MONTH : MAY 2023

Realities of next round financing

In the last 2 quarters, we have had a handful of conversations with portfolio companies for funding. These companies can be categorized broadly into the following buckets:

STRUGGLER

Meaning: A struggler is a company which has seen revenue degrowth in the past 12 months and its core business fundamentals are on shaky wicket

 

Key point: These companies could not validate their initial business hypothesis, or got out-competed by their peers. Strugglers typically fail to reinvent themselves and are unable to find the next hypothesis to validate in order to prove milestone achievement for their next round of financing

 

Typical conversations: “We will break even in the next quarter if X happens, and we need emergency funding to do that”

 

Investor point of view: As investors, it is very difficult to justify additional funding to strugglers in the absence of either a) new business definition or hypothesis, or b) visibility of strong growth in existing business

 

Likely outcome: Investors will typically pass and companies may shut down

 

COASTER

Meaning: A coaster is a company which has seen some revenue growth over the past 12 months and its core business fundamentals are steady – neither improving nor deteriorating

 

Key point: These companies validated their initial business hypothesis but could not excel in their traction or growth. Coasters by definition coast along where the market takes them. They are on the fence, with investors wanting to see evidence of them becoming winners in the future before they make up their minds to invest

 

Typical conversations: “We are doing well with evidence of sales growth; we have some cash in bank but we need more funding soon in order to go all out and achieve milestones required for the next round”

 

Investor point of view: New investors rarely do bridge rounds to support a non-portfolio company. Existing investors are open to supporting a bridge only if they see evidence of growth, good and constant communication & data to prove & disprove the founders’ hypothesis

 

Likely outcome: Depending on growth, and comfort level with founders, existing investors may participate with small cheques in order to support cash burn and milestone achievement to enable companies to raise their next round. Typically, convertible structures are used with a cap, floor, and discount to price of next round

 

WINNER

Meaning: A winner is a company which has seen strong revenue & traction growth over the past 12 months and its core business fundamentals are improving

 

Key point: These companies validated their initial business hypothesis and excel in their traction or growth. Winners typically meet or outperform their milestones of previous round. There is evidence that the company is in the right direction

 

Typical conversations: “We have met/exceeded milestones and are ready to raise our next round”

 

Investor point of view: These companies have strong interest from multiple investors (new & existing). Typically existing investors are happy with the performance and provide an initial soft commitment of 20-30% of the target round while the founder brings in a lead investor who takes up a majority

 

Likely outcome: These companies are able to raise from multiple investors and close their round from a place of abundance before their cash runs out

 

Facing the realities

Understanding the realities of next-round financing is crucial. Strugglers face challenges in validating their business hypothesis, while coasters need to demonstrate potential for investor interest. Winners with strong revenue and traction have multiple funding options.

 

Regardless of your category, take proactive steps to strengthen your position. Analyze your business hypothesis, seek feedback, and communicate transparently with investors. Strugglers and coasters should focus on reinventing themselves or finding new growth avenues. Winners should secure commitments from existing investors and seek a lead investor.

 

In conclusion, assess your position honestly, adapt your strategy, and take proactive steps to secure the funding you need.

Mentor Vs Mentee

Every coworking space, every incubator, every accelerator and every startup conference or events boasts of top notch mentors that they will help entrepreneurs connect with. However, what this in reality ends up being is just a show of names with little or no value added to the entrepreneurs. None of the top notch mentors who just have their names in the list but are not getting anything out of it can afford to give the time that’s really required to understand a startup in detail and give real mentoring. It usually ends up being a 5-10 mins interaction with others waiting in line to talk to the “mentor” and the entrepreneur getting top of the mind, off the cuff advise or “mentoring”.

If any entrepreneur takes critical decisions for their startup just based on the feedback from 5-10 mins of interaction with a “just met for first time” mentor, then they seriously need to get their brains checked! Mentoring is a long term process and just like a mentor needs to spend time with the mentee to understand their business and frame of mind, same way the mentee needs to spend time with mentor to understand their experience and expertise.

 

Both the mentor and the mentee need to decide what value they can actually add to each other. Are they suited for each other? Does the mentor have the required experience and expertise to actually mentor the startup? Or does the entrepreneur do enough homework before coming to the mentor in a prepared manner rather than running to mentor for each and every idea that pops up in their mind? So checking if mentor or mentee has a match is very important to avoid disappointment later on. End of the day it boils down to your doing research & reference check about someone and your judgement of people – both ways. In my view when it comes specifically mentorship related to entrepreneurship, one basic fact check is if the mentor themselves have ever done any startup or new business on their own themselves.

Then comes their depth of experience and knowledge. Advice is cheap and easily dispensable… It’s the advice taker who has to decide if it’s worth taking or not. And as they say God gave us two ears so that if someone gives us BS, then we can listen from one and expel from the other!! On the other hand its an insult to the mentor who has agreed to give their time to an entrepreneur who has not even done basic research on what he wants to accomplish.

 

Smart money vs. Dumb money

For entrepreneurs struggling to raise money for their start-ups, any money looks good. But is it wise to take any money that’s offered to you? Smart money is money plus the value in terms of mentoring, guidance, opening doors, initial customers connect for validation or early adoption, strategic partners connect for market access, tech licensing, attracting other investors etc.. Basically something besides money that you would otherwise on its own willingly pay or give equity for.

Dumb money is money plus the hidden pain it comes with like low understanding of your business, having to spend more time explaining to investor than to customers when you plan anything new, adding no value as mentioned above for smart money and not understanding how valuation business is different from traditional trading/manufacturing type of businesses and same parameters don’t apply when measuring progress etc etc.

Entrepreneurs need to weed out the dumb money with diligence. Evaluate supposedly smart money with the Smart MoneyTest – would you take the investor on as member of your board of directors or as an advisor if he had ZERO money? If the answer is not a clear resounding YES, then that’s not smart money.

Before someone points this out, also remember there is no Neutral Money. Anyone who puts in money comes with attachments – great, good, bad or outright ugly.

 

Co-founder Conflict

Research in failed start-ups show that 62% of all start-ups fail due to co-founder conflict! When a startup is riding the wave of success, it usually covers up the conflict. However, it’s only when the going gets tough do the basic differences underneath start showing up. If you haven’t prepared for conflict in your co-founder relationship, you’ll be fighting like dogs the moment when you most need to be working well together to save your startup.

The best way to avoid this is to fully understand & acknowledge each other’s strengths and weaknesses, divide responsibilities clearly, acknowledge that mistakes can and will be made and speak directly and honestly when conflict rears its ugly head. Be quick to seek professional support from mentors if it is not getting resolved rather than brushing it under the carpet and pretending it does not exist. Successful co-founders actually embrace conflict and constantly work towards resolving it. As they say a stitch in time saves the whole startup!!  

PS: do comment and share your experiences if you have suffered from Co founder conflict in your startup or someone else. We all learn by sharing the mistakes we all make.

 

The Dreaded Exit Strategy Slide

This is a slide we all know we need to have in our pitch deck to investors but does not have enough meat to talk about. We all make pitches and one of the slides I have seen entrepreneurs get lost or fumble through uncomfortably is the "Exit Strategy” slide. We all know the traditional exit options (IPO, acquisition by bigger company or good old royalties/revenue share options). Don’t the investors also also know these options? So why do they even expect entrepreneur to put it in the presentation? And then this deeply divided opinion that should this even be discussed or is it even valid at an early seed stage investment - a point for discussion some other time!

In my view, this slide demonstrates to the investor that you are actually thinking of how the investor will make a return on their investment and not just about your startup growth. The biggest mistakes are to just put “Get acquired by Google, Microsoft or Facebook” kind of one line with no backup data or research! That’s just being pure lazy. Try and research which large companies have acquired your kind of companies in the last three years.

 

Have at least three examples of such acquisitions ready to talk about in Q&A post pitching. If that’s not available, then find out large well funded companies (in India like Paytm, Flipkart etc) that are pretty active in your target segment and for whom it would make a great business extension by acquiring your company.

For example Paytm and so many other new payment banks being active in payments and FinTech space but not yet covering the niche you are focusing on and may want to expand into in next 2-3 years once your niche segment has grown.

The biggest turn off for investors and a blunder when discussing exit strategy is to proudly announce “We don’t want to sell our company for next 10+ years!!”.

The best stance to take is that you understand the exit options, have researched about them and would prefer to build a strong, viable and scalable company but if the right opportunity comes along that gives great returns to investors and other shareholders, you will be open to looking at them.

 

Launching MVP programme #3

We are back with our MVP 3.0 programme at Malpani Ventures to support pre-seed startups.

We are not doing just B2B SaaS. We are now doing ALL THINGS B2B! & We are now writing upto $200k cheques!

If you're building 𝗕𝟮𝗕 𝘀𝗼𝗹𝘂𝘁𝗶𝗼𝗻𝘀 𝗶𝗻 𝘀𝗼𝗳𝘁𝘄𝗮𝗿𝗲, 𝗵𝗲𝗮𝗹𝘁𝗵𝗰𝗮𝗿𝗲, 𝘀𝘂𝗽𝗽𝗹𝘆 𝗰𝗵𝗮𝗶𝗻𝘀, 𝗰𝗹𝗶𝗺𝗮𝘁𝗲 𝘁𝗲𝗰𝗵 𝗮𝗻𝗱 𝗺𝗼𝗿𝗲, check us out! We are keen to partner early with founders to solve hard problems for Indian and global businesses.

Do apply here or refer your founder friends for the programme:

https://malpaniventuresmvp.carrd.co

 

Why should you apply?

 
  • Term Sheet to promising founders within 30 days and feedback for each startup within 14 days
  • Access to patient capital from a single-family office – We want to help build companies until they IPO! We reserve a substantial amount to follow-on in promising startups
  • Significant reserves: Ticket size up to $500k at seed once your startup grows + willingness to follow on with adequate reserves
  • Access to a network of other B2B focused founders + investors

Who should apply?

 
  • If you are a founder or a team of co-founders passionate about building in India to solve Indian problems, or building in India to solve global problems, then you should apply

  • B2B Founders with MVP in place - focusing on early customer pilots and signing your first few customer contracts

We prefer bootstrapped registered companies or companies which have recently graduated from an accelerator or have a few family, friends and angels on the cap table

At Malpani Ventures, our objective is to fund frugal innovation in India in a broad range of sectors within B2B (SMB or Enterprise customers in India or global markets).

We will strongly prefer founders who:

  • Understand their market and customers well
  • Have/ are building an unfair distribution advantage.
  • Seek to build a 10x product/ solution

 We are agnostic to both experienced and first-time founders. Your unique customer or problem-solving insights in a sector help us evaluate your application better.

 

Apply here:

https://malpaniventuresmvp.carrd.co

 

Acquiring the First 3 Customers

If you are crazily funded startup like the 0.1% of startups out there then this post is not for you and pls stop right here! But if you are like those 99%+ of entrepreneurs who have to bootstrap with self funding or with less than 50L to 1 Cr of initial funding, then you need to worry about how can you get your first customers. I'm talking here more about B2B Enterprise startups.

At this early stage of your startup with no customers, you startup has zero credibility and no track record to talk about. The only thing special it has is you, the FOUNDER! So that's what you will have to leverage when talking to early prospects.

Rather than talking about the startup talk about your personal expertise, experience and track record. Statements like "I have been in this domain for over X years and have personally served prestigious customers like A, B & C. I have always had over 80% customer retention as I always believed in selling exactly what customers need etc etc". Another thing to focus on is using relationships and references shamelessly. Never go to a sales call unless someone has put in a word or given a reference, personal or professional, however tenuous that ref is. Use LinkedIn to the hilt. Get its paid membership that gives you unfettered access to the whole network. Also be willing to do special deals for the first few customers. They are putting their trust in your startup and they deserve something special.

 

The first 3 customers are the toughest. The next ones are easier to get. Once you have sold to one company, talk to their competitors and ask them if they would be interested in knowing more. I remember after selling to Airtel, one of my earliest customers in my startup, it was easy to get a meeting with Vodafone when I called them to see if they would be interested in knowing what amazing work Airtel was doing with our products - rather than trying to sell our stuff. Everyone wants to know what their competitors are doing... and soon we had Vodafone as our customer!

Also, never ask for business from a weak or emotional stand point. I have seen startups try to play the emotional card with customers saying as they are a startup the customer should support and buy products from them. Customers buy because a product adds value to their business... It helps them save $$ or make extra $$... nothing else! So focus on that and sell value.

 

Are you sure you want to be an founder?

Becoming a start-up founder seems to be a very cool thing to do these days. Everyone wants to be a CEO, which is why you see so many incubators, accelerators, mentors and coaches who are happy to help you start your start-up. Another huge influx is of potential entrepreneurs is going to come from all the engineers who have been laid off from companies like Infosys and Cognizant. They have corporate experience, and because they understand how the business world works, many of them are going to get the itch to become founders, because there aren't enough corporate jobs available. 

 

It's good for the country if we have lots of entrepreneurs, because start-ups can potentially add a lot of value to the economy. They create jobs and improve the quality of life by solving pain points for consumers. 

 

However, the problem is that the idea of becoming an entrepreneur has been made out to be far sexier than what it really is. Reading hagiographies about successful founders who've created unicorns and become rich quickly can be very inspiring. All aspiring entrepreneurs think of themselves as being the Steve Jobs, but they are completely clueless about the sacrifices which founders need to make to reach their goal. 

 

No one talks about the emotional stress which entrepreneurs have to deal with on a daily basis. They are forced to listen to a never-ending stream of No from everyone they talk to. Family members are usually not supportive, and they think your idea about starting up on your own is terrible. They would rather you found a safe and secure job which pays well, at least until you are "settled". Your friends back out at the last minute and refuse to join you as co-founders because they don't want to take the risk; and employees prefer joining a large established corporate, rather than hitch their future to a start-up whose future is completely uncertain. Finally, investors refuse to back you, because they don't think you're going to be able to pull it off.

 

All these rejections are a constant assault on your self-esteem and confidence, and you spend sleepless nights, wondering whether you're going to be able to pull it off. You need a lot of emotional resilience, and this is not easy to acquire when there are so many people trying to tell you why you're not going to be successful. You pay a price for deciding to march to your own tune - and this is both personal and social. Entrepreneurship can be a thankless and lonely journey, and you need to be prepared for this. 

 

 

You feel especially guilty when you can't spend enough time with your children. Your family pays a price too, and because you're so obsessed with your start-up, you don't pay enough attention to your spouse, who feels neglected and unloved. 

 

There is no free lunch, and entrepreneurs need to be aware of the downsides of launching their own start-up. It's a risk worth taking, but please do this with your eyes wide open!

Learning the art of negotiation

Being an entrepreneur can be challenging because you need to wear multiple hats all the time. A lot of this is stuff you've never been taught, and you need to learn "just in time" and on the job. There is no safety net, and you need to learn many different skills : how to interpret a cash flow statement; how to sell; how to hire and fire people. These are complex tasks, and while you may never be able to master all of them, you definitely need to become a jack of all trades if you want to continue growing your company. 

 

I think there is one key skill which entrepreneurs often don't appreciate the value of - and this is the art and science of negotiation. The reason it's so important is because you need to negotiate all the time as a founder. Negotiation is the heart of human interaction and you need to do this on a daily basis. You need to convince : your family members that you it makes sense for you to leave your cushy job with a corporate with a fat salary and start off on your own; your co-founders, that they should join you in your madcap journey; your employees that they should to come work for you, even though they will have to take a cut in their salary, and work their butts off if they want to shine. You will need to negotiate with : customers, and explain to them why your product is better than what's available in the market, even though you are untried, unproven and untested; vendors, when you can't afford to pay them on time, as to why they should be patient and give you a discount, because this will be good for them in the long run. You have to negotiate with everyone you meet to back you, and this means they need to take a major leap of faith in your abilities to pull this off, because no one is ever sure how a start-up will fare. 

 

Because you have to do this day in and day out, successful entrepreneurs have mastered the techniques of negotiation. While some people are naturally good at it, you can learn this invaluable skill once you understand the key role it plays in your success.

 

 

The problem is that it's an unappreciated asset, because often people don't even realize that what they're doing is negotiating. This is why it's important to have a theoretical framework, so that you can follow a process and do it intelligently. If you don't, you will find that you're on the losing end multiple times, and this can be an expensive proposition!

 

You may not even realize that the reason you are hitting barriers all the time is because you're not being able to negotiate properly. As an entrepreneur, you are going to have to deal with conflict all the time, because you are always going to be shackled by constraints. The definition of a great negotiator is one who can resolve conflict in such a way that both parties end up thinking of themselves as being winners at the end of the negotiation. This requires a lot of maturity, and the good news is it's a skill which can be learned, but you do need to invest time and energy to do so.

 

You can learn from the master negotiators you will meet on your journey - and every time you lose, treat this as an opportunity to learn from the person who out-negotiated you! It's very helpful to have a partner with you, so that you can go over the process in a thoughtful fashion, and analyse what went right, and what went wrong. This will help you hone your skills. There are also lots of great books which can help you do a better job. And if you are lucky and have a small child at home, you will find they are the best teachers of this skill - they have learned how to get adults to do what they want, which means they can wield influence without having any apparent power!

Fixing founder-funder friction

One of the problems in the start-up space is the tension between investors and entrepreneurs. This is often the elephant in the room, and it often rears its ugly head during Board meetings. The focus in these is usually on whether financial targets have been met or not, and since most start-ups are chronically under-manned and under-funded, they are usually lagging behind. This causes the investors a lot of anxiety, and gives them a stick to beat the entrepreneur with. This creates angst in the entrepreneur, because he feels that he's not being appreciated for all the good that he's achieved so far. Founders feel that all their funders do is give them a kick up the backside because they have not met their goals, and they never get any compliments. The investor, on the other hand, is upset that the entrepreneur is always missing his targets and not being able to deliver as promised in the last Board meeting. After all, the purpose of these meetings is to highlight gaps and then try to fill these in, to ensure that the company does not fail.

 

It's often the entrepreneur who contributes to the problem, because he typically reaches out to investors only when he starts running out of money. This irritates investors, because they feel that the entrepreneur treats them as a bank with limitless funds whose only job is to infuse cash whenever they ask for it. This causes the relationship between the two groups to sour, which is quite sad. 

 

 

The truth is that we'd like to give you a pat on your back when things are going well, but you need to tell us about your accomplishments and share your wins on a regular basis with your investors. We are happy to participate in your joy, and it helps if you allow us to feel that we have contributed to your victories! Please share what you have learned with us - this helps us to become smarter, and learn more about your domain. Try to create goodwill by sharing happy moments, so you don't end up only discussing problems with your investors. You do need to create a reservoir of positivity - you will need this when things go sour. It helps to communicate frequently by sending emails regularly - and you will find that taking the time and trouble to write stuff down will help you to sharpen your own thinking. 

 

Part of the problem is that entrepreneurs feel that their investors are very busy, and they've got tons of other things to do. This is why they keep all their communications for the quarterly Board meeting. While quarterly meetings may be fine for a large company, start-up founders need to provide updates on a much more frequent basis to their investors. A start-up is marked by volatility, complexity, ambiguity and uncertainty, and because things move much more quickly, waiting for the next Board meeting may allow problems to balloon completely out of control. By this time it may be too late for the investors to provide any useful feedback. 

 

Also, Board meetings are often conducted very poorly. They are often unproductive, and many investors find they are a waste of their time. The founder treats them as a rubberstamp, and does not bother to share an agenda in advance, which means investors cannot prepare properly. They don't have enough background material to be able to offer thoughtful suggestions, and cannot contribute any constructive insights. Savvy founders will bury the skeletons, or gloss over contentious issues, and investors feel short-changed by this lack of transparency. Many meetings are dysfunctional, because some members get distracted by irrelevant issues, as a result of which high priority matters don't get the attention they deserve. 

 

This is why it's important that entrepreneurs organise more frequent calls with their investors. These should be once a month - and may need to be even more frequent - for example, when you need to pivot because you are running out of cash.

 

One of the reasons founders don't share information on a more regular basis is because they are worried that the investor may not understand their long-term vision. They are concerned that funders are so focussed on short-term cash flows, that they may not agree with why they have chosen to doing things a particular way. Founders don't want their plans to be second-guessed, and they dislike being micro-managed, which is why they prefer not discussing contentious issues until they come to a boil. 

 

This is tragic, because investors have signed up because they believe in the entrepreneur's dreams, and want to make them come true. We think that you will be successful, which is why we are backing you with our hard earned money. We expect to be treated as partners, and you shouldn't keep on worrying that our vision won't be aligned. We're happy that you dream big, and this is why we funded you, but we also want to make sure that you don't run out of money in your quest to fulfill your aspirations. We understand that you need to experiment, but you need to learn to be frugal and thoughtful when you do so - please treat our money as if it were your own!

 

You should provide information proactively, rather than wait for your investors to ask for it. Your investors are usually more experienced than you, because they are older, and have more of life. They have backed other start-ups which have tackled the same kind of problems you're dealing with, and may have useful insights to share - please make use of them. After all, two heads are better than one!

 

You need to take ownership of your problems - we are not going to be able to spoon feed you or solve them for you. You do need to tell us what your problems are; what possible solutions you are exploring; and then invite feedback. Doing this on a regular basis is a great way of showing that you respect your investors. This also helps to stroke their egos, and they are happy that you are reaching out to them, not just for money, but for advice as well. On a long term basis, doing this regularly will make sure that your visions are aligned, so that you can take them to where you want to go, rather than have to keep on arguing with them, which can create a lot of unnecessary frustration for both of you.

 

Many entrepreneurs are worried that investors will start micromanaging them; or provide completely wacky solutions which they will not be able to implement. They are also scared that investors may get upset and irritated if they don't listen to their advice. Yes, it's true that investors come in all shapes and sizes, but don't forget that most investors have their own lives to lead, and after offering you a solution, they're going to leave it up to you to decide whether to implement it or not. We respect your ability to make the right decision, and are happy to support you, but you need to show us that you have thought through all the possible solutions systematically before acting. 

 

We don't like being blindsided by bad news which comes as a bolt from the blue, because you have not shared information. And we dislike being treated as puppets who are only asked to rubber-stamp your decisions at the Board meeting. While you can pull a fast one every once in a while by presenting us with a fait accompli, you will not be able to continue to get away with this behaviour on an ongoing basis, and it will come back to haunt you - especially when you need to raise more money. 

Books versus conferences as learning tools

We need to keep on learning all the time because the world is changing so quickly. Financial challenges are never-ending; competition crops up all the time; technology keeps on evolving; and market requirements change. This is why both angel investors and entrepreneurs need to learn, unlearn, and relearn stuff all the time, and this keeps them on their toes.

 

Typically, we all have different learning styles. Some of us learn by talking to experts; others by attending conferences and listening to gurus; while some prefer imbibing ideas by reading books or online content. 

 

Conferences are very popular as a platform for sharing knowledge. Experts with real-life experience and invited to give speeches and share their perspectives, so that young founders can listen to their nuggets of wisdom. It also gives them a chance to ask them questions on a one-on-one basis as well, so that they can get answers tailored to their specific circumstances. 

 

It's true that attending conferences can be lots of fun. You get to network; to party; and to meet lots of other entrepreneurs, with whom you can share notes. You get a chance to vent, because you can complain about how clueless and short-sighted most investors are. Hanging out with like-minded entrepreneurs can be inspiring, and a conference can give you a boost of emotional energy, but the problem is that this high dissipates very quickly. You collect lots of visiting cards, and many investors promise to get back to you, but once you go back to your routine life, you find no one is really very interested in talking to you anymore when you try to reconnect.

 

If you look at the long-term ROI of attending a conference, I often think it's negative. You need to take time away from work, and this can be an expensive distraction. Also, with the Indian conferences it is that often the speakers are running late; and they aren’t always at their best, because they haven't taken the time or trouble to prepare. Even worse, you are forced to listen to what the organizer feels is important - and a lot of this may be of no interest or relevance to you.

 

 

Whereas, with a book, you can customize your learning to what you need to learn at that particular time, so that it's just-in-time learning. Because books are edited and polished, the wisdom which an expert shares in a book is far more comprehensive, encyclopaedic and accurate as compared to what he says in a speech.

 

I think after attending a conference, within a month's time, you should perhaps do a post-mortem, and then think about what you learned, how you benefited from the conference, how constructive it really was. The question you need to ask yourself is, "Could you have learned the same lessons more efficiently and effectively?" Let's not forget your time and bandwidth are precious and you can't afford to fritter them away.

 

Now, I also think technology has changed so while it's great to talk about networking, if there really is someone you want to reach out to, all these people now have digital profiles. If you have something of value, then they will be more than happy to connect with you digitally so that you can then set up a one-on-one meeting, which is far more productive, rather than stand in line and hand out visiting cards and beg for one.

 

Also, your bandwidth is precious, as is your time, and you need to learn to conserve it so that you get the biggest bang for your buck. You need to actually measure ROI of these events. While it can be fun to attend an event, a critical analysis will usually show that you could have got the same knowledge boost using other more efficient ways, tailored to what your particular needs are.

 

I feel the return on investment as far as learning stuff goes, it's far better from a book or a website, as compared to a conference.

Overcoming VC's FOLS and attracting investments

 

In the world of venture capital investments, the Fear of Missing Out (FOMO) is a widely recognized psychological factor. However, one aspect that often goes unspoken is the Fear of Looking Stupid (FOLS). FOLS acts as a counter-balance to FOMO, impacting startups' ability to attract serious interest from investors. This fear hinders both investors and founders, leading to missed opportunities and insufficient information for investment decisions. In this article, we will delve into the significance of FOLS and explore strategies to overcome it, ultimately increasing the chances of securing VC investment at the early stages of a startup.

The Impact of Fear of Looking Stupid:

FOLS can have detrimental effects on startups seeking funding. Some investors, driven by their fear of not fully understanding innovative ideas or technologies, may choose to avoid investing altogether. This fear-based avoidance stifles progress and restricts the growth potential of startups with groundbreaking concepts. Additionally, founders often encounter situations where investors refrain from asking important questions due to the fear of appearing ignorant. Consequently, this lack of crucial information can impede investment decisions and hinder the startup's ability to communicate its value effectively.

Prioritizing Learning and Curiosity:

To overcome FOLS, it is crucial for investors to prioritize learning and maintain a sense of curiosity about new developments. VCs should actively seek opportunities to broaden their knowledge and understanding of innovative industries, technologies, and business models. By adopting a growth mindset and embracing continuous learning, VCs can mitigate the fear of looking stupid and unlock the potential of groundbreaking startups.

Education and Lowering Perceived Risk:

Equally important is the role of founders in educating investors and minimizing perceived risks associated with their business. By proactively identifying and addressing potential risks within their startup, founders can demonstrate preparedness and instill confidence in investors. In the early stages, it is imperative to present a clear and comprehensive business plan that highlights the identified risks and outlines effective mitigation strategies. Transparent communication of these plans allows founders to mitigate the fear of looking stupid on both sides, enabling investors to make informed decisions.

Mitigating FOLS: Strategies for Founders:

  1. Self-Awareness: Recognize and acknowledge the fear of looking stupid as a common barrier to success. Embrace the understanding that mistakes and uncertainties are part of the entrepreneurial journey.
  2. Knowledge Empowerment: Continuously expand your knowledge base and stay up-to-date with industry trends, emerging technologies, and relevant market dynamics. This will enhance your ability to confidently communicate your startup's value proposition.
  3. Risk Identification: Conduct a thorough risk assessment of your business, addressing potential concerns that investors may have. Be proactive in anticipating and addressing these concerns within your pitch.
  4. Effective Communication: Clearly articulate your business model, competitive advantages, and growth strategies. Develop a compelling narrative that educates investors and alleviates their apprehensions.
  5. Network and Mentorship: Surround yourself with a supportive network of experienced entrepreneurs, mentors, and advisors who can guide you through the investment process and provide valuable insights.

Conclusion:

The Fear of Looking Stupid (FOLS) can hinder startups from securing investment opportunities. By acknowledging the existence of FOLS and actively working to overcome it, both venture capitalists and founders can unlock the true potential of innovative startups. VCs must prioritize learning and maintain curiosity, while founders should educate investors and lower the perceived risks in their business. By being proactive, transparent, and confident in addressing risks, founders can navigate the investment landscape more effectively, increasing their chances of securing early-stage investment. Embracing a growth mindset and leveraging the strategies outlined in this article will enable startups to break free from the shackles of FOLS and thrive in the competitive world of entrepreneurship

Raising money is a never ending struggle for founders

Running a start-up can be extremely challenging, and founders often underestimate how much time and energy they will need to spend in raising money to make sure that they don't run out of cash. 

 

Most founders are well-equipped to handle the technical problems which they will have to deal with. They are confident about their ability to craft a better product; take it to market; and improve the technology in order to stay ahead of the competition. This is the stuff they enjoy, which is why they're good at doing it. However, raising money is a completely different cup of tea. It's not something which they've done before and it's often not something which they ever get good at doing.

 

The problem is that you are advised to raise only enough money to last you for about 18 months, because you don't want to dilute yourself too much and hand out too much of your precious equity to investors. This means that you need to go back to the market every 18 months or so, in order to look for more money. If we assume that a start-up is going to take about 8 years or so to reach maturity, this means you have to go out with a begging bowl about 4 or 5 times, until your start-up starts generating enough money to be able to run on its own. 

 

 

You also need to remember that raising money is expensive - both on a short term basis, as well as on a long perspective. Thus, it consumes time and energy, and you have to travel in order to pitch to investors - many of whom will take perverse pride in yanking your chain. This is time you can't really afford, because it distracts you from your core business of running a company which will create a product which will delight customers. On a long term basis, by giving away a share in your company, you are diluting yourself, and this can affect your ability to control its destiny

 

You may feel that once you've raised money the first time, it's going to become easier the second time, but unfortunately this is not true. It can actually become more complicated, because you now have existing investors whom you need to pacify, and they may not agree either with you, or with your new investors. These differences of opinion can complicate matters considerably! Thus, your original angels may not get along well with your series A investors; who may not see eye to eye with your series B investors, as regards valuation and liquidation preferences. You can read about these well-publicised conflicts in the press, who describe the sticky issues which larger start-ups have to deal with when they need to raise Series C rounds. The problems which plague early stage companies are very similar (but not as well publicised), because they involve fewer zeroes - and smaller egos!

 

The good news is that once you've raised a seed round, you at least have a working familiarity with some of the terms which investors use, and you understand how to read a term sheet. You are better equipped to negotiate, because you've done it once. However, it's not something you can take for granted, because each negotiation involves dealing with a new set of investors, some of whom will have an idiosyncratic worldview and very different expectations. It's very hard to keep so many people happy all the time, especially when their interests are not aligned. 

 

This can get really stressful, especially when you find that you are running out of money, and need to raise a bridge round at very short notice. The fear is that if you don't raise money quickly enough, your company will fold, and all the years of effort which you have put in will go down the drain. You may be desperate for a cash infusion, and investors can sense this and will take advantage of it. This is why it's so important to start preparing for your next fundraise well in advance - as we all know, the best time to raise money is when you don't need it! 

Finally, never forget, that the best source of funding are your customers, and therefore you should focus on reaching cashflow profitability as soon as you can.

Why do founders make such poor use of their investors?

As with lots of things in life, you require a team in order to be able to accomplish something, and this is true for start-ups as well. This is why most start-ups have co-founders who help each other during their journey, which can often be rocky. However, entrepreneurs should also think of their angel investors as being partners in running the start-up. 

 

Part of the problem is most founders think of investors as providing dumb money. All they really want is the cash, and then the freedom to use that as they see fit, in order to implement their dreams and crazy ideas. This is why they have a very limited view of the value which a mature angel investor can add to the start-up. This is such a shame, because every good team needs both a thinker as well as a doer. The job of the entrepreneur is to do - to execute and implement, by getting their hands dirty. The task of the investor is to be a thinker, because you have a 30,000 foot view, and can provide guidance as to what to focus on, so that he does the stuff which is likely to give him the biggest bang for his buck. Working together, you can bridge the Thinking-Doing Gap, which often causes start-ups to collapse.

 

Lot of angel investors are experienced and worldly-wise. They have run their own businesses, and made money. They have a lifetime of experience to share, and quite a bit of maturity as well because of their age - grey hairs are acquired at a high price! It surprises and disappointing me when entrepreneurs don't take advantage of this. 

 

When they are stuck, logically the first people they should reach out to is their angel investors - after all, that's the job description of an angel investor. He didn't just hand over a cheque with the expectation that you would multiply his money after five years. If that's what he wanted, then he would be much better off putting it is a fixed deposit, where's it far more secure.

 

 

Now you don't need to talk to all of them - just the few whom you have established a rapport with. (And if you haven't been able to do so, shame on you - this is a key task of a good entrepreneur!) The problem is that this requires humility and integrity. You need a lot of self-confidence to reach out for help, because you are signalling that you are out of your depth, and you are worried that your investor may interpret this as a sign of incompetence.

 

Please remember that your investors don't think you are superman! Yes, they have taken a bet on you, but they also understand that you are raw and inexperienced, and will need some hand-holding and guidance during your journey.

 

They will often be able to provide you extremely high quality advice, because of their experience with watching how other start-ups have evolved. They have a network, and can help you tap into it, to make your path easier. Remember that they have skin in the game, and are invested in making sure that you succeed. They will not think any less of you just because you are stuck - and in fact will admire your courage in asking for assistance.

 

This is why it's part of your job to frequently send them updates, and keep them in the loop. You should do this for selfish reasons, as it'll increase your chances of success. If you had to pay a similarly qualified consultant for advice, you would have to pay an arm and a leg- and your angels are happy to give this to you at no charge. I think this is perhaps part of the problem - because it's free, it's not valued as much!

 

That's why it's important to respect your investors and share information with them proactively on a regular basis. Reaching out and asking for help is good for you, because they may be able to provide invaluable insights - often in a short phone conversation. You do need to learn to respect their time, and you should craft your problem and the possible solutions you are exploring succinctly and in writing, so that they can add value. Yes, they are busy, but if you help them to feel involved and engaged in your start-up, they are much more likely to help when you find yourself in a spot. Remember that they have a soft corner for you, which is why they invested in you - be smart and make the most of this.

 

No investor likes to think of himself as being just a source of dumb money (though I agree that many of us are often quite clueless) If you are respectful and show that you want to tap into knowledge, they will be happy to help. Most angels think they are smart, and we want founders to make use our wisdom - after all, this is why we became angel investors in the first place! 

 

And, yes, it's true that some investors can be a pain in the neck. They may end up eating into your time and giving you all kinds of silly suggestions, but it's a good idea to assume positive intent, and then calibrate the interactions you have with each of them depending on the value which they add to your life. Be smart, and make clever use of them!

Are you a coachable founder?

I have a lot of respect for entrepreneurs because I know how hard it can be to run a start-up. This is why, whenever we are evaluating an investment opportunity, one of the key questions we ask ourselves is - Is the founder coachable?

 

The reality is that he's going to have to master 50 different skills, many of which he's completely clueless about right now. He's going to have to learn on the job, to make sure that the start-up doesn't crash and burn. This is no mean achievement - it requires a lot of flexibility, agility, resilience, intellectual fire power, grit and emotional maturity. When doing our due diligence, it's very hard to judge whether a founder has these skills or not, and this is why our focus is not on testing how much he knows, but whether or not he's capable of learning - that's what we're trying to find out. 

 

We'd rather back someone who is comfortable acknowledging his ignorance; and is willing to do the work in order to fill the gaps in his knowledge, rather than someone who is overconfident because they are arrogant about their intellectual prowess. It's this hubris which comes back to haunt the entrepreneur later on, because these are the people who are not capable of unlearning and relearning. They will not listen to feedback, and will not be able to pivot based on changing circumstances, because they refuse to acknowledge reality. Because they think they already have all the answers, they are not open to receiving feedback or accepting advice. 

 

 

We are looking for someone who is honest about their limitations, and who is willing to put in the hard work needed to find out the answers to what he doesn't know, rather than someone who is happy remaining confidently ignorant. 

 

This is a remarkably uncommon trait, because it requires a lot of self-awareness to be able to be able to learn from different people. Not everyone has the maturity to accept feedback from others - especially when you have the title of CEO, and think that your job description signifies that you know all the answers. Being the CEO can go the founder's head if he is immature! Yes, the buck does stop with you, but you do need to be humble and curious, so that you can roll with the punches. 

 

This is why mature founders, who've graduated from the school of hard knocks, and have been able to show that they have grown over the years because they're able to absorb wisdom from others, are far more likely to do well as entrepreneurs. Yes, we still haven't learned how to judge this character trait accurately, but we get a fairly good sense by seeing how well the founder answers queries and objections. We are looking for someone who is curious and willing to learn, unlearn and relearn; and someone who is humble and willing to accept that he may be wrong. 

Looking for founders from smaller towns

Like all angel investors, we are always looking for an edge, and this is why we actively try to seek founders whom we think have a better shot at being successful. We want to talk to founders who haven't been shopping around, and would like to become the angel of first choice for those who fall in our sweet spot. 

 

This can be a challenging undertaking, because we know that most start-ups are going to fail. In order to make money, we will need to be right, and to have the courage to go against the crowd. If we try to follow the herd and invest in sectors which are "hot", we are unlikely to be successful. These start-ups attract a lot of media attention, as a result of which their expected valuations become so high, that they're very unlikely to provide a satisfactory return. 

 

Now, while most angel investors are happy to take a piggy back approach and let someone else lead the deal, we prefer taking a more activist approach. We think this is where we have an edge, and we want to play to our strengths. 

 

Our hypothesis is that India is a booming market, which is going to continue growing. Because the start-up ecosystem is still immature, it provides us with lots of opportunities, and we are happy to pan for gold. We want to back Indian entrepreneurs, because they understand what makes the Indian market tick. 

 

We're specifically looking for Indian entrepreneurs who come from tier two and tier three cities. They live where most Indian consumers reside, and we believe that this means they have a much better understanding of the pain points of these consumers. We hope they will be able to use their insights to create clever solutions, adapted for India.

 

 

Usually these entrepreneurs are not very sophisticated. They're not very good at making pitches or designing PowerPoint presentations. Their English skills often leave a lot to be desired; and they're not very good at networking. Most don't have an IIT or an IIM pedigree, as a result of which they're always struggling to find investors who are willing to give them money. They are usually neglected, and many have a chip on their shoulder, because they resent being treated as second-class citizens simply because they don't have the right paper credentials.

 

However, they are usually very street smart, and these are the founders we have a soft corner for. This is because they operate in areas where there isn't much competition, as a result of which they have a chance to shine. Also, we feel we can add a lot of value to them, If they have sound technical skills and a good product, then we are happy to help them to polish their pitch and improve their English. 

 

Interestingly, these entrepreneurs have a lot of business sense. They are often from baniya families, and have lots of business men in their family. They are taught to be frugal, and understand the importance of tracking the bottom line very carefully. This is our sweet spot, and we think that by marrying our strengths, we can help them to create a winning company.

Why do founders dread due diligence?

One of the terms which inspires terror in most entrepreneurs' hearts is "due diligence". This is the time when investors will poke and probe and prod. They will open your kimono and look into your company's bowels. They will scrutinise your book of accounts; quiz your customers; and grill your suppliers, in order to find out whether you're worth investing in. This can be quite scary, because you're always worried about whether they will uncover the skeletons in your cupboard (and we all have skeletons we have done our best to hide!). You are not sure whether you'll be able to pass their tests, and this can create a lot of anxiety. Part of this is because most entrepreneurs have been so focused on running the company and making sure that operations are running smoothly so that they can acquire paying customers that they often don't bother about niceties such as accounting or governance. This is the one thing which investors are focused on, because they need to make sure that everything is shipshape before they will put in money into the company.

 

Due diligence is a bit like exam time, and entrepreneurs don't look forward to it, but they need to change their perspective. If they really want to grow, they should actually look upon it as an important test from which they can learn a lot. It will help them to plan for the future, because if you want to remain more than just a small start-up, and if you feel that you're mature enough to be able to absorb the investors' money, you need to be able to show that you're capable of meeting the high governance standards which investor demand in order to protect their money.

 

If due diligence is performed well by an investor, then irrespective of whether he finally decides to give you money or not, the process can provide you with very valuable insights into your company. This is usually stuff you know which needs to be fixed, but which you have never got around to doing, because you have been too busy fighting hundreds of other fires in order to remain afloat., The truth is that none of us wants to accept our failings, and we'd rather bury them under the carpet, but the due diligence exercise will not allow you to shy away from your lacunae, and you will be forced to fix these. 

 

 

This is a great chance to get your act together, both internally as well as externally. If you had to pay a consultant to do this, they would charge you an arm and a leg, and your investors are doing this for free, which means it's a great bargain!

 

You will also get valuable insights into the investors' worldview, which will stand you in good stead - not just for this round of funding, but for the future as well. You will learn what investors are looking for, and you will also find out whether you're capable of providing this.

 

On the other hand, you may realise that this is just not your cup of tea, and you're quite happy continuing growing slowly as a lifestyle business. After all, taking on the responsibility of accepting money from outsiders means that you become answerable to them, and this will be an ongoing burden you may not want to bear.

Our pitch to health-tech founders

At Malpani Ventures, we have a deep passion for supporting innovative startups that are making a real difference in the world. We believe that technology has the power to transform the healthcare industry and improve patient outcomes.

We want to partner with founders who share this vision - so if you are a health-tech founder, here is our pitch to you.

But first, who are we?

State of Health-tech Funding in India

 

 There has been significant growth in the healthcare sector funding over the past decade, with rising demand for quality healthcare services and a growing awareness of the importance of health and wellness.

However, numbers do not paint the whole picture. A significant portion of the funding is concentrated in a few large deals. Moreover, the quantum of funding is far limited compared to other sectors such as SAAS, fintech, e-commerce, etc.

There has been a limited impetus on funding research-first/ deep tech startups in healthcare with funding largely flowing to consumer marketplaces, telemedicine, or aggregation plays

This is where we come in!

Malpani Ventures’ investment process:

 

Our selection criteria for healthcare opportunities:

  • Working prototype/ MVP backed by intellectual property
  • Deep expertise of founding team
  • We don’t seek to fund customer acquisition plays + opportunities with limited tech differentiation – hardware/ software

Key trends we are bullish about:

  • India-first models: Affordable, easy-to-deploy
  • Application of AI/ ML on diagnostics & drug discovery

What is our stage/ size of investments?

  • We invest in pre-seed & seed stage startups in India.
  • Invest between Rs 1 - 4 cr as the first cheque. We reserve ~2x the amount of our first cheque to participate in follow-ons.

 

What do we look for in opportunities:

 

While we have shared our due diligence process in detail here, the below image is a fair summary of the key questions we seek to answer during our discussions with founders:

 

What do we look for in a pitch by a health-tech founder:

 

A simple and clear understanding of the opportunity:

  • Why you are solving a real problem and
  • Why you are best placed to do so?

What is the north star for the founder?

  • As most startups are pre-revenue, investors can often not have a barometer to judge startups. Develop a way of demonstrating traction

Clear business model: Most technical founders struggle when presenting a financial business plan.

Deep understanding of the regulatory and competitive landscape


How do we add value to founders:

At Malpani Ventures, we understand that founders are the experts in their businesses. That's why our motto is "Founders know how to run their business best, for everything else we can offer our assistance."

We believe in providing patient, long-term, and flexible capital, which is crucial for early-stage healthcare founders. Being a family office, we are not bound by the constraints and demands of a typical fund and the associated pressures

But, our support extends far beyond just financial assistance. Here are some of the ways we seek to add value to healthcare founders:

  • Finance and Metrics: We understand the importance of tracking metrics and maintaining financial discipline, especially in the healthcare industry. Our team works closely with founders to improve reporting and tracking metrics. By offering this support, we help founders to stay on track and make data-driven decisions, which is critical for their success.
  • Building the Right Narrative: Raising capital is an essential part of scaling any startup, and we act as co-pitchers for follow-on rounds. We help founders to articulate their vision and present their business in a way that is both compelling and credible.

  • Connections: At Malpani Ventures, we understand that the right connections can make all the difference when it comes to building a successful healthcare startup. We offer our founders access to our extensive network, which includes other founders, customers, and employees.

Bonus: Our principal, Dr Aniruddha Malpani is a renowned IVF specialist and runs his own clinic. In his own words. “My medical background gives me an advantage in evaluating early healthcare startups. However, my greatest strength as an investor is my ability to empathise with fellow entrepreneurs.”

 

Summary:

 

We are always looking for founders who share our passion for transforming the healthcare industry. So, if you're a health-tech founder looking for a committed partner who will offer more than just funding, please pitch to us. We promise to listen, ask questions, and provide feedback that will help you take your business to the next level.

We are excited to hear from you and learn about the innovative solutions you're working on. Please pitch to us here

 

Do share our pitch with other founders in your network!

 

Innovation versus implementation

One of the virtues which is highly regarded in the start-up ecosystem is innovation and creativity. Everyone looks up to original thinkers, and we want our students to come up with brilliant new ideas, so that they can translate them into successful businesses. Even our PM exhorts our youth to "think out of the box". Yes, this is a cool aspiration, which is why Steve Jobs is an icon who continues to inspire the next generation. These are the success stories which we talk about in our classrooms and this is why books which teach you how to be more creative sell like hot cakes on Amazon. 

 

However, young entrepreneurs in India complain that seed-stage investors are old-fashioned and stodgy. The refuse to fund their innovative ideas, and are only happy to back safe, boring "me-too" models.

 

 

The truth is that innovation by itself means nothing - implementing it is much harder. Execution is hard work, because you have to get your hands dirty. You need to be willing to slog, and put up with the daily grind of having to sell to everyone you meet. You need to overcome objections and criticism; stay ahead of competitors; bounce back from failure; raise money; convince sceptics; and keep on pushing, until you can actually see your idea come to fruition. This is the boring stuff which entrepreneurs do day in and day out, but because it's not fun or exciting, it's something we don't talk about enough. This is a shame, because students fail to appreciate how important flawless execution is. They end up building castles in the air, but don't know how to put foundations under them.

 

This is one of the reasons why fast followers often do so much better than first movers. While innovators may think of an idea first, if you can't convince the rest of world that it has merits, your originality does not translate into anything useful or concrete - either for you, or for the world at large. 

 

Rather than debate which of the two skills - innovation and implementation - is more important, we need to understand that we need both. One without the other is incomplete. Innovation and implementation set up a positive virtuous cycle which feed off each other. This is why it's so important to have a team, where one person can be passionate, and the other one can be perseverant. It's this combination which creates the magic sauce which spells the difference between a start-up which does well, and one which goes down the tubes. It's very unusual to find one single person who has both these skill-sets, which is why finding the right co-founder is so important. 

When raising money is a bad idea for a founder

For lots of first-time founders, raising money is the first hurdle they need to cross. This is like a rite of passage, and they feel that unless they are able to raise oodles of cash, they're not going to be able to run their start-up successfully. This is partly because of all the media buzz around funding, and since it's only the start-ups who raise money which get written about, it's completely natural for all entrepreneurs to believe that this is the only path to success. 

 

This is extremely short-sighted. While it's true that there is a right time to raise money, it's also true that there is a wrong time - and especially for a young start-up, raising funds too early can actually be harmful. This is true for multiple reasons. 

 

Raising funds is a long, complicated, time-consuming process, which distracts you from running your company, so that instead of focusing on your consumer and creating a product which delights him, you start focusing on investors.

 

Funders can be hard to deal with. They waste your time; lead you up the garden path; say contradictory things; and make all kinds of promises, which they never live up to. The experience can leave you embittered and disillusioned. 

 

The truth is that getting buy-in from investors and raising money is hardly a validation that your start-up will be successful - you should aim for getting paying customers instead! Ironically, once you start getting customers, the investors will follow - I can promise you that.

 

Unfortunately, the reverse does not work, and just because you've raised money from investors doesn't mean that your product will be accepted in the market. Just because investors have money doesn't mean they have all the answers. If they were really so smart then they would all be rolling in money by starting their own companies!

 

 

The danger is that once you have money, you start becoming sloppy. You are happy to burn the money because that's what your investor wants; no longer are you frugal, and you don't think about being creative within your constraints. Because money can cover up a lot of errors, you may end up going down the wrong path - often instigated by "insights" from your investor who has a great 30000 foot view of the market, but may be completely out of touch with reality. By the time you realize that you're up a creek without a paddle, you've burned all your money and you can't recover. You're then saddled with not only a damaged reputation, but a lot of blame and recrimination as well, which can be hard to live with.

 

On the other hand, if you are spending personal funds, you're likely to be much more conservative and careful. This helps you take advantage of the major benefit of being a start-up - you can be nimble, and since you can afford to experiment inexpensively, you can fail fast. Also, because you are not answerable to anyone else other than your customers, you don't have to worry about trying to keep your investors happy.

 

While having a certain amount of money can be a useful cushion, raising it too early can be toxic. This is something which founders often don't realize, because it's so exciting to be able to get a boatload of money from someone simply by making a presentation. The trouble is that this encourages shortcuts, which will come back to haunt you afterwards. It will be very difficult to recover from these errors, simply because you ended up spending so much money on pursuing a red herring. 

 

If you fail to raise money, don't get disheartened or disappointed - this could actually be a blessing in disguise. Just because your investors have said no now, doesn't mean they will continue to say no. Get some paying customers, and they will be singing a different tune!

Bridging the founder-investor gap

There are many similarities between the healthcare ecosystem and the start-up ecosystem. Just like there are lots of patients who line up to see a few doctors, there are lots of founders with great ideas who are chasing a handful of investors who have tons of money. To this extent, founders resemble patients; and the investors play the role of the doctors. Founders approach investors for money, and it's the funders who decide whom to give money to (whom to treat, in one sense), and whom to refuse. The dynamics of the founder-funder relationship are very similar to the doctor-patient relationship because they are both characterised by power and information asymmetry. 

 

This is why founders feel vulnerable and exposed. It's true that at first blush, it appears that it's the investors who have all the power, because they have all the money. As the golden rule says - He who has the gold makes the rules.

 

There are enough horror stories of naive entrepreneurs who have been cheated by investors. They have been made to sign term sheets which are very one-sided and unfair; have been paid a pittance for their hard work; have been squeezed out of their companies; and have even had their ideas stolen, 

 

 

A few bad apples amongst funders can damage the reputation of all investors - and this is uncannily similar to the medical profession, where the high-handed bad behaviour of a few doctors has caused patients to treat all doctors with suspicion. There is very little regulation in both systems, which means that just like bad doctors can get away with providing poor quality care, bad investors can also get away with ill-treating founders. These investors take undue advantage of the first time founder's immaturity with impunity, and end up harming all the players in this fragile ecosystem, which needs mutual trust and respect to thrive.

 

The cheated founders then start bad-mouthing the funders privately, and the mistrust spreads. All investors get tarred with the same brush, and this harms the good ones as well. The only way to fight this is by encouraging openness and transparency. This will help to create a level playing field, so that funders cannot take advantage of the ignorance of entrepreneurs.

 

Part of the problem is that investors forget that they are in the business of providing a service to entrepreneurs. We see exactly the same issue in the medical profession as well, where the sense of power sometimes goes to the doctor's head, and he then starts treating patients badly, because they are vulnerable and clueless.

 

Doctors need to be reminded that patients are the only reason doctors exist, and doctors need to learn to put their patients first. This is equally true of investors as well. The only reason we are around is because entrepreneurs have the courage and guts to start a company. Our job is to support and service them, which is why we need to learn to put founders first. We need to respect them, so we can help them to grow. Wise funders who do this will do much better than the rest, and this will give them a competitive edge. 

 

I have been trying to bridge the gap between patients and doctors for many years, because it pains me to see how the increasing distrust between them is poisoning the doctor-patient relationship, which lies at the heart of good medical care. This is why I have authored many books, such as Information Therapy - Putting Patients First; Patient Advocacy - Giving Voice to Patients; and Patient Safety - Protect yourself from Medical Errors, all of which are available online at the www.thebestmedicalcare.com.

 

I am very worried that the same distrust will wreck the start-up space as well, if we allow crooked funders and founders to get away with bad behaviour. I am trying to inject more trust into the system, by helping investors to see the entrepreneur's perspective; and vice versa. I am hoping that my posts on LinkedIn will help to bridge the funder-founder gap, so that first-time entrepreneurs and investors don't burn their fingers!

Why I am happy to fund failed founders

I attended an interesting TiE meeting for charter members which discussed angel investing because TiE has now started a special interest group for angel investors. One of the topics for discussion was - How do you choose which entrepreneur to back? Seasoned investors spoke about the metrics they use to evaluate a founder, such as : has he been referred by someone they trust? what's the total addressable market (TAM)? how passionate is he? what are his credentials? has he been able to put together a sterling team? Pretty standard stuff, which most of us are familiar with. 

 

It's clear that there really is no formula which anyone can use when deciding which start-up to invest in. This is why which start-up company to fund is always a million-dollar question, and pretty much all seed stage investors have to use their gut, simply because there are such few data points available. For every success story we tom-tom about, there are at least five failures, and this is what keeps us humble. No matter how many years of experience we have, every new deal is a learning experience, because the space is such a dynamic system which keeps on changing so quickly. 

 

 

My most useful rule of thumb is to back a failed entrepreneur. This might seem unusual - why would I want to fund someone who's not been able to pull off his first start-up successfully? Here's my reasoning. 

I think he's learned a lot of valuable lessons by failing the first time. This has been on someone else's dime, and I stand to benefit as a result of the knowledge which he has garnered from the school of hard knocks. 

 

Because he's failed once, he has much more at stake, and is desperate to prove himself. He will be far more focused on making sure that this company doesn't meet the same fate, because he knows it's very unlikely he will get a third chance. 

 

He's likely to be more receptive to the advice his investors give him, because he's appreciative of the fact that we've given him a second chance. He will hopefully try to live up to the faith we've placed in him. He's very likely to be frugal, because he understands the importance of cashflow in ensuring a business doesn't die. Because he's run a business before, he understands the importance of finding getting paying customers, and this means his chances of making mistakes goes down quite a bit - he's already made quite a few before in his first start-up, and will not repeat these again.

 

While entrepreneurs who have a PhD from an Ivy League college have a great resume, these failed entrepreneurs have a PSD (poor, smart and a deep desire to be rich) from the school of hard knocks, and I feel this is more valuable in the start-up space. The fact that they are willing to try this again rather than give up just because their first start-up went belly-up means they have emotional grit, and this is a very valuable personality trait.

 

Just because his first start-up failed doesn't mean that his second one will fail as well, and I do believe in giving people second chances, if he can show me has absorbed the lessons he has been taught. In fact, I believe he will work extra-hard to make sure that this start-up will be successful. Finally, because this is a contrarian approach, there is not much competition from other funders, as a result of which the valuations he expects are much more realistic. 

Scams in the startup ecosystem

The start-up space has been attracting a lot of interest in India. There are lots of young entrepreneurs who feel they can start a new business which can change the world. This is all for the best, because we need the spirit, creativity, and enthusiasm which young blood can bring to infuse fresh life so that we can continue to progress. Unfortunately, because these entrepreneurs are very young and immature, they're also very vulnerable. There are lots of scam artists who are out to take advantage of the fact that these founders are looking for funding and don't know how to get it

 

 

 

They make all kinds of promises to lure them in. For example, they promise them funding by offering to introduce them to influential well-heeled connections for a "facilitation fee " - and end up converting that poor entrepreneur's dream into a nightmare because they have no intention of delivering. These scum bags will often end up cheating the entrepreneur, by stealing his idea and taking ownership of all the hard work he's done. By the time he realizes that he's spent many months just chasing a mirage, there is precious little he can do about it. He feels bitter and angry, and feels that all investors are crooks.

 

One way of fixing this problem is by openly sharing your experiences on LinkedIn as to how these scam artists work. The truth is that when you're cheated, you contribute to the problem by keeping quiet, because your silence encourages the cheater to cheat other people. Because you are ashamed that you were so naive that you got duped, you clam up and don't want to acknowledge that you allow yourself to be taken for a ride. It is this passivity which allows these cheats to continue to flourish. They hone their techniques and polish their modus operandi, because new suckers are born all the time. It's because entrepreneurs don't share this information amongst themselves that this problem becomes even worse.

 

Yes, there are informal networks of founders who discuss these issues amongst themselves, but this is not enough. We need openness and transparency if we want to clean up the system. While you may not be able to get your time or money back, the best form of revenge is outing these scammers, so they aren't able to swindle other founders. 

 

I think it's equally important that good funders also speak up, and let founders know what is considered to be good practice in the investor community. If we don't, then the entire funding ecosystem starts getting a bad reputation, and this will affect all of us. By keeping quiet, we allow a few bad apples to spoil the entire bunch, because "bad money drives out good." These are still early days, but if we don't nip this problem in the bud, we will find it increasingly harder to cope with over time. It's great that there are open platforms like LinkedIn which allow funder and founders to connect with each other, so they can share their experiences, and learn from each other. 

Know Your Investor

We know how important it is to have the right investors backing your company. Not only do they provide the necessary funding, but they can also offer valuable guidance or connections to help your business succeed. However, finding the perfect investor can be a daunting task. That's why we're trying to provide a comprehensive guide on what to ask potential investors at each stage of the meeting process. We'll cover everything from the basics of their investment thesis to more detailed questions on their support for portfolio companies. So, grab a notebook and let's get started on finding the investor that's the perfect fit for your startup!

Source: Symanto

 

Checking the Fit

Before you meet with your potential investor, consider finding out the following from their website or news, or even asking them:

What sectors do they invest in? Most investors now write their thesis on their websites or social media.

What round sizes and stages do they invest in?

How many investments have they made in the last year? - Can be found usually in press releases, or 'why we invested/our investment in..'

 

First Meeting Questions

When preparing for your first meeting, consider asking:

How large is the fund and how much of their fund do they reserve for follow-ons? Some investors have published fund theses during their fundraising press releases

Do they lead or follow?

What is their view on this space? Can check their blogs on market landscapes, thesis etc.

 

Follow-up Meeting Questions

If the first meeting goes well, follow up with:

How do they work with portfolio companies? Ask for specific examples

Who would be on the board and how many board seats/observers do they expect?

What kind of return or exit valuation do they expect from your investment?

Where does their money come from and who are their LPs?

How do they decide which companies to follow on with? Are there examples where they have not followed on?

Do they do bridge rounds?

 

Conducting Reference Calls

Conducting reference calls can help you get a better feel for what it’s like to work with a potential investor. Here are some questions to ask during your reference calls:

What is working with [prospective investor name] like?

How often do you speak to them?

Do they ever feel they are not able to contribute to you because of their other board seats/many investments?

What are some examples of things that they have done to add value?

What has been a difficult time, and how did they react or support you?

Did they follow on in your later rounds or support in any bridge rounds?

What is one thing you have disagreed on?

If something dramatic happens, who would you call first from your investors? And who would expect to be most helpful?

Rate the investor on a scale of 1-10.

 

Asking Co-investors for References

Asking co-investors for references may seem like overkill, but remember that you will be tied to your investor for years. Here are some questions to ask:

Have you invested with them? Do you rate them, and would you take money from them?

Did they support the company?

In areas of disagreement were they reasonable and constructive or difficult and uncommunicative?

 

Making the Right Choice

Once you have gathered all the necessary information, it’s time to make your decision. Remember to consider all the different perspectives you have gained and choose the investor that aligns best with your goals and values.

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