Two investors, one entrepreneur and one banker get together to speak about what makes or breaks a deal. A few excerpts from the discussion…
There’s no startup conference that goes by without a panel discussion on fund raising. Booming economy or bubble, Asia or Silicon Valley, technology entrepreneur audience or family business owner, every one wants to understand the thought process of a venture capital investor. After all, these are people who make bets right at the early stage of a venture.
At Startup50, we lined up one entrepreneur, two business leaders-turned VCs and one investment banker for a discussion on fund raising. The panel members were: Deepak Nataraj, managing director of Aarin Capital; GanapathyVenugopal, founder-CEO of Axilor, a new early stage fund and accelerator founded by Infosys’ SD Shibulal and Kris Gopalakrishnan;SashankRishyasringa, Founder-CEO of Capital Float, a SME debt financing firm; and Srikanth Narasimhan, Director, Veda Corp.
The session was moderated by Prem, our editor, and topic of focus was a simple, yet important one: What makes an investor say YES; what makes one say NO.
“Can I have a healthy discussion with the entrepreneur?”
According to Deepak Natraj, what Aarin Capital looks for is not only whether an entrepreneur has a great idea, but also whether he has an understanding of the implications of the idea. Citing the example of Byju’s classes, he recalled, “When I met the entrepreneur on a campus, he was not looking for funds. We called him and spoke to him and realized that he had cracked the problem of distribution of test papers, had good understanding of his segment, was experienced and knew how to connect to his students and their parents.” The investors funded him to enable him to scale up. Confidence, team building, understanding of the market and entrepreneur’s ability to deal with difficult situations are some of the factors that go into deciding whether to fund or not, says Natraj.
Natraj adds: “Can I have a healthy discussion with this entrepreneur? Will he take corrective action if the metrics demand that? How confident is he/she about the idea and at the same time, will he/she be flexible if things don’t go well?” are some key questions he asks himself before taking a call.
“Stay in touch with prospective investors, even if they don’t fund you immediately”
Sashank Rishyasringa recalls his experience when he returned to India during an economic low, and his idea of offering “fast, flexible loans for small businesses” did not find takers among prospective investors. Undeterred, Rishyasringa decided to bootstrap the venture, and formed Capital Float with his co-founder Gaurav Hinduja in 2013.
Even though it was bootstrapped, the founders worked on building relationships with prospective investors, ensured the business was gaining traction and kept the investors updated about the progress they were making. In 2014, the company raised US $4 million from SAIF Partners, Aspada Investment Company and others. In February 2015, the company raised a US $13 million round led by SAIF Partners and Sequoia Capital.
About the early days of fund raising, Rishyasringa says, “We realized thatit was important to build sound relationships with VCs, show traction and control aggression.”
Also, it was important for the company to raise the right amount of capital. “As a financial services company, there is a natural limit to how much we can grow since it is easy to give loans but difficult to get them back,” he adds. Today, over 50-70 per cent of Capital Float’s clients are SMEs who sell on e-commerce platforms like Flipkart, Snapdeal and Amazon. SMEs in the manufacturing sector too are now resorting to taking loans from Capital Float.
Can I have a healthy discussion with this entrepreneur? Will he/she take corrective action if the metrics demand that?
– Deepak Natraj of Aarin Capital on evaluating prospective investee entrepreneurs.
“What evidence-based data do you have?”
Ganapathy Venugopal, the founder and CEO of Axilor, spoke about his key mission statement; It is simply – how can you improve your odds of success? At Axilor, there are three structured funding programs – accelerator, entrepreneur-in-residence and early-stage funding.
Venugopal said: “Our primary focus is to help the entrepreneur in the first 24 months. In the accelerator program, we take an idea to pilot, then to seed and then finally to a series-A round.” The fund’s focus is to enable the entrepreneur to validate the idea, understand the hierarchy of customer problems and specifically, understand and decide which ones it can solve. “At the pilot stage, feedback from customers will help shape the business model and usually, it makes sense to make these decisions based on evidence-based data,” he added.
Three key areas in which Axilor is scouting around for ideas are e-commerce enablement, healthcare and life sciences and clean tech.
“How do you react to a NO from a prospective investor?”
Veda Corp’s Srikanth Narasimhan gave us a perspective on how it works for mature organizations with a proven revenue model, where the challenges are of a different kind. The bigger challenge is the entrepreneur himself, who needs to be on top of every aspect of his business – be it market, competition, or strategy. The quality of the entrepreneur becomes criticaland an investor must be convinced that he/she will be able to scale up as per plans.
When the moderator requested Narasimhan to advice entrepreneurs on how they should react to a NO, he decided to narrate a story for the audience. He took the example of Bessemer Venture Partners (BVP), one of the oldest VC firms in the US. BVP’s website, in addition to listing its portfolio, also lists a very interesting page titled “Anti Portfolio” – the name it has given to various startups that pitched to BVP, but BVP decided not the fund. Go have a look at the list and you’d be amazed. Hold your breath, it includes Facebook and Google. According to the website, one of the BVP partners told Eduardo Savarin of Facebook, “Kid, haven’t you heard of Friendster; Move on. It’s over.” Narasimhan added: “So the point is, if you hear a no, don’t worry. You could be well on your way to greatness. If you believe in the business, move on and see what you can do next.”
Quality of the entrepreneur, their attitude, approach and understanding of the space they are operating in
Strong understanding of the customer problems, and exactly which problems the startup solves
Traction and momentum in the right metrics are crucial
Build relationships with investors, stay in touch and update them on progress
Last but certainly not the least, do you completely believe in your business? Can you tackle a difficult situation, with calmness?