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Should you write the executive summary first or last? Why?

The executive summary is a summary of your business plan. Hence, it is to be written last.

Here‘s my suggestion on working on a ‗business plan‘.

Start with a „story‟ - ‗See the film in your mind‘ about your venture – what do you want to do, how large do you want it to be, what will make you happy, what are your aspirations, etc. Imagine it as a business a few years down. This gives you a good view of ‗what you want to aim for‘

Work out rough milestones and goals: Your long-terms goals and aspirations should then be broken into short-term and long-term milestones, which are the stepping-stones to your eventual destination.

Think deeply of how you will implement it: This is the critical aspect of planning your implementation. This also gives you a view of the cost structures, the infrastructure & people needs, processes, etc.

Work out the „structure‟ of an excel sheet: Now, after you have done the thinking, it is time to use an excel sheet to evaluate if there is a business case in what you plan to do. Before you start entering numbers, work out the ‗structure‘ detailing every cost head and revenue stream.

Start working in the excel sheet assumptions are critical: An excel sheet exercise with the wrong assumptions is going to give you a very wrong direction, and perhaps wrong hopes. Be realistic. Be conservative.

Work on multiple „scenarios‟: Life does not play out the way you plan it. Real life situation will be different than your excel sheet plans. It is therefore essential for entrepreneurs to work out multiple scenarios to see how the business will pan out under different outcomes.

Finally, articulate it into the „presentations‟: Once your ‗Business plan‘ is ready, you then articulate it into different presentations. Even an executive summary is one articulation of the B-plan. You can have an executive summary for introductions, a 8-10 slide ppt for first meetings and more detailed documents and presentations for follow-up meetings where specific details are going to be discussed.

You can see the presentation on this link on our blog

„What do investors look for in startups‟?

Stages of a startups… and its relevance

Sanjay explained that a startup is not just someone who has ‗started a venture‘ but could also be a person or a group of individuals who are ‗thinking about building a business around a concept‘.

Teams who have tested a product/service for some time but are yet to launch in a serious scale could also be considered startups.

The stage of startup is important because the nature of the investor is dependent on the stage.

At the concept stage level is when angel investors will invest, while post the concept stage is when it generally becomes possible for VCs to consider investing.

Angel investors and VCs both bring very different value to the startup, and because they participate in different risk stages of the company, both also look at very different things in companies they engage with.

The first thing investors look at it “What is the quality of the team”

How committed are the founders to give it their 100% this is especially critical because at early stages startups will face significant challenges and it is often tempting for teams that are not 100% committed to give up at the first signs of challenges

How capable is the team While experience is good to have, it is not a necessity… as long as the team understands what it takes to build a business around the concept.

And above all, ethics and value systems this is a must

Often based on gut feel there is no real basis for evaluating, and hence often it is on the basis of the chemistry in the initial meeting

Some suggestions

Be upfront and be honest in sharing even your failures and past challenges. Past failures are not likely to be the reason for not investing, as long as you have emerged wiser from the experience.

Dream big – don‘t be scared to have large aspirations.

Try to have a team with at least a couple of people entrepreneurship is a challenging journey and it helps to have a co-founder or a few co-founder to keep you going when the going gets tough

Some level of bonding between founders is important good to have people who know each other

But need to identify what does each person get to the table and each person‘s role is

A bulk of evaluation time spent by angels on assessing the quality of the team

The next aspect which investors look for in „what is the idea‟

The idea has to be very well defined many good ideas do not get a good chance because they are not well articulate or presented appropriately

The more clear you are about your own idea, the more clearer will your communication be

What problem are you solving?

Investors look for solutions to big problems

Disruptive solutions are liked more by investors

Ideally the problem should not have been solved by someone else… but if it has been, for your concept to get investor interest, the market will have to be large and growing at a healthy rate

The problem should address large markets… niche problems are nice, but they may not have a strong business case

Ideas which address a problem for larger audiences have a greater opportunity to scale up

Even in the 4th and 5th year of business, there should be enough room for growth to attract the next round of investors… i.e. therefore scalable concepts make better business sense

Ideas mean nothing by themselves. Implementation is key.

Does the team understand what is required to build a large business?

Business model and revenue model should be attractive, practical and simple

Elaborate marketing plans at the beginning are not important.

Plan the rollout in phases first phase definition should be to ‗prove that the idea has takers someone is paying for it‘

Keep the first phase goal as ‗proving the concept and business model‘.

It takes at least a year plus to find feet… and therefore be very realistic and your execution.

i.e.

‘Angels in India generally invest sub 50 lacs‘… and therefore see what stage this money can take me to.

If you take lot of money, you may end up diluting a lot of your money…

Keep requirements to the minimum… But keep a 20-30% buffer… you will often need more money than you estimate

„‟Who else is doing this idea”

Angels will often ask ―Is there a role model… may be in another country… is someone else doing it‖

What is the risk?

What can spoil the party

All businesses have risks… investors are not looking for ventures without risks. They are looking for entrepreneurs who understand the risks involved and have evaluated the business case after understanding the risks

Valuations

Angels do not have any scientific way of arriving at a valuation It is usually a gut feel on how much is required for what stage, and then if there is enough on the table for the team to be incentivized

Usually angels expect 20% equity in the company in the initial round this gives you enough cushion on raise further rounds

Any good investor would not take more than 40% in the first round

Whom should you raise money from?

Raise what is called ‗intelligent capital‘ – if you have an option, work towards getting money from folks who will help in the business they can help you with business plan, help you with operating plans, giving references, putting in touch with the right people, etc.

Raise capital a little more than what you need… and raise ‗intelligent capital‘

Question & Answer segment:

When should you approach investors?

When at least the core team should be in place

If you can avoid it, ideal to approach after the concept has been tested a bit

How do you define how large a market is…

If you can continuously grow at a high double digit number in that market even for 3rd round of funding… and have enough revenue to make yourself profitable

What kind of returns do angel investors look for and do they assist in next round of funding

Angels expect a 4x or 5x return… could be as much as 10x investments can be wiped off

An angel has an important role in future funding

What is the average lead time for raising funding

6 months

Can a team member be a spouse or relative?

they also equally understand that their

Why not? But if he/she has the required skillset or competencies or experience about what you need from a team member

How is the valuation decided for a startup?

Valuation is decided between the investor and the entrepreneur. At the early-stage/concept stage, there is no science or formula to arrive at a valuation. Hence, you go by generally accepted benchmarks in your country, and eventually conclude a deal at what the entrepreneur and investor feel is a fair valuation.

What valuation investors may offer for the same plan depends on a variety of factors, including the quality & experience of the team, the investors view of the potential of the concept, the competition, how easy or difficult it is for other competitors to enter the market, is there any IP or competitive advantage which this team has, etc.

In all this, the quality of the team is he most important consideration for investments at the concept stage or early- stages. The same business plan, with exactly the same details could get a very different valuation for a team of college students executing it than what an experienced team would get for the same plan.

What should be the answer to “What if Google builds the same product as yours tomorrow”?

The right answer for you is the one that YOU have identified for yourself. If there indeed is a possibility of Google doing what you intend doing, then as a part of your own risk evaluation you need to identify what your response could be.

In a few cases, the answer was ―Well, if Google really wants to get into this business, they would be the first one that they should try to buy.‖ And that would work well with investors!!!

Top 5 points to know about a business plan

1. A biz plan is not a product. It is a process.

2. Entrepreneurs have to understand the business dynamics around the concept. Just domain expertise without

understanding of how business works is not enough.

3. Investors are interested in ‗how you will do what you intend to do‘, rather than just knowing what you are

planning to do.

4. Business model is about ‗who will pay how much and to whom and for what‘

5. The quality of your business plan is dependent purely on the quality of your assumptions. If your assumptions

and logic are incorrect, no amount of great planning will help.

What are preference shares and convertible notes with reference to angel investing?

Preference shares typically have attributes of both debt and equity instruments.

It resembles equity in the following ways :

Dividend on these shares are payable out of distributable profits

Dividends are not an obligatory payment and are entirely at the discretion of the directors

Dividends are not tax deductible payment

Preference shares are similar to debt in many ways :

Dividend rates are fixed similar to any debt instrument

In case the company goes into liquidation, the claim of preference share holders precede the claims of equity

share holder

Preference share holders normally do not enjoy the right to vote

From the perspective of angel investors, investing through the preference share route provides the investor certain benefits without directly exposing to the risk of the equity shareholders who normally are the promoters. The investors have the comfort of getting a minimal return on their investment and a priority over the equity shareholders out of the liquidation proceeds.

From the perspective of the promoters of the company, the burden of servicing high cost debt is not there as the dividend on preference shares are typically not guaranteed and often lower than the cost of debt for an early stage company and in the absence of voting right, the promoters face minimal interference from the financiers in the regular management and operation of the company.

One can structure the instrument to include additional features such as accumulation of dividends, call option, convertibility to normal equity shares, redeemable such as in any debt instrument and power to vote.

Convertible notes on the other hand are structured as a debt instrument but comes with an option for it to be converted into equity shares on a given future date or within a specified time frame at a pre-specified price.

Angel investors find comfort in this instrument as it comes with certain advantages which are :

A fixed interest payment till conversion which is assured

The conversion price is normally at a discount to the estimated value of the company, hence the investor can

take part in the upside

The conversion is normally at the option of the investor which gives the investor a protection from the

downside

From the perspective of the company the promoters enjoy the following advantages :

The interest payment are at rates lower than a regular debenture because of the convertible feature which

offers upside to the investor

As there are no voting rights attached, the company can operate with minimal external intervention.

How do I write a powerful elevator pitch?

An elevator pitch is what you can describe about your venture in a 1 2 minute window that you may with a person. The person could be a potential investor, or even a potential client, a potential partner or a potential employee.

The purpose of an elevator pitch to an investor is to excite him or her about THE BUSINESS CASE OF YOUR CONCEPT. The business case is about „Who will pay how much for what and to whom‟.

An elevator pitch is usually a short conversation, which starts with a one-line introduction to your venture. This one-line description is something that should excite the investor to know more.

Once the investor is excited with a one-line descriptor, the follow-up answer should cover a brief overview of the concept, your aspirations, and most importantly, what you expect from the person e.g. possibly a meeting to present your concept.

Here‟s an example of an „elevator pitch conversation‟

Entrepreneur: ―Hi, I am the co-founder of Tune Patrol, an online platform for independent musicians to upload, share and sell their music. We are in beta stage. The results look very good. We are now seeking a USD 100,000 in funding to go to a million users mark. We are currently funded through friends and family, including my ex-boss who invested USD 5,000 in my venture‖

Investor: Looks good. Tell me more.

Entrepreneur: Thanks. My name is Saurabh. We launched the platform a month ago. I have two co-founders, one of whom is a techie, the other a music promotion professional. I have 3 years of experience as a marketing professional. The ex-CEO of one of the largest music channels in India is an advisor to us. We have what we think is a good business plan, and a strong business case. Apart from funding we need mentoring and insights to help us convert our dream into a very large company.

Investor: Good. How can I help?

Entrepreneur: Could we come over and meet you someday? We have a presentation and would really appreciate your advice, and of course seek your investment.

Investor: Sure we could meet. Here‘s my card. Drop me a mail with a presentation and the link to your platform. I will put you on to someone from our office to set up a meeting. All the best.

What startup pitch phrases meant to impress actually makes potential investors cringe?

I have 3 that stand out as most common:

1. We have no competition: If there is no one else doing what you are doing, how are the consumers currently

solving the problem? E.g. in a online food ordering business, if there is no other brand does not mean that there

is no competition. ‗Calling up the restaurants using menu cards available at home‘ is your competition.

2. We are cheaper, hence we have a stronger value proposition”: Well, in many instances what the

entrepreneurs meant was that they will sell cheaper

least in my observation, most often the assumption of ‗we are cheaper‘ was based purely on being a smaller and

which is different than being a lower cost producer. And, at

hence leaner company and not based on any fundamental competence or process that allowed them to retain

the cost advantage, if any at all.

3. “According to Gartner, the market is USD 80 billion by 2015″: Now, this has no relevance to a startup. More

so if any case all you were trying to achieve anyway was USD 10 20 million in revenues in 2015. Startups

should build their model ground up and not top down. I.e. they should think in terms of how much it costs and

what does it take to acquire and service one customer and hence what is the possibile revenues within what you

are trying to do.

What do investors think of concepts with competing startups doing exactly the same thing as you?

Investors recognize that most concepts will have direct or indirect competition. In many cases, there will be a few other startups or established companies planning ventures that are fairly similar to what is being presented by a team.

Investors prefer honest answers, and the comfort of knowing that the team has indeed evaluated the competition and have some thoughts around how they intend to be one up in the game.

In some cases even a honest answer saying ―Well, they are pretty similar to what we are doing. However, there is room for more than a few payers and we are glad that we do not have to create the market all on our own. We do however see us having a significant edge over them in the quality of the team.‖.

What investors are not comfortable with are boastful claims with little substance to back it. We have often heard many entrepreneurs say ―Oh, their product is just not as good as ours‖. One should remember that while having a great product is certainly an advantage, having a better product is not necessarily a guarantee of success or leadership.

What parameters do investors use to decide on an investment?

Different investors will have different criteria for selection, and could vary by not just the amount of capital they invest but also the stage at which they invest and the kind of companies that they invest in.

We invest in what we like to call ‗two people and a powerpoint‘ stage and our decisions are based on the following:

Quality of the team: This is our most important criterion. We are not looking for experienced entrepreneurs. But we certainly look for understanding of the domain, understanding of business concepts & operations management, and most certainly commitment to the venture.

Clarity of the concept/idea: How well has the team been able to articulate what they want to do. You cannot pan well what you cannot communicate well.

Size of the potential: Concepts addressing large markets with large potential are obviously better.

If the above two are positive, then the following few areas would be discussed:

Scale of aspiration of the team: Does the team have the aspiration and hunger to be a market leader?

Business case: Is the business case strong enough remember, when pitching to an investor you are

competing not just with direct competition from your domain but also with startups with interesting business plans

Exit potential: How are we going to get a good return on our investment. i.e. what is the exit option for us.

Why do early stage investors not invest in a company‟s later stage rounds even if the company is successful?

Well, different investors participate in different stages of a venture. These stages carry different risks, apart from being different in the amount of capital consumed.

At the very beginning, which is where angel investors or seed stage investors participate, is the highest risk-stage of the venture. I.e. at this stage the venture carries a concept risk [i.e. will the concept/product/service work, will the business model work] as well as the execution risk [i.e. will the team deliver] and scaling-up risk [i.e. will this model scale and can this team scale it]. Angel Investors work closely with the entrepreneurs complementing the skill set gaps in the current team. The role of the angel investors, apart from providing capital, is to help the team prove the concept and the business model.

As the venture progresses and the concept and business model is proven, the venture needs to prepare for scale and that is when additional capital is required. At this stage, angels usually step back as the venture needs larger capital, which is usually got from institutional investors like VCs.

Institutional investors typically assist the company in building the foundations for scaling up organization structure, processes resources, infrastructure, etc.

Post this round, capital is usually required for scaling up. This is the stage when growth stage VCs or PEs come in. At this stage, the model is proven, the teams capability to execute is proven and now the capital is required to significantly scale the operations, and perhaps explore new revenue streams, new markets, etc.

Therefore, in each of these three stages of a venture i.e. concept stage, execution stage and scaling-up stage different investors participate with different levels of involvement and different inputs required for these three different stages.

How should I pitch if investors don‟t understand my domain?

Investors do not have to be domain experts in the companies they invest in.

Investors are keen to understand the business case for the concept/product/service that you want to introduce. Hence, the following steps help in setting the stage for your presentation of your business case:

• Clearly articulating what problem your are solving or what opportunity you are addressing is important. This helps those who are not familiar with your domain get a sense of the opportunity.

• Establishing ‗what‘ it is specifically that you propose to do is critical. Often, this is the part where entrepreneurs ramble and have long winding speeches for. Instead, it is good to have a sharp, short one/two line pitch about what you intend to do. E.g. We plan to make the vaccination process convenient by creating a ‗vaccines-at-home‘ service. Vaccines have a 40-50% gross margin and additionally we plan to charge a premium for home visit and the assured quality of experience.‖

• The next part is explaining ‗how‘ you intend to do it. I.e. The implementation plan and what it would take to make this concept work.

• The potential and the scale of your aspiration: Especially for investors who are not familiar with your domain, it is important for you to explain the size of the opportunity and how large you want your company to be.

5 mistakes to avoid when pitching to investors

With most VCs, you will get just one chance to present your business case. VCs are usually a skeptical lot because they see a lot of bad presentations.

Here are some mistakes to avoid when pitching to investors

Poor assessment of the risks in your venture: All businesses have competition. VCs are not looking for

businesses without risks… in the businesses they are interested in, they are looking for teams who

understand the risks and have a plan to manage the risks.

Poor assessment of the competition or assuming that there is no competition: If there is no one else doing

what you are doing, how are the consumers currently solving the problem? E.g. in a online food ordering

business, just because there is no other brand does not mean that there is no competition. ‗Calling up the

restaurants using menu cards available at home‘ is your competition.

Exaggerating management strengths: Remember, most VCs will do due-diligence… and most are

experienced enough to know what is practical and what is fluff. E.g. for a professional with 2-years

experience to claim ―In my role as Client Services Manager I was responsible for formulating strategy and

operations planning for fortune 500 clients‖ is usually not going to be an accurate representation of your role.

However, ―was involved with‖ instead of ―was responsible for‖ is perhaps closer to reality.

Also, giving the right picture of your current skill sets and capabilities helps investors understand what assistance they may need to bring to the table, in case they decide to invest.

Investors are not looking for ‗we know all and we have been there done that‘ teams… those are rare to find. Investors are interested in honest teams who are passionate about the domain and are smart enough to learn the things that they currently don‘t know.

Impractical and unrealistic growth projections: While aspiring for scale is important, planning ‗how‘ you are

going to achieve it is critical. Without a plan, aspirations of scale are merely a statement of intent. Investors

invest in a team with plans… not just on statements of intent.

Don‘t include names of ‗advisors‘ if they are not genuinely involved. Plain show & tell names just because you

know a few people don‘t impress investors.

Should startups seek funding from VCs or Angel Investors?

While there is no right or wrong answer to this question, there are a few points you may want to consider:

Most VCs would not invest less than USD 1 mn. So, if you need lesser than USD 1mn capital, angel investors may be more appropriate.

Decision-making is much longer for a VC as they have to follow their own processes and internal approvals. It can often take between 30 90 days after the VC has broadly agreed to invest. On the other hand, since angels are making investments in their individual capacity, decision making is faster.

Most VCs are likely to ask for some control over decision-making, and most would certainly ask for board positions. Angels on the other hand may not seek board positions.

VCs may not be able to participate closely with the operations, while angels who invest because of their interest in the domain may find great joy in assisting you with your daily challenges. Depending how deep your team‘s expertise on critical aspects of your business are, you may want to consider whether you want someone who can help you on the operational front or you need someone who is hands off.

VCs and Angel investors are ‗expected‘ to give you different kinds of advice. Angel investors, because of the stage they participate in are expected to help you with the fundamental of the business at the starting point and guide you through the ‗setting up‘ stage. They are also expected to help you with advice on what kind of investors to connect with, how to pitch and, often, help with the introductions too. On the other hand, VCs, because they

usually participate after the concept is proven, are expected to give entrepreneurs advice on scaling up and of preparing the company for scale, fine-tuning the business model if required. They could also help with introductions, PR and in hiring senior employees.

Managing the relationship with your investors

Companies with a healthy relationship with their investors are happier companies. Unhealthy relationship between investors and founders can be quite stressful. That‘s why it is critical for startups and their investors to work as a team and be on one side of the table.

While some responsibility of ensuring a healthy relationship is obviously with the investors, founders have a critical role to play in this process.

Clarity on goals and objectives

The starting point of course is to ensure that your investors and founders are aligned on the goals & milestones and objectives of the company, and the parameters on which progress is to be measured.

Agree on the communication and intervention processes

Getting investor agreements on the periodicity and format of reporting and engagement is helpful in ensuring that the intervention is structured and planned. A monthly review is suggested for startups, though in concept stage companies founders may benefit from the experience and the business relationships of investors and hence may engage more frequently.

Communicate early on challenges and issues

No one expects to have a smooth journey and challenges and roadblocks are part of the journey. Your investors are critical stakeholders in your progress. Hence, if there are challenges and issues, often investors can assist with solutions. Communicate early and be transparent.

Reporting and templates

Investors and founders should agree on the format for reporting progress. A template that captures the key parameters should be drawn and presented every month to investors.

Have formal board meetings, including structured meetings with your advisory board members

Apart from it being mandatory governance requirements, quarterly board meetings are a good forum to engage with a wider group of stakeholders where progress, challenges, issues and direction changes, if any, can be discussed.

Selecting your investors

Startups are usually not in a position to be choosy about whom they can accept funding from, and quite often after a number of rejections end up taking money from whoever willing to fund them.

However, while signing up your investors, it is critical to check the following:

Will you enjoy working with them? While this is a difficult one to take an objective view on when you really,

really need their money, it is a critical question to ask. Attitudes to investee companies, style of working,

matching of personalities are critical components in ensuring that investor & investees enjoy working with

each other. In startups, in my view, it is ideal that the founders and investors can have a friendly relationship.

And this does not mean not being professional… but an easy going, non-formal style of working is helpful in a

startup stage when things are not going to be as predictable as they are in a growth stage company.

Is the personality, ethics, value system, aggression, compassion, etc. of the investors in line with the

personality of what I want to build. Different people have different styles of operating and if these styles are in

conflict, it may lead to disagreements in how you handle the business, especially how you tough situations.

What‘s their outlook to your business and are they willing to wait out the difficult times? While your investors

and you may agree with the potential, some investors have a ‗spray and pray‘ approach. I.e. they invest in

many companies, especially in emerging sectors, and see which ones quickly show signs of success. They

are quite happy then to disengage with the slow movers and back the early-successes. In such situations, if

your startups does not really take off as expected, and most don‘t, you may be left in a corner.

Do they have experience of working with startups at your stage. There are clearly different investor groups

who specialize in different stages of the company. Angel investors will invest in the concept stage, early-stage

VCs will invest in the post proof-of-concept stage and VCs/PEs will participate in the scaling-up stage.

Different stages of a company require different competencies and therefore different interventions from the

investors. Investors who usually deal with growth stage companies may not have the patience or experience

in dealing with the nimbleness and direction changes that a startup may have.

Of course, it helps to connect with companies that the investors have funded and understand about their experiences with the investors.

Understanding valuations

Simply put, valuation is about how much the shares of your company are valued at.

In a private limited company, ownership is decided on the basis of equity shares. The % of shares you own

defines the % of your ownership of the company.

Let us understand with an example. I am of course over simplifying for the purpose of ease of explaining and understanding.

Ramesh and Suresh start a company. They both own 50% each of the company.

A few months later, Ramesh and Suresh approach an angel investor who decides to invest Rs.50,00,000 [INR 50

lacs / USD 100,000] in their company for which he takes 20% of the company. In this scenario, the post-money valuation of the company would be Rs.250,00,000 or Rs.2.5 cr [USD 500,000]. This is because Rs.50 lacs got the investor 20% equity, so the value of 100% is Rs.250 lacs or Rs.2.5 cr.

Stated differently, the company got a pre-money valuation of Rs200,00,000 or Rs.2cr [USD 300,000]. In this scenario, Ramesh and Suresh now own 40% each in the company, with 20% being owned by the investor.

Later, the company decides to raise Rs.10 cr [USD 2 mn] from a VC who takes 20% of the company. In this scenario, the post money valuation of the company is Rs.50cr [USD 10 mn]. Stated differently, the company raised Rs 10 cr at a pre-money valuation of Rs.40 cr [USD 8 mn]. With this round, Ramesh, Suresh and the angel investor each get diluted by 20% and hence the capital structure or cap table stands as follows:

Ramesh

32%

Suresh

32%

Angel Investor

16%

VC

20%

In both the rounds, the money invested by the angel investor and the VC has gone into the company and not to Ramesh and Suresh.

Going further, the company does well and the VC decides to increase their holding to 26% and offers to buy 6% of the shares held by the angel investor for Rs. 10 cr. [USD 2 mn]. Now, the valuation of the company is Rs.166 cr or USD 33mn. Even at this stage, when the valuation of the company is Rs 166 cr, Ramesh and Suresh have not made any money. However, the angel investor has had a successful exit with a 20x return on his original investment, and still retains 10% in the company.

At this stage, the capital table will look like this:

Ramesh

32%

Suresh

32%

Angel Investor

10%

VC

26%

At a later stage, Ramesh and Suresh decide to dilute their holding and decide to sell 5% equity each to another VC for which each get Rs.20 cr [USD 4mn]. At this stage, the 2 nd VC decides to also buy the 10% held by the angel investor for Rs.20 cr. Hence, now the valuation of the company therefore is Rs.200cr or USD 40mn, and the cap table will look as follows:

Ramesh

27%

Suresh

27%%

Angel Investor

-%

VC

26%

VC 2

20%

This of course is a rather simplified version of reality, but done only to illustrate the concept.

The process of pitching to investors

Often first-time entrepreneurs underestimate the time it may take to raise funds for your startup. Unless you get seriously lucky or have easy access to a number of investors, it is prudent to estimate anywhere between 3 6 months to get funded. And that is if you have a good plan and a great team.

Well, its relatively easier with angel investors and much easier with angel groups like the Angel Investors Consortium. That‘s primarily because they invest smaller amounts in a wider range of companies but also because individuals are making decisions and hence do not have to go through more complex processes of VC funds.

Here are a few steps that are involved and approximate time it could take with angel investors:

Step 1

Identifying the right investors

2 weeks

Step 2

Getting the first meeting, including

1 2 weeks

time taken for trying to reach

someone to get meetings set up

Step 3

Meetings with the evaluation team

1 week

Step 4

Presentation to Investment

2 weeks

committee

Step 5

Term sheet

1 week

Step 6

Term sheet agreements

1 week

Step 7

Due diligence and signing of

1 2 weeks

documents

Step 8

Funds hit your bank

 
 

Total time

9 12 weeks

Here are a few steps that are involved and approximate time it could take with institutional investors:

Step 1

Identifying the right investors

2

weeks

Step 2

Getting the first meeting, including

2

4 weeks

time taken for trying to reach

 

someone to get meetings set up

Step 3

Meetings with the first layer of

2

weeks

filtering

 

Step 4

Meetings with the senior layer

2

weeks

Step 5

Internal presentation to Investment

2

4 weeks

committee

 

Step 6

Term sheet

1

week

Step 7

Term sheet agreements

2

weeks

Step 8

Due diligence

2- 4 weeks

Step 9

Signing of documents

1

week

Step 10

Funds hit your bank

 
 

Total time

16 20 weeks

And these are fairly optimistic timelines with the investors who finally fund you. There will be several you would meet who may, out of genuine interest to invest, progress the discussions but may not conclude the deal for several reasons. And there will also be many who may decline to invest in the first meeting itself but still it will have taken 4 – 8 weeks to get the ―No‖ as an answer.

Given the lengthy process, the entrepreneur should try to be selective about which investors they should approach. Investors, especially VC funds are clear about the kind of companies, the stage and the domains they would invest in, and that information is usually available on their websites.

One of the first things that entrepreneurs need to do is make a shortlist of who the ‗right‘ investors would be.

To begin with, you need to decide if you are ready for angel investors or for VCs.

When applying to investors, check their websites and see if they have invested in businesses similar to yours

and if your domain is within their interest areas. E.g. if you are a life-sciences company, there is no point in

approaching investors whose focus areas are Mobile & Internet and Consumer Businesses.

Check if there are synergies between any of their portfolio companies and your business, and if there are,

then evaluate highlighting the same during your presentation.

From among the many people at the VC, identify who in their team is more likely to be excited about your

idea. This is easy to find because most VCs will have profiles of their team members, including details of

which companies or domains that person is involved with.

Once you have identified the investor, and the person who you are going to connect with, try seeking an appointment by making a call to the office. Most likely, you will be asked to send the presentation to a generic mail id used for receiving business plans. Well, this is not something that you can always avoid. The truth is that investors get so many calls and mails requesting for meetings that it is almost impossible to accept all requests.

In most VC offices, business plans received will be reviewed with some level of seriousness, though most probably by the junior most executives who may not necessarily be experienced at taking a gut feel call on what seems like a good business case. If you are lucky to get past this stage, you will be asked to come and meet an associate. And that‘s just fine. This is the first line of filter in a VC fund and an associate is expected to do a thorough evaluation based on their internal criteria, and then if and found suitable, are expected to move the deal up to a partner who can decide if the deal is to be presented to the investment committee.

If you pass the first line of filter in a VC fund, and this can take a few meetings, you would have to present to the next level. This round, depending on the interest of the fund, could take a few meetings with revisions and discussions on strategy, scale, funding needs, etc.

Once there is broad agreement on key areas, and if the deal fits into the internal criteria of the fund, the deal will be discussed at the investment committee meeting where the terms of the term sheet will be outlined.

After presenting the term sheet, the entrepreneur is expected to run it past someone who knows the legal stuff around term sheets…. And when you ask someone‘s opinion, the person feels it obligatory to suggest a few changes. It then takes a few meetings and discussions to finalize the term sheet and sign off.

NOTE: some VCs would discuss the terms of the term sheet offline over meetings and dinners, and therefore the draft presented to the entrepreneur on which there is an informal agreement on key points like valuations, control, vesting, rights and downside protection. However, the time taken would still be approximately be the same.

Once the term sheet is signed off, the due-diligence will start. Also, the startup may have to complete some tasks as part of the ‗conditions precedent‘ and that could be things like filing for patents, getting an independent director on board, getting customer contracts signed, etc.

After all this is done, the final signing of the documents and receiving the cheque are the logical next steps.

Understanding term sheets

A Term Sheet is a document that defines the terms of the transaction between the investor and the company. It

outlines terms for the following broad categories:

Valuations

Control

Exit options

Downside protection

While most first-time entrepreneurs are more focused on the valuations, the terms and conditions that cover the valuations are as critical. E.g. a company raising USD 100,000 at a pre-money valuation of USD 400,000 may not necessarily have a better deal than a company raising USD 100,000 at a pre-money valuation of USD 300,000 if the terms of the second company are more favorable than the first.

While there are several terms that will require understanding, here we have outlined a few that are of importance

to entrepreneurs. Disclaimer: Please consult your lawyer when dealing with a term sheet. If you need any

information, write to us at info@thehatch.in and we will try to provide you answers.

Term

Meaning

Liquidation

Liquidation preference defines how monies received on

preference

liquidation are going to be split between different

classes of shares. [Just like different categories of

creditors will have different rights in terms of

liquidation.]The term sheet will specify what ‗preference‘

the investor will get over ‗common stock‘ owned by the

entrepreneur/founders/existing share holders. E.g. the

term sheet may suggest that, in the case of a

liquidation, the investor will get 2x their investment

before the balance, if any, is split between common

share holders.

A

liquidation preference may also allow the investor to

instead convert their holding into the proportionate % of common shares and sell, if it is higher than the money they would get on selling at the price they would get if sold at the preference value.

In

some cases, if the term clarifies, the existing investor

may be allowed to convert to common stock and hold their holding. They would do this if they believe that the new buyers of the company will increase the value of their holdings.

Liquidation is not necessarily only if the company fails. It could be merger or a strategic sale or whatever. In these situation, what level of preference multiple is offered will decide what is left for the entrepreneur [and other common share holders] in case of liquidation.

In

case where the investor is allowed the option of

 

converting to common shares AND holding on to their shares, it may cause issues with the acquirer if they do not see value in the investor holding on or if there is a strategic interest clash.

As with every other term, the negotiating power of an entrepreneur with a proven track record [professional career record or previous successful entrepreneurship

experiences] wil be higher than the negotiating power of

relatively newer entrepreneur. In bad times, the preference multiples asked could be ridiculous.

a

Drag Along

This term requires the minority share holders to sell

their equity to an acquirer if a majority of the

shareholders agree to a sale.To illustrate with an

example, if an entrepreneur owns 40% of the company

with 2 VC firms holding the balance 60%, if they decide

to sell their stake, this clause will force the entrepreneur

to also offload his/her shares, even if he/she did not

want to exit.

Implications are obvious. If the company does not do well and if the investors decide to bail out with whatever value they can realize, the entrepreneur would be forced to sell his/her stake even if they believe that there is merit in continuing with the venture.

Sometimes an investor may want to exit because the venture [or the domain] does not fit into their strategic thinking any more. In this case, if the investor wants to exit, even if the going is good, the entrepreneur may have to sell his/her stake.

Preference shares

Preference shares are shares that enjoy more privileges

than common shares. These could be in availing

dividends before common share or preference share

holders may also have greater rights to the company‘s

assets and proceeds in the event of liquidation.

Here too, the implications on the entrepreneur are based on multiple factors including the multiple of liquidation preference, if it is included, etc.

In most cases, simple preference shares which give an investor rights over assets in case of liquidation and

dividends before common share holders are not considered unfair by entrepreneurs as it represents only

a

fair demand that the investor is seeking to protect

his/her capital and the entrepreneurs acceptance indicates a high level of confidence in the venture to

 

allow an investor to protect his/her capital.

Indemnity

Well, this is a pretty straight forward one in which the

investor who sits on your board seeks an insurance

cover to as an indemnity cover should there be a legal

case and the investor needs to protect himself/herself.

Depends on how much protection is sought and how much the insurance premium is, and how that amount is in relation to the amount that is raised.

I.e. the investor and entrepreneur need to evaluate if and if yes, how much, indemnity insurance makes sense. Especially if it is going to cost a lot and if the amount of capital raised is little.

Also, if the capital is raised for, say, concept testing where the exposure to liability is nil or limited, then it may not make sense to invest in insurance premium [again, if the capital raised is limited]

Anti- Dilution

Anti dilution protects the investor‘s capital in case the

Protection

entrepreneur decides to, for reasons of market

conditions or strategic relevance or whatever, to accept

capital from a new investor at a valuation that is lower

than that at which the investor had invested.In a

situation where a subsequent round is raised at a lower

valuation, anti dilution right allows the company to

revalue the original valuation and thus issue additional

shares to the investor.

This, in my view, is a fair clause and entrepreneurs should be confident enough and accept it. Fighting this clause would necessarily mean lack of confidence in estimating a higher value for the equity in subsequent rounds.

Right of First

ROFR allows investors the right but not the obligation to

RefusalOr ROFR

invest in the subsequent round of fund raising. With this

clause, in the next round(s) of funding all things being

the same i.e. as long as the existing investor too is

offering the same value, the company will have to

accept investment from the existing investor.

Vesting

Vesting means that the stock will be available to the

person after a pre-determined time or on reaching a

pre-determined milestones.

Often used for stocks offered to employees e.g. ‗xx‘ number of shares will vest on completing 24 months of employment.

Vesting is also common in the case of early-stage companies to protect the investors from one or all founders quitting the company after the funding. In the case of vesting for employees, the term sheet may specify a ‗cliff of a year‘ followed by monthly vesting thereafter. This means that if the entrepreneur leaves within the first 12 months, he/she would get no equity. However, on completing 12 months, the entrepreneur would get a significant portion of his/her equity and the balance will vest monthly over a period of the next 2-3 years.

In the case of vesting though, there will be clauses which protect the entrepreneur in case of events like next round of funding, acquisition or even firing by the board.

While it seems unfair, it also provides protection to the entrepreneurs. For example, if one of the founders leaves or does not perform as expected and is asked to leave, then vesting ensures that he/she does not get the full benefit of the equity due and gets only as much is vested till leaving or being asked to leave.

How to pitch to an investor

Apart from having a good business plan, which is of course the most critical thing, HOW you present your case to investors will determine whether you will get their attention and interest or not.

Because investors often listen to very bad presentations, good quality presentation itself offers a substantial edge while presenting to investors.

The most important thing to remember is that YOUR FIRST PRESENTATION IS AN ELEVATOR PITCH… NOT A FULL SCALE BUSINSS PLAN PRESENTATION WITH EXCEL SHEETS, TECHNICAL SPECIFICATIONS AND OPERATING DETAILS. In the first meeting, investors want to quickly judge whether they are interested in investing in the company. Hence, the focus should be on communicating the concept and the potential and not the finer detail.

Here are a few quick things to keep in mind

Start by introducing what you do and for whom… without any preamble Investors will be interested in the details AFTER they have got excited about the concept, the scale and the team.

Hence, while presenting, ensure that your pitch focuses on what you intend to do, how you plan to implement it, how you will make money from it, what your scale of aspiration is and why you and your team is the one they should bet on. In fact, your opening statement should clearly state what you do and for whom. I.e.

―we are an online music discovery platform where independent artistes upload their music and consumers buy or listen‖ or ―we help small companies manage their sales processes‖.

Most entrepreneurs make the mistake of diluting the pitch with a lot of detail of the operations, which of course will be of interest to investors… but only after and only if they have an interest in participating in your journey.

The initial pitch presentation should not be more than 8 10 slides. Click here to see template of the investor pitch presentation.

Investors are interested in the business case… not just details of the concept or the product

A concept and product is different than the business case for the same. Most first-time entrepreneurs make the

mistake of thinking of the concept as the business. E.g. for someone presenting for a e-tailing venture, the investor would be interested in knowing your competencies or plans on supply chain, warehousing, procurement, customer acquisition, etc. Not just about how cool your web platform is.

One common mistake made by many first-time entrepreneurs is to elaborate on technical details. Technical details of your product/concept, and operating details will be relevant in the subsequent presentation… which will come about only if the investors get excited about the opportunity and you as a team.

Focus on key aspects rather than fluff around your business case

In most cases you will get a 20-30 minute window to present. You will have 10 15 minutes to make your case

with 10 15 minutes for Q&A. In fact, in most cases, you would have either got their attention or lost them in the

first few sentences. Rehearse your opening lines… once you get through this, the rest is the easier part. If you don‘t get their attention and interest in the first few sentences, the rest really won‘t matter that much.

“According to Gartner the market is 8 bn USD globally” has no meaning At startup stage, investors are interested in knowing what you are going to do in the next few quarters. Of course, they would be keen to know whether the market is large and how large. But in most cases, industry reports on the size of the industry is no indicator of the size of the opportunity you are addressing.

You should focus on your plans and what you intend to get to in the next few years.

Be prepared with answers to questions

It is critical for entrepreneurs to know your business better than anyone else in the room. Be prepared with answers to questions, especially around assumptions about your business.

Know your business inside out. Know who the competitors are, know their business models, know the size of markets, know why consumers buy, know what the problems are with what your consumers are solving their problems currently with.

Explain why you are qualified to do this business Investors are keen to know what you and the founding team brings to the table. So, a listing of your resume and career graph is not relevant. What is relevant within that is what you have done to make you a good candidate to pursue this venture. E.g. for an online retailing company, that ―you have 11 years of professional experience in blue chip companies‖ is not as relevant as ―I have handled supply chain and established relationships with vendors across the country‖ is important for investors to hear.

Be passionate. Early-stage investors, angels as well as VCs, invest in people At the startup phase, investors are largely taking a bet on YOU and your team. They are betting on your ability to create a large company around the concept you are presenting. Hence, it is critical for them to see your deep commitment to the domain and your passion for the space.

Be clear about what you expect Tell the investors clearly about how much money you need and what you intend doing with the money and what milestones you will achieve with the money that you are asking for.

End with a recap end strong Don‘t end the presentation with slides of excel sheet numbers. End with a strong recap of what you have told them. Summarize what your concept is and say why this is a good business case.

Remember all the basics of good presentation skills

Few words per slide

Good looking slides attract attention – put some effort in designing the presentation well… at least it has to be

clean and well-structured

Speak clearly and speak slowly

Be confident and passionate

Let one person present while the other handles the computers – don‘t try to do all things together

Decide who will answer what questions

One person should present – don‘t try to distribute the presentation among 2-3 co-founders remember, the

first meeting will be only 20 minutes or so. Others should participate in the post-presentation discussion.

Don‘t go with an army of people if the others are not going to participate in the discussions – but ideally all co-

founders should be present

WHAT SHOULD A BUSINESS PLAN COVER?

A business plan is a ‗Plan for your Business‘. It is not a document that you make for the investors. It is a document that you should prepare for yourself. Writing down your business plan helps you think through the assumptions clearly, and often writing helps you identify impracticalities in the through process.

Yes, for investor presentations too, a business plan is necessary.

Broadly speaking, a business plan should communicate the following to an investor:

• What are you selling and to whom?

• How large do you see the company growing to – what is your own aspiration for the company?

• How are you going to implement it?

• How are you going to make money?

• Why are you the right team for the investors to invest in ?

Components of a Business Plan

Brief business description No more than one paragraph to describe your business and the business opportunity. If it takes more than a paragraph to describe your business, perhaps you need to revisit the drawing board. The simpler the message, the quicker you will draw investor attention.

Team This section should answer the question ‗Why is this team/entrepreneur best suited to implement this business opportunity‘. Keep it simple. Include educational qualifications and work experience.

What is the issue / pain point that your product / solution will address This section will reflect the clarity of your thinking about your business opportunity. Be precise and succinct.

What is the size of the market opportunity Investors like big ideas with big markets. Be clear about who and where is going to buy your product/service and how much they would pay for it.

Product / Technology Overview Highlight the uniqueness of the technology and application and not the technical details of the solution.

What is the value proposition Why would consumers choose this over others?

Business model / financial model This is about how you will make money from this business opportunity. The business model is important, not an excel sheet with 5 year detailed projections. Please remember, a 3/5-year excel sheet projection is at best an educated guess. More than specific details, the financial model should reflect the aspiration of the team.

Competitive landscape Who are you currently or in future likely to compete against and what is your plan to win this battle?

Risk factors to execution What are the market risks, financial risks, business model risks, execution risks, etc. that may hamper your plans?

Funding objective and use of funds Describe how much money you want to raise and what you intend doing with these funds.

Fundraising history and investors Mention previous investment history including year, amount and investors.

Exit options

Exit Options is nothing but different ways through which investors can ‗cash out‘ of an investment. To understand the concept of exit options, let us understand how Venture Capital works.

Angel investors, VCs and Private Equity Funds buy equity in a company when they make an investment. I.e. they buy shares of the company at an agreed price. Let us say they buy 100,000 the shares of the company as a per share price of Rs.100. Investors make this investment NOT to earn dividend but to have substantial gain through increase in the value of the shares that they have bought.

Over a period of a few years, depending on the outlook of the investor, the investor would want to ‗cash out‘ of their investment. For this, they will have to sell their shares to someone else. Who all they can sell the shares to are what is called the exit options.

Typically, there is a hierarchy of exit possibilities. i.e. angel investors, who invest in the earliest stage of the company, typically seek an exit by selling their shares to VCs who invest when the company‘s concept and business model is proven. Often VCs would get complete or partial exits by selling shares to another VC who invests in the company after the company has gained some traction and needs further capital to scale up.

In addition to selling shares to the next round of investors, the following exit options are available:

Sale to a strategic partner e.g. a travel services company may sell stake or be acquired by a large travel portal

Sale to a bigger brand in the space: e.g. a local online food ordering site may be acquired by a global brand when they want to enter that market

Of course, doing an IPO is an aspirational exit option for many

Buy back: When the promoters or company buys back the shares of the investors. This is the least preferred option for investors and is usually used when the company is not able to provide any other exit option to the investors.

Related posts Do entrepreneurs have to exit along with the VCs

What is a business model?

Simply put, if the idea is the ‗what‘ part, the business model is the ‗how‘ part of your plan. It is a clear statement of how you are going to make money from your venture.

In other words, it reflects your thinking on the following broad parameters. Of course, the parameters will vary by business:

• Who is your customer

• What are the revenue stream(s)

• How much will they pay for the service

• How much gross margin will you make on each sale

To illustrate with an example:

For an online toy store the business model can be as follows:

―We sell & deliver toys to consumers who order online from our website. Our target consumer is the affluent family with children below 7 years. Our average ticket size per transaction is INR 1000 and we expect our target customers to buy 2-3 times a year from our online store.

We have a 50%+ gross margin on our products. Thus, we expect to make about INR 1000 gross per customer per year.‖

Note: Once you have your business model detailed out, you will need to check if your concept and business model has a business case. I.e. At the startup stage of low capital-intensive businesses, it will suffice to identify at what phase does the business become operationally profitable.

Business models could vary, even for the same concept different companies could follow different business models. Let us see with another example:

Possible business models for an outsourced HR management company:

• One-time engagement for setting up processes

• On-going, shared services model

• On-going embedded employees model

• Consulting services model

Understanding pricing & revenue models

How much to charge your customers is a critical decision for entrepreneurs. I.e. pricing is a critical component of your business strategy. While getting your pricing strategy right is no guarantee of success, getting is wrong is one sure shot route for failure. Obviously, how much consumers are willing to pay is dependent on the value they see in the solution you offer, be it a product or a service.

There are quite a few Revenue Models available for startups to consider:

Value based model: For products or services that do not have an individual unit price [e.g. Microsoft Office software], the seller decides the price based on what they believe is possible to be charged from the consumer. This is the toughest part and may require some experimentation and in-market tests to arrive at the price point that you could charge.

Distribute the product free but customers pay for services: In some markets telecom companies follow this model where they give away the telephone instrument for free, and people pay for the usage. In some cases, e.g. printers, the base product is not given free but is offered at a very low price, often lower than the cost price, with the hope of recovering it through sale of related products and services e.g. cartridges and printer servicing.

Free for consumers ad supported model: E.g. Angry Birds

Freemium: Free for basic, paid for premium services. E.g. sugarsync.com, linkedin, gmail, etc.

Cost Plus mode: where the seller decides the price of the product based on the cost of the product. This is usually done for physical goods e.g. shoes, garments, computers, pens, etc. Doing this model for online services is not feasible because there is no real cost of the physical goods. How much premium you can charge over the cost is dependent on a number of factors including competition, alternate options, the overall value-proposition that the customers see in your offering, and often, also the personality & equity of the brand.

Portfolio pricing or package price: This strategy is applicable when the seller has a range of products and/or services and may want to engage the consumer for the entire portfolio. E.g. Insurance companies which offer for corporates a portfolio comprising of life insurance + car insurance + fire insurance + health insurance

Subscription model i.e. users pay a per month/per year e.g. book libraries, dropbox and other online storage sites, SAAS platforms, etc.

Pay-per-use model i.e. users pay as they use it e.g. Platforms like Webex have a pay per use model

One-time payment i.e. users buy a license to use e.g. Microsoft Office

Tiered or volume pricing: Typically used to group buying benefits. E.g. an enterprise software where the license fee per user reduces as more licenses get bought. The pricing in this model is often defined in slabs as relevant to the category.

Raising funds from angel investors.

Angel investors are individuals who invest their own funds in early stage companies or startups, unlike VCs who manage the pooled money of others in a professionally managed fund.

Angel investors typically invest at the power-point or paper concept stage i.e. at the very concept stage of a company. In effect, they are taking a bet on the team and on their belief that the concept would work.

Angels would most likely invest smaller amounts, which is usually sufficient to cover the fund requirements for going past the proof-of-concept stage. Angel rounds will most likely be followed by rounds of institutional funding like VC and strategic investment or acquisition.

At the stage at which angel investors invest, the risk is the highest. This is because neither is the concept proven, nor the business model nor the team’s capability to deliver proven. Moreover, because angel rounds are usually followed by further rounds to fund the capital requirements for growth, angel investor’s equity in the company gets diluted in further rounds of investments.

Because their investments carry their highest risk and dilution, the valuation offered by angel investors will be the lower than those offered by VCs in the subsequent rounds when the business has been significantly de-risked.

Often, angel investors invest in domains they are passionate about, and therefore bring invaluable experience to the startup through their participation as advisors and/or board

members. Angel investors, apart from capital, are expected to help startups with advice, networking & introductions and oversight of business. Some angel investors also go to the extent of representing the startup in PR or meeting important customers or in interviewing potential senior employees. Most certainly, angel investors are expected to assist the startup in accessing institutional capital for subsequent rounds of funding.

How to reach angel investors or angel groups?

Angel investors are typically High Networth Individuals [HNIs], most often successful entrepreneurs or very senior professionals. Some institutional investors also participate in angel funding in their individual capacity.

Angel investors are flooded with requests for funding, and because they invest in the highest-risk stage of startups, they have to be selective in the deals that they invest in. One of the important criteria that angel investors use is to ‗seriously evaluate‘ deals that have come from reliable references. It is also for this reason that many angel investors prefer to go through angel networks like Angel Investors Consortium.

How to find the right angel investors?

Apart from individuals who invest in startups, many angel investors are part of a network like the Angel Investors Consortium [AIC] or the Indian Angel Network.

Angel networks like AIC help angel investor members co-invest in startups that have been shortlisted for presentation to angel investors. Angel groups and their partners like The Hatch not just review and shortlist startups from many proposals received, but they also help startups fine-tune their business plans, rework strategy and make the business case more compelling.

As angel investments are a relatively new and emerging phenomena in India, there are only a handful of really experienced angel investors. Maturity in understanding the investment process, especially while dealing with challenging times during for the startup, is invaluable. Even when you get investments from angels who are investing for the first time, it is prudent to have a co-investment from a more experienced angel.

Some points to remember when selecting angel investors:

Evaluate what the angel investor gets to the table in addition to capital: How willing is the angel investor

/ angel investor group willing to assist you in your entrepreneurial journey. But do remember that this can be a

double-edged sword. You want the advice and guidance, but do not need operational interference.

Does the angel investor‟s vision match your vision, aspirations and goals: This is critical as a mismatch

in goals and vision could lead to conflict on the direction the company could take.

How read is the investor to lose his investment: This is a critical point. Angel investments carry the

highest risk, and most angel investments are not even able to recover their capital. While you would aim for

the best outcome, the angel has to be prepared for his capital to be fully wiped out. Hence, it is important that

the angel investor understands that they should invest only as much as they can comfortably lose.

What is the network of the angel investor with the institutional investors i.e. VCs: Angel investors with

deep connections with investor groups and investors are great help while raising the next round of capital

Do the paperwork well: even if it is limited paperwork, and significantly lesser documentation than would be

required in an institutional funding round, do evaluate the term sheet carefully. Even if the angel is not keen

on proper documentation, do insist on completing the paperwork. This is especially true in the case of a

friends & family round when the paper work tends to get ignored.

How much money should you raise for starting up?

Obviously, this depends on the nature of the business, what is required to be done, your and your team‘s capabilities, the competition, etc.

There is no one ‗real number‘ on the investment required as that number would be different not just for different businesses but also would be different for different execution strategies for the same business plan.

In fact, there are startups in the online space which have done excellent progress with some angel investments, while there are others which are scaling up nicely with crores in funding, largely for marketing investments.

Broadly speaking, concepts that have been proven and just need great execution + marketing to build a scale business will need to raise larger capital. Concepts that have yet to be proven in the market place could do with lower levels of funding in the initial stages. This is because you don‘t need senior employees and huge marketing at pilot or proof-of-concept stages.

What is essential therefore is to have a realistic estimation of the costs and investments required to reach the milestones.

Most often entrepreneurs go wrong in estimating funding needs. They are unrealistically conservative on costs, and impractically optimistic about revenues. Underfunding your venture i.e. raising lesser money that is practically required can have serious consequences as you could run out of cash sooner than expected, thus leaving you without capital to continue the venture… or having to rush to raise another round in a distress situation.

One question investors are most likely to ask you is how much money you need in the round that you have approached them for. While most entrepreneurs give a one-figure reply, my preference is for entrepreneurs to provide a perspective of what can be achieved with different levels of funding. E.g. with INR 50 lacs [USD 100,000] you could develop the solution on a SAAS platform, hire a base team, prove the model in one market and prepare the company for scale. However, if you had INR 200 lacs as a commitment, even if the first tranche was the original INR 50 lacs, you could accelerate the hiring and scale up as soon as the key performance indicators were on the right trajectory. On the other hand, if you got just R. 25 lacs [I.e. USD 50,000] you would just develop the product, outsource the online marketing to an aggregator agency, and prove that the concept works.

You need to bear in mind that if you business is successful, you are most likely to need MORE CAPITAL. Most entrepreneurs assume that very quickly their business will be cash positive and that they are not likely to require more capital beyond the first round.

Working on a realistic business plan is therefore critical in determining how much money you are likely to need for your venture.

Points to remember when raising funds for your startup

One of the toughest challenges that startups face is to raise capital at the beginning of their entrepreneurial journey.

Raising your first round of funding is probably gong to be the toughest part of starting up… certainly is for

most startups

Beak your fund requirements by risk stages as different classes of investors participate in different risk stages

of a venture

Angel investors

Participate at starting up stage – they invest at a ‗concept risk‘ stage i.e. when the concept is not proven and

the capabilities of the team to execute the concept too is not proven

Investment amount is small enough to sustain operations till the venture becomes ready for institutional

capital

Usually take a bet on the entrepreneur hence quality of founding team is critical

Venture Capitalists VCs

VCs typically invest when the concept and business model is proven

Funding is usually for growing the business and scaling-up

Hence, in round 1, keep your funding requirements to just enough to prove the concept. In round 2, keep your capital requirements to be sufficient to expand to a scalable model and in round 3, raise capital to fund the grown and scaling up.

Angel investors can help reduce your funding requirements significantly if they assist you with things like

customer introductions, partnerships, infrastructures support, etc. Often an investor who takes up an active

advisory role can fill in a competency gap in the team.

Budget at least 3-months for a funding round to close IF YOUR CONCEPT HAS A STRONG BUSINESS

CASE AND YOU HAVE A STRONG TEAM

Raising too little capital or raising too much capital are both avoidable scenarios raising too little can keep

you strapped for funds while raising much more than required will dilute you more than required… also,

attempting to raise more than required may make it difficult to get the funding

Funding options for startups

While most entrepreneurs think of VC funding as the most obvious way of funding their startups, there are actually many different ways in which you can fund your startup.

Getting risk capital i.e. angel investors or Venture Capitalist VCs

Angel investors or VCs are investors who give you capital in exchange of equity in the company.

Angels and VCs buy equity in a company for a price and expect to make a profit by selling it at a higher price. Just like it happens in the stock market, but in this case because your company is not listed, VCs make money by privately selling the stock they hold in your company to someone else. E.g. an angel investor may ‗exit‘ by selling his/her stock to a VC and later the VC could exit by selling the stock they hold to either a Private Equity firm or to a strategic investor, or in rare cases by diluting their holding during or post an IPO.

The money that angel investors give is collateral free. I.e. you do not have to mortgage your house or something to get money from angel investors of VCs. In case the company fails, investors lose their capital and entrepreneurs do not have to return the capital. This is the one and only reason why angel investors and VCs will evaluate plans thoroughly before making a decision to invest in a company. In effect, they are taking the following risks about your venture:

That you and your co-founders are a great team that is capable of scaling up the business

That your concept will work

That the market is large and therefore there is potential to build a large company

Because of this, funds raised from angel investors, VCs and later from Private Equity funds is called ‗Risk Capital‘.

While angel investors and VCs provide capital without collaterals, and thus allow you to start up without having your own capital or collaterals for a loan, it is probably the most expensive form of capital. That‘s because you are giving away equity in exchange for the capital you raise.

Let us understand this with an example. I am of course, simplifying and exaggerating for easier understanding, but the principle is correct.

Let us assume company A raises INR 10 lacs [i.e. USD 20,000] from an angel investor and gives the angel investor 10% equity in the company. Assume further that this company is able to successfully scale up and is receiving a INR 5 crore [USD 1 mn] funding from a VC for a valuation of INR 20 cr. [USD 4 mn]. Assume that the angel investor exists at this round by selling his stake to the VC. In this scenario, the VC would get about INR 1.5 cr for his/her share holding in the company. The illustration below gives a sequential view of the capital structure of the company after every event i.e. when the angel invests, when the VC invests and finally when the angel exits by selling his/her stake to the VC.

Share holding at starting Phase

Entity

Founder

 

No. of

Investment

shares

1,00,000

50,000

Price per

share

% holding

2

50%

Co-founder

Total

1,00,000

50,000

2

50%

2,00,000

1,00,000

100%

Share holding after angel investor invests INR 10 lacs and takes 10%

equity

Entity

Founder

Co-founder

Angel investor

Total

 

No. of

Investment

shares

1,00,000

50,000

1,00,000

50,000

10,00,000

11,111

12,00,000

1,11,111

Price per

share

% holding

2

2

90

45%

45%

10%

100%

Further, a VC invests INR 5 cr and takes 25% of the equity

Entity

Founder

Co-founder

Angel investor

VC

Total

 

No. of

Investment

shares

1,00,000

50,000

1,00,000

50,000

10,00,000

11,111

5,00,00,000

37,037

5,12,00,000

1,48,148

Price per

share

2

2

90

1350

% holding

34%

34%

8%

25%

100%

If the angel investor sells his/her shares to the VC, then the VC would have

paid the angel investor a sum of Rs.150,00,000 i.e. Rs.1.5 cr to buy the

angel investors shares in the company. The capital structure of the

company would be as below.

Entity

Founder

Co-founder

Angel investor

VC

Total

 

No. of

Price per

Investment

shares

share

% holding

1,00,000

50,000

2

34%

1,00,000

50,000

2

34%

10,00,000

6,50,00,000

48,148

1350

33%

6,62,00,000

1,48,148

100%

Bootstrapping

Bootstrapping is the art of going as far as you can without external funding. i.e. pooling together your own resources, usually at a pre-concept stage or at a prototype building stage.

Often, people bootstrap their startup while still keeping their job. Whether you should bootstrap or go for external funding is a factor of how much money you need, and for what. I.e. if you are building a solar micro-grid, it is unlikely to be funded through bootstrapping as it is likely to be a capital-intensive business. However, on the other hand, an e-commerce venture can most likely be bootstrapped… often by using SAAS platforms, etc.

When to bootstrap

When your concept is yet to be proven … and can be proven with limited capital

When you too are unsure if you would like this to be your lifetime career and want to give it a shot

When you have the resources to go past the concept proof stage

When not to bootstrap

When the capital required for the proof-of-concept stage is more than what you can garner from your current

resources

Even when you don‘t need the capital, it is sometimes good to pitch to investors as it gives you a good feedback on your concept. If many investors say no, it may be worthwhile evaluating the concept and pan thoroughly before diving into the game.

You may want to consider the points below before you take the decision to bootstrap:

Evaluate whether your idea has a good business case speak to some experts, pay attention to those who

are not excited about your idea. After all, even if it is not costing you a lot of money, your time invested has a

lost opportunity cost.

Prioritize: to bootstrap efficiently, you need to make your limited resources go far. Take a call on what is

critical and what can be put off till you receive adequate capital.

Keep the expenses side as low as possible. That means having a very, very lean team. That means hiring

multi-taskers rather than specialists.

Consider SAAS and outsourcing: Even if that is not your most preferred option, you should take a call on

what is important. Is getting ‗something‘ out in the market more important or getting ‗The most perfect

product‘ most important? SAAS platforms may not give you the customization possibilities, but often they can

shave off a significant percentage of your funding needs. You can always develop your own platforms after

you have proven the concept and the model.

Debt

In other words, taking a loan.

Institutional loans often require a collateral, which many entrepreneurs may not have. Even if you have the collateral, do a real hard evaluation if the business model and concept is fully ready for you to take an individual risk on. Often, getting other external investors gets you more parties to take strategic decisions with, and provides an invaluable group to bounce ideas with.

Friends & Family round

For startups which need limited capital to start up, a friends & family round may be an option worth considering.

Points to remember in a friends & family round

Treat the friends & family round as a formal fund raising round too pitch to the interested investors as you

would to a group of angel investors or VCs

Complete the paper work and other formalities too issue equity shares

Manage the relationship as a professional investor relationship send quarterly reports, have a board, etc.

Get strategic investors

Larger companies for whom your concept is an adjacent or related opportunity may find it interesting to investing as a strategic investor.

Adjacent opportunity e.g. Educational content platforms could be an adjacent opportunity for a large company

in the education space

Related opportunity e.g. healthcare services for the poor is a related product for a micro-finance company

A strategic investor, apart from providing capital, also helps validate the concept for external investors thus

making it easier for raising the next round of funding or for getting co-investors in the current round.