Counteract: Choose a VC

In recent times, we have watched several business reality television series like Dragon's Den, Sharks' Tank, Money Tigers and many other such presentations adding on to the available offline investor pitch events. Aspiring entrepreneurs pitch their business models to a panel of investors and persuade them to invest money in their idea. The investors use several valuation techniques to debunk or concur with the owner's valuation and decide whether to grant them funding in return for an ownership stake.

The budding entrepreneurs get a fixed amount of time to primarily pitch their business ideas to the in-panel multi-millionaires who are willing to invest their own cash, time, and expertise to kick-start the business or at times t help scale-up the business in terms of geography, expertise, technology, and help the entrepreneur with their business knowledge, market dynamics etc. After the pitch, the investors have the opportunity to ask questions about the venture. The entrepreneurs do not always have to answer or elaborate, but of course, what they choose not to address could very well affect the outcome. The pitch is over when each of the investors have either declared themselves out for further deliberation, or when the entrepreneur secures the full investment that they are asking for.

There are rare occurrences, when the entrepreneur(s) receive multiple competitive offers and deals either individually or collaborated by a few investors. Here the entrepreneur faces a dilemma for which he must think on his/her feet and conclude a response to - How to go about it? Who to collaborate with? Which offer to accept?

The entrepreneur must now choose and pick an offer or investor by analyzing the take-aways and let goes. How does s/he decide? 

Startup Mentors: A Need or Luxury?

Entrepreneurs typically delve into the market with disruptive ideas and big visions, and often than not explore diverse avenues to take the idea(s) to the end of the tunnel and may get entangled and spoilt for choice and scamper to find that one right path to tread on, either tried-and-tested on into the unchartered territory on an unexplored trek. A big impediment in the path of many entrepreneurs is that although they have no perceived dearth of subject knowledge and market dynamics, there are hints of inexperience when they start a business. This hypothesis is backed by the fact that almost 90% of Indian startups fail within the first 5 years, mostly because of inexperienced founders. While this may be a big concern, hell did not break loose and hope is not lost yet, as a way to overcome this obstacle is to engage with an advisor, mentor, coach, or guide, as one would like to call them.

Mentorship is a key factor that shows the way for startups to reach heights. A perfect mentor provides tried and tested ideas, fills your knowledge gap, and helps to reach your goals with less stress. That brings us to the most important set of questions - Who can be the right-fit Mentor for the Idea? Where to find this Mentor? and How to get the best out of the Mentor?

While startup mentors are extremely critical, the foremost objective is to not find "a mentor" but "mentors" who are experts in different fields, because any single mentor may not be capable or sufficient to solve all the problems that the entrepreneur or the venture was, is or will be facing.

There are several diverse factors that contribute to eventual success and meeting the entrepreneur objective and vision of the business. The robustness of the idea, cohesiveness of the team, the sense of association and being integral part of the vision from the employees, the go-to-market strategy of the company in terms of product/solution, promotion, pricing, and timing among others, and the entrepreneurial experience of the frontrunner, These sought-after startup mentors help to maintain focus on the business problems and provide alternative solutions to the problems.

VC Myth 03: Dilution

Myth: The issue is about how much external financing the founders should raise, and when. It also reflects on who and how the company is being controlled, an issue near and dear to the hearts of all entrepreneurs across the globe. This myth exists in many variations, all centering on two themes: control and dilution. This might be stated in diverse ways, with the same underlying belief - if you raise money, you should raise as little money as possible, because then you will give up less of the company now.

The amount of financing a company should raise is often a controversial (internally) issue. Entrepreneurs sometimes intentionally choose to raise lower amounts of funding to minimize dilution or to remain attractive for the quick flip in the unlikely situation (at times it is intended and planned too) sale of the company, but most of the time, that decision is later regretted. The entrepreneur should raise the amount of funding that will enable accomplishment, with some cushion, of the key milestone that will justify a significant increase in valuation. Valuations of early-stage companies do not increase in a linear fashion over time, but instead in a "stair-stepping" fashion, jumping upon a key accomplishment such as a product release, a certain level of customer traction, a big deal, or a technical milestone and then more or less flattening again until the next milestone. Taking an illustration, a INR 5L seed investment to be able to raise "Series A" at a higher valuation makes sense, but only if that key milestone can be reached with the IINR 5L funding.

Very few entrepreneurs have ever regretted taking additional funding when it is offered. At the end of the day, start-up businesses fail for one reason: because they run out of money. Raising money opportunistically helps to weather the storm caused by external factors such as market or economic conditions.

VC Myth 02: Board of Control

Myth: While it is imperative from a fund-raising perspective and can be considered as one of the ten important pillars of early-stage fundraising activities, there is some deep-diving and understanding required of it. Entrepreneurs who are overly concerned about control will need to find a path to success other than venture capital. A glance at the typical ownership percentages as understood previously shows that even after a single round of financing, the founders no longer have "control," while also the VCs would have special veto rights over key matters such as acquisitions, the next round of financing, et all.

The terms of venture capital financings are structured around alignment of incentives, and not control, which is unlike many other routes of corporate financing methodologies. VCs appreciate the fact that the founders must have a sufficient incentive and bandwidth to create value for the benefit of all. Hence, the terms of a typical venture capital financing provide that, after a return of capital invested, the investors do not profit unless and until the management does. Likewise, management does not profit unless and until the investors do. This circular dependency and co-habitation create a mutually beneficial and conducive corporate structure.

VC Myth 01: Valuation of the Idea

Myth: Most entrepreneurs tend to focus extensively on the value of their enterprise, creating elaborate storyboards, extrapolated discounted cash flow models to demonstrate the net present value of their future projected revenues.

In early-stage venture capital financing, the concept of valuation is simply a surrogate - it is more about the percentages and ratios. The typical post-financing value share for a company's initial venture capital financing breaks down as - 

• Main (Lead) VC: typically insist on owning close to 20-25% of all early-stage portfolio companies
• Co-Investor VC: Most VCs prefer to invest alongside a co-investor, which is favorable to both the investors and the company. Here too, a typical 20-25% must be given off, here as well
• Option Pool: negotiating the size of the option pool is a surprisingly effective back-door way of negotiating valuation, as part of the "pre-money" valuation equation, which constitutes 15-20% share of the company
• Founders: taking into perspective and consideration the above dilutions, the founder entrepreneurs are left with almost 35-40% of the company

Unlike valuations of later-stage companies, valuations of early-stage companies do not fluctuate with the financial markets, but economic downturns do have an impact in the number of early-stage companies getting financed, and those who brave the winters and autumns, succeed in smaller funding amounts than would have been otherwise.