Moving The Problem With Money

Scene: A startup in a large market is growing 5-10% week on week. The startup founder wants to grow faster. For this he needs to convince suppliers beyond the organic pull.

Problem: The suppliers don’t trust him because he is relatively new. Hence, they are asking for a minimum revenue guarantee. The founder is good at creating a product but not very good at selling, so he is not able to convince the potential suppliers.

Potential Solution: The founder thinks if he has enough money in the bank, he can offer minimum revenue guarantee to suppliers and that should be enough to convince them. So he ventures out to raise funds.

Solution or New Problem: Now he is working on convincing an investor instead of the vendors. He will now dilute equity to give advance revenue to suppliers. Is the problem solved or moved? 

Moved Scene: What he doesn’t realise is that the business model has now changed from a zero-inventory marketplace to a high-risk trading, where he has already unwritten the supplier. In the previous model the supplier was working to make sure things on the marketplace sell, now they have no interest in helping drive sales.

Changed habits: The suppliers habit haven’t changed, but the founder and his team is now used to buying inventory instead of convincing anyone. More suppliers are interested in selling to him. Supply chain metrics is measuring number of new suppliers added every month. The team goes berserk and buys any and everything to show better numbers in quarterly reviews.

New Problem: A lot of unsold perishable inventory that has already been paid for. Some of it is not sellable.

New Solution: Sell everything at lower price. Any revenue is better than no revenue. Bad inventory gets bad review, so the team now spends in refurbishing that inventory.

New Problem: Additional investment required to maintain and refurbish inventory.

Side Problem: Suppliers are buying their own inventory at lower price. Real buyers are missing.

End Result: Low equity holding. High inventory holding. Unhappy customers. Suppliers still don’t trust you because they can see the gap in your model and are scared of the bubble bursting. 

Moral: Learn to sell and convince the right person. Don’t move the problem with money.

Over simplistic? I know. But you get the point.

How To Raise Angel Investment Funding in India [Practical Tips]

Source: http://www.saranmok.com/jokes

I am going to discuss “party rounds” here. This is generally the 1st or 2nd round of funding for Indian startups when they set out to raise through references or funding platforms like Letsventure, IAN, Angelist etc.

This is only meant to set expectations right for first time fund raisers. Some of you might find it controversial to discuss some of this publicly but it’s all plain honest observation.

  1. If you are planning to raise INR 75L. Always say INR 50L in the market. Read on to know why.
  2. Raising INR 50L to 5Cr is possible in such party rounds. Lowest I have seen is INR25L.
  3. Have a star investor (brand name) or lead investor (more money) who has covered 30-60% of the round, so that there is momentum to show when you hit the road. This is where announcing a lower target helps. Always show momentum during fund raise. It helps create FOMO.
  4. There are only 2 reason why you get investment viz. history with the investor and momentum in the product. First investor is almost always based on history.
  5. Keep refining your pitch after every pitch. A lot of NO’s generally means bad team (lack of history, trust, affiliations) or bad market (too difficult to visualize). It’s never about the product at this stage. People have limitations with respect to what markets they can analyse. They trust the lead investor for other markets.
  6. Investors are easy to convince when they are also potential target customers. A premium cab service is easier to raise for, even though it might have limited market, as opposed to a low cost water cooling device which has a bigger market in India. Investors are not wrong when they turn you down, everyone has limitations to what they can understand. Bank upon your current investors to open more doors for you. Referrals always help.
  7. There is always a flavour of the season in investments. If there is a fresh acquisition in your industry, or a star investor has invested in your competitor, your industry will be the new flavour of the season. More competitors is good at this stage, it helps establish that there is a market. Herd mentality is for real.
  8. As low as 10% dilution is possible at this stage. Don’t go beyond 33% dilution, you will either have money lying in the bank or you would be burning unnecessarily.
  9. Always pitch with pre-money valuation. Post-money valuation will defer based on exact round size.
  10. Never give investors a range for valuation or round size. Always give definite numbers. It helps. It is OK to change round size by 10-15% later, NOT OK to change pre-money valuation. Be sure of what you want to optimise for(read this) in this round.
  11. Keep paper work ready. Ask for cheque or transfer to an escrow account immediately. Angel investments are impulse purchases. Once they are enticed, don’t give them time to think or discuss much with friends/family.
  12. INR 5-25L is the general range from individuals. I have seen as low as INR 60K. I have heard of maximum INR 1Cr from an individual.
  13.  Try and get commitments of upto INR 1cr. Then start making the final closure. You will have a 20% dropout at this point. Which will set you around your initial target.
  14. Close the current round when you hit the target 80-120%. You will never have exact round size.
  15. If this is your first round, open new a round immediately after this. Keep feeding your current set of on-boarded investors with momentum news. Give them something to brag about in social gatherings or online. Keep the language simple. Mostly, news about star name client onboarding helps. People love to reduce their degree of separation from “bigger people”. At this stage your startup is nothing more than a diamond necklace worn by a rich aunty at the Kitty Party. Sparkle. Give her reasons to get noticed. She will attract more investors for you. This is easy money, coming through envy. Don’t say no even if you still have 90% of the money from the last round. Ask for a 50-100% premium from your last round or do a convertible note. Capitalise on FOMO.
  16. Never say no to an incoming cheque. Most money will come to you when you need it least.
  17. Target to raise for 18 Months. For your next round, keep a milestone that you plan to hit in 9 months. You will always take 18months. Hit the road again in 12 months. 6 months of dedicated follow up to close a funding round is normal.
  18. Star investors do the least amount of diligence. They are generally betting on the market and you seem to be a trustable salesman. Your startup is still a show piece diamond necklace.
  19. Smaller unknown investors come on-board because they want to be in the same kitty party as this star investor. They are also under the impression that the star investor must have done due diligence. Mostly that never happens if this is the first round.
  20. At this stage, due diligence is a name-sake signature to keep the kitty party happy. The startup pays for the due diligence. You, as founder, can always threaten the auditor to not pay if diligence report is not in your favour. It is always in your favour. Incase of big VCs, the DD is paid for by the startup only if the investment happens. That is still sane.
  21. Don’t ever request for NDA’s. No one likes it and you won’t have energy to sue anyone incase of a breach. Your pitch-deck will be floating in the market. Your competitors will have access to it. You can’t help it.
  22. News about this will leak. The analyst at a VC firm did it. Or the star investor wore you too early to the kitty party. You can’t help it.
  23. There are no standard laws. Everything is negotiable.
  24. Don’t complain about anything while you are raising money. People like to associate with positive people, keep your social media clean. A lot of first time eye-opening moments will be experienced. Learn and move on. Don’t complain.

What Should You Optimize For In Fund Raising?

You have 3 variables in fund raising-

  1. The Investor
  2. The Amount
  3. The Valuation

In most cases, entrepreneurs are trying to optimize for 2 or all 3 variables and that is what takes away most of the time. If you only optimize for 1 of the 3 metrics, suddenly the problem looks simple. And that may be the difference between life and death of your startup. Which metrics to optimize is dependent on which stage you are at. The only time you can optimize for valuation is when you don’t need the money.

As simple as it sounds, most entrepreneurs with a decent product, fail to identify the priority order.

In general, the 3 choices viz. affiliation, short term quantity and long term value are present in every decision.

For job – Brand name, work experience, salary.  – When should you optimize for what?

For Sales –  The customer’s brand name, the invoice size, the gross margin.

Knowing what you want out of the deal helps you speed up.