Food for thought for startups

Thought Stimulants for Start-ups

A compilation of articles

and posts by Dr. Anirudha

Malpani

Curated by V Rameshwar


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IS IT FAIR TO RELEASE START-UP FUNDING IN TRANCHES? .............................................................. 5

THE VALUE OF DUE DILIGENCE ........................................................................................................ 7

WHEN THE CUSTOMER SAYS NO ..................................................................................................... 9

WHY DEALS FALL THROUGH .......................................................................................................... 11

MAKING SENSE OF TERMS SHEETS AND SHAS ............................................................................... 14

HOW TO FIND THE BEST MENTOR ................................................................................................. 17

START-UPS AND MARRIAGE .......................................................................................................... 20

THE LOVE HATE RELATIONSHIP BETWEEN FUNDERS AND FOUNDERS ............................................ 23

HOW TO HIRE ROCK STARS AND AVOID THE PRIMA DONNAS! ...................................................... 25

WHY THE YC MODEL WILL NOT WORK IN INDIA ............................................................................ 30

THE FIRST-TIME ENTREPRENEUR VERSUS THE SEASONED ENTREPRENEUR .................................... 33

THE ROLE OF INVESTMENT BANKERS IN THE START-UP ECOSYSTEM .............................................. 36

WHY DUE DILIGENCE TAKES TIME ................................................................................................. 40

WHY ARE ENTREPRENEURS SO OVEROPTIMISTIC? ........................................................................ 44

CLOSING THE FUNDING ................................................................................................................. 46

THE START-UP CRAZE .................................................................................................................... 47

WHY DO ENTREPRENEURS HIDE BAD NEWS? ................................................................................ 49

MANAGING MULTIPLE ANGEL INVESTORS ..................................................................................... 51

RISK MANAGEMENT FOR START-UPS ............................................................................................ 53

THE ENTREPRENEUR'S EGO ........................................................................................................... 55

STORY SELLING FOR ENTREPRENEURS ........................................................................................... 56

GRIT OR QUIT? ............................................................................................................................. 58

IS YOUR START-UP IDEA VIABLE? .................................................................................................. 60

FUNDING A PRE-REVENUE START-UP ............................................................................................ 63

HOW TO SUCCEED AS A SAAS START-UP ....................................................................................... 67

HOW TO ASK FOR HELP WHEN YOU ARE STUCK ............................................................................ 70

CRITIQUING AN ENTREPRENEUR'S PITCH ...................................................................................... 72

FREE CUSTOMERS ARE NOT REAL CUSTOMERS .............................................................................. 74


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HOW ONE ANGEL INVESTOR LOOKS AT THE WORLD ..................................................................... 76

WHY I ADMIRE ENTREPRENEURS .................................................................................................. 78

ENTREPRENEURS NEED TO HELP EACH OTHER! ............................................................................. 80

HOW DO YOU VALUE A START-UP? ............................................................................................... 83

THE ENTREPRENEUR'S BALANCING ACT ........................................................................................ 86

ANGEL INVESTORS NEED TO ADD VALUE TO THE ENTREPRENEUR ................................................. 88

WHAT I HAVE LEARNED FROM START-UP FAILURE ........................................................................ 91

BOOKS AS A BUFFET ..................................................................................................................... 94

HOW TO IMPROVE YOUR PITCHING STRATEGY ............................................................................. 96

FINDING THE RIGHT INVESTOR ...................................................................................................... 98

ENTREPRENEURS NEED TO BE THICK SKINNED! ........................................................................... 101

WHY ENTREPRENEURS NEED TO LEARN DESIGN THINKING .......................................................... 103

THE PROBLEM WITH FREE ........................................................................................................... 105

THE PURPOSE OF A PITCH ........................................................................................................... 107

HOW TO CONTACT INVESTORS ................................................................................................... 109


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Think of a start-up as an experiment.

Your early experiments are supposed to

go wrong - after all, you are trying to do

something which no one else has done

before! Your goal is to find out what

went wrong and fix the issues before

you run out of money!


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Is it fair to release start-up funding in

tranches?

Many entrepreneurs resent investors who want to release funds in

tranches, based on the milestones they achieve. They think of these as

unfair hurdles, and believe that this reflects an investor's lack of trust in

the founder. They believe that if a funder has faith in the entrepreneur,

he should go ahead and write the cheque for the entire amount

upfront, so that they have at least 12 to 18 months of runway, and

don't have to waste time and energy in trying to prove that they

deserve the second tranche.

However, I think a milestone-based disbursement of funds in tranches is

actually very valuable, because it provides a reality check about six

months after the initial funding. Are you on track? Have you been able

to achieve the goals you said you were? This staged funding makes

you much more answerable and accountable.

The good thing about having an investor looking over your shoulder is

that he can provide an objective 30,000 foot view, and explain to you

what you're doing right, and where you're going wrong. Just like

entrepreneurs want investors to trust them, why can't the entrepreneur

also trust that the investor will be willing to release funds if they perform

as promised? And even if he doesn't achieve 100% success in meeting

the milestones, most investors are understanding and will not be

unreasonable. After all, six months is more than enough for a founder

to be able to get the investor to trust him. And if he's not been able to

do that, then this reflects poorly on him, rather than on the investor.

Yes, founders are worried that the investor may change his mind after 6

months, and renege on his commitment. However, this kind of

milestone-based release of tranches actually makes sure interests are


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aligned. After all, investors want our entrepreneurs to succeed, and we

will not pull the plug unless there is good cause to do so!

Yes, there are other ways of achieving the same end - for example, by

putting the second tranche in an escrow account. And it's also

possible that in the future, we'll have blockchain-based smart

contracts where the funds get released automatically once the

milestones have been reached.


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The value of due diligence

Most entrepreneurs dread the idea of subjecting themselves to due

diligence by investors. They pride themselves on their autonomy and

domain expertise, and don't find the concept of someone digging into

what they're doing very appealing. Some feel threatened when an

outsider who has very little operational skills or real life experience

dares to ask them questions, and challenge what they've done so far -

and dispute their projections. And they resent having to be answerable

to investors just because they have deep pockets.

However, in the start-up ecosystem, as in other parts of life, the Golden

Rule applies - the person who has the gold makes the

rules! Entrepreneurs need to reframe their perspective and understand

that the due diligence process can actually add a lot of value to

them. Yes, it's true that you're likely to feel uncomfortable because

you're forced to expose all your weaknesses, but you can learn a lot

from an independent, intelligent outsider's perspective. Rather than

think of it as a confrontational or adversarial exercise, remember that

financial-savvy, experienced investors can provide you with valuable

insights, which can help you fill in the gaps which would otherwise you

to fail as time goes by.

A good investor will show you a brutally honest mirror. He will administer

tough love, and pick holes in your business plan - and not because he's

wicked or wants to pull you down. He has no interest in demonstrating

his superiority - don't forget, he wants you to succeed, and this is why

he is looking to invest in you! He's going to give you his hard earned

money, and he wants to be sure that your business is waterproof and

watertight. Even though he knows that the odds of your failing are

high, he is still willing to invest in you - please treat this is a marker for the

degree of confidence he has in you!


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He needs to make sure that you've thought about the potential

weaknesses in your business model, and that you are mature enough

to acknowledge these. He needs to find out if you are coachable, and

are willing to fix the gaps which will definitely crop up as you make

progress. Often founders find themselves stuck in the trenches having

to tackle the daily problems which confront a start-up, and they may

end up losing their perspective.

A well-structured due diligence exercise can help you whip your

accounting and governance in shape. Now these are not the things

which most entrepreneurs worry about routinely, because there are

too many other daily fires which they need to put out. However, unless

you address these, you're never going to be able to grow your

company successfully.

A well-informed investor can educate you about your competition,

and you can learn how they view the other players in your domain. He

can give you helpful insights, because he has a 30,000 view. Now you

may feel that it's not fair that investors who don't need to get their

hands dirty should be preaching to you from their comfortable ivory

tower seats, but you need to learn to take the entire due diligence

exercise in the right spirit. Yes, the investor may not have as much

expertise in your field as you do, but don't forget that he has helped

other start-ups to grow, and this experience can be invaluable in

preventing you from imploding! He can also help you to polish and

improve your business model, and help you explore new markets you

may not have thought of.

Think of the investor as being a consultant from McKinsey, who is going

to look into the bowels of your start-up, so he can help you fix problems

at an early stage, and help you make your foundation much stronger,

so you don't have to deal with organisational and cultural debt later

on. And the best thing is you're getting this opinion for free, so make

the most of it!


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When the customer says No

Many entrepreneurs get disheartened when a customer refuses to buy

from them. However, as a famous book advises, the sale begins after

the customer says No!

Customers have multiple reasons for rejecting you, so don't take this

personally. Sometimes the features your product offers may not be

good enough; or you may be too expensive; or they may feel that you

will not be around for long enough for them to take a risk on buying

your product, because you may not be able to support it if you go

belly up.

Many entrepreneurs give up when the customer says no, and they

complain that they wasted many months trying to pitch and adding as

many features as the customer demanded in their attempts to delight

him. When they find they are not able to close the order in spite of all

their efforts, they start feeling sorry for themselves and blame the

system for being start-up unfriendly.

Yes, it's true that life is unfair, but just because a customer says no it

doesn't mean you need to give up on him. The secret is to keep in

touch, and continue showing them that you are making progress. Thus,

if they wanted three additional features that you weren't able to

provide, show them that you are working towards adding these to your

product, so that you can meet their requirements - maybe if not now,

then in the next two months. This will signal that you value their business

and are working hard to win it. This will help you to earn their respect

and they will be more willing to treat you like a potential business. They

can see that not only are you making the effort, you're also willing to

be open and transparent by sharing share what you're doing , and

demonstrating the progress which you're making in order to with their

business.


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More importantly, it will allow you to retain your position in their share of

mind, so they will consider you as a serious contender when they finally

place their order. This way you're much less likely to lose the deal to a

competitor! If you sulk and just give up, they will assume you're no

longer interested, and will buy from someone else.

Yes, you have to be careful that you do this for serious customers only -

those who have the need and the capacity to pay - don't waste your

time on guys who just want to kick the tyres!


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Why Deals Fall Through

Angel investors are always looking for good

entrepreneurs to invest in, and when they finally do

identify a start-up which they feel meets their sweet

spot, they're quite happy to fund it so they can get

on with helping the founder to grow the business.

However, even after offering a term sheet, there

are times when the deal doesn't get consummated

and entrepreneurs push back. They refuse to

accept the money, because they're not

comfortable with the terms which are being

offered.

One of the stickiest issues is that of valuation. Typically, entrepreneurs

always feel that they're being undervalued, and their biggest worry is

that the investor, who has much more experience in doing these deals,

will take undue advantage of their naivet. They believe they are

being offered a pittance, compared to the potential value which

they're bringing to the table, and they fear they will end up getting

much less than what they're really worth.

This is why founders use lots of different metrics in order to come up

with a valuation for how much they think their start-up is worth. The

truth is that valuing a start-up is extremely difficult to do, because it's all

about valuing future potential - and as well all know, the future is

uncertain. Entrepreneurs are always excessively optimistic that they will

be the one start-up which succeeds against all odds, while investors

know that the fact that 80% of all start-ups fails is the base rate which

should never be ignored. This is why there's often a gap between how

much the investor is willing to offer and the entrepreneur is willing to

accept.

Founders often get

fixated on a high

valuation when

negotiating seed stage

funding. This is short

sighted . Successful

entrepreneurs make

their money at the time

of exit, and they need to

be patient and work

their butt off to execute

flawlessly


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However, there really is no sound reason for the number which the

entrepreneur comes up with - or which the investor offers either, for

that matter, in all fairness! The founder obviously wants as much as

possible, and he may fall prey to an anchoring bias. Thus, he may insist

he is worth at least a million dollars (for some reason, Indian founders

still love discussing valuations in dollars), and insist that he get at least

this much. Their logic is "Our pre-money valuation should be at least $1

million, because in Silicon Valley it would have been at least $3 million."

One of the reasons he gets biased is because he only uses the

successful start-ups - the ones who actually get funding as reported in

the media - as his basis for comparison. However, the reality is that lots

of other start-ups which were in exactly in the same space folded,

even after raising funding - and some did not even manage to do

that.

The biggest fear of every investor is that he may end up losing all his

capital, which is why they need to be very conservative about how

they deploy their funds. After all, they need a ROI so they can continue

investing in other start-ups! They know that no matter how good the

team may be, how good the product ; and how passionate and

resourceful the founders are, the base rate for start-up failure is 80%,

and there's no reason to expect that this particular start-up is going to

be different from the rest !

This is why we prefer talking to entrepreneurs who are mature enough

to understand the importance of negotiation - they should want to

create a win-win situation. If they don't, they make it very difficult to

continue the conversation on an intelligent basis. As an investor, you

know that the only negotiation power you have is before you sign the

cheque, and therefore you want an entrepreneur who will try to help

you to win, rather than selfishly looking after his own interests.


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If he's very rigid at this time, before the cheque is signed, it's unlikely

that he will treat you as a valued partner after he gets the funds. If he

doesn't think that the investor brings a lot more value to the table than

just money, this means he will does not respect the investor's

contribution, and there's really no reason why a good investor would

want to continue having a conversation. Effectively, this means that

these entrepreneurs then usually end up getting stuck with an investor

who only looks at them as a source of money - someone who will want

a ROI by exiting, rather than trying to help them grow the company.


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Making sense of terms sheets and SHAs

Signing a shareholder agreement is a daunting task for the first time

entrepreneur because it's full of legalese. These are foreign terms which

he's never come across and he's not sure how to make sense of the

jargon. What's scary is that the term sheet and shareholder agreement

are usually drafted by the investors, and they are worried that all the

Greek and Latin they are stuffed with are designed to protect the

rights of the investors, and hand over control of their company to

them.

Every entrepreneur has heard horror stories about how greedy investors

are, and that they are out to take over the business, because of the

disproportionate power which the agreement gives them. They are

petrified that the investors will kick them out of the company which

they have spent their blood, sweat and tears on building up.

Now we need to understand that an agreement is precisely that - it's a

legal description of the terms you agree on. This is why the entire

approach has to be one built on trust - you have to trust that the

investors you're going to take money from have your best interests at

heart, and want your business to grow. The reality is that investors are in

the business of investing money so they can grow their capital - they

are not in the business of running your business, because they have

other things to do. Ideally, they would want you to run your start-up in

such a fashion that they don't need to worry about what you're doing.

Their dream is to find an entrepreneur who will continue growing his

start-up so well that they will become progressively wealthier without

having to worry.

However, the fact remains that entrepreneurs sometimes don't do a

very good job of managing a growing business, because this is outside


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their area of competence, and investors need to monitor them to

make sure their capital is being protected.

The truth is that after the cheque has been deposited; all the power is

actually in the entrepreneur's hand. He is the one who manages the

company on a daily basis, and makes the 101 decisions which are

required to run the business. The investor has very little say - and this is

as it should be - we don't want to micromanage the founder.

This is why it's so important for an investor to clearly specify what things

he wants to be involved, in so that the entrepreneur doesn't run the

company into the ground. Now these are pretty standard terms, and

include things like the terms under which new funds can be raised.

They are designed to restrict the ability of the entrepreneur to

mismanage the company and drive it to the ground, causing

the investor to lose all his hard-earned money - it does not affect the

ability of the management to run the company's routine business.

The purpose of the agreement is to protect the interests of both the

parties and create a win-win situation - one where the entrepreneur

has the freedom to do what needs to be done on a daily basis to

make sure the company is growing, while also giving the investor the

rights to stop the entrepreneur from doing anything stupid which would

cause the company to implode.

Having said all this, legal agreements have very limited value in India,

because we all know how effective (or should I say ineffective) the

judiciary is. If things go sour and there is a dispute, there is little effective

recourse the parties have. This is why the agreement is often more of

symbolic value - that the investor and the entrepreneur trust each

other.


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However, it's a very useful legal document as you continue to grow,

and need to raise fresh funds - this SHA will form the bedrock of the

relationships you have with future funders as well.

Some entrepreneurs shy away from the agreement, saying they don't

understand what terms such as voting rights, protective provisions, and

conditions precedent mean. This is not a good argument. No one

wants you to become a lawyer, but as an entrepreneur you need to

learn lots of things on the job, and one of them is making sense of a

shareholder agreement, and understanding the rationale behind all

the terms and clauses which a shareholder agreement has.

To help you make sense of the SHA, so you can understand more

about both the entrepreneur's perspective, as well as the investors,

the site at https://www.marsdd.com/mars-library/understanding-the-

term-sheet/ is helpful. You can also generate your own term sheet

at https://www.wsgr.com/WSGR/Display.aspx?SectionName=practice/

termsheet.htm. Talking to other founders is helpful , and you can hire

your own lawyer to draft a term sheet for you .

Reading the right book can help you immensely, because it will explain

to you how the shareholder agreement ensures that everyone's

interests are aligned, and I would suggest you spend time

understanding Brad Feld's book, Venture Deals. This will give you a lot

more confidence in your ability to make the right decision , and will

help you trust the investor more , when you will realize what he's doing

is in the best interests of your business.

Instead of worrying about all the things which can go wrong, try to

focus on what will go right, so your partnership with your investor starts

off on the right foot !

https://www.marsdd.com/mars-library/understanding-the-term-sheet/https://www.marsdd.com/mars-library/understanding-the-term-sheet/https://www.wsgr.com/WSGR/Display.aspx?SectionName=practice/termsheet.htmhttps://www.wsgr.com/WSGR/Display.aspx?SectionName=practice/termsheet.htm


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How to find the best mentor

I have a friend who manages my portfolio , and his results over the last

5 years have been quite unbelievable. He's beaten the market by such

a huge margin that it's sometimes hard to believe that his returns are

real, but my bank balance can vouch for the fact that they are !

I was asking him why his performance is so much better than other

fund managers . He's a simple, straightforward value investor who

worships Warren Buffett. He selects small cap stocks and holds onto

them, but it's his ability to consistently pick winners which is quite

amazing, so I was very interested in finding out what makes him tick !

The first thing he said is, "I benefited a lot by not having a mentor," -

something which I thought was very counterintuitive ! He explained,

"Because I didn't have a mentor, I was forced to learn for myself - and

the best source of learning is from books ! I had to become a voracious

reader, and read all the books on investing , written by multiple

different authors , so that I could develop a style of my own."

He said that the problem with working with a hot shot fund manager

when you're young and junior is that you are very impressionable , and

you tend to adopt a lot of their bad habits, because you are so

dazzled by them. You don't even realise that you are aping them,

because you are so much in awe of them. Its easy to get swayed by

someone who's a glib talker and very charismatic even though his

basic philosophy may not be sound.

Thus, you are far less likely to learn from someone who maybe a much

better investor , simply because he is much more laid back and not as

captivating. Because he didn't have someone who took him under his

wing when he was young, he was forced to fend for himself. Therefore,

he was forced to learn from books written by world class experts -

which is why his fundamentals are so sound. He also emphasised the


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fact that the lessons books teach you are far more enduring because

you're forced to engage intellectually when you are studying a book -

you don't get just carried away by superficial impressions.

He says, "My mentors were all virtual , and the person I admire the most

is Warren Buffett. Now lots of people say they follow Buffett's style, but

they aren't able to walk their talk. I've read Warren Buffett multiple

times , and the first time you read him, it's to try to understand his

philosophy - how he invests; what companies he picks ; and why.

However, the real lessons only come through when you read about

Warren Buffet the second and the third time, because what you can

really learn from him is his integrity , humility and simplicity ! What really

stands out is the way he leads his personal life - he's a straightforward

guy, who doesn't flaunt his wealth or his skills. I admire how he has

consistently stuck to his knitting and remained honest to his basic

philosophy. The most difficult part about following Buffett is not copying

his investing style , but adopting his impeccably high levels of integrity

and honesty."

He says - " What makes Buffett truly special in the financial service

industry is his emphasis on integrity , and this is what I want to emulate!

This is what makes him special - his refusal to compromise or take

shortcuts. Buffett can teach you not just how to invest, but how to lead

an honourable life. It's not just his personal integrity - it's also how much

he values integrity in the management of the companies in whom he

invests in ."

Interestingly, his favourite Warren Buffett quote is " It takes a lifetime

to build a reputation but only five minutes to destroy it."

What he has learned from Buffett is the importance of becoming a

learning machine, which is why he is a voracious reader. In a way, it's a

bit like the story of Eklavya and Dronacharya, and he has a burning

desire to learn the best investing practices from the world's best . He


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doesn't have a MBA; he has not graduated from a brand-name

university; and he doesn't have a rich uncle who's given him a helping

hand - he has started from scratch and is completely self-made.

He's refreshingly transparent and honest , so that when he talks about

the returns on his portfolio, he specifies the client's returns - net of taxes

and fees - how much the client actually gets in his bank account at

the end of the say. This is such a contrast from other fund managers

who are happy to game the system in order to make a quick buck at

the client's expense. While everyone in the financial services industry

always talks about how they put their clients first, in reality it's very rare

to come across someone who says what he does , and does what he

says. Having someone who walks the talk is so refreshing - especially

when his returns are so dramatic. It does seems like honesty does pay

off in the long run , and he reinforces my faith in goodness.

For me, the most important lesson is that potentially, anyone anywhere

could follow in his footsteps, because you can pick and choose your

own virtual mentors by reading books !


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Start-ups and marriage

The funder-founder relationship is a lot like getting married, and that's

why it needs to be handled with a lot of love and care. While theres a

lot of excitement during the dating phase, the problem is that a lot of

these end up in a divorce, creating a lot of mess and unhappiness for

everyone concerned.

Any marriage has its ups and downs, and there is often a rocky love-

hate relationship between entrepreneurs and investors. The good news

is theres lots which can be done in order to help the marriage

become stronger and more stable.

Dating is a lot of fun, because you can pick and choose. You are

single, and there are lots of fish in the sea ! You feel you can select

whom you want, because you think you are a hot prospect, and any

investor would be happy to back you ! It's only when you realize that

there are lots of other prospective grooms out there, many of whom

are much more attractive than you, because they've got a better

pedigree or are more experienced, that you finally realise that raising

funds can be really hard work.

Dating can be hard work, because you need to groom and prepare

yourself. You need to be charming and persuasive, so he can see what

a great catch you are ! Yes, you will get better over time as you get

more experience, but you do need to do your research. Please don't

jump into bed with the first person who finds you attractive enough to

fund - there is no rush ! Remember that this is a long-term relationship,

and getting stuck with a wrong partner can be extremely expensive.

Beauty lies in the eye of the beholder, and it may take time to the find

the right match , so please be patient ! It's helpful to have a wingman,

who sings your praises - and your best bet is a paying customer, who is

happy to be your evangelist !


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The alternative is to go in for an arranged marriage, and this may

sound more boring , but it's far more likely to be stable. It does

take more time, but its often worth the effort, because a good

matchmaker will make sure that you're both on the same page. The

problem is that the matchmaker charges a fee - and sometimes he

cannot help you find the right match despite all the promises he makes

! And even if he does find someone who is interested in getting hitched

to you, you still need to be sure that the chemistry between you and

the investor is right !

So, you have finally found the right person, and you go off on your

honeymoon. Honeymoons are exciting, because you are in love with

each other, and you are looking forward to a great time together, but

do remember that honeymoons don't last too long ! The actual work of

making the marriage starts afterwards when you get back home !

While the funding gets a lot of publicity , and youre like the new bride

whom everyone wants to show off proudly, you need to make sure

that you fulfill your end of the bargain, because a marriage is not a

one night affair. This is a relationship which needs to get stronger over

time, provided you are willing to give it the love and energy it needs.

Part of the problem is that men are from Mars and women are from

Venus - and this is true of founders and funders as well ! While some

marriages are a delight, where both partners complement each

other's strengths, others are a real mess. While there's little you can do

about how your investor behaves, theres a lot which you can do to

improve the chances of the marriage being happy by focusing on

what's in your control, and doing your best to keep him happy. The

secret, as a marriage counsellor will tell you is simple - it's all about

communication ! Be open and transparent, and share everything- the

good, the bad and the indifferent, so that you create trust and

intimacy.


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Most investors hate the fact that entrepreneurs reach out to them only

when theyre running out of money. We like to hear about your success

stories too , so that we can participate at least vicariously in the fact

that you're doing well !

Yes, it's true that some marriages don't work out well. The relationship

suffers from neglect, and you may require counseling to make sure

things don't go sour. Rather than give it up as a lost cause, remember

that you selected each other , and it's worth putting in the effort to

salvage the bond - after all, divorce can be a really messy affair !

And even if it does end in a divorce, remember that people do get

remarried ! A second marriage is the triumph of hope over experience,

and hopefully you will be a better marriage partner the second time

around, because you've learned so much from your mistakes the first

time around !


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Angel investors give

entrepreneurs money. In

exchange, they give us

hope, so we can be

optimistic that the world

will be a better place

tomorrow I think we get

the better deal!

The love hate relationship between

funders and founders

A mature start-up ecosystem requires

that both entrepreneurs and investors

work together in order to flourish.

However, in India, relationships between

them are tense.

Many entrepreneurs feel investors take

advantage of their financial naivet by

extracting their pound of flesh. They

believe that investors want to take over

control of their company, and will start

micromanaging them, as a result of which entrepreneurs will no longer

be able to pursue their dreams .

The other common criticism is that investors are not responsive - they

do not bother to reply to their emails .

Finally, they believe that all investors care about is the bottom line -

that they are heartless, and are not willing to support the

entrepreneur's passions and dreams.

However, every coin has two sides , and investors also feel that

entrepreneurs are exceptionally naive. Falling in love with a great idea

is not enough to run a business , and they need to learn to be a lot

more hardnosed if they want to become successful. They also feel that

founders need to be a little more respectful , and that they don't value

the investor's contribution enough - they think of them as being dumb

money-bags.


24 | P a g e

Unless we can get entrepreneurs and investors to trust and respect

each other, this ecosystem is never going to mature . The best way of

doing this is by understanding each other's perspective .

Interestingly, investors know that we cannot exist without entrepreneurs

, which is why we respect them , but don't forget that we aren't forced

to become angel investors - we choose this option. Start-up investing is

just one of the many asset classes which are open to someone who

has money - and most of these are far safer than becoming an angel

investor !

Angel investors are not just coaches or well-wishers or mentors or

cheer-leaders - they are willing to put their money where their mouth is

! Yes, we acknowledge that there is a lot which entrepreneurs can do

by their own, but they do need to work at earning the investor's trust if

they want to be funded. Just because an investor has money doesn't

mean he's going to sign a cheque when an entrepreneur pitches an

innovative idea !

This is why investors are very disappointed when they encounter

entrepreneurs who are extremely technically savvy , but who haven't

bothered to do any homework about how to run a business. They don't

seem to understand how to create financial statements , or report the

key metrics needed to track operational success.

These are gaps which are easy to bridge, but entrepreneurs need to

remember that the buck stops with them . Yes, it's not compulsory for

them to seek funding from investors , but if they decide to do so , that

then it's their responsibility to make sure the investor is confident that

the entrepreneur can deliver what he has promised.


25 | P a g e

How to hire rock stars and avoid the

prima donnas!

As the start-up grows, the founders need to add people to be able to

implement their business plans. However, the motivation of employees

is very different from that of the founders, and it's very hard for a start-

up to hire quality employees !

Joining a start-up is a risky choice, and good quality workers have lots

of options, which means it's hard for a bootstrapped start-up to attract

the right people. Initially, you will tap into your personal network, but

you will quickly need to cast your net further to find the right people.

Founders try to source employees using the standard recruiting

platforms, but these are designed to cater to the larger companies.

Using their personal network may work well for the first few employees,

but it's hard to continue to find good people as they grow.

Using interns is a useful stop-gap measure, but you can't run a business

using only interns ! Good interns prefer working for large companies,

where they are assured of long-term stability, and have a well-defined

career path. Hiring interns will also help you become better organised,

as you have to train them. This means you will need to set up SOPs, and

these systems and processes will help you scale up as you grow.

Yes, it's possible to use freelancers; and you can outsource work which

is not critical, but this can only take you so far ! It's hard to manage

freelancers remotely; and they will cost you both time and money,

especially if they don't do a good job; or if you need them to change

the delivered product.

One problem is that founders have very high expectations from their

employees. They expect that they will be as driven and passionate as


26 | P a g e

they are, but this is not going to happen - if they were that enthusiastic,

they would start off on their own - why would they join someone else's

start-up ?

The expectations which some employees have when they apply to

work for a start-up are often not well defined. Some want to work only

for a short time, as a stop-gap measure while they continue hunting for

a job at a large company; while others just want to add the fact that

they worked for a start-up to their resume, because they think this looks

cool !

People who work well in a start-up have to be wired differently. They

need to be willing to get their hands dirty; and be happy to learn new

skills which were not part of their original description, as the start-up

grows. They need to be able to work independently, and should be

willing to work overtime all the time, without expecting to get paid

extra for this !

Founders need to remember that great employees are worth their

weight in gold, and they can make or break the start-up. The truth is

that good employees have multiple choices - and you have to be

able to make them an offer they cannot refuse. Good people don't

work just for money - and this is actually your trump card ! As a start-up,

you can offer them autonomy and flexibility, so they can grow while

working for you.

It's very important that you take your time when hiring. You might be

desperate for warm bodies to make sure that work gets done, but

getting stuck with the wrong person can prove to be a very expensive

error ! Firing someone is very hard, and often causes sleepless nights for

the founders.

Finding the right applicants is a huge challenge , and you may have to

sort through hundreds of applications from various sources before


27 | P a g e

being able to select the right candidate. You may get fatigued, and

end up taking a short cut, but this will come back to haunt you later.

Add a practical test in the hiring process to evaluate their skills. Ask

them difficult questions to see how they respond under pressure. Try to

figure out their motivation for joining you ? Is it just the salary? Or are

they excited about working on the problem you are trying to solve?

Will they be able to deal with the daily chaos which characterizes a

start-up ? Or do they need close supervision ? Are they self-starters ? Or

will they treat this as a job at which they need to work from 9 to 5 ? This

will help you identify candidates who would be willing to go above

and beyond what the job description on paper requires.

Hiring well is just the first step. You then need to be sure you onboard

the new hires properly so they settle in well. The first few days are

crucial, and it helps to assign them a buddy, so they feel at home

when at work. Regular feedback is also crucial , since things change so

quickly, and you need to be sure everyone is on the same page.

It's not easy hiring and grooming people, but they are your most

valuable assets, and you need to do this yourself - you cannot

outsource this . Part of your job description is to help them to grow, and

you need to be able to inspire them. You have to lead from the front

by being their role model - they are watching you carefully, and will do

what you do - not what you say !

It can be hard to manage morale when things are not going well, but

it's best to be open and transparent. If things aren't going well, don't try

to hide the truth. Employees can sense your desperation, and while

they may forgive you for failing, they will not forgive you for lying to

them !

If you get funded, then employees will demand a salary hike - after all,

they want a slice of the pie as well. They may not understand that you


28 | P a g e

need all the money you have raised to make sure the start-up does not

fold, and will resent the fact that they are stuck with the same meagre

salary when they joined.

Also, as you grow, some will resent the fact that the founders get all the

publicity and money, while they are stuck with only a salary, as well as

ESOPs , which look good only on paper !

Today, many well-funded Indian start-ups have become bloated, and

their per-employee productivity metrics are poor, because they are

not able to attract the right talent. Most employees have no loyalty,

and are happy to move to a competitor if they get paid more. Many

will moonlight and freelance on the side as well, on the sly, to augment

their income.

Some founders will hire experienced executives who have worked in

large companies, to head their sales and marketing effort, because

they believe their experience will be valuable. Sadly, this often does

not work well in life. They are used to fat salaries; giving orders, and

having support staff to do their work for them - they no longer want to

do this themselves, which means they often end up becoming

expensive misfits, who need to be let go before they do too much

harm.

Human capital is the core strength of a company today, and this is

where social impact start-ups have an edge. They can attract loyal

employees with the right DNA, because they are inspired by the

mission of the start-up.

This post was inspired by a question asked to me by Vidhi Gupta , Co-

Founder at SyncSpire, who helped me to polish it

I asked one of my entrepreneurs, Anuradha Agarwal, who is Founder

at Multibhashi for her inputs, and this is what she kindly added

https://www.linkedin.com/in/vidhi-gupta-a1529934/https://www.linkedin.com/in/anuradha-agarwal-65974134/


29 | P a g e

There are two broad categories of candidates that I focus on:

o Freshers who knowingly avoided placements in big corporate

companies because they didn't want to become just a cog in the

wheel and are particularly looking for a start-up to work for because

some point later in their lives they want to become entrepreneurs

themselves

o Candidates with prior experience in a small or even a failed start-up;

not big start-ups because these biggies are corporates in their own

way

The hiring process is short and straightforward; no multiple rounds of

interviews; one critical assignment followed by one interview. The result,

whether positive or negative, is clearly communicated swiftly. As a

start-up we have to take decisions quickly and value our own as well

as the candidate's time

The biggest objective of the interview is to ascertain if the person is

really start-up material or just someone fascinated with the term "start-

up" but lacks the amount of drive, initiative, grit and hard work that it

requires.

Once hired, the whole team becomes responsible for this

candidate's motivation or demotivation but above all as a leader, the

founder needs to "walk the talk"; be super prompt with feedback and

follow-ups, be present by the team's side for late night deadline chases

and find one to one time with every team member at least bi-weekly.

Good hiring and managing becomes an excellent channel for

further hiring. Just like happy customers, happy employees refer more

people to join the team :)


30 | P a g e

Why the YC model will not work in

India

The start-up space has become extremely active in India today, and

because the ecosystem is still so immature, we're trying to learn from

the US. One of the outstanding success stories in Silicon Valley which

has created a great reputation for helping start-ups to grow has been

Y Combinator. Its unique business model has allowed it to produce a

large number of successful start-ups year every year, which is why it's

very tempting to try to replicate this in India. However, it's very unlikely

that this will work in India, because these are completely different

ecosystems. If we try to copy and paste, we will end up being

extremely disappointed.

For one thing, the US is flush with capital today. There's so much liquidity

that investors are willing to throw money at entrepreneurs. This is

typically what happens to YC-selected start-ups , who are able to

attract a lot of interest from funders , because they have mastered the

art of pitching. A very high failure rate is acceptable, because funds

have so much capital, and can afford to back highly risky start-ups .

Indian start-ups have much more limited access to funds, because

capital is much more expensive in India today, and funders don't have

such deep pockets. Silicon Valley's risk appetite is completely different,

because of their track record of success over many decades. This is

why ideas and start-ups which might get funded in the US would not

have a chance of attracting investors in India. Now, this doesn't mean

that Indian investors are stupid or that they don't understand how to

support innovation - it just means that they need to be far more

conservative, given the constraints they operate under. They know that

aping YC is a formula for disaster, which will just end up bankrupting

them.


31 | P a g e

The fact that the YC model may not work well in India is actually an

opportunity , because it means we need to start developing our own

models. However, if we keep on looking up to Silicon Valley and use

them as our benchmark , then we will continue doing a sorry job. Trying

to clone what works in the US is doomed to fail in India because

foreign bodies always get rejected.

Indian home-grown accelerator and incubator programs are trying to

develop their own recipe for success, but they're still struggling ,

because it takes time for an ecosystem to mature - especially in India,

where everything takes twice as long as it does in the developed

world.

Investors abroad are willing to take larger risks, which is why they are

willing to sign higher cheques at an early stage. In India, however,

where capital is a constraint, angel investors will typically sign a smaller

cheque at an early stage. This may end up benefitting Indian start-ups ,

as they are forced to grow their businesses frugally. They need to

remain focused and try to solve problems in a cost-effective manner,

because they don't have the luxury of having a lot of cash to burn. .

Fortunately, the cost of setting up and running businesses in India is

lower when compared to other developed nations. Talent is much less

expensive, which is why Indian start-ups have an advantage while

setting up businesses which are solving global problems. .

Indian entrepreneurs need to keep in mind that if they want to play to

their strengths, they should focus on solving the problems of Indian

customers. . They need to get their hands dirty, so they can develop

uniquely Indian solutions for Indian problems. Fortunately, the domestic

market is big enough, so they can do this profitably. With disposable

incomes being on the rise, start-ups can target a higher wallet share of

middle-class tech-savvy Indians.


32 | P a g e

As the Indian start-up ecosystem matures , and there are enough

success stories for investors, the risk appetite of Indian investors would

also increase. This in turn will encourage Indian entrepreneurs to take

larger risks.

Incidentally, Paul Graham is one of my personal heroes, and I admire

YC tremendously ! I believe they are flexible and agile enough to

create a new model for India - it will be interesting to see how they

adapt and evolve.


33 | P a g e

The first-time entrepreneur versus the

seasoned entrepreneur

Most entrepreneurs are first-time entrepreneurs. They have never done

this before, and are very excited about

starting a start up. These are usually young

students who feel that being an

entrepreneur is the best way of being able

to change the world. They're very gung-

ho , and are optimistic that they will be

able to implement the great ideas which

they have been working on, which is why

they go looking for investors to back

them.

Occasionally, the first time entrepreneur is

a more seasoned mature professional,

who has worked for a few years in a job,

and now wants to strike out on his own ,

because they want to be independent.

They are fed up of being stifled in a

corporate job, which strait- jackets them,

and want to be in charge of their own

destiny.

The other , much smaller group of

entrepreneurs , are those who are

experienced and seasoned founders, and

they also fall into two categories. Some

are the serial entrepreneurs, who have

had one of more successful exits in the

past. They enjoy the challenge of starting

a company from scratch, growing it to a

To reduce the risk

of your start-up

failing, you need to

learn from other

businesses. A great

tool is studying

pre-existing

analogs and

antilogs,

introduced by

Randy Komisar and

John Mullins in

their book, Getting

to Plan B. Copy

what works

shamelessly - you

don't need to

reinvent the wheel.

But please do also

learn from the

companies which

failed, so you don't

repeat their

mistakes.


34 | P a g e

particular size , and then letting someone else run it , because they find

management boring . They don't like getting bogged down in the

minutiae of setting up systems and processes, and supervising

employees. They would rather take on a new challenge , and they

thrive on the adrenaline of creating something from nothing. These

successful entrepreneurs find it much easier to get funding for their next

venture, because they have an established track record.

The other group of seasoned entrepreneurs are those who have failed

the first or second time, but have been able to gather up their

courage, bounce back , and want to start off again. They have a

much harder time , because once they have failed, this becomes a

blot on their track record , especially in India, where failure still carries a

huge social stigma . People are very reluctant to fund these failed

founders , because they think their chance of succeeding again are

very poor.

I have a slightly different perspective, and have a soft corner for these

entrepreneurs. For one, they are older, which means they're more

mature, and I find it easier to talk to them, since I am an old fogey too !

More importantly , because they've been through failure, they're going

to be very careful this time around about not repeating the same set

of mistakes which caused them to fail the first time.

They are much more careful about putting together the right team of

people; of respecting the value which investors add by bringing in

valuable funds ; and of monitoring their cash flow like a hawk. They've

learned all these lessons the hard way, and these are hard wired into

their brain . They are much more frugal and careful , because they

know they are not likely to get another chance, and are quite

desperate to prove themselves.

I am happy to back these entrepreneurs , provided they are upfront

and honest; can explain what mistakes they made in their earlier start-


35 | P a g e

up; what they've learned from them ; and how they're going to do

things differently this time around.


36 | P a g e

The role of investment bankers in the

start-up ecosystem

Start-ups often need to raise funds in order to grow, and most

entrepreneurs don't understand the fundraising process. It's all very

foreign to them, and they don't know how to pitch, or how to contact

investors.

This is where investment bankers can be

helpful - they help to connect funders with

founders. Good investment bankers have

cultivated relationships with investors, which

they nurture over many years. They

understand what investors are looking for,

and can help to bridge the gap between

entrepreneurs and investors . The reduce

some of the friction which founders would

otherwise encounter.

They coach entrepreneurs, and explain to

them what investors are looking for. They help

them to polish their pitch, and massage their

numbers , so that they are better prepared for

some of the tough queries which investors are

going to ask them. They provide many dress

rehearsals, so that the founder is better

positioned to be able to raise funds. A good investment banker

actually acts like a guide , and can play a key role in helping the

entrepreneur to succeed.

Good investment bankers take a lot of time and trouble to create a

good reputation for themselves. He understands what each investor is

looking for, because funders come in so many shapes and sizes. He is a

If an investor

refuses to invest in

you, rather than

criticising investors

for their lack of

insight, why not

accept

responsibility for

the fact that you

have not been able

to sell to them

effectively?


37 | P a g e

skilled at connecting the right entrepreneur with the right investor.

Because he's built up a lot of credibility in the start-up ecosystem, his

word carries weight, and he can help entrepreneurs to get warm

introductions to the right people.

However, because you don't require any special qualification to

become an investment banker , lots of middlemen are positioning

themselves as specialists in fund raising for start-ups. Sadly , they end up

taking undue advantage of raw entrepreneurs , most of whom don't

know how to differentiate between good bankers and bad ones.

They are sweet talkers and slick salesmen, who promise founders they

will be able to raise millions for them - after they have been paid their

fat fees. They charge a consultation fee; they charge a sign-up fee;

they charge a fee to vet the proposal; which means they keep on

extracting money from the entrepreneur.

These investment bankers want to make lots of money, which is why

they hang around at start-up conferences . They style themselves as

Investment Consultants , and make lots of promises, most of which

they're never able to fulfill. They get the entrepreneur's hopes up, by

arranging meetings with many investors in fancy hotels, but usually

these are not serious angel investors - not the ones who actually sign

cheques !

Many entrepreneurs waste not only a lot of money , but plenty of

precious time and energy as well . His confidence in the start-up

ecosystem takes a big blow, because he's been exposed to the wrong

people. He starts feeling the Indian start-up space is a sham , and there

aren't any good guys at all. This is tragic, and that's why it's so important

that entrepreneurs are able to differentiate between a good banker

and a bad one.


38 | P a g e

Bad investment bankers also make an investor's life difficult. They

mindlessly send the decks of all the companies they are raising funds

for to every potential funder on their list. Not only is this spamming bad

for their own credibility, it actually backfires, and ends up hurting the

founder. If a deal has been shopped around for too long, it becomes

stale, and serious investors will no longer be interested in evaluating it.

Good investment bankers do not take fees upfront. If anyone asks for

this ( often in the guise of "processing fees"), then this should be a red

flag. To make sure your interests are aligned, good bankers only make

money when they are able to help you raise money, so what they

should charge should be a success fee, which they get only after you

have received your cheque.

A good banker will take the time and trouble to study both you and

your company. He will act as your champion, and he should know as

much about your company as you do, so he can be an advocate for

you. You don't want someone who takes on too many clients, because

he will not be able to give you the personalised hand-holding and

attention you need. Good bankers are in great demand, and they

are quite picky and choosy as to who they will sign on as clients. They

should add value to your life, and it should be very obvious to you

what this value is. Just like the chemistry between the funder and

founder is so important, the chemistry between you and the

investment banker you select is also critically important.

The truth is that you are very vulnerable as a first time

entrepreneur. Any time anyone promises to help connect you to an

investor ( especially when they call him by his first name !) , you are

happy to clutch at straws. Some of these bankers are extremely slick

salesmen , who are happy to help part you from your money. This is

why you need to be on your guard . Please check out their reputation ,

and see what their track record is . Talk to entrepreneurs who they've

helped to raise funds for in the past, before signing up with anyone,


39 | P a g e

because making a wrong decision can prove to be extremely

expensive for you.

I asked Devendra Agarwal of Dexter Capital for his comments. He is

unusual, because he wears two hats at one time - not only is he a very

thoughtful investment banker, he is also an entrepreneurs who is the

founder of InstaOffice !

* I feel investment banking for start-ups below a certain size is very hard

for good knowledgeable bankers , especially if they want to build an

organization (as that entails incurring a fixed cost every month , and

good people are expensive)

* Most good investment banker will charge a fixed fee to ensure that

they are dealing with only serious entrepreneurs . However, good ones

will not take wrong mandates just in order to earn the fee, because

they don't want to jeopardise their reputation.

* Yes , their final fee should be paid once the entrepreneur has

received the money , but often entrepreneurs do not pay even after

having signed a contract . For all practical purposes, contracts are not

enforceable in India's legal system today, and some entrepreneurs

take advantage of that fact

* The investment needs of a start-up looking to raise seed vis-a-vis Series

A vis-a-vis growth capital is very different

* Many time investors by-pass the banker, and even entrepreneurs feel

happy about this, because it saves them the banker's fee, but this

leaves the banker high and dry.

* A good investment banker adds a lot of value during the negotiation

of the term sheet, and can help to expedite documentation and the

closing process , as often the entrepreneur and investor get stuck on

many legal points

https://www.linkedin.com/in/devendra-agrawal-1008917/?ppe=1


40 | P a g e

How to evaluate

entrepreneurs Start with

being as sceptical as

possible, and share your

doubts and worries with the

founders, so they can answer

your concerns ( which I am

sure they have answers for,

since they have been doing

this for a few years). Be as

blunt and straight-forward

as possible. Then, suspend

disbelief, and go and meet

them, and give them a

chance to win you over to

their side - allow yourself to

fall in love with the

entrepreneur! If you decide

not to invest, that's fine, but

you should be able to argue

his case persuasively

Why due diligence takes time

The way an investor looks at time

when doing his due diligence on a

start-up is very different from the way

an entrepreneur does. For an

entrepreneur , the negotiation with an

investor is just one of the many hurdles

which he needs to cross in order to

make his start-up successful. He wants

to pitch and get the money, so that

he can then focus on what's

important - moving on with growing

his business. He is looking for an

investor who will give him the cheque

as quickly as possible, at his chosen

valuation. He wants to expedite the

due diligence process quickly,

because speed is important . The

longer he spends on raising funding ,

the less time and energy he has on

building his business and delighting his

customers. This is why entrepreneurs

think of funding as a distraction -

something which is painful, but which

they should get over with as quickly as

possible.

An investor's viewpoint is obviously completely different. He is taking a

big risk in deciding whether he should be giving you his money or not,

because he doesn't know enough about you. For him, time is his friend.

The more the time he spends on doing his due diligence, the more he'll

understand about you, your team, your business , your weaknesses,


41 | P a g e

and your strengths. He will be able to judge whether you're capable of

compensating for those weaknesses and implement your business

plans.

As an entrepreneur , you're naturally going to be very biased. Everyone

entrepreneur thinks his start-up is the best in the world , and that

funders should line up to give them funding, because they have such a

cool idea , and are so accomplished.

However, this is not the way the investor looks at the world. You are

one of the many start-ups who is pitching to him, and because he has

limited funds, he needs to decide whom to give them to. It's quite

possible that even though you may be an A grade founder, there is

someone else who is an A plus, who he thinks is more likely to give him

a better return on his investment. This is why he selects him over you.

While investors understand your anxiety about moving on with the due

diligence process quickly, you must understand that it takes time to do

this properly. You can't hurry this up. The investor needs to look you in

the eye; to check the chemistry between you and him; assess how

stable your team is and whether you work well together. This is a time

consuming process, because he has other start-ups to evaluate as

well.

Trying to take shortcuts in the due diligence process ends up hurting

investors , and we have learned this the hard way. Also, investors work

as a team, which means even if one person in the team likes you a lot,

but someone else doesn't, then there's very little you can do about it.

The truth is that everyone on the investor team has to agree before

they will actually sign that cheque, because there's so much at stake.

The sooner you accept this reality , the better for you. Yes, this can be

frustrating because you have one person on the team who seems to

play the good cop , and is very enthusiastic and excited about

funding you, while someone else plays the bad cop , who finds 50


42 | P a g e

reasons why you're not the right person. Every time you feel, "Oh great

the deal is closed; Ive answered all their questions and doubts, and

finally they should be happy," when a new set of queries comes up the

next day !

Now it's not like investors are trying to harass you, but it takes them time

to get up to speed about exploring your domain and your start-up. As

they dig deeper, they will have more questions, and you just need to

be patient.

If you are mature and learn to look at the world from their perspective

it makes complete sense as to why they're doing this systematically

and methodically. In fact , this is in your best interests too, because

they will be able to pinpoint what's wrong with what you're doing. They

can highlight what your weaknesses are, and you can use this

feedback cleverly in order to do a better job. It's like getting the

advice of a McKinsey consultant - for free ! Even if they end up not

funding you, thoughtful insights from an expert investor will help you

run your start-up better !

Yes, it's true that not all investors are well-organised; and some even

seem to take a perverse delight in leaving entrepreneurs hanging for

their replies. This is sad, and these investors harm the entire ecosystem,

which is why you should be picky and choosy about whom you

choose to raise funds from.

I agree it's not much fun when you hear a No from an investor ,

especially after you have spent so much time and energy on the due

diligence process. Yes, it can be heartbreaking , because that means

you have to start the exercise all over again with a new funder.

However, you will get incrementally smarter, and it will become easier

for you , because your pitch will be more polished , and you will have

better answers for many of their questions. You will have learned


43 | P a g e

exactly what they're looking for , and will be able to tailor your

presentation accordingly.

Lots of honest entrepreneurs will agree that their start-up has become

much better because they went through the trial of fire by due

diligence, and if done well, everyone benefits from this process.


44 | P a g e

Why are entrepreneurs so

overoptimistic?

Most entrepreneurs are very sure that the start-up which they are going

to start is going to change the world. Everyone dreams they are going

to found the next unicorn, otherwise no one would ever go down this

path !

I think it's important that you have a lot of optimism , because the truth

is that you do need to be a little crazy in order to have the courage to

found start up. However, some of this is misplaced.

This is partly because first-time entrepreneurs are usually students

who've been extremely successful academically, which is why they are

not used to handling failure. The naively assume that just because

they've been very successful in school and college, they will continue

being successful in the real world as well. However, we all know there is

no correlation between academic success and real world success, but

this is not something which they've learned as yet.

The other problem is all the Kool-Aid which they're used to drinking

because of all the hype which surrounds the start-up ecosystem. They

read all the success stories which the media highlights; they soak up all

the praise which is showered on the start-up founders who have made

it big; and they binge on all the Shark Tank shows.

Sadly, few people talk about the failures and hardships which

entrepreneurs need to endure. Even successful entrepreneurs convey

a very rosy picture of their journey, because they want to show how

heroic they have been in overcoming all the obstacles they were

forced to surmount. They usually downplay all the near death

experiences which they've had.


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Investors, on the other hand, are acutely aware of the fact that lots of

start-ups fail. Most investors have invested in companies which have

gone belly up, even though the start-up was very well positioned and

the founder seemed to be very bright, and had all the right things

going for them. Even after being able to raise funds from sceptical and

cynical funders , they still end up failing - often after burning through a

lot of money. This is why there's such a huge difference in the world

view between the battle-scarred seasoned investor , and the first-time

entrepreneur !


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Closing the funding

It can be very exciting when an investor agrees to fund you, but you

need to understand that this is just the first step on a new leg of your

journey. There is still lots of stuff which needs to be accomplished

before the cheque hits your bank account, and you need to be on

top of things to make sure that this process gets expedited. Think of it

as a project with multiple moving parts, and you need to take

ownership to make sure that nothing falls between the cracks . Things

can change quickly , especially when you are dealing with many

investors, and you don't want to lose momentum.

Because there are multiple players (your lawyer, their lawyer, their

analyst, the many complex forms ; and the multiple signatures ) the

process can seem complex and this can unnerve you. Its a good idea

to set up a list of deliverables; define who is responsible for which task;

create a timeline; and then share this with everyone proactively , so

that everyone can track progress. The fact of the matter is that

investors are busy, and there are lots of different things going on in their

life. Unless you make this your personal priority , things will take forever

and ever to happen.

You need to keep on pushing and pulling to make sure that things

move quickly, because you may find that the ball gets dropped

because no one is very clear who's supposed to be doing what. This

lack of coordination can come back to hurt you.

There are lots of tools available to help you manage the closure of the

deal effectively. Once you put down the tasks on paper and add a

timeline to it, what you need to accomplish will become a lot clearer ,

and you'll be able to remain on top of things.


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The Start-up Craze

There are many reasons why the start-up

ecosystem is booming in India.

The Indian government is pushing the idea of

entrepreneurship as being the answer to

creating new jobs to kick-start the economy;

and because of all the adulation which the

media lavishes on successful founders , the

new generation of entrepreneurs (the Bansals,

Vijay Shekhar Sharma and Bhavesh Agarwal)

have become the new role models for

students. The start-up space is hot and

happening, and everyone wants to become

an entrepreneur !

Another contributing factor is that the jobs in

the IT companies have dried up. Engineering graduates are finding it

hard to find employment, which means that they need to create jobs

for themselves by creating start-ups. Since there is so much interest in

entrepreneurship, lots of accelerators and incubators have now sprung

up, which are helping students to create a business , by teaching them

how to craft business plans and to pitch to investors. Finally, to

complete the virtuous cycle, lots of investors are joining the

bandwagon as angels, because they think this is a great way of

getting rich quick.

A very important catalyst is the fact that the barriers to entry to starting

up have become extremely low. It's become quite inexpensive to start

a start-up these days. Thus, when you need an office, you no longer

need to spend hours negotiating with brokers and landlords to find

space you can afford. You can walk into a co-working space which

Are you cut out to be an

entrepreneur?

Willing to take risks?

Can bounce back from

failure?

Able to sell?

Can't stand the politics

in a large firm?


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provides you all the amenities you need, and you are ready to go ! IT

infrastructure has become a cheap commodity, and you can get

reliable server space from Amazon or Microsoft for a few thousand

rupees per month. Finally, it's possible to get freelancers to build the

technology you want, which means you only need a very lean and

mean team to create a minimum viable product.

Also, as the system is maturing, the successful entrepreneurs who have

made money are happy to encourage the next generation of students

from their college, because they have a soft corner for their alumni.

When they go back to give lectures at their colleges , they inspire a lot

of students to follow in their footsteps. They are happy to fund the

bright ones, and provide them with mentoring as well, and this support

can be priceless.

However, a big problem is that we end up glamorizing

entrepreneurship , as a result of which young entrepreneurs have very

unrealistic expectation of what is involved in running a start-up. They

think it's all fun and games , and that all you need to do is find

someone to sign a cheque, and you're in business ! They all think of

themselves as being the next Steve Jobs, and believe their idea and

passion will help to disrupt the world.

However, the reality is that running a start-up is a hard grind. It's a lot

of work which involves sleepless nights; and having to deal with cash

crunches, unhappy customers, and angry investors. It's not something

which should be taken lightly, and we need to bring some sanity and

reality back into the system. The truth is that most people are not cut

out to be entrepreneurs, and they will just be miserable trying to run a

start-up. They will end up wasting a lot of their time and energy, and

will end up being unhappy and disillusioned.


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Why Do Entrepreneurs Hide Bad

News?

Entrepreneurs are responsible people , and when they raise funds from

investors, they want to do their best to make sure that they can return

the money back to the investor with a profit. They work hard to make

this happen, but the truth is that shit happens, and life it not always

predictable. Bad things do happen - especially in a start-up , when

there are so many moving parts. It's very hard to predict where the

next problem is going to come from, which is why entrepreneurs are

always is fire-fighting mode.

Now whenever something bad happens, the knee jerk reflex is to hide

it. This is the natural response of every child, who wants to conceal the

fact from Mummy that he broke the vase while playing with a ball,

even though he was expressly forbidden to do this. The entrepreneur

too tries to tackle the problem himself , without bringing it to the

attention of the investor. Often he's optimistic that he'll be able to solve

the problem by himself, so why cause the investor sleepless nights by

giving him reason to worry, when he can fix the issue at his level.

This is why he works extra hard in order to nip the problem in the bud .

Most founders are very independent, and they don't really want an

investor looking over their shoulder , telling him what do to. And no one

likes hearing criticism, and it's no fun having an investor censure him for

telling him that the problem occurred because he was careless and

wasn't able to anticipate it.

Sadly, this cover-up just makes a bad problem worse. If you can't solve

the problem, it spins out of control, but because you are so busy trying

to tackle it and hide it from the investor at the same time, that it often

balloons up , until it blows up in your face . You are then forced to go


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back to the investor and tell him about the mess you find yourself in,

because you need his help.

By the time you reach this stage, the investor's not likely to be very

forgiving . He's naturally upset about the fact that you didn't bring it to

his attention when the problem was small, and could have been

handled easily. Because you were not open and transparent, you

allowed the problem to fester, as a result of which it become big and

unmanageable , and it's much harder for him to help you. What burns

him up is that you contributed to the problem by refusing to share the

facts. This is why he's not inclined to help you at this stage, because

you have lost his trust. This is often the beginning of the end for the

start-up.

This is why you need to create a culture of openness and transparency

in your company. Not only should you encourage your employees to

be brutally honest with you, you need to be frank and forthright with

your investors as well. Yes, it's not fun having to listen to all the hindsight

wisdom which they will give you, but this is far better than being forced

to shut down because you are in deep doo-doo. Please don't try to be

Superman - your investors are on your side, and want you to succeed,

and will help you to do so, if you allow them to !


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Managing multiple angel investors

When you need to raise funds, you will often need to approach

multiple angel investors to fund your seed stage round. Because angels

usually have limited personal funds, they have to band together in

order to meet your requirements. This means you will need to talk to 10

or more angels at one time , to convince them to give you the money

you need, because one may not have the capacity to be able to

fund you.

As with everything in life, this has its pros and cons . Many heads are

often better than one, and each angel brings his own network along

with him when he invests in your company. He will share his industry

perspective and domain expertise ; and will be able to connect you to

lots of people within the ecosystem, because most angel investors stick

to a space in which they have some experience. However, you still

need to work on them one at a time, because if one person signs on ,

the others are much more willing to follow his lead as well. After all,

most

Food for thought for startups

Small Business & Entrepreneurship

Transcript of Food for thought for startups