Wednesday, April 15, 2015

STARTUP / VENTURE FUND SPECIAL................. An Uneasy Alliance

STARTUP VENTURE FUND An Uneasy Alliance


Venture capitalists and entrepreneurs know they need each other, but most times they can't stand each other.

Startup founders and venture capitalists share a complicated relationship. The former stand for brave, new ideas that seek to disrupt through innovation. The latter represent the money that fuels those ideas. Indispensable as they may seem to each other, the relationship is often an uneasy one.
Like their peers in Silicon Valley, Indian startups view venture capitalists with a degree of mistrust.“(Venture capital) is like a necessary evil,“ said the founder of a Mumbai-based mobile services startup that has raised multiple rounds of funding from venture capital firms.
While much of this animosity simmers below the surface, sometimes it can bubble up into the open in an ugly fashion.
Much of the hostility has to do with the yawning gap in India between ideas and capital. There are about 20 venture capital firms actively investing in India, where technology startups alone numbered more than 3,000 at the close of 2014.
As more ideas chase this limited pool of risk capital, the rejection rates for startups become inordinately high. Most venture capital firms cap the number of deals every year at 10, which includes follow-on funding in portfolio companies. “The quality of incoming deals has certainly improved over the years, but we still reject 98% of the deals that we evaluate,“ said a venture capitalist at a Mumbai-based firm that invests in early and growth stage companies.
Most of the founders and venture capitalists ET spoke with declined to be identified for this story.
It is usually when deals are being negotiated that issues crop up. “VCs will engage very heavily with you for a month, ask for data and then decide not to invest in the company. Sometimes they will also announce investment in a competitor even while you are waiting for a response from them about the deal,“ said another Mumbai-based venture capital investor.
Not unlike a marriage, successful founder and venture capitalist relationships rest on a couple of factors ­ trust and respect. This is easier said than done. Matters are complicated by the fact that in India venture capitalists are a somewhat insular community. Most prefer to source deals through known references and will rarely take a bet on a completely unknown entrepreneur.
That has started to change in recent times. Taking a cue from their peers in Silicon Valley, venture capitalists are trying to become more flexible in the way they interact with startups. “These days it is not unusual for me to talk deal terms with a founder at a spa or a coffee shop,“ said a venture capitalist who leads investments for a Silicon Valleybased firm. This is also because entrepreneurs have become more assertive with more capital available to them now. “They have realised if they are not assertive they will never get respected,“ said Anand Lunia, founder of seed stage fund India Quotient.

10 THINGS FOUNDERS DON'T 10 LIKE ABOUT VC FIRMS
No risky business, please
The venture capital business is about investing in brave, new ideas. Indian VCs are, however, largely risk averse. Business plans in long-gestation sectors such as medical technology or software products struggle to land termsheets or even ly get a foot in the door.
Come into my ivory tower (if you can)
Many Indian venture capital firms are inaccessible, especially to first-time founders. In Silicon Valley, it is not uncommon to find partners from top-tier VCs informally networking with young entrepreneurs at coffee shops. Indian VCs rarely step out of their offices to meet startups.If they do, it would usually be at a formal conferencing forum.
It's so much fun to run with the herd
Being risk-averse makes VCs seek safety in numbers.Investors tend to concentrate investments in sectors that are the flavour of the season. Ergo, capital gets concentrated in a few companies as investors scramble to get a piece of the most `prized assets'.
We don't sign NDAs (but we may borrow your idea)
Founders often complain that VCs don't sign non-disclosure agreements prior to an idea pitch. This is a well-accepted global practice. However, there have been instances of VCs `stealing' ideas from a first-time founder's pitch and replicating it within their portfolio. In one case, a VC used an idea pitched by a founder to incubate a similar startup in-house.
Termsheet googly
A termsheet is an intent to invest, not a commitment.
This implies that founders are free to evaluate multiple termsheets at any given time.
Sometimes, though, VCs hand out termsheets on the condi tion that founders will not negotiate with other investors.
This is fine if the termsheet leads to a deal. If it doesn't, which is often the case, the founder is left high and dry.
Rights, rights and more rights
If a founder does get to the termsheet stage, they could get overwhelmed by the unending rights VCs seek for writing a cheque. Board seats, anti-dilution rights, reverse vesting of founders' stock, drag-along rights ­ everything appears to be designed to benefit the investor.
We like your idea, but it doesn't fit our investment thesis
In the startup world, this is code for `we have no idea what you're talking about'.Indian founders usually have a tough time selling their ideas to VCs because most VCs here lack prior experience in creating or running businesses and have little or no domain expertise.
The handshake agreement
The VC industry is not known for its transparency and understanding the internal dynamics of a firm is even tougher. Sometimes, when a VC offers founders a `handshake agreement' on an investment, it doesn't necessarily mean the deal is done. What's unsaid is that the deal still has to be approved by the VC's internal committee.
Nice idea. How does it compare with China?
Typically, the first thing a VC will ask founders is to compare their idea to an equivalent business model in China or the US. Doesn't matter if the founders are building a business unique to the Indian market. Makes the pitch that much tougher.

10 THINGS VC FIRMS WOULD LIKE 10 FOUNDERS TO DO BETTER
Passion is good, but flexibility is a virtue
Founders often tend to fall in love with their ideas so much that they are inflexible to a fresh perspective.
VCs like founders who are open to suggestions and are willing to make reasonable changes to the original business plan if required.
Are you pitch-perfect?
Too many founders, not just in India, lose out on the chance to score venture capital because of a poor pitch. Founders need to be able to articulate their core idea and vision and support it with a crisp presentation. The thumb rule in the VC industry is that the initial investor deck should be no longer than 10 slides to get the message across.
`I want to be ac quired by Google' is not a revenue model
A good VC will not usually back founders whose endgame is to be acquired. Because that would indicate the founder is not really interested in evolving a sustainable revenue model. Acquisitions spell a key exit strategy for VCs but not before value has been created through a revenue model that would sustain in the absence of acquisition prospects in the medium to long term.
References get a foot in the door faster
Much as founders may hate it, VCs rarely entertain cold calls or emails. It isn't too tough to find a reference. Get a common contact, however remote, for an introduction to a VC. It is also a test of how hard you're willing to push.
Single founder startups rarely win
Most successful startups have two or more founders, and with good reason. If you are a single founder startup, it is always a good idea to get a capable co-founder on board before you approach VCs for funding. It reassures VCs that responsibilities are shared and that the company is capable of evolving a stable senior management structure.
Invest in building the relationship
The venture capital industry works on the principle of relationships built over time. It is wise not to pitch for funding in the first meeting. Instead, focus on brainstorming and building a relationship that may translate into funding later. VCs invest in people first.
Do you have enough skin in the game?
Founders who expect to get funded just on the basis of a business plan are plain naive or presumptuous.This happens, but very rarely. VCs like to see whether founders have invested some of their own capital, however little, have built minimum viable products or prototypes, and have tried to partner with 1-2 potential customers.
Don't bring up NDAs at the pitch
While some VCs may be errant, investors actually have legitimate reasons for not signing non-disclosure agreements. VCs meet a lot of startups, including those building businesses similar to yours.
Signing an NDA can become a profes sional hazard as they could be taken to court every time they announce an investment.
Shopping termsheets
Getting a termsheet from a VC and then leveraging that to get a better valu ation from others is the biggest pain point among investors. Firstly, it hurts the inves tor's ego who now feel they have no strategic value. Also, word gets around, es pecially in the Indian VC community, which is fairly small.
Ditch the tall tales
Being a great salesman can be a vital skill for a founder, but even the most fantastic story has to be backed by facts. Founders sometimes get carried away with projections and start throwing names and numbers without a backup date.All this falls through during due diligence and can make the founder look shabby.
How the demand and supply dynamics stack up
India currently has more than 3,000 technology startups, according to Nasscom
VCs invested $2.1 billion in 2014 across 246 deals, according to VCCEdge. More than 50% of this was invested in mature internet startups
The country's entire venture capital industry consists of about 20 firms
An Indian VC evaluates an average of 1,500 deals every year and usually closes fewer than 10
More than 90% of new startups born each year die for lack of funding at the seed stage.

How VCs are Trying to Connect with Startups
Partners at Helion Venture Partners have lately taken to Twitter to invite founders to “catch up over beer“ across cities like Mumbai and Chennai. The format is deliberately informal, targeted at young entrepreneurs and aimed at positioning Helion as a founder-friendly venture capital firm
SAIF Partners' sprawling terrace garden at its headquarters in Gurgaon has become a venue for brainstorming and networking events that involve investors and founders. The firm recently kicked off M-Series, a series of discussions and workshops themed around the evolution of the mobile ecosystem
Fireside chats, workshops and panel discussions hosted by firms such as Accel Partners, Nexus Venture Partners, Blume Ventures and Matrix Partners are now a regular part of the startup social calendar.Events takes place across Mumbai, Delhi and Bengaluru.

ET3APR15

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