MONTH : FEBRUARY 2023

Evolving as an early stage investor - lessons learned over the past few years

I have been an angel for quite a few years now, and every year I try to look back and reflect over what I've learned during the journey, and how I've evolved.

 

Initially, the idea of being an angel was very romantic. The hope was that you could sign a cheque based on a dream which an entrepreneur sold to you on the back of a napkin, and you would then be able to discover the next Google. While this is a tempting fantasy, I've realized that it's also exceptionally naïve. Just getting cool ideas is not enough - implementing them is much harder. This is why I'm no longer so fussed about the idea itself. While I admire and respect creativity and innovation, I now realise that they are neither necessary nor sufficient for a start-up's success. Moonshot ideas are fun to read about, but extremely hard to pull off.

 

I've realized that it's the entrepreneur who makes or breaks the company, and that if we can identify the right founders, our chances of succeeding will increase enormously.

 

Though we've become better at doing this, it's still a time consuming, complicated exercise. In the past, we took pride in being able to sign a cheque quickly. Today, our mantra is we will say no quickly if the fit is not right, but we will take our time about saying yes. We need to make sure that we can trust the entrepreneur before handing over the money.

 

We've also realized that it's important to double our bets when we think we have a winner. While we will not pull the plugs on the losers, we will not continue investing in them.

 

Finally, we think the best way of reducing our risks is to make sure that we invest in a company which has demonstrated traction. We are looking for founders who have paying customers, which means their product is mature. We are longer willing to fund just the idea - we want to fund the scaling up.

 

Does this mean we are boring and conservative because we are not willing to back an ambitious founder with a great idea? Yes, perhaps this is true - we cannot be the right funder for every founder who comes to is. After all, this is personal money I am investing, and I don't have the deep pockets which a VC has. The benefit is that our model allows us to be nimble and agile, and I can afford to be idiosyncratic in placing my bets, but it also means I have limits as to how much support I can provide. I think of our role as nurturing the start-up until they are mature enough to hand off to a VC, who can then hold their hand from then on.

 

What about the possibility of striking it rich by backing the right founder? I think this is a fantasy, and while I am not averse to hitting the jackpot, I am realistic enough to accept that the odds of my doing so are very slim. Now, this doesn't mean that I am willing to throw my money away - it just means I am fine with being patient, and don't think of angel investing as a "get rich quick" scheme.

 

The good news is that the Indian ecosystem is still growing, which means there is room for many players along the way to success, as the start-up grows. Each one needs to identify what works best for them, so they don't burn their fingers because they had unrealistic expectations.

Importance of doing anti reference checks

We all know that one of the most difficult things to do is to judge the honesty and integrity of a start-up founder. If you choose to back someone who's either a crook or who's incompetent, you're going to end up in deep trouble. The problem is that you're not going to realize this until it's too late, because everyone wears rose coloured glasses during the 6-month honeymoon period after funding has been raised.

 

This is one of the reasons why investors will perform so many reference checks as part of their due diligence process, in order to judge which founder to back. You don't want to be taken in by a glib, smooth talking imposter.

 

Typically, most reference checks are done as a standard “check the box “exercise. The entrepreneur provides a list of people who will vouch for him, who are either professors, or his earlier bosses. Because these are people he has selected, usually they will have good things to say about the founder. This is why the reference check usually just becomes a perfunctory task which is delegated to a junior analyst, and doesn't provide much useful information.

 

This is why it's so important to do what I call anti-reference checks. You need to ask him for names of people who will not say complimentary things about him. This could be a boss whom he used to work for whom he didn't get along well with; or a senior who fired him from his job; or a customer whom he failed to sell to. These are the people you should actually be talking to, because they are much more likely to give you the unvarnished truth.

 

One tip: If anyone has anything negative to say about him, please give this a disproportionate amount of importance. Typically, most people are very reluctant to say anything unflattering about anyone else, and their comments are quite likely to be very guarded, because they want to be politically correct. You can always ask the founder to provide an explanation for any criticism you unearth.

 

Unless you triangulate, you're not going to be able to get a 360 degree view, and you may get carried away by some of the positive things which the people he selected have to say about him. They are likely to be biased, which is why they fail to provide any useful information about his weaknesses.

 

This is the strength of LinkedIn. It allows you to check his credentials with independent colleagues and seniors in his previous jobs, even if he doesn't volunteer this information. Digital trails make doing reference checks much easier!

Why startup founders lurch from crisis to crisis?

I'm an angel investor in quite a few start-ups, and often I feel like I am on an emotional roller coaster ride. When the founder presents an update at the Board meeting, you get the feeling that everything seems to be going extremely well. At the end of the review, everyone is on a high, and you pat yourself on the back because you were smart enough to invest in such a clever founder.

 

However, after a month, he calls to let you know that he's running out of cash, and desperately needs another infusion of funds. This is why angels feel so lost and confused.

 

Part of the problem is that founders are very interested in moonshot ideas - these are far more sexy and exciting! They want to hit fours and sixes, because they want to win as quickly as possible - getting rich in a hurry is much more fun that getting rich slowly. They feel they are competing with the other wildly successful founders who are featured in the press all the time, because they are raking in the millions. They too want to be seen as being winners by the rest of the world, and they don't want to keep on waiting and waiting until their company matures. They are young, and easy to understand why they're in such a hurry.

 

Unfortunately, that's not the way successful businesses are run. If you want to win a cricket match, what you really need to do is hit lots of singles safely and steadily, rather than take outsize risks and get bowled out while trying to hit a six. While the crowd will cheer for the flamboyant batsman who hits a lot of boundaries, this can be a risky way to play a match. Unfortunately, you only understand this after many years of experience, as you grow a little bit older and more mature. This difference in perception is one of the reasons for the conflict between founders and funders.

 

The best way to be right is not to be wrong, and if you minimize your risk of failure by not trying to heroically swing for the fences every time you come to bat, you'll automatically increase your chances of winning.

 

Unfortunately, this is not a very sexy way of doing things. It takes time to achieve results, and most founders are young men in a hurry who want to get to their goal quickly. There's no glamour in the daily grind, and it can be very tempting to try to pull off a moon-shot. The problem is that a lot of these are doomed to fail - after all, there's a reason they are called moon-shots!

 

The media exacerbates the problem by highlighting the outliers - the guys who achieved success very quickly by making millions within a few years - after all, these stories attract many more readers! What's the point in writing about the typical founder who achieved overnight success after slogging for 15 years?

 

We don't want to pour water on our founder's dreams and it's okay to try hit sixes, but it's sensible to do this only when you have a huge lead. In real life, when you have enough money in your bank account, you can afford to take lots more risks, so that even if they fail, your company doesn't go to pieces. However, it takes time to build up enough of a buffer, and you need patience to get to that stage.

 

The problem is that a lot of founders feel that investors are old fashioned and stodgy - that they're trying to clip their wings and drag them down. They feel they are acting as hurdles in their path to success, and this creates friction. The reality is that there is no shortcut to winning - and while hard work is not sufficient to succeed, it is necessary for most of us. Hope and luck are not useful strategies.

 

This is why investors will not get carried away by your brilliant ideas and rosy projections when you pitch to them. They understand that the key to success is your ability to get your hands dirty on a daily basis, and cope with the endless grind of running a start-up.

 

It's fine to build castles in the air, but you also need to build foundations under them. While being a tortoise maybe boring and old fashioned, there's a good reason why this fable has been taught to many generations!

Is entrepreneurship teachable?

Entrepreneurship has become fashionable and the start-up space has become hot. It you're young and ambitious, you no longer just want to work for a large company - you would rather become the founder and CEO of your own company.

 

All this is fine, but the question is, "Can you actually teach entrepreneurship? Is it possible to create entrepreneurs? Are entrepreneurs born, or can they be made?"

 

The start-up space has become the newest bandwagon, and everyone wants to get on. This is why you see lots of incubators and accelerators, which promise to teach young founders how to become successful entrepreneurs. Even the IIMs have got into the game, and have started offering courses on learning entrepreneurship. These are also available online, from leading universities such as Stanford.

 

This brings us back to the question, "Is entrepreneurship something which can be taught?"

 

I think it's a bit like leadership. It's one of those intangible qualities, where everyone wants to create leaders, and everyone wants to be a leader themselves, but is it possible to actually teach someone how to become a leader?

 

It's not that people haven't tried! There must be at least a thousand books on how to become a leader, lots of whom have been written by icons who've been leaders themselves. However, I don't really think reading books, attending MBA courses or attending workshops will helps founders to succeed.

 

The only way to learn is by experiencing the daily grind of a start-up, so you understand the ups and downs you will have to cope with daily. It all looks very rosy from the outside, but the reality is far grimmer. Yes, some people who graduate from accelerator programs will become successful entrepreneurs, but often this could be in spite of the training - not because of it.

 

The best training is still the 'School of Hard Knocks' - and if you want to be a successful entrepreneur, plan to work for a start-up, and then start up you own once you are confident you will be able to survive the emotional roller coaster ride.

 

I believe entrepreneurship cannot be taught, but it can be learned - and when the student is ready, the teacher will appear!

Dream big or play safe - the start-up's dilemma?

Start-up founders are sometimes forced to lead a schizophrenic existence. They have big dreams, and the reason they want to create a start-up is because they want to change the world. They've been told they need to think big, because the magic mantra today is disruption. Their icons are larger than life figures like Steve Jobs and Elon Musk, who succeeded by breaking conventions because they had the courage to challenge the status quo.

 

Now the only way you can disrupt much larger companies is by battling them on their home turf. This requires a lot of guts, and is often doomed to fail, because the odds are always stacked against David, no matter how brave he may be. While start-up founders want to create a big splash by shaking up the entire system, the reality is that because they have limited funds, a lot of their dreams never come to fruition.  They will usually run out of money before tasting success, and this is a constant source of tension, both for the founders as well as the investors.

 

On one hand, you have one set of investors who tell the founder, "We will give you as much money as you like - we want you to create something completely new. We need you to think out of the box, so that you can dream big and be innovative. We want you to experiment, because this is the only way to succeed - by daring to be different."

 

On the other hand, you have investors who tell founders to think about profitability and unit    economics. They preach the importance of being frugal, so they can conserve their funds. They advice them to run low-cost experiments and fail fast, so they can survive and live to continue the unequal battle.

 

Both the options make sense, which is why the founder faces a dilemma. Though he has lots of hopes and dreams, he's never sure whether he should go all in and take a big bet. If that fails, then he is back to square one, and everyone will blame him for running the company into the ground. On the other hand, if he doesn't have the courage to take a big bet, then how can he call himself a daring entrepreneur?

 

As usual, there are never any right answers - they depend upon the circumstances the founder finds himself in, and this is usually out of his control. All one can do is empathize with his quandary, and help him to find the path which is correct for him.

Budgeting for your funding round

 

We often speak to founders raising their first round of capital: $200k to $500k (VC jargon: pre-seed) at Malpani Ventures. In most cases, founders have an MVP and early customers in place. As a general rule, 5 to 10 beta customers in B2B are usually good enough to raise your first round.

With the plethora of information handily available, founders, today, are much more savvy in the way they go about their fundraising process. The quality of pitch decks has generally improved and founders are better equipped with answers to questions VCs ask

Some areas, in my experience, where founders tend to be off, very often are:

  • Founders assume the next seed round (~$1 to 2Mn) will be easily raised in the next 9 to 12 months
  • Over-estimate growth: In my experience, founders take about 3 months to really figure out capital allocation to target the right sources of growth
  • Underestimate their burn rate over the medium term: S&M ROAS looks very different at different scales especially if you don’t have a semblance of PMF or at least the right channel fit

A potentially big TAM and a great founding team are no longer enough to raise a $1Mn+ round - You would not get funded at the pre-seed if these weren’t present already!

The revised bar for a seed round generally includes the following: Growth + Quality of revenue, contribution margin positive UE (or at least a credible path to it) plus repeat/ recurring customers. These are difficult to achieve for any young startup.

A rule of thumb we generally use while funding is this: Startups must raise for HIGHER of the following

  • Gross burn (all expenses assuming no revenue) for 12 months 
  • Net burn (all expenses less reasonable revenue) for 24 months

This ensures a reasonable runway for founders to focus on getting close to PMF without the pressure of getting all things right in the first instance, or else risk running out of cash!

 

When your planned start-up is doing badly

The life of a start-up is full of uncertainty. There are often going to be rough patches, when nothing seems to be going well. In order to sail through the turbulence, the founder realises he needs to pivot, but is not sure what to do next. He may have lost his confidence because his earlier attempts have failed, and he is full of self-doubt. 

 

At these times, a supporting investor, who has the benefit of having a 30,000 foot overview, can be very helpful.

 

However, sometimes you may disagree with the path which the founder wants to follow. The problem is that hard to know how to disagree tactfully. You don't want to upset him, because it is his company after all. He is in the trenches daily, getting his hands dirty, while you apply your mind to his problems infrequently.

 

However, it's important to speak up, because you do have a fiduciary responsibility to do so. I've realized that mature founders are quite happy to listen to feedback. They want you to question their assumptions because it helps them to sharpen their thinking. If they can answer your objections, not only does your confidence in them increase, their confidence in their own business model increases as well.

 

As an investor, you don't want to take over control of the company - you have too many other things to do in your life! You just want to be sure that the entrepreneur is being thoughtful; has considered all possible alternative options; and has a good reason for choosing the one he has selected. We all know that the future is uncertain, and whether his choice will turn out to be any better than yours is hard to predict.

 

We can all be wise after the event, but every start-up is an experiment where N = 1. We can't forecast what will happen, because they are complex adaptive systems, characterised by volatility, uncertainty and ambiguity.

 

It's important to learn to be tactful when you disagree with the founder's choice. You need to do it one on one, in a face to face meeting, rather than in front of other people, or at a board meeting. You need to find the right balance between being completely hands-off and allowing him to do what he likes (which is fine if things are going well), or being much more hands-on when he's running into trouble.

 

Of course, you can't force him to do what you think is right. That's a decision which he has to make for himself. However, if he's responsive and responsible, even if things don't go well after the pivot, you may still be happy to offer him a lifeline to help him recover from a near- death experience, which may leave him wiser, more resilient, and therefore more likely to succeed.

 

Using dashboards to manage your start-up

Every start-up is an experiment and the reality is that most of them fail. This is because they're complex systems with multiple moving parts, all of which have to work properly to make sure that the company continues to grow. This can be extremely challenging for the founder, who has to juggle multiple balls, and make sure he doesn't drop any of them. This is daunting task, because you need to learn on the job - which is why it's very hard to know whether you're on the right track or not. Are you chasing the right customers? Is your product delighting them? Is your competition catching up with you? Will you be able to find investors to fund your next round? It can be extremely hard to track all this stuff, especially when there is so much uncertainty, and it's easy for things to fall between the cracks.

 

Because there are no pat formulas you may find yourself disagreeing with your investors - for example, if you should go international, or whether you should stay in India. The only way to find the right answers is to run low-cost experiments, and track the results, so that you become progressively smarter. This is why tracking the key metrics is vital - so you can quickly see if you are on the right track or not.

 

Most founders use Excel to monitor their company's vital signs, but a dashboard can be much more helpful.

 

The secret is to follow open management principles, and keep an online dashboard which is accessible to everyone. This way, all employees can see how the company is doing; how it's progressing; what their personal contribution is; and what they need to do to make sure that the company continues to grow. It's far better to put it all out in the open, even when things aren't going well. You may be worried that this will affect morale, and that your staff will quit, but the truth is that most of them can sense when the company is doing badly, and they are already worrying anyway. It's far better to acknowledge this, rather than try to hide the truth from them, because this just makes matters worse. Being open about it will help to dispel rumours and gossip; and will reassure them that you have a plan of action to deal with the crisis. Even better, it will bring them all together and help them to pitch in, so that you can tackle the problem as a united team - there is strength in numbers, and employees should be empowered to provide solutions!

 

The dashboard should be simple, and should focus only on a few key metrics. You need to define what these are, because they will vary from company to company. You will also need to modify them as your company evolves. The beauty is that a dashboard creates a sense of ownership amongst all your staff.

 

As a CEO, your dashboard allows you to check how you've progressed; and whether you're headed in the right direction or not. You can set up access privileges, so if there's some information which you think is confidential (for example salaries), then you don't need to put that up on the publicly accessible dashboard.

 

Even better, a dashboard allows you to share information with your investors proactively, without your having to do any additional work. They will be happy to provide support and insights when they can see you are treating them as partners in your journey. 

 

A dashboard can be a very useful tool, and you should explore the available options. The standard is www.geckoboard.com, and there are many inexpensive alternatives as well, such as http://finalboard.com/. You can use also the open source JSlate code at https://github.com/rasmusbergpalm/jslate to create your own free customised dashboard as well

 

As a start-up founder eloquently said, “Without a dashboard, running a start-up is like flying a plane through fog with no instruments.” Life as a founder is hard enough as it is - why handicap yourself even further?

The secret sauce to delighting your investors

Raising funds is a major milestone in the history of every start-up, and you should congratulate yourself for doing this successfully - after all, only a very small percentage of founders manage to get to this stage. After you've patted yourself on your back, accepted the congratulations which pour in, and issued the press releases to let the world know that you are on your path to building a world-class company, you then need to then get down to brass tacks.

 

The problem is that after founders get their first cheque, they're so focused on fine-tuning their product and marketing it, that they forget that they also need to take care of their investors.

 

Here's a simple solution - make sure you send a weekly email to all your investors on a regular basis, updating them as to what's happening to the company.

 

You can use a basic template which covers all the major areas - product updates; hires and fires; revenue and cash burn; your plans for the next months; and what help you need from your investors. Lots of the headings will be blank, and that's fine too.

 

Talk about both the highlights and lowlights, and don't gloss over problems. This is stuff which you live and breathe on a daily basis, so you won't need much time to do this - all you require is discipline! Not sure what to put in and what to leave out? The rule is simple - more is better, so over communicate, rather than censor. It won't take your investors much time to read through your email, and they can always skip the stuff they aren't interested in.

 

You could start off by saying, "I'm really excited to have all of you as our partners on this journey and I'd like to share information with you on a regular basis. Could you please give me permission to do so?" And then you should send them the email every Sunday. Providing regular updates is part of your share holder agreement (SHA) in any case, but doing more than is required is a great way of standing out!

 

Are you scared that this will consume a lot of your time? It really shouldn't. It's just a question of compiling the information you already have on your fingertips on a regular basis. This is the Open Management concept, where the founder has a dashboard which he uses to track the pulse of his business and shares with all his employees - you just need to share this with your investors. The weekly report only contains the key operating numbers - the tactics, insights and strategy will be reserved for the monthly MIS.

 

Will your investors get worried and lose faith in you when you describe the fires you are having to put out? No - we know you will run into problems, and would like to know how you plan to deal with them, before they become unmanageable. Will they want to start micromanaging you? Again, this is unlikely - we have enough on our plates already, and are quite happy to give you the freedom to run your company, if you can show us that you are doing a good job!

 

This kind of regular contact is good for your investors because it will help them to trust you. It will show them that you are open and transparent, and are behaving like a real partner. This exercise demonstrates that you don't just want their money - that you also value their expertise and feedback. The benefit is that the next time you do run into trouble (and I promise you that you will!), they'll be much more inclined to help you as compared to the other founders that they have given money to, because you're going to stand out.

 

You should do this not just for the sake of the investors, but for yourself as well. The right time to fill your bucket with goodwill is when you don't need to - when things are going well. Sharing updates regularly is a sign of respect, and by keeping them in the loop, it's much easier for you to ask for additional assistance when you need this. You'll be surprised how helpful investors can be if you adopt this approach, rather than run to them for help only when you run into problems.

 

This is also a great way of stepping back on a regular basis, so you get an overview of how your company's doing - you will get a 30000 foot perspective as to how you are evolving. It'll help you to stay on track and remain grounded, so that you can no longer fool yourself about your failure to deliver what you originally promised (and I can promise you that there will be hiccups along the way!).

 

And on a personal note, it will be fun to share your journal with your grandchildren when you finally become a millionaire.

Improving your pitch recall

Most founders get only one chance to raise money from a particular investor, which is why the pitch they make is so vitally important. The trouble with all these pitches is that because all the founders read the same books and use the same templates to create them, they end up looking very similar to each other. This is why they often end up putting the investor to sleep.

 

Founders need to work on their pitch in order to stand out from the rest of the competition. You need to think about what makes you different - what makes you memorable. This is why less is more - there is a reason why miniskirts attract more interest than gowns! The purpose of the pitch is not to get the investor to sign a cheque - it is simply to arouse interest, so you can keep the conversation going. This is why you can't afford to pad your pitch with the same boring clichés and platitudes which everyone else does.

 

If you have a generic slide in your presentation, then please take it out. What is a generic slide? It's a slide which any founder can use, because it's full of weasel words and jargon which mean very little. They often serve only to switch the investor's brain off, because he's heard it all before.

 

What you really want to do is to make the investor think. You need to provoke him a bit, and the best way of doing this is by asking intelligent questions. For example, if you wanted to create a better online grocery delivery start-up, your first slide should ask - Why are companies like Grofer still losing money? This will get his attention, and force him to think, which means he will start actively listening to your presentation. You then need to provide him with a counterintuitive answer, so that whether or not he funds you, at least he will respect your depth of knowledge, and will be happy to continue engaging with you. This is not easy, because you need to have a lot of expertise and a contrarian point of view. It is hard work to come up with an origin al perspective, and you won't be able to use canned presentations.

 

You need to polish and tailor your pitch, depending on who exactly you're pitching to. You need to prove to the investor that you've done your homework - that you understand his sweet spot and investing thesis. Anticipate his objections, and answer his questions even before he asks them, so he can see you are capable and competent.

The trouble with a lot of pitches is they're usually peppered with fashionable buzzwords. For example, the current crop of buzzwords is artificial intelligence / deep learning / neural networks/ machine learning. Don't forget, investors aren't dumb. We have good bullshit detectors, and it's easy for us to figure out when the knowledge of the founder is shallow. We can sense when the founder is using jargon only in order to impress the investor, rather than because he actually understands the space.

 

This lack of depth can backfire. When we ask more probing questions, you're not going to be able to answer them, and you will end up with egg on your face.

 

Be creative and innovative when crafting your pitch - make it an original work of art. Take a few risks! After all, if the definition of an entrepreneur is someone who takes intelligent risks, then why not use your pitch to show investors that you fit the bill!

 

The good thing about giving presentations is that you will get progressively better, if you ask for feedback.  Try to make your presentation short and sweet, so that you leave enough time for the investor to ask you questions. Winston Churchill said it best— 'A good speech should be like a woman's skirt; long enough to cover the subject and short enough to create interest.'

 

Q. How to piss off your investor?

While there are a lot of areas of friction between founders and funders, one of the trickiest areas is that of sharing information about what's happening at the company after the funds have been transferred.

 

As investors, we expect the founder to keep us informed about how the company is progressing on a regular basis - what the highlights are; what the low lights are; what's going well, and what's not.

 

This is not just a question of the investor asserting one of his rights as specified in the shareholder agreement. Founders need to remember that one of the reason angels invest in a start-up is that they want to see it grow. They want to help it to become successful, but they can only do so if they know what's happening. They need to know the unvarnished truth, which is why they want regular reports from the founder.

 

The trouble is that most entrepreneurs are very reluctant to share information, especially when things aren't going well. They may feel that they need to bury problems under the carpet, because they don't want investors to lose faith in their competence and ability. Also, because they are entrepreneurs, they're usually very optimistic and believe they will be able to solve it on their own, without getting the investor involved. Some may feel that they should not be troubling investors with their problems, because they're big boys, and should be able to tackle these themselves. They are worried that asking for help reflects poorly on their competence. It's true no one likes sharing bad news, which is why they prefer not talking about it.

 

This is why sometimes investors feel that getting information from the founder is like extracting teeth. They have to send regular reminders to the entrepreneurs, so they can figure out what's happening. I can't understand why founders aren't more proactive about communicating regularly.

 

When things are going well, entrepreneurs should share good news with their investors - after all, we want you to succeed, and are happy to share your joy. This is something which should be done on a regular basis - not just to let investors know that things are on the right track or to show off how competent you are, but also to establish an emotional connection. Founders need to understand that early stage funders don't just give money - they want to be more engaged and one of the best ways of doing this is by sharing information proactively.

 

Sharing information when things are going well is easy, but it's critically important when things aren't going well. This is the time when you really need help - when you find you are in a soup! And who better to help you than your investors, who have skin in the game, and want you to succeed as much as you want to? Yes, they may have opinions which differ from yours, but two heads are better than one, and you should actively seek out their assistance. You may be worried that they may end up micromanaging you, but you should be mature enough to be able to listen to different perspectives, and then finally decide on what's right, because it is your company after all.

 

Refusing to share information doesn't help at all, and in fact gives off all the wrong signals to investors. When they find out that things aren't going well, and that you have hidden the truth from them, they're likely to be resentful and angry. Often founders wait until they are running out of cash, but by this time the damage has already been done, and there's very little which they can do to correct it.

 

That's why the secret for success is to over-communicate. Maybe your agreement asks for a report once every three months. Why not do this once every month? It is especially when you find yourself at an inflection point that you should do this even more frequently. This is not only to help your investors to help you, but also to help them feel that you are keeping them in the loop and respect their views.

 

It doesn't take much time to prepare a report, especially if you do this on a regular basis. Remember, that the easiest person to fool is yourself, and it can be hard to see the writing on the wall when you are putting out fires on a daily basis. Providing updates is a discipline which will keep you grounded, and your investors can help you to ensure that your company is on the right track. 

 

For most of us, asking for help does not come naturally, but you must put your fears and ego aside if you hope to learn quickly. Respect your investors as valuable resources. Update them on your business and let them challenge you. This will not only make you sharper, it will help you to get mired in your own bullshit. They can act as a trusted sounding board, and their feedback will help you course-correct faster if you’re heading down a tricky or sticky path. And if you don't trust and respect your investors, then shame on you for raising money from them in the first place!

 

Pipeline coverage

Often we meet founders who have lofty targets for their current or next quarter sales numbers. One of the simplest ways for an investor to understand if a startup is going to meet its targets is to look at its pipeline - especially in B2B and enterprise sales-led SaaS companies.

In SaaS, the sales pipeline typically starts with lead generation, followed by lead qualification, opportunity identification, deal negotiation, and finally, closing the deal.

For the sake of simplicity, for this post we'll assume only 3 steps in the process - lead generation, demo, and closure; and every deal has the same dollar value of $10,000/year. Most companies we meet have conversion rates of leads:demos:closures of 10:5:3 (this can change according to stage & industry). This simply means for every 10 leads generated, the company gives 5 demos (after lead qualification), and closes 3 deals (after successful negotiations).

Assuming a contract value of $10,000/year, how many deals does the company need to close to reach $1mn in revenues? Quite simply, it is Annual Revenue divided by Annual contract value, $1mn divided by $10,000 which is 100 deals.

For the company to close 100 deals, with a conversion rate of demo to closure of 5:3, how many demos does it need to provide? It needs to provide [target deals] x demo/closure, i.e. 100 x 5/3 = 167 demos

For the company to give 167 demos, with a conversion rate of lead to demo 10:5, how many demos does it need to provide? It needs to provide [target demo] x lead/demos, i.e. 167 x 10/5 = 334 leads

Effectively, for every 1 deal to close, the company needs to have 3.3 deals in its pipeline (i.e leads:closures 10/3). This number (3.3) is the pipeline coverage required for the company to meet its targets.

In a sales-led organization, it is imperative to be on top of these numbers as they can make or break your targets. Every rep needs to have targets so they can work accordingly to achieve them. The founders need to check the pipeline periodically to see how is it moving, what part of it is stale.

Further reading: What a Pipeline Coverage Target of >3x Says To Me

 

How to connect with investors

One of the commonest problems first-time entrepreneurs face is how to get access to investors. The investor community seems to close-knit and closed, and it seems very difficult to gain entry into this. 

The standard advice so far has been that you need a warm introduction. You are told to find someone - either an alumnus , or a friend , or another entrepreneur who's been funded by the investor - so that he can introduce you to the investor. This is one reason why so many entrepreneurs are actively looking for connections on LinkedIn , so that they can get these doors opened.

However, times are changing and while a warm introduction is always welcome, there are lots of good investors who will respond to high quality cold emails as well. 

However, it takes time and trouble to craft a good email . Please remember that an investor has limited bandwidth, and because there are lots of entrepreneurs who are pitching to him all the time, he's often swamped with email.

This is why you need to be extremely thoughtful and careful when you send the email, because you're not going to get a second chance. The trick is to think about how you can add value to the investor's life . Please have realistic expectations - no one is going to fund you based on your email - all you can ask for is a meeting, and this is what your single-point agenda should be - to get him to agree to meet with you !

You need to do two things.

  1. Firstly, you need to do your homework about the investor, so you understand what his sweet spot is .
  2. You then need to show him how you fit into his sweet spot. 

Your email should show that you have researched him thoroughly, and that your start-up fits his investment thesis. Your email should be designed to pique his curiosity and interest . It should intrigue him , and demonstrate that he is likely to become smarter as a result of interacting with you. He will then be willing to take the time and trouble to engage with you. 

You cannot be lazy and use a "one size fits all" generic email which you shoot off to every investor you come across. If you do this, your response rate will be deservedly dismal - not because investors are not accessible, but because you have not bothered to take the time and energy to personalise your email. And if you don't get replies, please stop complaining that Indian investors are uncaring and thoughtless - it just means that you need to do a better job at connecting with them !

It's only if you put the investor's interest first will you be able to maximize your chances of getting a meeting with the investor. This is what your philosophy should be - and this is a far more effective approach, rather than looking for common acquaintances.

The purpose of a pitch by a founder

Many entrepreneurs get disheartened and disappointed when they pitch to a funder and the investor refuses to fund them. Their single point purpose while pitching is to raise money for their start up , and when they fail in this exercise, they start worrying that their start up is doomed to fail. 

Founders need to step outside their skin and look at the big picture. Rejections from investors should never be taken personally, because you need to remember that the funder's response to most pitches is going to be a 'no' . Capital is a scare commodity in limited in India , and even if the investor thinks your company is good, he doesn't necessarily have the liquidity to be able to fund every good entrepreneur who comes to him. When the investor turns you down, please don't start catastrophising. . A No does not mean that your start up is not going to do well - it just means that this particular investor is not right for you at that particular point of time.

Your agenda when pitching shouldn't be limited to only raising money . The odds of doing this successfully are stacked against you, and you will start getting frustrated and disappointed. You need to change your perspective , and think of each pitch to an investor as an opportunity to learn from someone in the start-up ecosystem - an outsider who can provide fresh insights which they would not be able to get on their own. 

You should aim to get smarter every time you pitch to an investor . A good investor will critique your pitch and ask tough questions . This is a good sign, and shows that he is interested in your start-up. Please don't get defensive , and learn to keep an open mind. This can be hard, but getting upset with the investor will not help you. 

If he has not been able to understand what makes you special, don't jump to the conclusion that he is dumb - often this means that you are not putting your point across properly, and need to work on refining your pitch.

While an investor may not have the deep domain expertise which you have, he does have a lot of industry expertise , because he's heard pitches from other entrepreneurs in the same space as yours . He will compare you with your competitors , and will also tap into his network of investors to identify your weaknesses and vulnerabilities.

You can use his feedback and criticism to incrementally improve your pitch, until you finally do find the investor who is right for you . You are looking for a stable marriage - not a one night stand !

The core problem with free

We all love anything which is free, and this is completely natural. After all, how can anyone resist such a great bargain- getting something for nothing ?

Ubiquitous internet access has made the expectation that everything will be available for free far more prevalent. Email is free; Google maps are free; many high quality apps are free; videos on YouTube are free; and lots of music is available for downloading free. After all, if so much stuff is free, then why bother to pay for anything.

Interestingly, this is a complete change of mind-set. A generation ago, if you got anything for free, you would treat this with a lot of suspicion. The first question you would ask is - What's the catch ? Why is the seller giving something away ? Today, we expect everything to be free in the online world, and are very reluctant to pay for anything !

However, there is a huge price we pay for consuming free stuff - and the tragedy is that we don't even realise this!

Because email is free, we send out tons of it - and mark everyone and their aunt on any email we send , which is why we are drowning in it. Most of us can't keep up the with emails which overload our inbox, as a result of which many important emails get lost or overlooked. Also, the subtle downside to this free channel is that many of the emails we send are sloppy and poorly written, as a result of which the signal to noise ratio is poor, and communication actually suffers. A tool which was meant to help us talk to each other actually ends up causing confusion and boredom. If we had to pay for each email we send   ( like we used to have to pay for posting letters in the past), I am sure we would be much more thoughtful about both their quantity and quality - and this would be all for the best !

Because we can watch hours of videos online for free, we end up spending hours binging on YouTube, without even realising how many hours we have wasted. It's easy to consume content passively, but this just ends up dumbing us down, as we lose our ability to think critically and analytically. Most young people don't know how to think logically or judiciously, which is why the level of public debate has dropped so precipitously in recent years.

The fact is that nothing is free. The price we pay is the time and attention we consume on these "free" channels - and the opportunity cost is huge. Our social skills atrophy, and we are no longer able to hold a real life conversation for more than a few minutes; or to engage with people when we meet them face to face.

Even worse, we don't realise that there is no such thing as a free lunch. When a company gives us a product for free, the truth is that we end up being the product - without even realising this ! The reason Google offers search free is so that it can sell clicks to advertisers !

Finally, free products kill innovation. Because Google search is free, it becomes very hard for a competitor who may have a better product to enter the market. The monopoly which free creates ends up stifling creativity and progress.

Why founders need to learn design thinking

Because so many things can go wrong when running a start-up, entrepreneurs need to use as many tools as possible in order to increase their chances of success. One very valuable tool , which is still very under-utilised, is design thinking.

When most people think of design, they think of art , or interior decorators , or architects. However, design thinking is much more than that. It forces you to be user-centric , and because it revolves around your customer, it helps you to think clearly about what you need to do to solve his problems.

Design thinking has now become an integral part of most MBA programs , and lots of books will teach you how to start using this method. It's something which should become an integral part of your start-up’s DNA, so that every time you're confronted with a problem, you use design thinking to solve it.

It is very versatile, because it allows you to use both divergent thinking , which allows you to brainstorm and come up with lots of solutions; followed by convergent thinking, so you can focus on implementing what's do-able and important , and ignore all the rest.

Design thinking follows well-defined principles . It's done in groups, which allows different stake-holders with varying perspectives providing their insights - after all, many heads are better than one. The leader of the group - the decision maker - is the person who owns the problem which needs to be solved. The mechanics are straight-forward, and allow all the participants to collaborate within a well-defined time frame. Basically, everyone draws their idea on sticky pads, which are then organized and rearrange on a wall . This encourages fluidity in thinking; and sparks off new ideas and creativity. It taps into your growth mindset , and allows you to come up with new possibilities.

A useful mnemonic to remember is, What is? What if? What wows? and What works? 

There are lots of useful resources which will teach you about Design Thinking - and many are free. 

The one book which I like the best is Sprint: How to Solve Big Problems and Test New Ideas in Just Five Days at https://www.amazon.in/Sprint-Solve-Problems-Test-Ideas/dp/150112174X

Increasing prices? Increase consumer delight first

2023 is the year of price increases for most startups. A global slowdown, no easy investor money has brought much-needed focus on profitability. Consequently most businesses have resorted to price-increases as the most obvious way to improve cash-flow.

While it is essential to ensure that your prices are competitive and reflect the value of the product, there are better ways to grow your business than just increasing the cost of your products or services

Harvard Business School Professor Felix Oberholzer-Gee in his book ‘Better, Simpler Strategy’ suggests a value stick framework to approach this problem

 

The value stick’s four levers are:

  1. Willingness to pay (WTP): The highest price a customer is willing to pay for your product or service

  2. Price: The amount customers must pay for goods or services

  3. Cost: The amount a company spends on producing goods or services

  4. Willingness to sell (WTS): The lowest amount suppliers are willing to accept for the materials required to produce goods or services

The HBS professor suggest that these four levers can be moved up and down. For instance, you can increase the price of your product or decrease its cost of production. Moving each lever impacts the value created for each stakeholder.

  • Customer delight represents the value captured by the customer and is influenced by WTP and price.

  • Firm margin represents the value captured by the business and is influenced by price and cost.

  • Supplier surplus represents the value captured by the firm’s suppliers and employees and is influenced by cost and WTS.

The value-stick approach starts with increasing the consumer delight rather than just simply increasing prices. Instead of raising the cost of your product, explore ways to add value and deliver extra benefits that increase the attractiveness of your product or service!

Delivering real value and improving customer experience can be done in many ways: investing in product quality, simplifying product experiences, enhancing customer service and providing an exceptional customer experience

A focus on WTP does not mean you build every possible feature. Excellence always requires resources that are in short supply: time, capital and managerial attention. To be great at a few critical features, companies have to be comfortable with deemphasizing others. Slack succeeded because it focussed on just three critical features - search, synchronization across devices and file sharing and neglected others

A great example shared in the book is this - Amazon entered the billion-dollar e-reader market dominated by Sony's Librie. Sony had a great product, a first-mover advantage, dominant market share and a big marketing budget. Despite these advantages, Amazon won a 62% market share within just five years. Amazon won because it offered free 3G internet access, which enabled users to instantly download e-books, while Sony users had to rely on computers. The product-centric Sony focussed only on a great reading experience which it knew would influence the customer's purchase decision. Amazon, in contrast, focussed on WTP and improved convenience across the customer journey.

By prioritizing the features customers find of highest value and investing in improving their experience, you can increase WTP and consequently be in a position to increase prices

Can organizations improve both WTP and WTS?

Yes, says the book Organizations can improve WTP and lower WTS simultaneously if both sets of value drivers are naturally connected. Malls give Apple a discount (lower WTS) because it attracts many shoppers (higher WTP). Doctors at Narayana Health perform more surgeries, which improves quality (higher WTP) and raises productivity (lower WTS). In services, employee satisfaction and customer experience are deeply interlinked. To create dual advantages, focus on connections that lead from one set of value drivers to others.

The key to organizational growth is a relentless focus on value creation. The value-based approach enables your company's core purpose: create more value for customers, employees, suppliers and shareholders.

See here for more insights from the book

Founders need to be thick skinned!

There are lots of articles which teach entrepreneurs how to create a business plan and how to pitch to investors, but the need for personal emotional resilience and fortitude is not emphasised enough. While it may seem that being an entrepreneur is very sexy, the truth is that it can be a lonely and difficult journey. The media adulates the ones who have made it big, and we love to hero worship icons like Steve Jobs and Elon Musk. They are our role models, and every entrepreneur thinks he is going to be the next Mark Zuckerberg. They don't read about the trials and tribulations which founders have to deal with on a daily basis, and are completely unprepared to cope with the daily grind which running and start-up entails.

The truth is that you will hear No a hundred times before you get a single Yes - and this is true, whether you talk to customers; prospective employees; and potential investors ! Even your family members will dissuade you, and will encourage you to take a safe and steady job ( " At least for the first few years, till you settle down "), rather than support you in your quest.

You will need to have a lot of courage and conviction - both on yourself, and your dreams. You will need to become selectively deaf, and learn when to ignore the advice of well-meaning elders.

You will need to trust your gut, and this can be hard - especially when you seem to be a lone voice crying in the wilderness. You will need to pay attention to feedback, and also learn to develop a thick skin, when people trot out a hundred reasons as to why you will fail. Even though you know that the odds are stacked against you, you will need to find the courage to continue going on - and this can be hard to do when an investor turns you down once again.

Every founder's path is unique, and there are no set formulas, which is what makes the journey so stimulating and exciting. It can be hard to sleep at night when you don't know how you will be able to pay salaries the next week; but it can be equally exhilarating when you get a great new idea , and customers line up to pay for your clever new product !

Entrepreneurship is not for everyone, and whether or not you make it big, I can promise you that you will learn far more about yourself and the world if you choose to explore this route !

You need to find people who believe in you - cheerleaders who will help you recover when you stumble and fall. Have realistic expectations, and take responsibility for your failures, rather than try to pass the buck or blame others. No one ever said the ride would be easy, but if you are curious and willing to work hard, entrepreneurship will help you grow and mature very quickly as a person with many talents ! You need to have the maturity and strength of character to measure your progress by your inner scorecard, rather than allow others to judge you. As long as you march of the beat of your inner drummer, you will be contented, and as Rudyard Kipling said - " and what's more, you'll be a man my son" !

NB: I apologise in advance for the use of the male gender - but it's not easy to write he/she and him/her all the time!

Finding the right investor for you

Entrepreneurs understand how important it is for them to raise funds from investors in order to grow. This acts as rocket fuel to help them scale up, so that they can lock in their first mover advantage. Getting funds provides them with a lot of confidence , and the fact that investors are willing to back their company with hard cash validates that they are on the right path, and have a good shot at being successful. 

However, in their anxiety to raise money, they underestimate the importance of finding the right investor. Now, we all talk about dumb money and smart money, but it's actually much more complicated. When you choose an investor , you're establishing a relationship which hopefully will last for many years. You need to be picky and choosy , because a bad investor can create a lot of harm. Money comes with strings attached, whether you like it or not.

You need to have a mental image of who your perfect investor would be, and then you need to go out and look for people who fit these criteria. Now, I'm not saying you'll find the perfect match, but if you have a picture in your head, your ability to find the right person increases dramatically. This way you will not be tempted into saying yes to the first person who offers you money, because this is never a good idea. 

The problem is that you can't afford to waste too much time on finding the right investor either, because you do have a company to run ! You need to find respectful investors who understand the value you bring to the table - and the value of your time as well. Good investors don't keep you dangling ; and they don't make you go through hoops in order to give you money.

This is why it's a good idea to do a background check and talk to the other entrepreneurs whom they've funded. Their website will describe their investment thesis and their sweet spot - does this fit your criteria ? Start a spreadsheet, and begin rating the investors you've spoken to.

Many will not be the right fit for you. For example, if you want to raise a huge amount of money, then talking to a seed investor is pointless, so don't waste your time ( or theirs ) approaching them.

You need to know how much money you're going to ask for, and how much you think your company is worth. It's not that someone will give you what you ask for, but at least that's a starting point in the conversation. It's very hard for investors to engage and have intelligent conversations unless you've thought these things through. If you are clueless, that's actually worrisome, because this means you don't know how to negotiate. 

Deciding on a value for your company is extremely difficult - after all, how do you set a price on a baby ? However, this is your responsibility, since this is your company, and you will need to learn how to do this. Your figure will be the starting point for a negotiation, and you will need to calibrate this over time as you meet other investors , because you will soon get a better sense of what the market is willing to value you at. This may be far less that what you think you are worth, and this may disappoint you, but you need to accept reality - this is not a game ! Please don't get misled by some of the metrics you read in the deals which get covered in the media - these are the outliers - not the median !

Thus, if some of your expectations are too outlandish or unrealistic, a lot of investors will say no quickly, so that you can reduce your valuations, and continue talking to others. The entire process will help you to become a little bit smarter, not only about your own company, but about what investors expect, so that you can fine-tune your pitch , in order to arouse investor interest. 

It helps if you follow the principle called satisficing, as described by Herbert Simon, the Nobel Prize winning economist. The secretary problem provides a very useful algorithm, which can help you optimize your search. You need to use the explore vs. exploit framework to find the right match , without wasting too much of your time and energy, rather than wait for the perfect investor, who many exist only in your dreams.

As your company matures, you will have to find different kinds of investors, as your funding requirements evolve. Seed stage investors , VC firms, and PE firms are all different animals, and have different perspectives, so you will need to keep on adapting as you grow.

.While fund raising is always nerve wracking and time consuming, you will get better over time, so please be patient - it's one of the other skills you will have to learn as a CEO. 

And if you are in the fortunate position where you can pick and choose, I would suggest you give preference to the investor where the chemistry between the two of you is right, rather than the settle on the one who gives you a better valuation. Yes, this is an intangible, but being able to establish an emotional connect will help both of you cope during the rough times which you are bound to encounter. Here's a simple question you should ask yourself - Will I look forward to inviting him home for dinner ( after he has signed the cheque) ?

How to improve pitching strategy

Most entrepreneurs will pitch to multiple investors at the same time when they're trying to raise funds. Time is at a premium and they're not sure which investor will be interested , so they try to hedge their bets. They use a spray and pray approach because they believe parallel processing is more efficient. After all, once you've prepared a deck, you can pitch it to many investors, so why stop at just one ?

This approach does have advantages. You get varied opinions and perspectives from different investors, and  hopefully their insights will help you polish your business model - and your pitch as well, so that the next pitch you make to the next investor will be that much better.

However, the problem is that you may get confused, because you get conflicting advice. Also, your pitch starts getting stale , and once investors can see it has been shopped around, they will back off, because they  start wondering why other investors are not willing to fund you. This ends up actually reducing your chances of getting funded m as compared to pitching to a single investor.

When you take a focussed rifle shot approach, your pitch is much better because you are able to tailor it to his special interests. Yes, this does require a lot more effort , and you need to be much more diligent about doing your homework - you cannot use a mindless cut and paste approach. However, in the long run, this is what really pays off. After all, the end point is not raising funds from any Tom, Dick or Harry - it's to get funds from an investor who shares your philosophy; who understands your worldview ; and who will be supportive during your rough patches ( and I can promise you there will be lots of these) !

The trick is not to think of this as speed dating , but like a marriage proposal. If you're picky and choosy about which investor you're going to pitch to, not only will your pitch be much better because you know a lot more about the investor, your chance of raising funds will be far better as well. Investors like exclusivity , and the fact that you've selected them as their investor of choice will improve the chances of their being more kindly predisposed towards you - and trust me, founders need all the kindness they can get !

Books as a enjoyable buffet

While most people know that they need to be reading a lot more books than they are right now, a lot of times they're find they are unable to do so , because of all the bad habits which they have acquired in school and college. Many of them have become allergic to books, because they still associate them with the painful reading assignments they were forced to complete by their teachers. They were forced to read the book from cover to cover, and then answer all kinds of pointless questions, based on some unimportant paragraph hidden away somewhere in the text. This made reading a painful exercise for them , and they still hate the idea of having to open a book.

They find reading an onerous task, simply because they haven't mastered the skills of being able to absorb the information which a book contains. This is because they think of a book as similar to eating a meal in their grandmother's house, where they were forced to eat whatever was put on their plate, and didn't have any choice in the matter.

The menu was decided by grand mom, who knew what was good for you, and you didn't have any say at all . You were forced to gobble whatever was put in front of you, no matter how much you hated brinjal and broccoli. You were a passive eater, and often got so stuffed on the tasteless main course , that you never managed to reach the dessert - the only part of the meal that you were really looking forward to ! 

You should jettison your old style of thinking, and start thinking of books as being a buffet . You are in control , because there is a wide choice of dishes in front of you, and you can sample them as you please, at your own pace. Not only can you pick and choose which books to read, you can also select which chapters you find interesting, and read these selectively. 

Just like there's no rule which says you need to start from soup and then plod your way to dessert, you can always decide to read the conclusion first, and then decide if you want to read the rest of the book. 

Equally important , you're the one who needs to put in effort to fill your stomach. You need to walk from counter to counter to see what's on display, and it's up to you to taste and eat whatever appeals to you . 

When you eat in a buffet, you can adapt your eating style, depending upon your preference. You can choose what to eat; in what order to eat it ; how much to eat of each dish ; how fast to eat; and can decide if you want to go back for seconds. And if you gorge on unhealthy stuff, then you only have yourself to blame if you feel sick the next day !

You need to use exactly the same proactive approach when reading a book ! Just like food can be very nourishing, so can a book, but how you extract that nourishment depends on the way you look at reading. Treat it as a buffet , where you're in charge !

Remember Bacon's famous words: "Some books are to be tasted, others to be swallowed, and some few to be chewed and digested."

What I have learned from start-up failures

I like the fact that everyone in the start-up space is learning all the time. This is a complex adaptive system, which is dynamic and changes all the time, which means no one has a formula to figure out how to identify the winners.

One would expect that the best way to learn is from the ones who have done well. All we need to do is to copy the success stories - after all, these are the ones we want to emulate !

We are looking for entrepreneurs who will have the same skill sets as the successful founders - and once we find them, we back them with money to create a winner. I wish life was so simple !

The problem is that a lot of these successful founders are one of a kind. They have a special skill set , and it's hard to quantify it, or find other people who have the same DNA. Also, what may have worked for him in the past is unlikely to work again because times and circumstances change, which is why using a copy and paste model is doomed to fail.

However, what's much more interesting is that the reasons for start-up failure are very similar across the board. If we follow Charlie Munger's reversal rule, the best way of ensuring success is to prevent failure , which means angel investors and entrepreneurs can learn a lot more from the start-ups which fail . They teach you what not to do , and it's much easier to translate these lessons into real life . This is what my experience has been .

Like most angel investors , I think of myself as being smart and experienced . I believe I am able to judge people , and am willing to invest my money so that I can back entrepreneurs who I think are going to be successful now .

I've been wrong a number of times , and it's these guys who teach me a lot about what I shouldn't be doing for the next start-up I invest in !

The most important lesson I have learned was from one of the first start-ups I invested in ( and I am protecting the guilty here by not naming them) . I blindly trusted a good friend's judgment about a founder whom he felt I should back because he was doing some very cool stuff. I didn't bother to do my due diligence, because my friend ( who is an experienced mentor and coach) vouched for this founder, who was from IIT, and was working in the alternative energy space - an area for which I have a soft corner. I was the sole investor, and signed a cheque for the entire amount, and didn't even bother to meet the other co-founders . Within a month of signing a fat cheque, the team imploded, and the start-up crashed and burned. I never got any updates; had to chase the founder repeatedly to even get a statement of accounts; and still have no idea where my money went and how it was spent ! While I am perfectly comfortable with the poor outcome ( I know that most start-ups do fail, and can be quite forgiving about this), what makes me unhappy is the lack of process - both in the way I invested; and in the way the founder failed to provide updates.

I am still unhappy about this, but have become mature enough to realise that I should think of angel investing as being a journey , and there's no point in dwelling in the past. Yes I am going to be wrong multiple times , but there's no point in beating up on myself. Provided I learn the right lessons from each failure , I will hopefully get incrementally smarter, so that I will hopefully improve my probability of success . My hope is that my batting average will incrementally improve over time. This is why we now have a thesis, and try not to break our rules, so we can check whether we are on the right track, and keep on testing our hypothesis.

This is why it's so important to have a long term perspective when you want to participate in the start-up space . Otherwise the chances are very high that you will end up burning your fingers and being extremely unhappy . In fact, you should worry if you have a few early successes , because this is likely to go to your head, and you will start thinking that you are much smarter than everyone else and have figured out all the answers . It's this lack of humility which is likely to lead to disaster .

I think experiencing a few failures ; and not giving up just because you have lost some money is far more likely to put you on a long-term path to success . This requires maturity , as well as the ability to allocate assets in such a fashion that you don't lose any sleep when the start-ups you back fail. While you can never control the outcome, you can control the process, and being systematic and disciplined improves your chances of success.

Conducting better pitches

It is vital for founders to conduct meetings seamlessly, control the flow, keep everyone a up-to-date, and drive towards the agenda at hand. Sometimes, it does become distracting when the flow strays from the agenda, or it starts becoming too technical which means some members start daydreaming about their lunch, or their next vacation. Don't you just hate it when that happens?

Whenever that happens, you can always fall upon some methods to quickly streamline the meeting and drive towards your goal.

 

How can founders conduct better meetings

a. Use Venn Diagrams

Why do we love the image of Ikigai? It just drives the point hard, and home!

Does not need elaborate explanations and time for people to understand. Visual representation is the easiest way to help draw attention. It does not matter if your diagram is correctly sized or accurate - it needs to invoke the mental capacities of everyone and make the meeting richer intellectually.

b. Do away with percentages, and use numbers

This is counter-intuitive, but hear us out. It is perfectly normal, and smarter to say "We have a 50% conversion rate". But think about it, we are so used to hearing percentages all the time. What if you say "We convert 1 out of every 2 users.... that means out of the 10 people sitting here, 5 of us can be buyers". This again ignites the mental capacities of listeners.

c. Note down important points

Always have a notepad handy. You need not keep records as impeccable as the minutes of the meeting. However, any feedback, inputs, suggestions, changing body language, objections, and questions need to be jotted down and revisited to understand why it happened, or how can you incorporate it to make your next meeting better.

d. Revisit some numbers or comments

It almost always helps if you can remember the context of a previous meeting, get everyone up-to-date, and then share a progress report. "If you remember when we last spoke you mentioned X, we've worked on it and I can confidently tell you that we have created 2X". This shows you pay attention, you work on inputs, and you know how to follow up. This, of course, only works if you actually did the hard work of following up!

e. Take a step back

Whenever you find the meeting going around in circles, politely request every one to take a step back. It can be as simple as "Hang on, what are we trying to discuss - we want to find the best way to do X right? Can we discuss what defines success - and we can take it up from there". This prevents a meeting from straying, and people from turning off after a point. Instead of that, you can take control, regroup, and work towards the goal in a time-bound manner. Nobody has 2 hours to spend discussing a point that was meaningless!

And there it is - simple methods to regain control of your pitch meeting and make it a productive one for you and your team! If you have any suggestions or personal experiences to share, please reach out to us. We'd love to hear from you!

Investors need to add value to the entrepreneur

As an angel investor, I want to think of myself as providing more than just a cheque. I want to think that we provide smart money, and then the question arises, "How do we add this value to the entrepreneur's life?" After all, the value has to be judged by the entrepreneur, not by us. 

So, we may think we're providing oversight, we're helping with corporate governance, and we’re helping him to provide a 30,000 foot view to make sure he's on the right track. We help him to raise his next round because his finances are in order and he's keeping track of unit economics.

But, this is the story we're selling to ourselves. Is that really true from the entrepreneur's perspective? We realize that given the fact that we're small, it makes much more sense for us to engage deeply with very few companies rather than try to do too much with too many, because if we try spreading ourselves too thin, we don't really add any value to the entrepreneur's life, and sometimes end up being a distraction.

Therefore, we're changing our focus a little bit. We think it makes a lot of sense for us to be able to be very choosy about which entrepreneurs we pick. But if we do, then we engage with them much more, which means we need to find entrepreneurs who think the same way we do. Whose philosophy is in sync, the culture is similar, and who respect us. I think that respect and trust needs to be earned over time. It's not given just because we've signed a check.

Therefore, we're changing our approach a little bit. For example, before we sign the cheque, we will want to spend a couple of days in the entrepreneur's office so that we can see how well his people fit in, what the morale of the team is, how well they mesh with each other because this is impossible to judge from a pitch. Actually spending time in an office gives you far more information, which is far more colourful.

Obviously some entrepreneurs will object to this. "We don't want to open our kimono, we don't want to share all these details before you've signed a check. Some of this stuff is proprietary." My feeling is that if they're not comfortable with us, if they're not willing to trust us before we sign the check, then why would they be willing to trust us just because we've signed the check? If they don't trust us, we'd rather not want to give them the check in the first place.

Similarly, I think after we've signed the check, we would like to spend at least one day in a month in the entrepreneur's office. We want entrepreneurs who understand the value of our doing this, because we can then provide an outside objective view as to what's going on. Let's not forget, interests are completely aligned. Everyone wants the company to grow. We think that by providing this kind of helpful oversight as an elder, trusted family member who's not stuck in the daily drudges and the daily grind, will add value. We're looking for entrepreneurs who want that kind of value support.

Over the years, we have learnt quite a bit about angel investing, and we are now modifying the way we evaluate entrepreneurs . 

When we invest in a start-up, this is effectively a bet on the entrepreneur. Do we believe that he can pull off the challenging feat of building a company from scratch ? This is a herculean task, and most founders will fail at it, which is why we are becoming increasingly selective about whom we will back.

We have realised that the company's culture is extremely important, and it's not possible to gauge this either by listening to a pitch, or by talking to the founder. The only way we can judge this is by spending time in the office, and seeing how the team works

When we invest, we don't treat it as speed dating, because we are looking for a marriage partner - someone who wants to settle down with us, because they understand that this is a long term relationship - not a one night stand

Hard work and effort - yes - for us and for you, because we are investing hard-earned money, and before we do this, we want to invest our time and energy to make sure the fit is right. We are happy to double up on our investments, and because we don't suffer from the institutional imperative, we are agile and can release funds to help the start-up when it is in distress, if the founder has earned out trust

If you think this smacks of a Big Brother attitude on our part, then this clearly means that you don't think of us as being partners in your venture. This means we are the wrong investors for you, and you should find someone else

One the other hand, if you feel this shows that we are diligent, and are willing to work hard in order to partner with our entrepreneurs to help them become successful, then please do talk to us !

The founder's balancing act

First time entrepreneurs often get confused because they get such conflicting advice. They talk to five different people who they tell them ten different things , which is why founders are never sure whether they are on the right track. 

Many mentors advice that you should be passionate - that you should dream big and follow your dreams because your goal should be to change the world. They are told to emulate heroes like Steve Jobs and Elon Musk who were able to implement their dreams and create companies which have changed the way we live our lives. 

Yes, this is the Holy Grail, and it's well worth aiming for ! We all want our children to be ambitious because there is so much which they can accomplish , and we want them to make the most of their potential. Having said this , we also tell founders to not bite off more than you can chew. Yes, it's important that a man's reach should exceed his grasp , but you do need to remember that you have real-world constraints, and you should be aware of these. We don't want to clip your wings, but you have to battle well-funded competitors with deep pockets; other start-ups are happy to steal your lunch; raising money is always an ongoing battle; delighting fickle customers is always a challenge; and there are the unknown unknowns to trip you up. It's hard to attract A players, and keep morale high when you are not sure how you will be able to pay next month's salaries can drive you nuts.

The risk is that if you try to do too much all at the same time , you'll end up accomplishing nothing at all. You'll burn through money quickly, and your dreams will get converted to nightmares because you are over-stretched. This is why it's so important to learn what not to do. It's essential that you learn to focus, and knowing how and what to prioritize is a key skill every founder needs to master.

So is the founder meant to create business plans which show how she will achieve world domination ? Or should she show how she can quickly achieve profitability ? Either way, there will be criticism . One group will say she's not able to think big; while others will mock her for trying to aim for the moon. It's because of these mixed messages that entrepreneurs get completely confused. 

The trick is to find the right balance. We don't want to be pessimistic , but we don't want you to be over-optimistic either and find that you have run out of steam even before completing the first lap. Remember that you are running a marathon , and you don't want to run out of money, steam and stamina ! You need to look for the golden mean, where you can show that you have a sensible approach which balances short term pain with long term gains. Yes, this is hard to do , but no one said being an entrepreneur would be easy . 

The key is that you should have a well-defined plan, and the courage of your convictions to stick to it, no matter what anyone else says and does. Learning how to meditate can help you find your true North Star and keep your balance !

How do you value a start-up opportunity?

One of the most contentious issues in the start-up space is putting a valuation on the start-up at the time of fundraising, and the problem is there really is no standard way of doing this. For established companies we can use discounted cash flows ( DCF) to estimate the value of the company is by calculating the net present value of future cash flows. However, we can't do this intelligently for a start-up because most are pre-revenue, while others are just starting to gain traction. This is why no two people will ever agree on what the start-up is worth.

The founder thinks of the future potential of his start-up , and his estimate of his worth is usually a lot more than what an investor is willing to give him. This is a sore area which often causes a lot of conflict, and is one of those things over which they will spend hours negotiating.

Finally, it's the founder who needs to decide how much stake of his company he's willing to give up for how much money. There are standard rules of thumb, and one of the commonest ones which people use is that of comparables. How much have other similar companies in the same space been valued at? Now this is often flawed, because companies in the US are given far higher valuations than Indian companies - something which irritates Indian founders a lot, because they feel they are being treated as poor cousins. 

The reason this is not a useful metric is because early stage companies end up having very different trajectories, and it's hard to predict whether this particular start-up will do well, or whether it's a company which will go down to zero. The reality is that equity in most start-ups is actually worth nothing, because 80% of them will crash and burn, and most will not return money back to the investors.

Investors are very aware of this fact, because they have burned their fingers in the past. However, every founder feels that his company is the one which is going to be the exception, which is why he deserves a high evaluation. Models which use discounted cash flows will never work, because they are just Excel projections which are full of flaws and fantasies. Founders need to be realistic, and a lot of it really is a question of whether you are in a strong position to negotiate. This depends upon many factors, most of which , are out of your control ! These include: how much money do you require; how desperate are you; whether the area you're in is hot or not; how much credibility you have; and how much investors are willing to give you. If you are able to setup a bidding war amongst investors, then your hand becomes much stronger . However, if there are other entrepreneurs in the same space who are desperate and are willing to settle for much less, this reduces your clout considerably. Obviously , a lot of these elements are determined by market forces, which are extremely dynamic. 

For example, if there is a funding shortage because of a lack of liquidity , it can be extremely hard for even experienced entrepreneurs to raise money. On the other hand, when there is surplus liquidity , investors can be quite irrational about how much money they're willing to give away. 

At the end of the day , remember that the value of your start-up depends on how much investors are willing to give you for it. There really is no standard metric anyone can use, and there is no right or wrong number.

However, a good investor will not try to beat you down on price, because he understands that it is not in his long term best interest to do so . He will not try to squeeze you, because while he might get away with it right now, he knows that this is something which you will resent in the long run, and that's not good for the company. Similarly, don't get greedy and get lured by investors who offer you excessively rich valuations. This can come back to haunt you later when you try to raise your next round ! It's best to understand that the golden mean is the best path to follow, so you can create a win-win where everyone benefits.

One way of doing this is by asking for the funds to be released in tranches , based on milestones which you set , which show that you are making progress. This allows you to course correct if things aren't going to plan, and adds discipline and rigor to governance, because you know you will need to report figures on a regular basis to your investors. You can also add a claw back clause, so that if you outperform, you get a sweetener in the form of a better valuation based on real life metrics !

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