evaluate the business model understanding it from both a 30,000 ft broad level view, and also dig deep into the specifics of what, how, and why via unit economics and product demos. We enter the due diligence process with a positive and open mind to fund the venture, and view every single part in the process as a stepping stone. Our final decision to issue the term sheet is the resultant outcome of a satisfactory due diligence.
What is the actual motive of our due diligence process?
But checking things off the list is just one side of the coin. The other side - something we believe is our value add to the entrepreneurs irrespective of our investment decision - is to bring more clarity to their business, and thoughts of the entrepreneur.
By engaging over an email thread that is sometimes longer than fifty replies, we get to the bottom of the business, the future plans, the mindset of the entrepreneurs, and find any opportunities for introductions to our network. We stress on entrepreneurs explaining the business to us in very simple terms, share a one-pager, their growth plans, and sit on a call to discuss the narrative behind the numbers.
This not only helps us understand the founder better, but also helps the founders understand where they stand themselves. There has been a time when an entrepreneur, during our diligence process, realized that he was not ready to scale the venture yet, and requested some time to build the foundation the right way. He kept in touch, shared progress, and requested to re-open the diligence a year later.
It is not an academic exercise!
We believe what is right for the company, should be right for the promoters, and also the investors. And every piece of communication is with this same intention. We do not engage in a lengthy due diligence process just for the sake of it. We want the process to add value to the venture, irrespective of our decision to invest.
The entrepreneurs who believe in this process are the ones we love to work with. And we consciously understand that we would not be the right investors for the ones who feel it is a burden or an academic exercise.
Our startup has seen considerable growth both in topline and profits. Is this the right time to raise funds and really scale up?
Logically, scaling up is the next step for most founders and startups. You want to capitalize on your success and leapfrog on its back. But is it that straightforward?
The decision to expand your startup and scale-up should always be made after thorough analysis by making sure you have all the knowledge and information you need to make the right directional choices. There are numerous factors to consider in the decision-making process.
Tailwinds vs Trends
Is your business growing on the back of strong long term tailwinds, or on the basis of a short term trend? This is the most vital piece of information to consider and analyze before taking the leap. There are numerous financial aspects involved in this piece, and some that can possibly have long term negative effects if the motive behind scaling up is not thought through. You can make large investments to scale up only to find that your growth was on the back of a trend that suddenly vanished! This can be catastrophic for your business. At Malpani Ventures, we structure our due diligence on figuring out whether the space you are operating in is a trend or has long term tailwinds.
Is scaling advantageous?
Logically speaking scaling should be advantageous. Everyone understands the economies of scale. But will this play out in your business? Is your business large enough for you to really grow? Or is your business in a niche, and you're expanding in an adjacency? If the space is large enough, the incremental cost to grow your business should be lower, and you will enjoy higher profits. However, if your growth is coming from an adjacency which is not your core- then think twice! It will probably cost more than you think to grow in the adjacency, and can have completely different unit economics than your core business. Scale only if you are really sure about improving your unit economics in the long run. Or else, wait for an opportune moment.
Is your tech stack or distribution capable enough?
We all know that the skills and capabilities required to grow from zero-to-one are very different from those required to scale from one-to-ten! While your current system capabilities might be just enough for your current business operations, at scale the scenario completely changes. It is very easy for a minor error or oversight to snowball in a large scale process. For you to really scale up, start planning your capabilities early on. This not only ensures there aren't any glitches when you expand, but also reduce the possibilities of downtime while working on the same glitches.
What about your people?
A truly scalable business should ideally not require hundreds of people. However, every business has a certain level of staffing requirements proportional to its size. You will need to plan your people requirements in advance, and in detail. At the same time, you will also need to keep in mind the productivity per employee, or revenue per employee benchmarks and plan your growth accordingly.
Scaling up is a difficult decision. You need to base your decision to scale up on the possibility of improving your efficiencies, and productivity with minimal downtime. Scaling up just does not mean growing revenues. It means growing revenues at lower incremental costs. Sometimes not scaling up is a better thing to do than scaling up and being in a weak position.
If you are a business with product-market fit, have largely developed your product, with all plans in place, and are looking for growth capital, please check our thesis to find out if we are the right investors for you. If you think Malpani Ventures can partner with you in your journey to scale your business, please reach out to us!