Ideas|Products|Startups|VCs

Start up killers are those said statements that may lose the funding for the entrepreneur. When pitching to investors about the new product and business proposition, there is some moment when you know that you have lost your listener. One misspoken comment and everyone wants to leave as soon as possible. Lets look at few turn offs

No Competition

There is always competition. In some way customers are fulfilling their needs today. Competition can be as simple as continuing to do things as they are doing them today. Never ever say there is no competition. Investors look for proven and tested market which is growing. Investors may not be keen to invest in saturated markets like OTAs in India because they often require too much capital to overcome the incumbents, not because they are not viable.

Being Conservative

Majority of the Indian entrepreneurs i have met seem to believe that VCs want to hear that their numbers and estimates are conservative.  As an entrepreneur you should know Investors know that backing a start up is a very risky business, and conservative isn’t what they are interested in, nor is it what they expect.  There are plenty of conservative, less risky investment vehicles like Post Office schemes, MF available to investors.

Missing the Detailing

If you are entering entering into a market and not understanding the nuances of the business will cause failure. Do your homework and establish a process to get all the details and nitty-gritty of an industry and customer that make a product successful. For instance if you want to start an e-commerce company make sure you have detailed out all of flows/vendor relationship involved in it. Investors want to know the startup has experience in the market.

Break Through Technology

Seriously! as an entrepreneur if you say to investor you have developed a break through technology, then be prepared to say immediately why. Most investors will not believe you and it is generally considered as Myth.

Negative Attitude

Remember Investors invests on Entrepreneur and not on idea, they would like to see, assess entrepreneur attitude. So appear coach able, Every time an investor asks a question, they are impacting valuable information.  Not listening or addressing their concerns is a start-up killer. Becoming defensive when they ask questions is negative as well.

Disregard for Investor Money

Having an apparent disregard for the investors money will often sink a deal or make investors wary of what is to come of the startup in the future.  Recently i came across a pitch where two co-founders presented to angel investors and when one investor asked what if the start up encountered problems and hit the roadblock, they immediately replied they would just go back to their old jobs.

-Hitesh, vcBytes.com

Off late i have come across couple of instances where VCs have not invested after signing the term sheets and really put startup and entrepreneur in back foot by their ‘No Shop‘ clause in the term sheet. Signing a term sheet with a no shop agreement is likely to send you back a month or more if the VC doesn’t end up funding the company.  I can see the insistence of no shop language in larger M&A deals but see no place for them in early stage rounds.

So what is a No Shop Clause?

In simple words ‘No shop’ clause, prohibits the entrepreneur from speaking to other investors while the VC completes his due diligence.

No Shop/Confidentiality provision is one of the two provisions in the term sheet that is usually “binding” on the company and the investors – meaning it is enforceable even if the rest of the contemplated financing is never completed.

The implications of the No Shop provision are very straightforward. The “No Shop” portion requires the company to refrain from actively pursuing any other investment or any sale of the company for a set period of time after the term sheet is signed. Most of the time the only point of negotiation is the length of the No Shop period. This ranges from 30 to 90 days, but is typically 45 or 60 days.  Once the term sheet is signed, both sides are usually anxious to get the transaction closed as quickly as possible.

This is an important issue because if your VC walks away after you sign the term sheet (which happens from time to time), your company may be considered damaged goods and it will be difficult for you to find another investor.  Accordingly, if you get any indication that your VC is getting cold feet, you want to be able to move quickly to re-kindle discussions with other investors, if possible.

If you believe in your startup and aiming at large market and have a lot of leverage (such as many VCs interested in your company), you may be able to knock this provision out entirely.  Remember: every clause in a termsheet is negotiable.

-Hitesh, vcBytes.com

Continuing its efforts to strengthen the Indian entrepreneurial support system and to fund promising start-ups, Indian Angel Network, India’s largest network of angel investors announced a series of start-up boot camps. To be held across Bangalore, Mumbai, Pune, Hyderabad and Delhi, these boot camps endeavor to bring together prominent angel investors and mentors and emerging and established entrepreneurs. These interactions serves as good learning ground for entrepreneurs by participating in engaging panel discussions on different facets as also pitch for seed-funding.

Further, in order to inspire a start-up culture and to engage a larger community these boot camps will bring simulate activities like online voting to short-list ideas as well as set up an ‘Ideas Marketplace’. This simulation will allow participants to validate the new venture ideas in an educative and fun way.

The entries to bootcamp open from 6:00 PM on March 2, 2011 at www.boot-camp.in. Named ‘The Baap of all Bootcamps’ – the event is powered by Springboard Ventures – an emerging start-up enabler which launched crowd-funding (http://india.growvc.com) as well as business plan advisory and development platform (www.mybplan.in).

Each of the bootcamp will be packed with knowledge-led sessions, including:

· IAN Showcase: Featuring some of the successful investee entrepreneurs of IAN on how to pitch to investors and what support to expect from IAN.

· Ideas Marketplace: Top ten shortlisted ideas in each city get an opportunity to make an elevator pitch to other participants in three minutes. Participants with top four ideas will get to meet angel investors, get incubated by IAN Incubator. They also get assistance making their business plan by MyBPlan.

· The Earthy Entrepreneurs : Special showcase and panel discussion on challenges and funding opportunities for social enterprises

· The Early stage Investment saga: Leading entrepreneurs and IAN members come together to discuss the challenges of early stage investments

· Start-up Pitch: Shortlisted eight start-up ideas in each city make detailed presentations to the investor members of IAN. Top two start-ups selected from each city compete with others at the grand finale at Delhi.

– Hitesh, vcBytes.com

What is Pre-money valuation? Pre-money valuation refers to the valuation of the company before an investor injects capital into the company. The post-money valuation of a company refers to the valuation of the company after an investor has injected capital into the company. Therefore, the post-money valuation of a company is always equal to the pre-money valuation plus the amount of capital injected by the investor.

In equation form -

1. Post-money valuation = Pre-money valuation + Investment amount

2. Purchase price per share = Pre-money valuation / Number of fully-diluted shares before investment

3. Number of new shares issued to investor = Investment amount / Purchase price per share

Example:

Corbyn Tech Ltd. currently has 5,000,000 common shares held by its founders, being 100% equity of the company.

It is agreed between Corbyn Tech Ltd. and Investor A that in the forthcoming Series A round, 1,000,000 common shares will be set aside for ESOP.

Therefore, the number of fully-diluted shares of Corbyn Tech Ltd. before the Series A round is 5,000,000 + 1,000,000 = 6,000,000.
Pre-money valuation:
Before financing, Investor A gives Corbyn Tech Ltd. a valuation of US$5,000,000.

Therefore, the pre-money valuation of Corbyn Tech Ltd. is US$5,000,000.
Purchase price per share:

Each share is valued at $5,000,000 / 6,000,000 = $0.83 (calculated on a fully-diluted basis).

-Guest Post by Ananth, Ananth is a Senior Analyst with a leading PE firm based out of Mumbai

If you are an entrepreneur, there is high probability of you meeting a VC and discussing about your venture and business plan. VCs, you must remember is a group of individuals that are seeking to make profitable investments in fast growing companies.

Beside focusing your attention on the unique qualities of your business, spend some time and work on the anticipated return on investment. VC firms often want to see companies that will produce returns in excess of 30% per year on a compounded annualized basis.

Lets look at the common questions VC asks an entrepreneur -

How much capital do you need? – This is one of the most imperative questions asked by a venture capital firm. They want to know how much of their capital will be needed to bring your business to profitability (if it isn’t profitable already). They will also want to know how these investment funds will be used, and if additional rounds of capital will be required.

Who is your competition? – This is also a highly asked question from VC firms. Every business has some form of competition. Discuss the competitors in your industry, how their product/service is similar to yours, and how your product is intrinsically better or more usable than that of the competition. Present the SWOT analysis.

Entry Barer ? – VCs are not keen in venture which have low entry barer which implies that this business model can be replicated easily. So as an entrepreneur you should be in full command to highlight why your business model is not easily be copied and how much time it would take for a newcomer to do so. VCs are keen to know if you can have patent protection on your product or your business process.

What is the current state of venture? – VCs are keen to know the current state of your venture to understand better the progress of the venture and also where funds will be utilized. Gone are the days, simply having a great idea does not cut it anymore. Venture capital firms want to see that you have something tangible to offer rather than just a good business plan or business concept. Prior to raising venture capital, you should try to move the business along as far as possible.

Do you currently have paying customers? – Paying customers definitely brings credibility to your product since VCs perceive it as a validation for the product and would like to talk to your customer to understand their viewpoint about the product.

Founding Team Experience? – VCs look for dynamic and extra ordinary founders to back them, a great leader can develop a very good business from an ordinary idea. They will want to know if you have the proper educational background, experience, and contacts within your field to make your venture successful and profitable.  Keep your biography and your senior management team profile handy.

How will i Exit? - Lets get this very straight VC never do charity, they are business folks and would like to see a hefty return of their investment, nothing less than 7x. They would like to exit the venture either by company’s IPO or strategic sale of their equity to a large company or a PE firm.

-Hitesh, vcBytes.com

Nexus Venture Partners, an early stage venture capital fund, announced today that it is launching a seed stage program called “Nexus Seed” which will help build a stronger entrepreneur ecosystem in India.

Nexus Venture Partners will use the Nexus Seed program to identify and fund high potential entrepreneurs who are building technology and Internet companies. Through this initiative, Nexus will invest Rs. 20 lakhs to 2 crores ($50k-$500k) each in up to 50 companies over the next 5 years. Entrepreneurs are encouraged to submit a summary of their plans to plan@nexusvp.com .

Nexus Venture Partners is the leading venture capital fund in India with total fund size of $320 million. Apart from investing in early to early growth companies, Nexus has also been incubating and investing in seed stage companies since 2006. These include Sedemac, Scalarc, Vdopia and several others. Many of these companies have gone on to raise further financing and build leadership positions in their markets.

Speaking about the seed program, Dr Naren Gupta, Managing Director of Nexus Venture Partners said, “We are excited to launch this platform to identify and assist entrepreneurs passionate about building leading companies to serve Indian or global markets. This will enable selected entrepreneurs to get access to expert help as well as seed stage capital which they can use to refine the concept and reduce some of the early stage risks.”

Deepti, vcBytes.com

Groffr is a year old startup based out of Mumbai founded by IIM-K graduates Vikhyat and Sandeep. Groffr is a group buying portal for high valuable items like real estate, cars. I have covered Groffr earlier, you can check here.

Groffr is looking to raise Venture Capital for expanding their operations, Let’s look at their VC pitch.

(Disclaimer: This video is uploaded after taking due permission from Groffr Founders)

VC Pitch is a very important activity of fund raising process, its the first step towards raising money. A great product/business entity can loose on the opportunity if its not pitched properly, I have personally seen great products have failed to catch the VCs attention since entrepreneurs messed up with their pitch. A bad pitch of a good product can ruin the investment opportunity while good pitch for a so-so product can attract investments.

VC pitch is no rocket science but its easier said than done. Entrepreneur has to worn multiple hats, he/she has to be a salesperson, dreamer, visionary, technologist, operations guru.

Key elements of a Pitch are -:

1. The problem/gap in the market
2. Solution
3. Business model/revenue model
4. Underlying magic/technology,
5. Marketing and sales,
6. Competition,
7. Founding Team,
8. Projections and milestones,
9. Status and timelines.
10. Summary – Investment required, Exit route to VCs

These are the basic guidelines, obviously some business requires further detailing but these elements are good enough for an impressive VC pitch.

-Hitesh, vcBytes.com

“The proposed fund would be in the range of $100-$150M, “Mr.Mohanjit Jolly, Executive Director, DFJ told Business Line on the sidelines of Carbon Forum Asia 2010 in Singapore last week.

DFJ which invests in early to mid-stage companies, would earmark about a fourth of its India-specific fund to invest in clean technology companies. DFJ, which has a total portfolio of 20 investments in India, recently exited from Reva Electric, which was acquired by Mahindra and Mahindra. The VC firm has so far made some five investments in clean tech in Indian companies including Husk Power Systems, Deeya Energy, D.light Design, Attero Recycling among others.

“The India story has been pretty strong – growing from an experiment to reality. Our Limited Partners (those who invest in a fund) are bullish on the India story. Moreover, with the recent exit, we have completed a full cycle in India,” Mr Jolly said.

Further, Mr Jolly said the company was currently evaluating two more proposals in the clean tech segment. In the current $350-million fund raised in July, DFJ has earmarked about $50 million to invest in the Indian market in the next two to three years, Mr Jolly added.

-Hitesh, vcBytes.com

You have founded a startup, prototype is done, some beta users paying some or no money and you approach a VC for series A fund. VC would be interested in knowing your product, market size and also the pre-money Valuation.

So What is pre-money valuation and and how do you determine the pre-money valuation set on the company.Pre-money refers to the valuation of a company or asset prior to an investment or financing. Where does it come from? It mainly depends on the space/industry the company is trying to foray and also into the stage of the company. There is no rocket science in calculating the pre-money valuation and it is generally discussed between entrepreneur and investor.

Pre-money valuation can be simplified and easy way is to determine the equity percentage the investor would receive for their investment.

For instance a VC invests $2M in a startup with a pre-money valuation of $3M, it implies the VC expects to own 40% of the company. In simple words the post-money valuation is the pre-money valuation plus the amount invested. Thus on raising $2M, the investor intends to own 40% of the company after the investment the pre-money valuation must be $3M.

A common misunderstanding and practice which is followed while calculating pre money valuation is derived from company’s potential earnings, with a discounted cash flow analysis (DCF) of the unleveraged cash flows. There is high probability that these projections will prove wrong and it will be determined by the financial numbers and not by the investors.

A mix and match of under mentioned three factors should be considered to derive a pre-money valuation.

1. The negotiation between entrepreneur and investor and percentage ownership described above.
2. The investor’s experience with previous investments of similarly staged companies.
3. Serial Entrepreneurs have a tendency to demand a higher valuation as compared to 1st time entrepreneur.

- Hitesh