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

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

Off late i have been meeting lot of entrepreneurs and thought of sharing reality checks that may be useful to become successful

Time is Money -

Last week i met a founder of a startup and was quite upset to find they took 2 years to develop the product and still not released in the market. They wanted to make so called “Perfect Product” which unfortunately doesn’t exist. They lost enormous time, opportunity to cash in from the product and end result is way beyond their perfect product definition.

So in order to succeed company needs to launch the product soon and keep on building features, workflows on top of it based on user feedback and business demand. Probability of success is much higher since you are closer to market and assessing the market need and addressing it via rapid release cycle. If you wait and watch for Perfect Product you are up for a big surprise since you will never be able to please everyone and run into stuff which you didn’t anticipate.

Numerous Sacrifices-

As a startup guy you to sacrifice a lot, in terms of money (made while working for a company), you won’t be able to spend quality time with your family and friends so make sure they have been taken into confidence while starting off. As a startup you may have to bear losses to build customer trust. PopaBook recently offered 25% flat discount on their entire inventory just to attract customers, I am sure there would be some losses for the company but its worth taking if it can help in building trust with end users.

Are you Solving a Problem - Make sure you are able to convince user that your product is addressing their pain point and will solve it. No point in making and developing another Me2 product. I met a startup guys few weeks back, they’ve developed a social networking product which lets user segregate groups depending on relationship. I liked their product but question is can it compete with Facebook and with only one distinguishing feature. So as a business i have serious doubts they can gain traction.

Start Making money - If you are developing a product to do business which means you are serious about making money. Generating revenue is a very critical component for startup to succeed since it keeps them in healthy stage – can manage their monthly expenses and plus its a big brownie point while raising Venture Capital. Don’t just create product thinking to be acquired by big firms without any revenue model, its totally suicidal. Before you put in a lot of time and effort into a business idea, ask yourself how are you going to make money. If you don’t have a solid answer, don’t get into that business.

Herculean task to run a company – You as a founder of a startup may be the boss of company but its a big task to run the company.  Its not a fixed timing job and there is always a deficit in spite howmuch ever time you invest in your startup. To be successful you should consider customers as your bosses which can go into 100s. Have discipline and formulate and adopt processes which will be adhered at any cost.

-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

Recently i have come across few bunch of smart people who spends couple of hours in a startup along with their steady job in big Software company. Best part is they have full faith in the vision of startup, its business goals but still hesitant to take a plunge and work full time. In my believe in order to kickoff an startup one has to really overcome the fear and which is the toughest thing to do.

Starting a new business is equally challenging and exciting, it can really scare the wits out of you; more so when you are leaving the comfort and security of a steady paycheck.

How you can mitigate the risks and conquer your fear of starting a business :

• Empower yourself with knowledge. Understand the domain, market size, product offerings in that space thoroughly. Understand why users buy the products of from your competitor and how your product can fit in that space, list out all the merits your product will have.
• List down the reasons why you want to start this venture, please don’t start just to compete with your friends who have started business and doing well. Get inspired don’t get influenced.
• Assess and build your support system, in case of any fall out you can rely on you support system.
• Be realistic in your aspirations, you just can’t start thinking you can give stiff competition to Apple or Google. Don’t be over ambitious.
• Be confident and believe in yourself, thats the most critical factor for success. If you doubt your capability new venture is sure to doom.
• There has to be an alignment with your goals and resources, you just cannot run overboard with goals which can develop friction within the team.