Ideas|Products|Startups|VCs

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

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

Parallocity, head-quartered in the Silicon Valley with a Product Engineering Center in Bangalore,  which develops high performance runtime program analysis and defect detection frameworks announced that it has closed Series A round of funding from venture capital firm Accel Partners.

Parallocity has created a virtual machine for program analysis and error detection, especially for multi-threaded / concurrent programs.  Zeus Virtual Machine (ZVM) brings in a new dimension to software testing and quality by incorporating best of current research in computing coupled with innovative applied testing methodologies. By empowering software developers and quality engineers find complex software errors with ease, Parallocity is paving way for next generation of software applications which take full advantage of the computing capabilities of state-of-the-art multi-core/ multi-processor platforms.

Subrata Mitra, Partner at Accel Partners, take the board seat at Parallocity. Parallocity houses an exceptional team delivering the next generation of capabilities in complex program analysis,” said Subrata Mitra, Accel Partners. “Investment in Parallocity is in-line with Accel’s mission to partner with companies that are truly path-breaking. We commit Accel’s global network of resources to help Parallocity scale quickly and realize its true potential.”

-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