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.
- If you are planning to raise INR 75L. Always say INR 50L in the market. Read on to know why.
- Raising INR 50L to 5Cr is possible in such party rounds. Lowest I have seen is INR25L.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- Always pitch with pre-money valuation. Post-money valuation will defer based on exact round size.
- 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.
- 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.
- 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.
- 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.
- Close the current round when you hit the target 80-120%. You will never have exact round size.
- 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.
- Never say no to an incoming cheque. Most money will come to you when you need it least.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- There are no standard laws. Everything is negotiable.
- 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.
Also published on Medium.