Lessons
on Funding
Comprehensive
guide for entrepreneurs to raising risk capital during a prolonged economic
downturn
Scores of entrepreneurs across India are braving regulatory uncertainty and a slowing economy to launch new businesses. These ventures spread across a multitude of industry sectors ranging from entertainment, travel, healthcare, education and financial services to clean technology often use the internet or mobile phone to reach their consumers. This focus on using technology to deliver products and services in a better, faster and cheaper way is attracting the attention of risk capital investors who have put in $363 million across 100 deals in India in the first half of 2102, according to a study by research firm Venture Intelligence. To raise equity capital is a milestone in the journey of every startup venture and one that most other aspiring entrepreneurs hope to emulate.
Six
Point Guide to Raising Money in a downturn.
1. STRONG TEAM
When it comes to investing in an early-stage startup, the team is the first, second and third most important criteria, says Samir Kumar, managing director of Inventus Capital Partners. In India, most sectors have large and fragmented markets and while a startup might launch with an idea, its final product or service might be completely different. Parikshit Jain launched Vienova Education in 2007, but it was only after months of research that he honed in on a clear segment – affordable education. Jain, who has raised three rounds of funding from Indian Angel Network, Helion Venture Partners and Bamboo Finance, attributes his success to his team. “Build a strong team. Investors bet on the team,” says Jain. While a great team can turn a mediocre idea into a winning business, a poor team can wreck a great idea with poor execution.
2. BUILD PRODUCT
While investors have invested in back-of-envelope business models, more often they like to see an actual product or a service that is in operation in at least a limited manner. Unmetric, a one-year-old startup that provides social media intelligence to enterprises, bagged a few large clients such as Bharti Airtel before pitching to investors. “After getting these customers, we signed the term-sheet with Nexus Venture Partners in less than a month in November last year,” says Lakshmanan Narayan, CEO and cofounder of Unmetric, which then raised over $3 million from Nexus. Sanjay Anandram, venture partner at Seedfund, points out that getting a customer is the first true test of an entrepreneur’s ability in navigating the competitive landscape.
3. LARGE TARGET MARKET
“No matter how good you or your idea is, if the market is small, the idea will not work,” says Sasha Mirchandani, angel investor and Managing Director, Kae Capital. Dippak Khurana, founder of Vserv.mobi, advises that entrepreneurs should ensure that they are chasing a large market opportunity and their company has the early mover advantage. His venture, which raised $3 million from IDG Ventures, has created an ad solution for mobile apps that is compatible with low-end feature phones and is not restricted to smart phone app developers. The company is also targeting developers across the globe, especially those in emerging markets such as Southeast Asia and Latin America. Investors say a large market gives the company and its investors more exit options like mergers and acquisitions.
4. CHOOSE THE RIGHT INVESTOR
The common consensus between entrepreneurs and investors, is that the latter has an equally strong vested interest in the startup venture and must fulfill his role accordingly. “The investor can win only if the startup wins. Therefore, the interests of both the investor and the entrepreneur have to be aligned. It’s like a matchmaking scenario,” says Anandaram. Entrepreneurs say having the right name on a fledgling venture’s board has numerous advantages. “Once we reached an advanced level of negotiation with one venture capital firm, everybody started approaching us to invest in the venture,” said Rohit MA, co-founder of Cloudnine. And it’s not just money that the investors bring to the table. “Chemistry is important as early stage investments are like marriages with an in-built breakup clause. The entrepreneur should look for what value the investor can add apart from just money,” says Inventus’ Kumar.
5. USE REFERRALS
However potentially exciting an idea may be, every entrepreneur – budding or otherwise – has had to learn funding lessons the hard way, by knocking on doors. Investors receive hundreds of proposals and business plans, and they point out that giving individual attention to each is a task of Herculean proportions. “Coming to us with a reference is the best way to do it, as we look at such proposals with greater seriousness. Entrepreneurs should also do reference check of the VCs and speak to portfolio companies to see if the VC is all that is made out to be,” says Sasha Mirchandani of Kae Capital. Otherwise, rejections can be swift. “Never cold call an investor. If you are approaching them, get an introduction first,” says Santanu Paul, co-founder, Talent Sprint. User referrals are generally used by investors as a basic tool to sift between what has strong market potential and an idea that has gone past its sell-by date. “That’s the ideal method, because referrals act as filtration system. Somebody has found your idea interesting, and has therefore, referred you to an investor. Referrals are a stamp of credibility to some extent,” says Seedfund’s Anadaram.
6. BOOTSTRAP
The focus on expanding into new geographies, reaching out to new consumers and rolling out new product offerings demands a constant inflow of capital. While approaching an investor for funding is the ideal solution, entrepreneurs and investors alike, point out that bootstrapping a brand-new venture for as long as possible, and achieving economies of scale, before going for institutional funding, is a more preferred route. “Bootstrap for as long as you can. It will make you a better entrepreneur,” says Mohammed Imthiaz, co-founder, Y2CF Digital Media. Aditya Sanghi, co-founder of HMS Infotech, points out that it was his company’s business model that convinced venture capital firm, Accel Partners, to invest in them. It’s a strategy that gets a seal of approval from investors. “Bootstrapping shows the team’s conviction in the idea and belief in their ability to execute without investor support. That will give investors some comfort,” says Sandeep Singhal, co-founder of Nexus Venture Partners.
Other Views
Entrepreneurs also had some contrarian advice
For favourable terms, make investors compete to invest in your company
Work in a segment that has less competition Do not give up too much stake as you will give up more stake in future fund raises
Go to investment bankers to help with the funding
Decide what you are ready to compromise while negotiating terms
Create the right budget for your business
1. STRONG TEAM
When it comes to investing in an early-stage startup, the team is the first, second and third most important criteria, says Samir Kumar, managing director of Inventus Capital Partners. In India, most sectors have large and fragmented markets and while a startup might launch with an idea, its final product or service might be completely different. Parikshit Jain launched Vienova Education in 2007, but it was only after months of research that he honed in on a clear segment – affordable education. Jain, who has raised three rounds of funding from Indian Angel Network, Helion Venture Partners and Bamboo Finance, attributes his success to his team. “Build a strong team. Investors bet on the team,” says Jain. While a great team can turn a mediocre idea into a winning business, a poor team can wreck a great idea with poor execution.
2. BUILD PRODUCT
While investors have invested in back-of-envelope business models, more often they like to see an actual product or a service that is in operation in at least a limited manner. Unmetric, a one-year-old startup that provides social media intelligence to enterprises, bagged a few large clients such as Bharti Airtel before pitching to investors. “After getting these customers, we signed the term-sheet with Nexus Venture Partners in less than a month in November last year,” says Lakshmanan Narayan, CEO and cofounder of Unmetric, which then raised over $3 million from Nexus. Sanjay Anandram, venture partner at Seedfund, points out that getting a customer is the first true test of an entrepreneur’s ability in navigating the competitive landscape.
3. LARGE TARGET MARKET
“No matter how good you or your idea is, if the market is small, the idea will not work,” says Sasha Mirchandani, angel investor and Managing Director, Kae Capital. Dippak Khurana, founder of Vserv.mobi, advises that entrepreneurs should ensure that they are chasing a large market opportunity and their company has the early mover advantage. His venture, which raised $3 million from IDG Ventures, has created an ad solution for mobile apps that is compatible with low-end feature phones and is not restricted to smart phone app developers. The company is also targeting developers across the globe, especially those in emerging markets such as Southeast Asia and Latin America. Investors say a large market gives the company and its investors more exit options like mergers and acquisitions.
4. CHOOSE THE RIGHT INVESTOR
The common consensus between entrepreneurs and investors, is that the latter has an equally strong vested interest in the startup venture and must fulfill his role accordingly. “The investor can win only if the startup wins. Therefore, the interests of both the investor and the entrepreneur have to be aligned. It’s like a matchmaking scenario,” says Anandaram. Entrepreneurs say having the right name on a fledgling venture’s board has numerous advantages. “Once we reached an advanced level of negotiation with one venture capital firm, everybody started approaching us to invest in the venture,” said Rohit MA, co-founder of Cloudnine. And it’s not just money that the investors bring to the table. “Chemistry is important as early stage investments are like marriages with an in-built breakup clause. The entrepreneur should look for what value the investor can add apart from just money,” says Inventus’ Kumar.
5. USE REFERRALS
However potentially exciting an idea may be, every entrepreneur – budding or otherwise – has had to learn funding lessons the hard way, by knocking on doors. Investors receive hundreds of proposals and business plans, and they point out that giving individual attention to each is a task of Herculean proportions. “Coming to us with a reference is the best way to do it, as we look at such proposals with greater seriousness. Entrepreneurs should also do reference check of the VCs and speak to portfolio companies to see if the VC is all that is made out to be,” says Sasha Mirchandani of Kae Capital. Otherwise, rejections can be swift. “Never cold call an investor. If you are approaching them, get an introduction first,” says Santanu Paul, co-founder, Talent Sprint. User referrals are generally used by investors as a basic tool to sift between what has strong market potential and an idea that has gone past its sell-by date. “That’s the ideal method, because referrals act as filtration system. Somebody has found your idea interesting, and has therefore, referred you to an investor. Referrals are a stamp of credibility to some extent,” says Seedfund’s Anadaram.
6. BOOTSTRAP
The focus on expanding into new geographies, reaching out to new consumers and rolling out new product offerings demands a constant inflow of capital. While approaching an investor for funding is the ideal solution, entrepreneurs and investors alike, point out that bootstrapping a brand-new venture for as long as possible, and achieving economies of scale, before going for institutional funding, is a more preferred route. “Bootstrap for as long as you can. It will make you a better entrepreneur,” says Mohammed Imthiaz, co-founder, Y2CF Digital Media. Aditya Sanghi, co-founder of HMS Infotech, points out that it was his company’s business model that convinced venture capital firm, Accel Partners, to invest in them. It’s a strategy that gets a seal of approval from investors. “Bootstrapping shows the team’s conviction in the idea and belief in their ability to execute without investor support. That will give investors some comfort,” says Sandeep Singhal, co-founder of Nexus Venture Partners.
Other Views
Entrepreneurs also had some contrarian advice
For favourable terms, make investors compete to invest in your company
Work in a segment that has less competition Do not give up too much stake as you will give up more stake in future fund raises
Go to investment bankers to help with the funding
Decide what you are ready to compromise while negotiating terms
Create the right budget for your business
ET120720
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