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Funding Game – The rules and the hacks via @skirani & @BKartRed

The weather in Chennai was finally getting kinder & more pleasant in tune with the time of the year, much like the funding climate which has been less testing on the entrepreneur in general. Depending on whether you ask a consumer product entrepreneur or a B2B SaaS product entrepreneur, the level of optimism could vary, but it’s optimism all around.

As a pre-event runup to SaaSx2, we met at Freshdesk’s office in Chennai, for the Roundtable on “What it takes to fund a SaaS company?”.

Shekhar Kirani from Accel and Karthik Reddy from Blume, joined by Girish Mathrubootham from Freshdesk, anchored the conversations.

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Shekhar and Karthik started the round table, with some pretty interesting nuances about what numbers ought to add up, for their investment to make the returns they promised to their limited partners. The conversation touched upon what it takes to get funded at the early stages (upto Series A) and what it takes to be on that path, beyond Series A. Girish chipped in with personal examples of how Freshdesk got funded and his first-hand insight into looking at early stage startups that get funded (or not)!

Here are some bite-sized insights from the conversation that lasted for 3 hours:

On the options for the entrepreneur

  1. Indian B2B entrepreneurs have bootstrapped their startups remarkably well that it’s not an exception. If you are a B2B entrepreneur bootstrap or do more with less. Wait for the right strategic opportunity to scale. With numbers backing you up, raise for growth.

2015-10-07 11.12.22On what drives investors’ decisions

  1. Don’t get discouraged with ‘No’ from a partner of a VC firm. They have their biases and baggages. It’s the partner who has a view and not the firm. Find your champion.
  2. Most investors don’t like it if the outcome has a cap to it — there’s a maximum that you can do in the market and that sets a pretty hard ceiling to crack. In such cases, you’ve to out-execute everyone else and that’s a hard ploy and makes less exciting for the investor. Example: Would you start another CRM company now and if so why would you do what the rest of the 1600 have not done. Even if you execute well, what market share can you capture?
  3. VC firms pitch to Limited Partners (wealthy individuals, family offices, pension funds etc.) more than startups do to investors. They’ve the same issue of having to convince an LP that a certain startup that’s pre-revenue will get an exit worth $100M in 7 years. To do that in India, when there was no such exit till recently, made it even less credible.
  4. Most funds last for 10 years. 3 years to invest and 7 years to grow and nurture those investments towards exit events.
  5. Among the top quartile or decile of startups in a portfolio, one company returns the entire fund. Top 5 companies return 90% of the capital.
  6. Each startup has to be a prospect for a $500M exit, for the fund to meet its “Return on Capital Employed” goals.

On what investors look for in a startup?

  1. In a SaaS startup, front loaded costs are high. So your first two rounds are not about revenue or profitability but more about Product-Market fit and elimination of business model risks.
  2. Integrity, smartness and hard working ethics of the team are important but not sufficient. There has to be a potential for $500M exit for that startup for investors’ math to work. Anything less is already a sub-par outcome.
  3. It’s the job of the entrepreneur to make the VC look and realize how big the market is. They see a 1000 pitches a month and carry stereotypes. Help them make the context switch.
  4. Integrity cannot be stressed enough — Questions about India’s professional ethics do come up.). Indian LPs too find it hard to fathom that it’s possible to legally generate a 25x outcome from a startup, given where they come from and what they’ve seen.

2015-10-07 11.12.37On how to negotiate investment terms

  1. Clauses are there to protect the downsides for an investor. If you understand why they are there it’s easy to have a conversation around them.
  2. Most dissonance that an entrepreneur feels is because s/he does not understand the responsibilities the investor has to his/her fund and their LPs.
  3. Clauses such as liquidation preferences are there to protect the downside of the investments. So long as you cover the down-sides as an entrepreneur, your negotiation leverage for not carrying over these clauses to subsequent rounds is high — Don’t get it yet? Ask entrepreneurs who’ve raised several rounds, on how to negotiate.
  4. Drag along clause is there so that an investor can get the fund its returns as the fund comes to the end of life. If that goal conflicts with your startup’s, look for funds that are early in their life, to take money from and thereby give yourself a better runway.
  5. Everything is negotiable if your numbers are good. All downside protections kick in only during the bad times. So the best way to stay on top of the negotiations is to execute well.

Contributed by Ashwin Ramasamy, ContractIQ

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Bootstrapping – Boon or Bane for Product Startups #BootUpINDIA

On August 14th, 2014 iSPIRT, the industry enabler that is creating a vibrant eco-system for promoting, encouraging, supporting and enabling product companies out of India, organized a very useful online discussion on the concept of bootstrapping. Titled ‘Bootstrapping – Boon or Bane’, the discussion explored various facets of bootstrapping, including its relevance, benefits, limitations, and challenges.

Sharad Sharma, founder of iSPIRT kicked off the conversation with a very incisive observation that the startup community, largely driven by the media, tends to celebrate and showcase startups only when they receive angel or institutional funding. How true is that!!! There are a number of very successful and modestly successful startups, many of who are deserving of the praise and showcase, but they get reported about only when they close an investment round. (I am not sure if the media is to blame entirely. I suspect companies too reach out to media only after they have received an investment round, perhaps because they believe that funding makes the ‘story saleable’ for the media.).

Avinash Raghava, startup eco-system builder and the driving force behind iSpirit shared that over 65 of the 140+ companies they have profiled, were indeed bootstrapped. Of course, some of them may have tried to seek VC money and started to bootstrap if they were not successful in raising capital. However, that they have succeeded in being showcase-worthy by iSPIRT, is indeed commendable.

The panel explored whether bootstrapping & angel/VC funding are either-or strategies or is there merit in a hybrid model. While the panel agreed that building a business with customer’s money is nicer than building a business with VC money, Bhanu Chopra, founder of Rategain(who has built a globally successful company that was bootstrapped) and Sharad Sharma suggested that there are no set rules, and companies should evaluate their strategies depending on the merits of the options available. (It is relatively easier to bootstrap for companies that address enterprise customers than B2B companies.).

Ramesh Loganathan of Progress Software added that while startups have to evaluate what’s the right way for them to fund their venture, it’s not just about the money, but the mentoring and advisory that comes along with that money, that is more valuable at the early stages. First-time entrepreneurs who have no experience of building a business, or even a full product, can benefit enormously from the perspectives and learnings of more experienced individuals. Now, whether this advice is available with or without money is immaterial.

Bootstrapping is not equally relevant or appropriate for all concepts/products/services: In some cases, it maybe possible to build the foundation or a company through bootstrapping, but you may need external capital to grow. In some cases, it may be possible to grow at a healthy rate through bootstrapping, and internal accruals may enable the company to even grow at a healthy rate. However, Bhanu elaborated that at some stage, the company may need to explore inorganic growth and may have to seek external capital.

Shekhar Kirani of Accel Partners, who has a unique perspective as a member of two hugely successful bootstrapped ventures, and is now a part of the investor community, was of the view that since all ventures need capital, the entrepreneur has to make an assessment on whether the idea needs VC money or are the idea & market conditions more suitable for bootstrapping.

He further explained that companies like Facebook, Twitter, Quora, etc. could not have been built without VC money as these businesses needed to invest a lot to build scale so that monetization opportunities arise. He added the once there are others in the market offering similar benefits, it is almost always difficult to leapfrog without adequate capital, and in such situations, bootstrapping may not be the right approach.

VCs have a lot of respect for companies that are bootstrapped. Bootstrapping demonstrates the entrepreneur’s commitment and conviction, both critical parameters for investors. In fact, Shekhar shared that even in the US, Accel invests in a number of companies that have built a reasonably sized business through bootstrapping, and Accel was the first institutional investor for scaling up.

Bootstrapping forces you to focus on building a strong ‘business’: For, Ahimanikya of DocEngage, one of the benefits of bootstrapping is that you are forced to think of revenues from day one. He added that it has become fashionable for entrepreneurs to seek VC money to pay for their lifestyle or for their own salaries, and felt that this approach, which does not have an element of risk-taking by the entrepreneurs was damaging for the startup community.

Bhanu mentioned that bootstrapping allowed them to focus on building a fundamentally strong product with a strong customer value proposition. It also instilled very strong fiscal discipline within the company.

All panelists agreed that for bootstrapping to be successful, it was important for an entrepreneur to be adequately prepared to multi-task and to be a multi-skilled. Else it becomes very difficult to sustain a bootstrapped venture. Panelists also agreed that at some stage, if the company needs to change gears to scale up using VC funding, they need to be prepared for a fundamentally different way of growing the business. If they are not prepared, they may miss out on some large opportunities.

To summarize: It was, as Sharad Sharma put it, a very thoughtful discussion, do watch the video for mode details.