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Advice Angel Investing Business Entrepreneurship InvestStream Video Startups Venture Capital

What makes a startup venture fundable?

There are a multitude of things that help make #startups attractive to #angel #investors & #venturecapitalists. In this video, I shared 3 things that I think are critical to a startup being venture fundable.

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There are a few things that should be on the checklist of any startup before they think of approaching investors other than friends and family.

  1. The first is TAM or “Total Addressable Market”. VCs need big markets to support big companies. A better understanding of VC economics would help explain this a bit better but for the moment, just assume that VCs need big exits otherwise they go out of business. Big exits are usually via IPOs. Rarely does the NYSE or Nasdaq allow listing a company under a $1 billion market cap. In order for a company to list for on a public exchange for a billion dollars, they really need a few hundred million in revenue and lots of growth prospects otherwise, public investors won’t buy into the IPO. After years of rapidly increasing valuations in the space, we’re starting to see some strain in the ride-sharing space after Lyft and Uber’s IPOs. Even Slack has struggled after going public. Unless the market that a startup is targeting is a multi-billion dollar market or growing rapidly, it’s very difficult to convince most VCs to invest.
  2. The quality of the team is critical to the success of a startup and its execution. If the team is solid, investors are more likely to get excited about investing.
  3. Finally, there’s traction. Having traction is critical to an early stage startup looking attractive to angels and VCs. If the traction is strong and there’s a well understood growth plan, investors are more confident that the team can attack the large total addressable market.

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Advice Angel Investing Business Entrepreneurship Startups Venture Capital

The Importance of Updating Your Stakeholders and Investors Regularly

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There are many good reasons to update your investors regularly on what’s happening with your business. Some venture capitalists and angels like monthly updates, some prefer quarterly investor updates, others are fine with ad hoc information – one founder created a WhatsApp group of his investors and just messages us whenever he wants. It helps to build confidence when an entrepreneur takes ownership of updating their investors and do not wait for investors to ask for updates.

The investor has placed their trust in you and taken considerable risk to help you achieve your dreams. Regardless of your fiduciary responsibility, the entrepreneur has a moral obligation to let these people know what’s happening with their money.

In addition, when a startup is young and relationships with investors are new, it’s even more important to invest in building a relationship. However, an entrepreneur’s first responsibility (and passion) is to move the startup ahead. Regular investor updates help solve both problems to a large degree, without the founder(s) needing to take time away for one-on -one calls or meetings.

  • It helps continue to build trust.
  • It keeps the investors interested and excited about what’s happening with your startup.
  • If things aren’t going so well, it isn’t a surprise to your investors. Bad surprises aren’t a good thing for anyone and frequently end with frayed relationships.
  • If you need help with something, this is your chance to ask your investors for help. It is especially important when things aren’t going as planned.
  • If they know what’s happening, you continue to build trust with them, then, when you take another swing at raising more money, they’re more likely to help you or participate.

This is an example that a company selling a product online might send to an investor.

Dear Pankaj,
It’s time for another update on where our startup is going. Here are some high level things to start with:

  • Gross Burn Dec 2018: $100,000 / month
  • Revenue Dec 2018: $20,000 / month
  • Net Burn Dec 2018: $80,000 / month
  • Cash in the bank Dec 31st, 2018: $850,000
  • Runway (typically Net Burn but could be different based on growth, cost cutting, etc.):14 months
  • Total Pageviews this month Dec 2018: 4,250,000
  • Pageview growth from (last month/last quarter/last year): 60%
  • Total Unique Visitors Dec 2018: 2,125,000
  • Visitor Growth from (last month/last quarter/last year): 40%
  • Total Items Sold Dec 2018: 8911
  • Items Sold Growth Since (last month/last quarter/last year): 10%
  • Average Order Value Dec 2018: $2.25
  • Order Value Growth Since (last month/last quarter/last year): 15%
  • Gross margin Dec 2018: 35%, up from 24% in Dec 2017
  • New product summary, Challenges Being Faced, Goals and targets for 2019, etc.

Of course, please modify this for your business, include your KPIs and adjust for the frequency with which you update investors.

Getting a routine for investor updates going also helps your team focus on the targets you’ve laid out together as well as keeping you apprised of situations that may be brewing and having a good handle on your KPIs.

What tools do you use to track your KPIs, effectively create and share your updates with your investors and stakeholders? Please share them in the comments.

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Should Your Startup Apply to an Accelerator Program?

I’ve helped run two accelerators in India and Silicon Valley. I also serve on the Investment Committee for an accelerator program based in the Middle East and I’m a mentor at an accelerator program in New York City. I’ve spent a considerable amount of time around accelerators and have seen the benefits and challenges that both founders as well as the program itself faces.

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YCombinator, the preeminent accelerator, was founded in 2005. Since then we have seen hundreds, if not thousands of accelerator programs around the world pop up. Mostly emulating the YC model while employing some variations. 

The idea of an accelerator is centered around providing entrepreneurs more than space and the occasional connection to a resource. They were designed to provide a curriculum based approach to getting ideas off the ground. The best accelerators, not only designed the best curriculums but they also brought in the best network of entrepreneurs, engineers, and investors from the ecosystem as mentors.  

There are many great accelerator programs. It isn’t YC or bust. Each accelerator program has some focus that makes them better for certain type of companies. For example, there are accelerator programs that are vertically focused and will bring networks and mentors in that particular industry to help companies. There are some that focus on startups from a specific geography.

There are many accelerators that take equity for “helping” a startup and they *may* invest in some of the companies at the end of the program. I can’t talk about the quality of these accelerators but I will say that they may provide more value in less developed startup ecosystems than places like Silicon Valley, NYC, London, Tel Aviv, Singapore, Berlin, Bangalore, etc. I’m not a fan of the “you can give me equity at the beginning of the program and I may invest cash later if I think you’re worthy”-model. I think it creates too much signaling risk and also starves young startups of two very important things, cash and equity. If you’re confident in your process then, at least invest a small amount of money in the beginning and handle the post-program follow-on at a slightly higher valuation or cap than the beginning of the program. There’s still some signaling risk for the companies that don’t get a follow-on.

In certain parts of the world, like India, accelerators have gotten bad name and a lot of founders won’t even consider an accelerator as an option. In recent years, most accelerators in India have either shut down their cohort based programs or they’ve changed them in significant ways. However, one of the most renowned investors in the world just announced that they are starting an accelerator program in India – Sequoia’s Surge program! Accelerators can play a very important role in bringing in mentors and resources that founders can get help on scaling their technology, finding initial product market fit, determining pricing points for a product, determining and tracking KPIs better, etc. etc.

Founders should spend as much time as possible doing their due diligence on an accelerator as any other investor, (check out https://youtu.be/3oltOd5Mdjo for more tips on raising money for your startup).

Just like college or graduate school, people strive to get into the best programs in the world. Those that make it into the top universities, have a significant advantage over others because of the credibility and the network that the top tier university has given a student access to. It’s not that different for accelerators. The top accelerators will be the hardest to get into and they will add real value. Of course, the value an entrepreneur can get out of the program, really depends on the founder and how they use the resources provided to both extract value but also contribute significant value back to the network they’ve been privileged to become a part of.

If you’ve been a part of an accelerator, please share your experience in the comments.

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Things that will make your investors walk

In this InvestStream Q&A I answer a viewer’s question about what are some things that VCs and angels frown upon. If you’ve got things that you think should be added to the list, please share them in the comments section on the YouTube Video.

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Advice Business India

How to Make an Introduction to a VC or Investor

Over the last year I’ve been getting a lot of introductions and requests for intros to other investors. I’ve been surprised by the low quality introductions some people make so I figured that writing a little about what makes a good investor introduction could be useful for the connectors out there.

Making the Right Introductions

Just because someone asks you to connect with someone isn’t a good enough reason to actually make the intro. Think very carefully about whether there is a fit between the two people. If someone you know has an “idea” and asks you for a connect to a VC, and you know that the VC doesn’t invest in “ideas” then feel free to tell that person that you’d be happy to make the introduction at a later date, when they are past the “idea” stage. Don’t forget to explain why the introduction might be premature.

You should also feel free to ask the person asking for an introduction, why they want an intro and if they are prepared for the connection (point them to 10 Things to Consider Before Approaching a VC).

What Making an Introduction Means

When you make an introduction to someone, the process has significant implications for you. Let’s think this through a little:

  1. You know person A that others are trying to get access to.
  2. Person B knows you and is trying to get access to person A.

You’re the gatekeeper. You should be thinking about how well do you know person B. Is person B an awesome person or is person B, not-so-awesome? If person B is not-so-awesome or you don’t know them that well, it’s ok to decline the request for an intro. You can say something like, “I’m sorry, but I don’t know you well enough to make the introduction.” Person B may not take it well, but, they’ll get over it.

Next. How well do you know person A? If person B is trying to get access to person A, chances are that others are also trying to get access to person A. What does this mean? Person A is probably getting more introductions and cold calls than they can handle or want.

If you do successfully wind up making the intro and if person A is not impressed with the intro, it will hurt your ability to make future intros and it will impair your ability to make the connection with person A stronger.

On the flipside, if person A turns out to be not-so-awesome and doesn’t gel well with person B, you haven’t lost much, but the chances of person B appreciating your spent social capital in making the intro is minimal.

Spending and Building Social Capital

As you meet new people, it’s important to nurture those connections. How to nurture them depends on the context of the connection. However, at a very basic level, you should be building trust. Building trust/social capital takes considerable time and effort.

It’s much easier to “spend” your social capital by making introductions when people ask for them because:

  1. You may just want to be a nice person
  2. You may want to be able to prove that you are a well connected person
  3. other reasons

However, do think very carefully before spending that social capital because it could either multiply when you make good intros or disappear when you make bad ones.

two businessmen shaking hands

Picture by MyTudut, on Flickr

Sample Intro 1

Below is an introduction I received a few months ago from someone I barely knew (names are changed).

Hi Pankaj,

[FRIEND A] is a friend and client to me. He has been involved in couple of web sites and businesses.

He is currently looking for some investors and VC’s. He shall connect with you with his requirements and please try to help him with investment.

[MR. CONNECTOR]

Why wasn’t I impressed or looking forward to this intro.

  1. Weak Connection: I have never met or spoken to “Mr. Connector”. I have exchanged emails with Mr. Connector when he wanted to volunteer for Startup Weekend. In the end, he went dark, never showed up. Never did anything.
  2. No understanding of investment thesis: He made no effort in the email to understand what I was looking for as an investor, what my thesis was, etc.
  3. No signal: He didn’t spend any time qualifying the person asking for the intro and signaling that info in the email.
  4. No context: For all I knew “FRIEND A”, could be asking me to invest in his gold buying business.

“FRIEND A” eventually emailed me as well

Hi [MR. CONNECTOR],

Thanks for the Introduction

@Pankj Nice to e-meet you,

We are currently developing ad network platform and will be launching it soon.

If we get an first round or angel investor I would be really glad and helpful, let me know what would you need from me to proceed for funding, I will arrange ASAP.

Best Regards,
[FRIEND A]

Yes, the email is copy and pasted exactly as it was received and yes, “Friend A” didn’t take a minute to check the email he sent realizing that he misspelled my name. Generally not a big deal but when you’re first connecting to someone, you want to put your best foot forward. In any event, I took a few minutes and responded to “FRIEND A”.

Hi [FRIEND A],
1) what’s your angellist profile?
2) what’s your LinkedIn profile?
3) what businesses have you been in and what have you done?
4) send me your investor deck
5) how much are you planning to raise?
6) what kind of ad network are you building?
7) why are you building another ad network?
8) how many customers have you brought on board for this ad network?
9) how many ad impressions have you shown this far and across how many sites/devices/etc?
10) are you raising via equity or convertible?

Pankaj

I never heard back from Mr. Connector or Friend A after asking them the questions above.

Sample Intro 2

Here’s an intro I received a few weeks ago. We are friendly even though we don’t know each other very well. However, I really respect him and the work he has done (again, names, numbers, details changed).

Hey Pankaj

Hope your’re doing good. I though of putting [ENTREPRENEUR] in touch with you. I’ve know [ENTREPRENEUR] for some time now and he is doing a startup called [STARTUP NAME] [URL]. They are beginning to see good traction ([ >25K ] signups to date) and their team has good product / engineering capabilities. You can check them out for 500startups, or even otherwise.

[ENTREPRENEUR]… Pankaj is a friend … you should sync up with him.

[MR. CONNECTOR 2]

Do you see a clear distinction between example 1 and 2

  1. Clear demonstration of connection strength: He clearly says that he has known “ENTREPRENEUR” for quite some time.
  2. Context: He may not explain the context but he gives me the name of the startup and gives me the info I need to look into the startup and do some research before taking the intro. He also indicates a potential fit with 500 Startups which is helpful for me.
  3. Traction: He gives me clear traction data points which I can draw my own conclusions from as well as indicative info about the product and engineering capabilities.
  4. Clear call to action: He gives the entrepreneur a clear call to act.

Based on this intro email, a dialogue has started between the entrepreneur and I. We are planning to meet soon.

What are some of the things you would recommend people think about when?

  • Asking for an intro
  • Making an intro
  • Taking an intro

Leave your tips in the comments below.

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