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Do you need funding? think again

Startups look at getting funding as an end in itself. To us at seedX, that seems to be missing the wood for the trees. When start-ups talk to us about fund raise before talking about their business, we see a red flag. The first step is to ask if you really need capital and if so, what kind of capital? Boils down to nature of the business, market size and cash flow profile. Funnily enough, if you are in a cash rich business without a large market or quantum growth potential, you will have a challenge raising capital. Large market size with quantum growth potential and a highly scalable offering will catch interest of investors. Key question – what is the industry you are in?

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Private investments in general and startup investments in particular, should only constitute a small part of your overall portfolio of public equity, real estate, gold, debt, etc. For many experienced angels, this amounts to 5% to 10% of their overall investment portfolio. A crucial thing to remember though, consider angel investments only if you have an appetite for risk. The thumb rule is ‘If making an investment is going to keep you awake at night, don’t invest.’

Signup as a potential investor at https://lnkd.in/fzh8c-n

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Will startups start mimicking local mom and pop joints?

I was at the Jaipur Startup Fest, invited by Startup Oasis which was partnering with the Rajasthan government in organising this event. It was great to see the activity even in this so-called Tier B city.  Entrepreneurship is throbbing in these cities despite the lack of a great support system, making it all the more creditable. Now with the govt. pitching in with some much needed support, it can kickstart many an entrepreneur's ambitions.

I was part of the business plan pitching session by the Startup Oasis shortlisted companies and another set of companies shortlisted by Headstart, the latter being companies that were a bit more mature and developed and looking for Series A or pre-Series A funding.

After meeting many startups at Jaipur and a couple of smaller towns, there were some thoughts that cropped up:

- There is not a lot to differentiate between startups in the bigger cities like Bangalore/ NCR and Jaipur. Barring some fine tuning around UX/ UI, there is not much to separate .  For instance, i saw furniture startups, food delivery and laundry pick up services that were pretty much equal in features and functionalities to what you might find in the big cities.  

- As the cost of starting a venture and getting it off the ground has reduced drastically, barring the marketing, we will see a lot of local ventures in these cities that work very well in their respective geographies, mimicking the mom and pop stores that we all are so familiar with. We will see a bunch of online home repair, groceries, salons, furniture, interior design ventures that are local, small and profitable as they can invest less on marketing and mine local relationships better.

- Bigger companies have little economies of scale in these specific areas mentioned above like salons, home repair, grocery and food delivery etc as the procurement is local, technology investment (and hence scale benefit) is minimal, and local relationships are important.

- As in the online world, no one wants to own assets but just want to be an intermediary or marketplace, in the long term, there can be a great play in the underlying infrastructure/ platform/ logistics providers where people can aggregate to increase vendor power. For instance, aggregators of electricians, delivery people, plumbers, etc by manpower or facility providers would be a good bet rather than just chasing the end customer.

It would be interesting to see how many of the ventures have the persistence and the courage to tough it out but the energy was certainly infectious. I have to thank the folks at Startup Oasis and Chintan Bakshi and his team of energetic organisers for managing things so smoothly.

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How much does pe-degree matter?

Vamshidhar Guthikonda

One question that inevitably get asked in all the talks i do is whether it is necessary to have a IIM/ IIT brand to get funded. It would be remiss on my part to paint a rosy picture and say that investors only look at quality of the product and founder and not as much at the education brand. However investors, being quite human and intending to take quick decisions do tend to look at the quality of the education that the founders have had. To some extent this may be justified as these premier institutes take hiqh quality input and also offer a great platform for networking among a strong alumni body. All this go a long way not just in getting funded but also in running a business.

However, that being said, having a strong education brand can open doors easier, get references through friends and alumni but it is not any indicator about entrepreneurial skills. In fact our premier institutes have been laggards in producing entrepreneurs.  So if you are a founder, play to your strengths and your ambition, street smartness, enterprise etc and look beyond any weaknesses that your education resume might carry.

Moreover, this situation becomes even less relevant over time with experienced founders, where actual on job performance and one's track record matters more than the strength of the education someone might carry. After 10-15 years on a job, everyone is as good as their last stint. Focus on continually refreshing your knowledge base, your skill sets and network a lot.

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Diversify at lower ticket sizes

Rajiv Raghunandan

One question I get asked repeatedly from our investor base is that they hear the classical view that one needs to invest in 10 ventures atleast to come up with one that has some kind of a chance to succeed. And how does one do that if their overall appetite is about Rs. 25 Lakhs or so across multiple ventures? The only way to do it with small ticket sizes is to aggregate across a known group of friends / associates and invest as a consortium

This achieves three key objectives:

Greater level of comfort and understanding within the group thus having a homogenous set of investors with similar objectives, risk appetite and tolerance levels. This helps both the investors and the ventures

Consortium can pool capital and be able to invest across more ventures than would have been possible as individuals

Allows for pooling of expertise (skills) and experience (functional/industry). This aids more informed decision making and a more objective assessment of a venture’s growth potential and business risk

All of these clearly result in greater diversification & mitigation of seed capital risk that otherwise would have been higher.  Yes, it involves some structuring to create a consortium amongst this group but that is something we can help with and facilitate the process.

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The boring but important stuff

Nikesh Shah

Ignore these necessary evils at your own peril

Does it excite you to compute your startup's TDS payments? Do you get up every morning and say, "Yippee, I have to fill up some regulatory compliance forms, I can't wait to get to work"? I'm guessing that the prospect doesn't sound exciting to any of you. However boring and annoying many of these activities are, they are an absolute necessity. Chances are most of these activities are getting neglected at your startup. Getting your books in order and being compliant with the law is important for many reasons

The most important reason being, especially to one looking to raise funds, that it indicates to  all  stakeholders and any prospective investor that you are serious about your business.

• It gives you, the entrepreneur, an idea of the real financial health of your company • It makes you compliant with the current regulations and ensures you don't end up paying heavy penalties down the line • Two of the most important of these services are provided by Chartered accountants and Company Secretaries

Chartered accountants are folks who will help you get your company's financial records in order and help you with your tax related activities. Company secretaries on the other hand advise on as well as implement all the activities that help you stay compliant with all the relevant regulations based on the law of the land. Ideally, you should get both these agencies on board before you even incorporate your firm since they will assist you in deciding the kind of firm you should be setting up and the corresponding implications.

Here are some simple pointers on how you should go about selecting any professional services provider.

It is ideal if the provider is referred by someone you trust.

• The provider should have the experience and openness to work with startups. Ask the  provider for references and speak to the founders to ensure that the provider is proactive in their approach as well as knowledgeable • The provider should be reasonable in terms of their charges so as to not burn a hole in your finances.

While some of this might sound as a whole lot of hassle to you, it is necessary to ensure that you are able to focus on your competency, which is building a business

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SeedX driving a multiplier effect

Rajiv Raghunandan

I am picking up on one of the things Vamsi said about thousands of investors who would love to invest but for whom start up discovery has been an issue. It's not just that;it's also about a popular notion being furthered all the time that angel investing is the preserve of a wealthy few and it being an "esoteric science" that has prevented more wider adoption of investments in what is essentially an alternative asset class. 

Angel investing offers a good diversification option to investors in India who are otherwise heavily invested in equity, fixed income and real estate. It offers investors the opportunity to invest a relatively "small" sum of money with an option to gain from disproportionate returns. Make no mistake, this is not an alternative to SIPs or fixed deposits but an additional avenue of investment, once an individual has made adequate investments in traditional asset classes.

There are thousands and thousands of investors in India in the 35-45 age group who would be positively inclined to invest an amount of Rs. 5 - Rs.10 lakh in a venture totaling to possibly an amount of Rs. 20 - 40 lakhs across 2-4 early stage ventures. These individuals would typically have disposable savings in the range of Rs. 1.5 to Rs. 3 crores thus implying a 10% - 15% portfolio allocation to angel investing. SeedX seeks to provide a platform for such investors. It is not just the high net worth individuals with disposable assets of Rs. 5cr & above who can become "angels"

The most significant benefit in my view for this profile of individual is not the potential returns but really the exposure to a very different world. This investor profile is largely salaried and works in large multi-national and private companies. SeedX provides a sneak peek for these individuals into the world of "start-ups" and early stage ventures, a world that all of these folks would like to be part of but never knew enough or didn't have the conviction & courage to branch out on their own. The platform will also enable these potential investors to get a realistic & pragmatic view of the "early stage venture" world, sans the glamour that is created by a few successes. It also offers a unique opportunity for investors to participate in other ways such as mentors, advisors, consultants etc. and thereby add value to the management teams. Thus, potential investors will get more & more comfortable with this "alternative world" and in time start their own venture or be encouraged enough to try out different & alternative career options. Hence, SeedX has the potential to be a catalyst and create a multiplier effect in the entrepreneur landscape of India.

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The Seed behind Seedx

Vamshidhar

The idea behind SeedX came out of many personal experiences of the founders both as investors and advisors. Being involved with a few startups as investors, we have been exposed to the tortuous and long winded process that an entrepreneur has to undergo while raising his first round of money. Raising the first round or seed/ angel round, as is the common parlance, is the most painful, with the chances of a successful fund raise extremely low. This is amplified in the Indian market where the ecosystem is not that developed because of an underpenetrated investor community. Even if an entrepreneur is successful in getting sufficient interest, the terms are quite one sided.

The established investment banks or advisory firms are loathe to work with startups as the economics do not work out for them. The entrepreneur has no one to turn to for advice. 

Similarly we have often encountered many friends, colleagues, business partners who are passionate about funding budding ventures. The investing community has hitherto been restricted to either some of the angel networks which are usually clubs of very high networth individuals or friends and family. There are thousands of investors outside this group who would love to invest for whom startup discovery has been an issue.

A wider investor base will also facilitate quicker deal closure, better terms for the startups and will also free up the founders' time to actual business rather than raising money.

We also recognise that raising money is only a part of the problem. Early stage ventures require a broader support structure in terms of process management, technology development, hiring, strategy and planning, legal and accounting help etc. At SeedX, we again want to take the pain and mystery of all these associated requirements and we will ensure that you get the best of breed advisory and support by providing or just connecting you to the best service providers.

At SeedX we provide a platform for the startups, investors, mentors, ecosystem service providers to discover each other and find a market for their services or an advisor for their requirements. Though we aim to disrupt the established angel funding and organise the unorganised angel advisory process in India, we would invite all the existing nodes in the ecosystem too to start using the platform. We would like them to be our partners and guide many of our startups.

The coming 10 years are going to be a golden period for Indian entrepreneurs. It is a case of now or never for the Indian growth story to finally come to fruition. All the political, social and economic factors are lining up to create the perfect environment for Indian economy in general and startups to prosper. The first post liberalisation generation is going to start coming onto the workforce. They will have a sounder social structure and thus less constrained by a fear of failure. More from this generation will take to starting their own businesses than any prior ones. SeedX hopes to be a partner, guide and a support system for these entrepreneurs.

We are looking forward to exciting times at SeedX.