fund raising

Indian startups need a wake-up call: Narendra Gupta

Lack of focus on long-term benefits among founders and funders is hampering the growth of a healthy ecosystem.

Narendra Gupta is one of India’s highest profile venture capital investors (founder of Nexus Venture Partners) as well as the founder of various investment and software firms (CEO and President of Integrated Systems Inc. (ISI) for a decade and a half).

The last 10 years have seen the birth of remarkable new-age startups in India. What are the common themes among these startups? They are technology-based and innovation-driven, and are often launched by motivated, educated, high-energy founders. These startups are changing a variety of industries, such as retail, health care, logistics, transportation, education, and entertainment. They enable a broad swathe of people to access high-quality products and services at affordable prices. Most importantly, these startups can scale rapidly and create millions of well-paying jobs, something India sorely needs.

Founders with grit and vision, fuelled by risk capital, have driven this vibrant startup scene. Recent changes in government regulations and tax policies are recognising the importance of startups among broader economic policy initiatives. Done right, these startups have the potential to form the foundation of long-term economic growth and bring millions of people out of poverty.

But the experiment that anchors India’s future is beginning to stumble. At least it seems far from realising even its modest potential. Let me explain why, and share some thoughts on what can be done before it is too late.

Based on my decades of experience in the Silicon Valley and, more recently, in India, I can say that Indian founders are, in general, world class. Venture funders and the media also have their hearts in the right places. The Indian ecosystem, however, lacks maturity. Unlike in the Silicon Valley, only a handful of investors in India have experienced multiple economic and venture cycles. All of us have a lot to learn.

While building great companies takes years, if not decades, many Indian investors have a short-term mindset. We often invest in areas that are ‘hot’, and shun larger, longer-term opportunities. The result is an over-funding of hot areas, with a concomitant funding dry-up a short time later. Indian investors also tend to value companies based on short-term metrics rather than an understanding of underlying technologies, business models and defensibility.

Post-funding, the investors’ focus seems to be on preparing for the next round of funding in preference to building sound, market-leading companies.

Exceptional founders need to be backed by a stable source of thoughtful capital from people who have gone through entire funding and company-building cycles.

The Indian media tends to over-promote ‘hot’ business opportunities and founders, setting them up for disappointments and eventual failure. When the lofty, unrealistic projections are not met, the media is equally expeditious in trashing the companies and their founders. It is either boom or it is bust. Over the last five years, the media coverage of microfinance, mobile VAS, media, ecommerce, food delivery, and other business opportunities, together with their founders, shows the immaturity of the Indian startup ecosystem. In my personal dialogues, I have generally found India business reporters to be informed, caring and thoughtful. I hope that the media will provide a more balanced coverage in good times and bad. The press should take a leadership role in helping potential customers discover innovative products and services from early-stage companies; something these companies do not have the resources to do themselves.

Most of a startup’s early success can be attributed to the founders and the leadership team. For this, they rightly deserve fame and fortune. Recently, I have observed rampant short-term orientation in Indian founders. Do irresponsible investors and the media drive this behaviour? I don’t know. In any case, exceptional founders should have the courage to go against the grain and do the right things. Startup leaders who cannot say ‘no’ to their board and venture investors when they are being misdirected are not good leaders.

In the early years of the Silicon Valley, in 1980, I started Integrated Systems, a company focussed on software products for real-time design and implementation. Our team wanted a company that would outlast any of us. We made numerous mistakes. One time, at the suggestion of one of our large customers, we got diverted into building a hardware product that could implement real-time logic for laboratory testing. It brought us revenue, but the decision almost killed the company since we were not set up to support hardware products in the field. Our biggest mistakes were, however, mistakes of omission—things we should have done, or the initiatives we should have killed, but did not, despite our instincts. Why? In every case, the decision would have caused short-term pain, but the long-term benefits would have been substantial.

We made many mistakes, large and small, but fortunately none turned out to be fatal. We learnt from every mistake. I ran the company for almost 15 years as president/CEO, with a maniacal focus: I took no outside board seats, or made any startup investments. It was the best time of my life. We took the company public in 1990, and merged it with Wind River in 2000. Integrated Systems remained a leader in the real-time space till Intel acquired the merged company for almost a billion dollars in 2009.

In 1995, after I stepped down from the CEO’s position at Integrated Systems, I met a young professor from Harvard University for lunch. Dr Yagyensh (Buno) Pati, in his post-doctoral research, had discovered a technology that would enable many more components to be placed on a semiconductor chip. I agreed to fund his company under only one condition: He would work on the company full time. Giving up an academic position at one of the most esteemed institutions in the world was a very difficult decision. In addition, bringing a new technology to market involved much iteration, some causing significant drops in short-term revenue. Buno had the courage to make the right calls. Five years later, the company went public and had a valuation of more than a billion dollars. As Buno says, “When you are standing on a pier with one foot in the boat, the boat is unlikely to go anywhere and you are likely to end up at the bottom of the sea.”

Over the last few years, I have failed to see this focus or commitment in many of the new-age company founders or management teams in India. They seem overly focussed on their image in the media, maximising valuations in the next funding rounds, and other short-term bragging rights. Where is the focus on exceptional products and customer satisfaction?

My belief is that today’s even moderately successful Indian entrepreneurs are so distracted that they cannot maniacally focus on building great companies. The baubles that distract them range from angel funding to building fancy bungalows. During my recent visit to Bengaluru, I cringed when I was told that many executives of rapidly growing companies were spending time with architects and builders, while their companies were losing millions of dollars every month and are in survival battles against strong competitors.

Some people say that the tendency to take short cuts is in our blood; the so-called ‘jugaad’ mentality. I disagree. It has nothing to do with Indian family values, culture or markets. Narayana Murthy and Sunil Mittal built large, durable companies in a less hospitable environment in the not-too-distant past. Indians around the world are doing exceptionally well as founders and leaders of market-leading innovators.

Two other major factors are affecting the ability of Indian founders to build large and sustainable market leaders.

One: Indian founders lack a culture of mutual support and brotherhood (and sisterhood) with other founders. In the Silicon Valley, founders frequently celebrate other founders’ successes. They try and buy products from other startups. The early-stage companies that we have funded in India tell us that moderately successful startups are their worst customers. For example, they would often defer payments to these early-stage companies while making timely payments to more established players. Startups that are further along also fail to leverage other startups’ innovative products and solutions. Rather than building a strong ecosystem around their companies, these founders set up competing teams within their own organisations. These teams are often incapable of competing with agile startups and distract the company from its main mission.

Founders, it seems, are doing everything possible to see other founders fail, even if they are in complementary businesses, at the expense of significant distractions, wastage of resources and less-than-optimal outcome. Founders and management teams need the courage to change conventional, dogmatic notions of ‘How India works’.

Two: Startup leaders need to embrace the notions of sharing and sacrifice, which are the key foundations of Indian culture. Authority, responsibility, credit for success and financial rewards should be shared broadly and deeply. When I ran Integrated Systems, one thing that made me proud was that most employees referred to Integrated Systems as “my company” in talks with their family, friends and the media.

The ‘me first’ way of thinking makes it difficult to build strong, committed teams with a wide range of expertise. As a startup scales, the capabilities of each team member and how well the team works together determines long-term success. The larger pie even allows more participants to benefit from the success. Silicon Valley has excelled on this philosophy of broad sharing. Given our culture, Indian startups can do even better.

Ten years ago, I decided to take a detour to help build the Indian startup ecosystem with a dream; a dream that the next mega success will originate in India. While the last couple of years have taken us sideways, the dream is alive and well.

We – founders, venture investors and the media – are all privileged to experience the once-in-a-lifetime opportunity first hand. But this privilege comes with responsibilities. Let us learn from the best in India, the United States, and elsewhere. Let us work together to leverage entrepreneurship for the benefit of billions of men and women in India and around the world.

This article was originally published in Forbes India

Reasons budding entrepreneurs should stop looking for venture capital

Here are seven reasons for budding entrepreneurs to give up the hunt for venture capital and angel investors.

Every year, about millions of new businesses are started, and fewer than one percent successfully raise venture capital (VC).

Whether it’s the feeling of acceptance into this elite club, or the misconception that it’s impossible to start a new business without millions in capital, many startup founders find themselves hypnotized by the pursuit of VCs and angel investors.

Perhaps the adage is true: We want what we can’t have. And yet it can be argued that your chances of success are greater if you stop looking for VC money and focus your energy on bootstrapping your business and attracting customers.

Here are seven reasons for budding entrepreneurs to give up the hunt for venture capital and angel investors:

1. You haven’t proven your market need

Sure, you’ve put together a pitch deck, business plan and financial projections, but those are all just that — projections. You’re basing the future success of your company solely on hypotheticals.

Before looking for VCs, prove that there are customers out there who want what you’re selling. Spend time talking to your users, and focus on giving them what they want. Invest your time in finding a place in the market before trying to convince investors to give you their money.

2. You lose control

Once you secure VCs, you’re at their mercy. Even if you maintain a majority stake, you’re giving up a percentage of equity, profits and control to a board that may have a different vision for your company than you do.

In most cases, your VCs will ask for one or more board seats giving them the right to vote on or veto key decisions that will directly affect the future of your company. These same people also have the right to fire you or members of your team, which means you could be ejected from the company you started.

3. You’re focused on the investor – not on your customer

Giving up control means you have a new responsibility. Your first priority is no longer to your customer, because your investors expect to come first. Among other conditions that are negotiated in a deal, venture capitalists can ask for anti-dilution protection, dividends, liquidation preferences, mandatory redemption and other perks that the founding partners may not even get the rights to.

In some extreme cases, VCs have the right to sue you for everything you own in the case you forget to tell them “bad news,” according to Bloomberg Business.

4. Instead of trying to make money, you’re trying to raise it

The irony of trying to raise venture capital is how much time you waste chasing down investors – when you could be chasing down customers. There are only so many hours in a day and only so much work you and your team members can take on. Every minute you spend chasing down a flippant VC is a minute you’re not working on creating a great business.

That’s all to say you’re putting a lot of your eggs into a basket that the statistics say you’ll never obtain.

5. Your burn rate is higher than if you were to bootstrap

What’s a burn rate? It’s the amount at which a company spends money, especially venture capital, in excess of income.

You may know the now viral story of CEO Maren Kate and the downfall of her company, Zirtual. She abruptly shut down all operations due to a glitch in the books that was overlooked. Basically, the company did not have a handle on its burn rate – and it ran out of money. This also supports the next point that…

6. You lose the hustle required in running a lean business

When playing with someone else’s money, many startup founders admit that it becomes less real. It’s harder to stay lean and savvy with the false impression that you’re rolling in the dough.

Investor and entrepreneur Gary Vaynerchuk writes: “Twenty-five to 50 percent of all the businesses I have ever looked at were more than capable of being a little scrappier.”

7. Your end goal is focused on an exit rather than building a company that will last

If your end game is growth over profit, then you are forever stuck in a cycle of having to raise more money. As soon as you’re no longer able to secure more from VCs, then your company will likely implode.

You’re relying on other people’s belief in you – based on hypothetical projections – rather than relying on a solid business model that turns profits and creates happy customers.

Author: Shannon Whitehead

Shannon Whitehead is the founder of Factory45, an online accelerator program that takes sustainable apparel companies from idea to launch — without raising venture capital. Committed to improving the fashion industry, Whitehead launched what was at the time the most successful fashion project on Kickstarter and now helps other fashion entrepreneurs bring their ideas to market.

Image credit: www.fortunebuilders.com

This article was originally published in Entrepreneur.com

How funding works – Splitting the equity pie with investors

The basic idea behind equity is the splitting of a pie. When you start something, your pie is really small. You have a 100% of a really small, bite-size pie. When you take outside investment and your company grows, your pie becomes bigger.

A hypothetical startup will get about $15,000 from family and friends, about $200,000 from an angel investor three months later, and about $2 Million from a VC another six months later. If all goes well. See how funding works in this infographic:

First, let’s figure out why we are talking about funding as something you need to do. This is not a given. The opposite of funding is “bootstrapping,” the process of funding a startup through your own savings. There are a few companies that bootstrapped for a while until taking investment, like MailChimp and AirBnB.

If you know the basics of how funding works, skim to the end. In this article I am giving the easiest to understand explanation of the process. Let’s start with the basics.

Every time you get funding, you give up a piece of your company. The more funding you get, the more company you give up. That ‘piece of company’ is ‘equity.’ Everyone you give it to becomes a co-owner of your company.

Splitting The Pie

When Google went public, Larry and Sergey had about 15% of the pie, each. But that 15% was a small slice of a really big pie.

Funding Stages

Let’s look at how a hypothetical startup would get funding.

Idea stage

At first it is just you. You are pretty brilliant, and out of the many ideas you have had, you finally decide that this is the one. You start working on it. The moment you started working, you started creating value. That value will translate into equity later, but since you own 100% of it now, and you are the only person in your still unregistered company, you are not even thinking about equity yet.

Co-Founder Stage

As you start to transform your idea into a physical prototype you realize that it is taking you longer (it almost always does.) You know you could really use another person’s skills. So you look for a co-founder. You find someone who is both enthusiastic and smart. You work together for a couple of days on your idea, and you see that she is adding a lot of value. So you offer them to become a co-founder. But you can’t pay her any money (and if you could, she would become an employee, not a co-founder), so you offer equity in exchange for work (sweat equity.) But how much should you give? 20% – too little? 40%? After all it is YOUR idea that even made this startup happen. But then you realize that your startup is worth practically nothing at this point, and your co-founder is taking a huge risk on it. You also realize that since she will do half of the work, she should get the same as you – 50%. Otherwise, she might be less motivated than you. A true partnership is based on respect. Respect is based on fairness. Anything less than fairness will fall apart eventually. And you want this thing to last. So you give your co-founder 50%.

Soon you realize that the two of you have been eating Ramen noodles three times a day. You need funding. You would prefer to go straight to a VC, but so far you don’t think you have enough of a working product to show, so you start looking at other options.

The Family and Friends Round: You think of putting an ad in the newspaper saying, “Startup investment opportunity.” But your lawyer friend tells you that would violate securities laws. Now you are a “private company,” and asking for money from “the public,” that is people you don’t know would be a “public solicitation,” which is illegal for private companies. So who can you take money from?

Accredited investors – People who either have $1 Million in the bank or make $200,000 annually. They are the “sophisticated investors” – that is people who the government thinks are smart enough to decide whether to invest in an ultra-risky company, like yours. What if you don’t know anyone with $1 Million? You are in luck, because there is an exception – friends and family.
Family and Friends – Even if your family and friends are not as rich as an investor, you can still accept their cash. That is what you decide to do, since your co-founder has a rich uncle. You give him 5% of the company in exchange for $15,000 cash. Now you can afford room and ramen for another 6 months while building your prototype.

Registering the Company

To give uncle the 5%, you registered the company, either though an online service like LegalZoom ($400), or through a lawyer friend (0$-$2,000). You issued some common stock, gave 5% to uncle and set aside 20% for your future employees – that is the ‘option pool.’ (You did this because 1. Future investors will want an option pool;, 2. That stock is safe from you and your co-founders doing anything with it.)

The Angel Round

With uncle’s cash in pocket and 6 months before it runs out, you realize that you need to start looking for your next funding source right now. If you run out of money, your startup dies. So you look at the options:

Incubators, accelerators, and “excubators” – these places often provide cash, working space, and advisors. The cash is tight – about $25,000 (for 5 to 10% of the company.) Some advisors are better than cash, like Paul Graham at Y Combinator.
Angels – in 2013 (Q1) the average angel round was $600,000 (from the HALO report). That’s the good news. The bad news is that angels were giving that money to companies that they valued at $2.5 million. So, now you have to ask if you are worth $2.5 million. How do you know? Make your best case. Let’s say it is still early days for you, and your working prototype is not that far along. You find an angel who looks at what you have and thinks that it is worth $1 million. He agrees to invest $200,000.

Now let’s count what percentage of the company you will give to the angel. Not 20%. We have to add the ‘pre-money valuation’ (how much the company is worth before new money comes in) and the investment

$1,000,000 + $200,000= $1,200,000 post-money valuation

(Think of it like this, first you take the money, then you give the shares. If you gave the shares before you added the angel’s investment, you would be dividing what was there before the angel joined. )

Now divide the investment by the post-money valuation $200,000/$1,200,000=1/6= 16.7%

The angel gets 16.7% of the company, or 1/6.

How Funding Works – Cutting the Pie

What about you, your co-founder and uncle? How much do you have left? All of your stakes will be diluted by 1/6. (See the infographic.)

Is dilution bad? No, because your pie is getting bigger with each investment. But, yes, dilution is bad, because you are losing control of your company. So what should you do? Take investment only when it is necessary. Only take money from people you respect. (There are other ways, like buying shares back from employees or the public, but that is further down the road.)

Venture Capital Round

Finally, you have built your first version and you have traction with users. You approach VCs. How much can VCs give you? They invest north of $500,000. Let’s say the VC values what you have now at $4 million. Again, that is your pre-money valuation. He says he wants to invest $2 Million. The math is the same as in the angel round. The VC gets 33.3% of your company. Now it’s his company, too, though.

Your first VC round is your series A. Now you can go on to have series B,C – at some point either of the three things will happen to you. Either you will run out of funding and no one will want to invest, so you die. Or, you get enough funding to build something a bigger company wants to buy, and they acquire you. Or, you do so well that, after many rounds of funding, you decide to go public.

Why Companies Go Public?

There are two basic reasons. Technically an IPO is just another way to raise money, but this time from millions of regular people. Through an IPO a company can sell stocks on the stock market and anyone can buy them. Since anyone can buy you can likely sell a lot of stock right away rather than go to individual investors and ask them to invest. So it sounds like an easier way to get money.

There is another reason to IPO. All those people who have invested in your company so far, including you, are holding the so-called ‘restricted stock’ – basically this is stock that you can’t simply go and sell for cash. Why? Because this is stock of a company that has not been so-to-say “verified by the government,” which is what the IPO process does. Unless the government sees your IPO paperwork, you might as well be selling snake oil, for all people know. So, the government thinks it is not safe to let regular people to invest in such companies. (Of course, that automatically precludes the poor from making high-return investments. But that is another story.) The people who have invested so far want to finally convert or sell their restricted stock and get cash or unrestricted stock, which is almost as good as cash. This is a liquidity event – when what you have becomes easily convertible into cash.

There is another group of people that really want you to IPO. The investment bankers, like Goldman Sachs and Morgan Stanley, to name the most famous ones. They will give you a call and ask to be your lead underwriter – the bank that prepares your IPO paperwork and calls up wealthy clients to sell them your stock. Why are the bankers so eager? Because they get 7% of all the money you raise in the IPO. In this infographic your startup raised $235,000,000 in the IPO – 7% of that is about $16.5 million (for two or three weeks of work for a team of 12 bankers). As you see, it is a win-win for all.

Being an Early Employee at a Startup

Last but not least, some of your “sweat equity” investors were the early employees who took stock in exchange for working at low salaries and living with the risk that your startup might fold. At the IPO it is their cash-out day.

This article was originally published in Funders and Founders

Image credit: saascribe.com

Fundraising 101: Checklist for Entrepreneurs

When raising funds for your entrepreneurial ventures, just follow this easy checklist to ensure you never forget the important steps again.

It’s easy to get lost in the whirlwind of raising funds for your business ventures. There’s so much to learn and process in a short space of time.

But don’t worry.

When raising funds for your entrepreneurial ventures, just follow this easy checklist to ensure you never forget the important steps again.

Do your homework.

Learn about the people you want around your business – those you want as business associates, those that can help you in your field and those businesses that rival yours. What can you do that will draw them to your business and you as an entrepreneur before others? Can you size up your competition early on and get ahead of the game?

Write your proposals for pitching to investors.

Once you have done your research and you know which people are available to invest in you and your business, you should write your pitch to target them specifically. Know your audience and how to handle them.

Build relationships.

Potential investors should know that the business you propose to carry out is a winner – but also that the person carrying it out with their investment money is willing and fully able to do what is necessary to build the business.

Reap the benefits.

Now that you’ve done all the grafting, it’s time to actually bring in your hard earned funds from your fundraising!

Whether you’re raising your funds from family and friends, big business investors or even crowd funding, you never have to miss a step again.

Meeting with Investors – Before, During and After

Meeting with investors is important and shouldn’t be taken lightly. However, if you prep right and show your passion for what you do, the rest can be worked on later.

It is important to be consistent throughout meetings with investors. As you meet with investors more and more, you will begin to develop your own way of working. To begin, here are some pointers we suggest when meeting with investors through the whole process.

Preparing for your meeting:

Carry out research on the person that you’re meeting with. What makes the person you’re meeting with excited? What grabs their attention? In doing this, you are getting a feel of your investor before you’re on the spot with them.

With your research in place, you can then fully prepare your pitch with your investor in mind. A tailored pitch makes for an interested investor – and an interested investor is one that actually invests in you. By personalising your pitch, you’re doing something many overlook and actually targeting the correct audience.

It’s also important to prepare yourself mentally. For a successful pitch, you need knowledge, passion and the ability to target your audience specifically.

During your meeting:

It is important to be confident during your meeting. Your investor is listening to every word you are saying and the way your portray yourself. Believe in yourself and your visions and an investor can spot that in your meetings.

While you may think that your memory is impeccable, don’t underestimate the value of taking notes on anything you find to be important. If you feel that it is important during your meeting – the chances are it will definitely be important afterwards. Even if your memory is that good, it shows your investor that you understand the importance of things being said in your meeting.

Another thing to do while you and your investor are face to face is to ask questions. You should ask questions about anything you would like further clarification on, that you’re interested in or that you don’t understand (if that is the case). Your investor will appreciate your receptiveness more than someone who doesn’t show interest in them.

Related Post: How to get investors for your startup?

After your meeting:

Back to the memory point, write any of your initial thoughts down. Not only are they fresh in your mind, you can go back to the exact thought you had and expand it, act on it or even bin it.

Anything agreed during the meeting that should happen after, should be actioned. It seems like an obvious point, but by writing them down during the meeting and having notes to act upon, you have an accurate base to work from.

Quite possibly the most important act is to maintain relationships with all investors – whether they invest in you and your business or not. If someone is giving you money for your business, you should keep them sweet at least and let them know their money is in safe hands. In the event that they don’t invest in you, there’s nothing to stop them from watching you grow your business and want to invest later.

Meeting with investors is important and shouldn’t be taken lightly. However, if you prep right and show your passion for what you do, the rest can be worked on later.

Image credit: vator.tv

Investments in Indian start-ups decline 24%

Investors infused some $1.15 billion into Indian start-ups in the first three months of this year, down almost a quarter on a sequential basis.

Venture capital (VC) and private equity (PE) firms cut investments in Indian start-ups by almost a quarter on a sequential basis in the three months to March, the second consecutive quarter they did so, as investors starved of exits and fearful of souring bets hold back cash.

Investors infused some $1.15 billion into Indian start-ups in the first quarter of this year, down as much as 24% from the December quarter, which itself had seen a slump in investments of 48% from the preceding three months, according to a joint report by KPMG and CB Insights.

The $1.15 billion reported by KPMG includes at least $150 million of secondary share sales that went from one set of investors in Snapdeal (Jasper Infotech Pvt. Ltd) to another.

The number of start-up deals fell 4% to 116 in the quarter, the report said.

The largest deals in the January quarter included $150 million received by online grocer BigBasket; $150 million raised by online marketplace Shopclues; and $50 million raised by Snapdeal, India’s second most valuable e-commerce firm.

“With mounting investor hesitation and concerns of overvaluation, Indian investment continued to decline in the first quarter,” KPMG and CB Insights said in the report.

After pumping more than $9 billion into Indian start-ups since the beginning of 2014, investors started pulling back late last year because of a mix of global macroeconomic factors such as a growth slowdown in China, as well as concerns over massive losses incurred by start-ups.

This year, investor caution has increased manifold, resulting in an acute slowdown in funding, fall in valuations and delayed deal closures.

“We have not been in contact with investors to raise funds but the sense we are getting is that there is a wait-and-watch situation that is going on,” said Ashish Goel, chief executive at online furniture retailer UrbanLadder. “There is definitely lesser investment in early-stage start-ups when compared to the last 4-5 months and (the number of) deals have certainly reduced.”

Even India’s top start-ups are struggling to raise cash at their current valuations.

Mint reported on 14 April that Flipkart Ltd and Snapdeal have held funding talks with several investors over the past six months, all of whom have refused to invest in the companies at their preferred valuations of $15 billion and $6.5 billion, respectively.

Both denied that they have been trying to raise fresh funds.

There are two main reasons why companies are struggling to raise money, said Aseem Khare, co-founder of home services start-up Taskbob, which raised Rs.28 crore in February.

“First, companies have been using investor money for giving away discounts that have beefed up top-line numbers but have not been able to create brand loyalty. Due to this, the percentage of revenue that comes through discounts is very high and has put doubts on the business model. The second reason is that of unit economics. There are businesses that are solving a problem, but the margins are too low for them to be sustainable or operationally profitable,” Khare said. By unit economics, Khare’s reference is to the cost and revenue from one transaction—say, a food delivery order taken online, and fulfilled.

The funding slowdown is not restricted to Indian start-ups alone, said Varun Khaitan, chief executive at home service app UrbanClap.

“The US has much bigger problems. And since some of the biggest investors are US-based, this problem has flowed into India. But if a company is doing well, then irrespective of the environment, it will attract investors,” he said.

The report by KPMG and CB Insights confirmed Khaitan’s views and said start-up deals in the US were much lower in the first quarter compared with the peak levels seen in 2015.

This article was originally published in Live Mint

Image credit: www.bitlanders.com

Forget unicorns – Investors are looking for ‘cockroach’ startups now

2015 was the year of the “unicorn” – private technology-driven startups that reached a valuation of $1 billion or more.
But tech and startup investment is going to be defined by a very different beast in 2016 – the cockroach.

“Everything is about resiliency now to weather the storm,” says Tim McSweeney, a director at technology-focused merchant bank Restoration Partners. “Unicorn, it’s a mythical beast, whereas a cockroach, it can survive a nuclear war.”

A unicorn is characterised by superfast growth, fuelled by VC money. They’re not profitable but the idea is that the business will reach “scale” first, before concentrating on making a money once it’s won plenty of market share. Uber is a prime example.

Startups that joined the unicorn club last year include TransferWise, Lyft, Zenefits, SoFi, Hellofresh, Prosper, Oscar, and Farfetch, according to venture capital data tracker CB Insights. There were many more.

A cockroach, by contrast, is a business that builds slowly and steadily from the get go, keeping a close eye on revenues and profits. Spending is kept in check so that it can weather any funding storm.

McSweeney says: “For the investment side, it’s minimizing the risk. Let’s find a company that can survive a nuclear war and then come back to fight another day or pivot and do something different – it has the right team, the right customer base etc.”

McSweeney mentioned the concept of a cockroach company to me at the launch of the Virtual Technology Cluster (VTC) Group recently in London and jumped on the phone later on to discuss it.

Restoration Partners doesn’t invest itself but offers banking services to business-focused technology startups. As such, McSweeney and his colleagues have a good view of the investment space.

McSweeney didn’t coin the term cockroach and isn’t the first to highlight it. The investment theory is an old one and Flickr founder Caterina Fake penned a blogpost on the idea last September.

Unicorns are going out of fashion for many investors.

But the idea of the cockroach vs. unicorn captures a widespread mood in the investment community right now. At a recent conference in London on fintech – one of the hottest subsectors of technology that boasts plenty of unicorns – I found investors and bankers worried about “froth” in the market.
McSweeney says: “I think the unicorn element is coming to an end anyway and the bubble in the market is just sloping off.”

McSweeney’s boss, Restoration Partners’ founder Ken Olisa, told me much the same thing. At the VTC Group launch, he said: “There’s a unicorn industry and they can play around with each other but all it will do is end in tears, because it’s not about the customer and it’s not about adding value to anything.”

So why are investors looking for cockroaches rather than unicorns now? The answer is funding.

2015 was characterised by free and easy funding for startups, thanks to record low-interest rates driving more and more cash into venture capital and poor stock market performance encouraging the likes of Fidelity and BlackRock to try their hand at VC investing.

But 2016 got off to a very different start, with venture capital funding drying up amid wobbles for the global economy.

This has revealed problems in the business models of many unicorns and other fast-growing tech businesses, most of which rely on easy VC money to fund their growth. Businesses like Twitter and Birchbox have all been making layoffs and Fortune’s Dan Primack recently noted that both private equity and venture capital performance declined in the first quarter of 2016 for the first time in years. Zenefits, one of the 2015 inductees to the unicorn club, has imploded pretty spectacularly.

McSweeney says: “In terms of chasing growth and growth and growth – it’s not about sustainability. It’s just trying to grow as quickly as you can without looking at the fundamentals of the house. That’s what I feel a unicorn is – chase growth so investors give you money. It’s kind of a reinforcing cycle.

“Google didn’t growth hack, they just provided a service to the internet and build a business around it.”

He adds: “Look at Powa. It’s the bubble – I wouldn’t say it’s bursting, but it’s sloping downwards. There’s frothiness.”

London-based Powa Technologies raised at least $225 million in debt and equity over the last three years and at one point claimed to be worth $2.7 billion. But the payments business went bust in February, with debts of $16.4 million and just $250,000 in the bank.

McSweeney says: “I still think there’s capital out there but the application of it is more judicious. People are looking for smarter businesses to apply their capital to.”

This article was originally published in Business Insider

Image credit: Reuters/Andrew Kelly

How to raise money for your startup?

Raising money is simple but not easy. This guide illustrates one way how to raise money for a startup, especially for first-time entrepreneurs.

Raising money is simple but not easy. This guide illustrates one way how to raise money for a startup, especially for first-time entrepreneurs. We have seen quite a few entrepreneurs go from nothing to a funded company. This infographic is a generalization of their experience. Let us know if you have any questions about it in the comments.

Few More Tips How To Raise Money

When it comes to funding, there is one thing that can increase your chance of getting funded astronomically – traction. Yet, founders often struggle to get traction and hope that investor money will help them get it. This problem can be solved if you start lean, test your product and and gather meaningful feedback from your customers.

Use that feedback to modify your product. After you get traction, you are certain to get interest from investors. How much traction? Compare yourself to your competitors at the moment they got funding and use that as a benchmark.

Preventing people from raising money successfully, the other myth is that you can raise money before you build anything. Even if you are not an engineer, you can build a prototype of your product. You can do it in WordPress, another content management system (CMS), you can learn to code the basics. If you do not go out of your way to build your own product, why should other people risk in joining you?

Finally, when you are going to raise money, have the investors feel good about what you are going to spend their money on – not marketing, not development, not business development, but scaling.

This post was written by Anna Vital and originally published in Funders And Founders.

Image credit: www.naeyc.org