STARTUP
VENTURE FUND An Uneasy Alliance
Venture capitalists and
entrepreneurs know they need each other, but most times they can't stand each
other.
Startup founders and venture
capitalists share a complicated relationship. The former stand for brave, new
ideas that seek to disrupt through innovation. The latter represent the money
that fuels those ideas. Indispensable as they may seem to each other, the
relationship is often an uneasy one.
Like their peers in Silicon Valley,
Indian startups view venture capitalists with a degree of mistrust.“(Venture
capital) is like a necessary evil,“ said the founder of a Mumbai-based mobile
services startup that has raised multiple rounds of funding from venture
capital firms.
While much of this animosity simmers
below the surface, sometimes it can bubble up into the open in an ugly fashion.
Much of the hostility has to do with
the yawning gap in India between ideas and capital. There are about 20 venture
capital firms actively investing in India, where technology startups alone
numbered more than 3,000 at the close of 2014.
As more ideas chase this limited
pool of risk capital, the rejection rates for startups become inordinately
high. Most venture capital firms cap the number of deals every year at 10,
which includes follow-on funding in portfolio companies. “The quality of
incoming deals has certainly improved over the years, but we still reject 98%
of the deals that we evaluate,“ said a venture capitalist at a Mumbai-based
firm that invests in early and growth stage companies.
Most of the founders and venture
capitalists ET spoke with declined to be identified for this story.
It is usually when deals are being
negotiated that issues crop up. “VCs will engage very heavily with you for a
month, ask for data and then decide not to invest in the company. Sometimes
they will also announce investment in a competitor even while you are waiting
for a response from them about the deal,“ said another Mumbai-based venture
capital investor.
Not unlike a marriage, successful
founder and venture capitalist relationships rest on a couple of factors
trust and respect. This is easier said than done. Matters are complicated by
the fact that in India venture capitalists are a somewhat insular community.
Most prefer to source deals through known references and will rarely take a bet
on a completely unknown entrepreneur.
That has started to change in recent
times. Taking a cue from their peers in Silicon Valley, venture capitalists are
trying to become more flexible in the way they interact with startups. “These
days it is not unusual for me to talk deal terms with a founder at a spa or a
coffee shop,“ said a venture capitalist who leads investments for a Silicon
Valleybased firm. This is also because entrepreneurs have become more assertive
with more capital available to them now. “They have realised if they are not
assertive they will never get respected,“ said Anand Lunia, founder of seed
stage fund India Quotient.
10 THINGS FOUNDERS DON'T 10 LIKE
ABOUT VC FIRMS
No risky business, please
The venture capital business is
about investing in brave, new ideas. Indian VCs are, however, largely risk
averse. Business plans in long-gestation sectors such as medical technology or
software products struggle to land termsheets or even ly get a foot in the
door.
Come into my ivory tower (if you
can)
Many Indian venture capital firms
are inaccessible, especially to first-time founders. In Silicon Valley, it is
not uncommon to find partners from top-tier VCs informally networking with
young entrepreneurs at coffee shops. Indian VCs rarely step out of their
offices to meet startups.If they do, it would usually be at a formal
conferencing forum.
It's so much fun to run with the
herd
Being risk-averse makes VCs seek
safety in numbers.Investors tend to concentrate investments in sectors that are
the flavour of the season. Ergo, capital gets concentrated in a few companies
as investors scramble to get a piece of the most `prized assets'.
We don't sign NDAs (but we may
borrow your idea)
Founders often complain that VCs
don't sign non-disclosure agreements prior to an idea pitch. This is a
well-accepted global practice. However, there have been instances of VCs
`stealing' ideas from a first-time founder's pitch and replicating it within
their portfolio. In one case, a VC used an idea pitched by a founder to
incubate a similar startup in-house.
Termsheet googly
A termsheet is an intent to invest,
not a commitment.
This implies that founders are free
to evaluate multiple termsheets at any given time.
Sometimes, though, VCs hand out
termsheets on the condi tion that founders will not negotiate with other
investors.
This is fine if the termsheet leads
to a deal. If it doesn't, which is often the case, the founder is left high and
dry.
Rights, rights and more rights
If a founder does get to the
termsheet stage, they could get overwhelmed by the unending rights VCs seek for
writing a cheque. Board seats, anti-dilution rights, reverse vesting of
founders' stock, drag-along rights everything appears to be designed to
benefit the investor.
We like your idea, but it doesn't
fit our investment thesis
In the startup world, this is code
for `we have no idea what you're talking about'.Indian founders usually have a
tough time selling their ideas to VCs because most VCs here lack prior
experience in creating or running businesses and have little or no domain
expertise.
The handshake agreement
The VC industry is not known for its
transparency and understanding the internal dynamics of a firm is even tougher.
Sometimes, when a VC offers founders a `handshake agreement' on an investment,
it doesn't necessarily mean the deal is done. What's unsaid is that the deal
still has to be approved by the VC's internal committee.
Nice idea. How does it compare with
China?
Typically, the first thing a VC will
ask founders is to compare their idea to an equivalent business model in China
or the US. Doesn't matter if the founders are building a business unique to the
Indian market. Makes the pitch that much tougher.
10 THINGS VC FIRMS WOULD LIKE 10
FOUNDERS TO DO BETTER
Passion is good, but flexibility is
a virtue
Founders often tend to fall in love
with their ideas so much that they are inflexible to a fresh perspective.
VCs like founders who are open to suggestions
and are willing to make reasonable changes to the original business plan if
required.
Are you pitch-perfect?
Too many founders, not just in
India, lose out on the chance to score venture capital because of a poor pitch.
Founders need to be able to articulate their core idea and vision and support
it with a crisp presentation. The thumb rule in the VC industry is that the
initial investor deck should be no longer than 10 slides to get the message
across.
`I want to be ac quired by Google'
is not a revenue model
A good VC will not usually back
founders whose endgame is to be acquired. Because that would indicate the
founder is not really interested in evolving a sustainable revenue model.
Acquisitions spell a key exit strategy for VCs but not before value has been
created through a revenue model that would sustain in the absence of
acquisition prospects in the medium to long term.
References get a foot in the door
faster
Much as founders may hate it, VCs
rarely entertain cold calls or emails. It isn't too tough to find a reference.
Get a common contact, however remote, for an introduction to a VC. It is also a
test of how hard you're willing to push.
Single founder startups rarely win
Most successful startups have two or
more founders, and with good reason. If you are a single founder startup, it is
always a good idea to get a capable co-founder on board before you approach VCs
for funding. It reassures VCs that responsibilities are shared and that the
company is capable of evolving a stable senior management structure.
Invest in building the relationship
The venture capital industry works
on the principle of relationships built over time. It is wise not to pitch for
funding in the first meeting. Instead, focus on brainstorming and building a
relationship that may translate into funding later. VCs invest in people first.
Do you have enough skin in the game?
Founders who expect to get funded
just on the basis of a business plan are plain naive or presumptuous.This
happens, but very rarely. VCs like to see whether founders have invested some
of their own capital, however little, have built minimum viable products or
prototypes, and have tried to partner with 1-2 potential customers.
Don't bring up NDAs at the pitch
While some VCs may be errant,
investors actually have legitimate reasons for not signing non-disclosure
agreements. VCs meet a lot of startups, including those building businesses
similar to yours.
Signing an NDA can become a profes
sional hazard as they could be taken to court every time they announce an
investment.
Shopping termsheets
Getting a termsheet from a VC and
then leveraging that to get a better valu ation from others is the biggest pain
point among investors. Firstly, it hurts the inves tor's ego who now feel they
have no strategic value. Also, word gets around, es pecially in the Indian VC
community, which is fairly small.
Ditch the tall tales
Being a great salesman can be a
vital skill for a founder, but even the most fantastic story has to be backed by
facts. Founders sometimes get carried away with projections and start throwing
names and numbers without a backup date.All this falls through during due
diligence and can make the founder look shabby.
How the demand and supply dynamics
stack up
India currently has more than 3,000
technology startups, according to Nasscom
VCs invested $2.1 billion in 2014
across 246 deals, according to VCCEdge. More than 50% of this was invested in
mature internet startups
The country's entire venture capital
industry consists of about 20 firms
An Indian VC evaluates an average of
1,500 deals every year and usually closes fewer than 10
More than 90% of new startups born
each year die for lack of funding at the seed stage.
How VCs are Trying to Connect with
Startups
Partners at Helion Venture Partners
have lately taken to Twitter to invite founders to “catch up over beer“ across
cities like Mumbai and Chennai. The format is deliberately informal, targeted
at young entrepreneurs and aimed at positioning Helion as a founder-friendly
venture capital firm
SAIF Partners' sprawling terrace
garden at its headquarters in Gurgaon has become a venue for brainstorming and
networking events that involve investors and founders. The firm recently kicked
off M-Series, a series of discussions and workshops themed around the evolution
of the mobile ecosystem
Fireside chats, workshops and panel
discussions hosted by firms such as Accel Partners, Nexus Venture Partners,
Blume Ventures and Matrix Partners are now a regular part of the startup social
calendar.Events takes place across Mumbai, Delhi and Bengaluru.
ET3APR15
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