The executive summary is a summary of your business plan. Hence, it is to be written last.
Heres my suggestion on working on a business plan.
Start with a story - See the film in your mind about your venture what do you want to do, how large do
you want it to be, what will make you happy, what are your aspirations, etc. Imagine it as a business a few
years down. This gives you a good view of what you want to aim for
Work out rough milestones and goals: Your long-terms goals and aspirations should then be broken into
short-term and long-term milestones, which are the stepping-stones to your eventual destination.
Think deeply of how you will implement it: This is the critical aspect of planning your implementation. This
also gives you a view of the cost structures, the infrastructure & people needs, processes, etc.
Work out the structure of an excel sheet: Now, after you have done the thinking, it is time to use an excel
sheet to evaluate if there is a business case in what you plan to do. Before you start entering numbers, work
out the structure detailing every cost head and revenue stream.
Start working in the excel sheet assumptions are critical: An excel sheet exercise with the wrong
assumptions is going to give you a very wrong direction, and perhaps wrong hopes. Be realistic. Be
conservative.
Work on multiple scenarios: Life does not play out the way you plan it. Real life situation will be different
than your excel sheet plans. It is therefore essential for entrepreneurs to work out multiple scenarios to see
how the business will pan out under different outcomes.
Finally, articulate it into the presentations: Once your Business plan is ready, you then articulate it into
different presentations. Even an executive summary is one articulation of the B-plan. You can have an
executive summary for introductions, a 8-10 slide ppt for first meetings and more detailed documents and
presentations for follow-up meetings where specific details are going to be discussed.
Sanjay explained that a startup is not just someone who has started a venture but could also be a person or
a group of individuals who are thinking about building a business around a concept.
Teams who have tested a product/service for some time but are yet to launch in a serious scale could also
be considered startups.
The stage of startup is important because the nature of the investor is dependent on the stage.
At the concept stage level is when angel investors will invest, while post the concept stage is when it
generally becomes possible for VCs to consider investing.
Angel investors and VCs both bring very different value to the startup, and because they participate in
different risk stages of the company, both also look at very different things in companies they engage with.
The first thing investors look at it What is the quality of the team
How committed are the founders to give it their 100% this is especially critical because at early stages
startups will face significant challenges and it is often tempting for teams that are not 100% committed to give
up at the first signs of challenges
How capable is the team While experience is good to have, it is not a necessity as long as the team
understands what it takes to build a business around the concept.
Often based on gut feel there is no real basis for evaluating, and hence often it is on the basis of the
chemistry in the initial meeting
Some suggestions
Be upfront and be honest in sharing even your failures and past challenges. Past failures are not likely to be
the reason for not investing, as long as you have emerged wiser from the experience.
Try to have a team with at least a couple of people entrepreneurship is a challenging journey and it helps
to have a co-founder or a few co-founder to keep you going when the going gets tough
Some level of bonding between founders is important good to have people who know each other
But need to identify what does each person get to the table and each persons role is
A bulk of evaluation time spent by angels on assessing the quality of the team
The next aspect which investors look for in what is the idea
The idea has to be very well defined many good ideas do not get a good chance because they are not well
articulate or presented appropriately
The more clear you are about your own idea, the more clearer will your communication be
What problem are you solving?
Angels in India generally invest sub 50 lacs and therefore see what stage this money can take me to.
If you take lot of money, you may end up diluting a lot of your money
Keep requirements to the minimum But keep a 20-30% buffer you will often need more money than
you estimate
Angels will often ask Is there a role model may be in another country is someone else doing it
Valuations
Angels do not have any scientific way of arriving at a valuation It is usually a gut feel on how much is
required for what stage, and then if there is enough on the table for the team to be incentivized
Usually angels expect 20% equity in the company in the initial round this gives you enough cushion on raise
further rounds
Any good investor would not take more than 40% in the first round
Raise what is called intelligent capital if you have an option, work towards getting money from folks who
will help in the business they can help you with business plan, help you with operating plans, giving
references, putting in touch with the right people, etc.
Raise capital a little more than what you need and raise intelligent capital
If you can continuously grow at a high double digit number in that market even for 3rd round of funding and
have enough revenue to make yourself profitable
What kind of returns do angel investors look for and do they assist in next round of funding
Angels expect a 4x or 5x return could be as much as 10x.. they also equally understand that their
investments can be wiped off
An angel has an important role in future funding
6 months
Why not? But if he/she has the required skillset or competencies or experience about what you need from a
team member
How is the valuation decided for a startup?
Valuation is decided between the investor and the entrepreneur. At the early-stage/concept stage, there is no
science or formula to arrive at a valuation. Hence, you go by generally accepted benchmarks in your country, and
eventually conclude a deal at what the entrepreneur and investor feel is a fair valuation.
What valuation investors may offer for the same plan depends on a variety of factors, including the quality &
experience of the team, the investors view of the potential of the concept, the competition, how easy or difficult it
is for other competitors to enter the market, is there any IP or competitive advantage which this team has, etc.
In all this, the quality of the team is he most important consideration for investments at the concept stage or early-
stages. The same business plan, with exactly the same details could get a very different valuation for a team of
college students executing it than what an experienced team would get for the same plan.
The right answer for you is the one that YOU have identified for yourself. If there indeed is a possibility of Google
doing what you intend doing, then as a part of your own risk evaluation you need to identify what your response
could be.
In a few cases, the answer was Well, if Google really wants to get into this business, they would be the first one
that they should try to buy. And that would work well with investors!!!
Preference shares typically have attributes of both debt and equity instruments.
It resembles equity in the following ways :
Dividend on these shares are payable out of distributable profits
Dividends are not an obligatory payment and are entirely at the discretion of the directors
Dividends are not tax deductible payment
From the perspective of angel investors, investing through the preference share route provides the investor
certain benefits without directly exposing to the risk of the equity shareholders who normally are the promoters.
The investors have the comfort of getting a minimal return on their investment and a priority over the equity
shareholders out of the liquidation proceeds.
From the perspective of the promoters of the company, the burden of servicing high cost debt is not there as the
dividend on preference shares are typically not guaranteed and often lower than the cost of debt for an early
stage company and in the absence of voting right, the promoters face minimal interference from the financiers in
the regular management and operation of the company.
One can structure the instrument to include additional features such as accumulation of dividends, call option,
convertibility to normal equity shares, redeemable such as in any debt instrument and power to vote.
Convertible notes on the other hand are structured as a debt instrument but comes with an option for it to be
converted into equity shares on a given future date or within a specified time frame at a pre-specified price.
Angel investors find comfort in this instrument as it comes with certain advantages which are :
From the perspective of the company the promoters enjoy the following advantages :
The interest payment are at rates lower than a regular debenture because of the convertible feature which
offers upside to the investor
As there are no voting rights attached, the company can operate with minimal external intervention.
An elevator pitch is what you can describe about your venture in a 1 2 minute window that you may with a
person. The person could be a potential investor, or even a potential client, a potential partner or a potential
employee.
The purpose of an elevator pitch to an investor is to excite him or her about THE BUSINESS CASE OF YOUR
CONCEPT. The business case is about Who will pay how much for what and to whom.
An elevator pitch is usually a short conversation, which starts with a one-line introduction to your venture. This
one-line description is something that should excite the investor to know more.
Once the investor is excited with a one-line descriptor, the follow-up answer should cover a brief overview of the
concept, your aspirations, and most importantly, what you expect from the person e.g. possibly a meeting to
present your concept.
Heres an example of an elevator pitch conversation
Entrepreneur: Hi, I am the co-founder of Tune Patrol, an online platform for independent musicians to upload,
share and sell their music. We are in beta stage. The results look very good. We are now seeking a USD 100,000
in funding to go to a million users mark. We are currently funded through friends and family, including my ex-boss
who invested USD 5,000 in my venture
Investor: Looks good. Tell me more.
Entrepreneur: Thanks. My name is Saurabh. We launched the platform a month ago. I have two co-founders,
one of whom is a techie, the other a music promotion professional. I have 3 years of experience as a marketing
professional. The ex-CEO of one of the largest music channels in India is an advisor to us. We have what we
think is a good business plan, and a strong business case. Apart from funding we need mentoring and insights to
help us convert our dream into a very large company.
Investor: Good. How can I help?
Entrepreneur: Could we come over and meet you someday? We have a presentation and would really
appreciate your advice, and of course seek your investment.
Investor: Sure we could meet. Heres my card. Drop me a mail with a presentation and the link to your platform. I
will put you on to someone from our office to set up a meeting. All the best.
1. We have no competition: If there is no one else doing what you are doing, how are the consumers currently
solving the problem? E.g. in a online food ordering business, if there is no other brand does not mean that there
is no competition. Calling up the restaurants using menu cards available at home is your competition.
2. We are cheaper, hence we have a stronger value proposition: Well, in many instances what the
entrepreneurs meant was that they will sell cheaper.. which is different than being a lower cost producer. And, at
least in my observation, most often the assumption of we are cheaper was based purely on being a smaller and
hence leaner company and not based on any fundamental competence or process that allowed them to retain
the cost advantage, if any at all.
3. According to Gartner, the market is USD 80 billion by 2015: Now, this has no relevance to a startup. More
so if any case all you were trying to achieve anyway was USD 10 20 million in revenues in 2015. Startups
should build their model ground up and not top down. I.e. they should think in terms of how much it costs and
what does it take to acquire and service one customer and hence what is the possibile revenues within what you
are trying to do.
Investors recognize that most concepts will have direct or indirect competition. In many cases, there will be a few
other startups or established companies planning ventures that are fairly similar to what is being presented by a
team.
Investors prefer honest answers, and the comfort of knowing that the team has indeed evaluated the competition
and have some thoughts around how they intend to be one up in the game.
In some cases even a honest answer saying Well, they are pretty similar to what we are doing. However, there
is room for more than a few payers and we are glad that we do not have to create the market all on our own. We
do however see us having a significant edge over them in the quality of the team..
What investors are not comfortable with are boastful claims with little substance to back it. We have often heard
many entrepreneurs say Oh, their product is just not as good as ours. One should remember that while having a
great product is certainly an advantage, having a better product is not necessarily a guarantee of success or
leadership.
Different investors will have different criteria for selection, and could vary by not just the amount of capital they
invest but also the stage at which they invest and the kind of companies that they invest in.
We invest in what we like to call two people and a powerpoint stage and our decisions are based on the
following:
Quality of the team: This is our most important criterion. We are not looking for experienced entrepreneurs.
But we certainly look for understanding of the domain, understanding of business concepts & operations
management, and most certainly commitment to the venture.
Clarity of the concept/idea: How well has the team been able to articulate what they want to do. You cannot
pan well what you cannot communicate well.
Size of the potential: Concepts addressing large markets with large potential are obviously better.
If the above two are positive, then the following few areas would be discussed:
Scale of aspiration of the team: Does the team have the aspiration and hunger to be a market leader?
Business case: Is the business case strong enough remember, when pitching to an investor you are
competing not just with direct competition from your domain but also with startups with interesting business plans
Exit potential: How are we going to get a good return on our investment. i.e. what is the exit option for us.
Investors do not have to be domain experts in the companies they invest in.
Investors are keen to understand the business case for the concept/product/service that you want to introduce.
Hence, the following steps help in setting the stage for your presentation of your business case:
Clearly articulating what problem your are solving or what opportunity you are addressing is important. This
helps those who are not familiar with your domain get a sense of the opportunity.
Establishing what it is specifically that you propose to do is critical. Often, this is the part where entrepreneurs
ramble and have long winding speeches for. Instead, it is good to have a sharp, short one/two line pitch about
what you intend to do. E.g. We plan to make the vaccination process convenient by creating a vaccines-at-home
service. Vaccines have a 40-50% gross margin and additionally we plan to charge a premium for home visit and
the assured quality of experience.
The next part is explaining how you intend to do it. I.e. The implementation plan and what it would take to
make this concept work.
The potential and the scale of your aspiration: Especially for investors who are not familiar with your domain, it
is important for you to explain the size of the opportunity and how large you want your company to be.
With most VCs, you will get just one chance to present your business case. VCs are usually a skeptical lot
because they see a lot of bad presentations.
Here are some mistakes to avoid when pitching to investors
Poor assessment of the risks in your venture: All businesses have competition. VCs are not looking for
businesses without risks in the businesses they are interested in, they are looking for teams who
understand the risks and have a plan to manage the risks.
Poor assessment of the competition or assuming that there is no competition: If there is no one else doing
what you are doing, how are the consumers currently solving the problem? E.g. in a online food ordering
business, just because there is no other brand does not mean that there is no competition. Calling up the
restaurants using menu cards available at home is your competition.
Exaggerating management strengths: Remember, most VCs will do due-diligence and most are
experienced enough to know what is practical and what is fluff. E.g. for a professional with 2-years
experience to claim In my role as Client Services Manager I was responsible for formulating strategy and
operations planning for fortune 500 clients is usually not going to be an accurate representation of your role.
However, was involved with instead of was responsible for is perhaps closer to reality.
Also, giving the right picture of your current skill sets and capabilities helps investors understand what assistance
they may need to bring to the table, in case they decide to invest.
Investors are not looking for we know all and we have been there done that teams those are rare to find.
Investors are interested in honest teams who are passionate about the domain and are smart enough to learn the
things that they currently dont know.
Impractical and unrealistic growth projections: While aspiring for scale is important, planning how you are
going to achieve it is critical. Without a plan, aspirations of scale are merely a statement of intent. Investors
invest in a team with plans not just on statements of intent.
Dont include names of advisors if they are not genuinely involved. Plain show & tell names just because you
know a few people dont impress investors.
While there is no right or wrong answer to this question, there are a few points you may want to
consider:
Most VCs would not invest less than USD 1 mn. So, if you need lesser than USD 1mn capital, angel investors
may be more appropriate.
Decision-making is much longer for a VC as they have to follow their own processes and internal approvals. It
can often take between 30 90 days after the VC has broadly agreed to invest. On the other hand, since angels
are making investments in their individual capacity, decision making is faster.
Most VCs are likely to ask for some control over decision-making, and most would certainly ask for board
positions. Angels on the other hand may not seek board positions.
VCs may not be able to participate closely with the operations, while angels who invest because of their interest
in the domain may find great joy in assisting you with your daily challenges. Depending how deep your teams
expertise on critical aspects of your business are, you may want to consider whether you want someone who can
help you on the operational front or you need someone who is hands off.
VCs and Angel investors are expected to give you different kinds of advice. Angel investors, because of the
stage they participate in are expected to help you with the fundamental of the business at the starting point and
guide you through the setting up stage. They are also expected to help you with advice on what kind of investors
to connect with, how to pitch and, often, help with the introductions too. On the other hand, VCs, because they
usually participate after the concept is proven, are expected to give entrepreneurs advice on scaling up and of
preparing the company for scale, fine-tuning the business model if required. They could also help with
introductions, PR and in hiring senior employees.
Companies with a healthy relationship with their investors are happier companies. Unhealthy relationship
between investors and founders can be quite stressful. Thats why it is critical for startups and their investors to
work as a team and be on one side of the table.
While some responsibility of ensuring a healthy relationship is obviously with the investors, founders have a
critical role to play in this process.
Have formal board meetings, including structured meetings with your advisory board members
Apart from it being mandatory governance requirements, quarterly board meetings are a good forum to engage
with a wider group of stakeholders where progress, challenges, issues and direction changes, if any, can be
discussed.
Startups are usually not in a position to be choosy about whom they can accept funding from, and quite often
after a number of rejections end up taking money from whoever willing to fund them.
However, while signing up your investors, it is critical to check the following:
Will you enjoy working with them? While this is a difficult one to take an objective view on when you really,
really need their money, it is a critical question to ask. Attitudes to investee companies, style of working,
matching of personalities are critical components in ensuring that investor & investees enjoy working with
each other. In startups, in my view, it is ideal that the founders and investors can have a friendly relationship.
And this does not mean not being professional but an easy going, non-formal style of working is helpful in a
startup stage when things are not going to be as predictable as they are in a growth stage company.
Is the personality, ethics, value system, aggression, compassion, etc. of the investors in line with the
personality of what I want to build. Different people have different styles of operating and if these styles are in
conflict, it may lead to disagreements in how you handle the business, especially how you tough situations.
Whats their outlook to your business and are they willing to wait out the difficult times? While your investors
and you may agree with the potential, some investors have a spray and pray approach. I.e. they invest in
many companies, especially in emerging sectors, and see which ones quickly show signs of success. They
are quite happy then to disengage with the slow movers and back the early-successes. In such situations, if
your startups does not really take off as expected, and most dont, you may be left in a corner.
Do they have experience of working with startups at your stage. There are clearly different investor groups
who specialize in different stages of the company. Angel investors will invest in the concept stage, early-stage
VCs will invest in the post proof-of-concept stage and VCs/PEs will participate in the scaling-up stage.
Different stages of a company require different competencies and therefore different interventions from the
investors. Investors who usually deal with growth stage companies may not have the patience or experience
in dealing with the nimbleness and direction changes that a startup may have.
Of course, it helps to connect with companies that the investors have funded and understand about their
experiences with the investors.
Understanding valuations
Simply put, valuation is about how much the shares of your company are valued at.
In a private limited company, ownership is decided on the basis of equity shares. The % of shares you own
defines the % of your ownership of the company.
Let us understand with an example. I am of course over simplifying for the purpose of ease of explaining
and understanding.
Ramesh and Suresh start a company. They both own 50% each of the company.
A few months later, Ramesh and Suresh approach an angel investor who decides to invest Rs.50,00,000 [INR 50
lacs / USD 100,000] in their company for which he takes 20% of the company. In this scenario, the post-money
valuation of the company would be Rs.250,00,000 or Rs.2.5 cr [USD 500,000]. This is because Rs.50 lacs got
the investor 20% equity, so the value of 100% is Rs.250 lacs or Rs.2.5 cr.
Stated differently, the company got a pre-money valuation of Rs200,00,000 or Rs.2cr [USD 300,000]. In this
scenario, Ramesh and Suresh now own 40% each in the company, with 20% being owned by the investor.
Later, the company decides to raise Rs.10 cr [USD 2 mn] from a VC who takes 20% of the company. In this
scenario, the post money valuation of the company is Rs.50cr [USD 10 mn]. Stated differently, the company
raised Rs 10 cr at a pre-money valuation of Rs.40 cr [USD 8 mn]. With this round, Ramesh, Suresh and the angel
investor each get diluted by 20% and hence the capital structure or cap table stands as follows:
Ramesh 32%
Suresh 32%
Angel Investor 16%
VC 20%
In both the rounds, the money invested by the angel investor and the VC has gone into the company and not to
Ramesh and Suresh.
Going further, the company does well and the VC decides to increase their holding to 26% and offers to buy 6%
of the shares held by the angel investor for Rs. 10 cr. [USD 2 mn]. Now, the valuation of the company is Rs.166
cr or USD 33mn. Even at this stage, when the valuation of the company is Rs 166 cr, Ramesh and Suresh have
not made any money. However, the angel investor has had a successful exit with a 20x return on his original
investment, and still retains 10% in the company.
At a later stage, Ramesh and Suresh decide to dilute their holding and decide to sell 5% equity each to another
VC for which each get Rs.20 cr [USD 4mn]. At this stage, the 2nd VC decides to also buy the 10% held by the
angel investor for Rs.20 cr. Hence, now the valuation of the company therefore is Rs.200cr or USD 40mn, and
the cap table will look as follows:
Ramesh 27%
Suresh 27%%
Angel Investor -%
VC 26%
VC 2 20%
This of course is a rather simplified version of reality, but done only to illustrate the concept.
Often first-time entrepreneurs underestimate the time it may take to raise funds for your startup. Unless you get
seriously lucky or have easy access to a number of investors, it is prudent to estimate anywhere between 3 6
months to get funded. And that is if you have a good plan and a great team.
Well, its relatively easier with angel investors and much easier with angel groups like the Angel Investors
Consortium. Thats primarily because they invest smaller amounts in a wider range of companies but also
because individuals are making decisions and hence do not have to go through more complex processes of VC
funds.
Here are a few steps that are involved and approximate time it could take with angel investors:
Here are a few steps that are involved and approximate time it could take with institutional investors:
And these are fairly optimistic timelines with the investors who finally fund you. There will be several you would
meet who may, out of genuine interest to invest, progress the discussions but may not conclude the deal for
several reasons. And there will also be many who may decline to invest in the first meeting itself but still it will
have taken 4 8 weeks to get the No as an answer.
Given the lengthy process, the entrepreneur should try to be selective about which investors they should
approach. Investors, especially VC funds are clear about the kind of companies, the stage and the domains they
would invest in, and that information is usually available on their websites.
One of the first things that entrepreneurs need to do is make a shortlist of who the right investors would be.
To begin with, you need to decide if you are ready for angel investors or for VCs.
When applying to investors, check their websites and see if they have invested in businesses similar to yours
and if your domain is within their interest areas. E.g. if you are a life-sciences company, there is no point in
approaching investors whose focus areas are Mobile & Internet and Consumer Businesses.
Check if there are synergies between any of their portfolio companies and your business, and if there are,
then evaluate highlighting the same during your presentation.
From among the many people at the VC, identify who in their team is more likely to be excited about your
idea. This is easy to find because most VCs will have profiles of their team members, including details of
which companies or domains that person is involved with.
Once you have identified the investor, and the person who you are going to connect with, try seeking an
appointment by making a call to the office. Most likely, you will be asked to send the presentation to a generic
mail id used for receiving business plans. Well, this is not something that you can always avoid. The truth is that
investors get so many calls and mails requesting for meetings that it is almost impossible to accept all requests.
In most VC offices, business plans received will be reviewed with some level of seriousness, though most
probably by the junior most executives who may not necessarily be experienced at taking a gut feel call on what
seems like a good business case. If you are lucky to get past this stage, you will be asked to come and meet an
associate. And thats just fine. This is the first line of filter in a VC fund and an associate is expected to do a
thorough evaluation based on their internal criteria, and then if and found suitable, are expected to move the deal
up to a partner who can decide if the deal is to be presented to the investment committee.
If you pass the first line of filter in a VC fund, and this can take a few meetings, you would have to present to the
next level. This round, depending on the interest of the fund, could take a few meetings with revisions and
discussions on strategy, scale, funding needs, etc.
Once there is broad agreement on key areas, and if the deal fits into the internal criteria of the fund, the deal will
be discussed at the investment committee meeting where the terms of the term sheet will be outlined.
After presenting the term sheet, the entrepreneur is expected to run it past someone who knows the legal stuff
around term sheets. And when you ask someones opinion, the person feels it obligatory to suggest a few
changes. It then takes a few meetings and discussions to finalize the term sheet and sign off.
NOTE: some VCs would discuss the terms of the term sheet offline over meetings and dinners, and therefore the
draft presented to the entrepreneur on which there is an informal agreement on key points like valuations, control,
vesting, rights and downside protection. However, the time taken would still be approximately be the same.
Once the term sheet is signed off, the due-diligence will start. Also, the startup may have to complete some tasks
as part of the conditions precedent and that could be things like filing for patents, getting an independent director
on board, getting customer contracts signed, etc.
After all this is done, the final signing of the documents and receiving the cheque are the logical next steps.
Valuations
Control
Exit options
Downside protection
While most first-time entrepreneurs are more focused on the valuations, the terms and conditions that cover the
valuations are as critical. E.g. a company raising USD 100,000 at a pre-money valuation of USD 400,000 may
not necessarily have a better deal than a company raising USD 100,000 at a pre-money valuation of USD
300,000 if the terms of the second company are more favorable than the first.
While there are several terms that will require understanding, here we have outlined a few that are of importance
to entrepreneurs. Disclaimer: Please consult your lawyer when dealing with a term sheet. If you need any
information, write to us at info@thehatch.in and we will try to provide you answers.
Term Meaning
Liquidation Liquidation preference defines how monies received on
preference liquidation are going to be split between different
classes of shares. [Just like different categories of
creditors will have different rights in terms of
liquidation.]The term sheet will specify what preference
the investor will get over common stock owned by the
entrepreneur/founders/existing share holders. E.g. the
term sheet may suggest that, in the case of a
liquidation, the investor will get 2x their investment
before the balance, if any, is split between common
share holders.
A liquidation preference may also allow the investor to
instead convert their holding into the proportionate % of
common shares and sell, if it is higher than the money
they would get on selling at the price they would get if
sold at the preference value.
In some cases, if the term clarifies, the existing investor
may be allowed to convert to common stock and hold
their holding. They would do this if they believe that the
new buyers of the company will increase the value of
their holdings.
Drag Along This term requires the minority share holders to sell
their equity to an acquirer if a majority of the
shareholders agree to a sale.To illustrate with an
example, if an entrepreneur owns 40% of the company
with 2 VC firms holding the balance 60%, if they decide
to sell their stake, this clause will force the entrepreneur
to also offload his/her shares, even if he/she did not
want to exit.
Preference shares Preference shares are shares that enjoy more privileges
than common shares. These could be in availing
dividends before common share or preference share
holders may also have greater rights to the companys
assets and proceeds in the event of liquidation.
Here too, the implications on the entrepreneur are
based on multiple factors including the multiple of
liquidation preference, if it is included, etc.
In most cases, simple preference shares which give an
investor rights over assets in case of liquidation and
dividends before common share holders are not
considered unfair by entrepreneurs as it represents only
a fair demand that the investor is seeking to protect
his/her capital and the entrepreneurs acceptance
indicates a high level of confidence in the venture to
allow an investor to protect his/her capital.
Anti- Dilution Anti dilution protects the investors capital in case the
Protection entrepreneur decides to, for reasons of market
conditions or strategic relevance or whatever, to accept
capital from a new investor at a valuation that is lower
than that at which the investor had invested.In a
situation where a subsequent round is raised at a lower
valuation, anti dilution right allows the company to
revalue the original valuation and thus issue additional
shares to the investor.
Right of First ROFR allows investors the right but not the obligation to
RefusalOr ROFR invest in the subsequent round of fund raising. With this
clause, in the next round(s) of funding all things being
the same i.e. as long as the existing investor too is
offering the same value, the company will have to
accept investment from the existing investor.
Apart from having a good business plan, which is of course the most critical thing, HOW you present your case to
investors will determine whether you will get their attention and interest or not.
Because investors often listen to very bad presentations, good quality presentation itself offers a substantial edge
while presenting to investors.
The most important thing to remember is that YOUR FIRST PRESENTATION IS AN ELEVATOR PITCH NOT
A FULL SCALE BUSINSS PLAN PRESENTATION WITH EXCEL SHEETS, TECHNICAL SPECIFICATIONS
AND OPERATING DETAILS. In the first meeting, investors want to quickly judge whether they are interested in
investing in the company. Hence, the focus should be on communicating the concept and the potential and not
the finer detail.
Here are a few quick things to keep in mind
Start by introducing what you do and for whom without any preamble
Investors will be interested in the details AFTER they have got excited about the concept, the scale and the team.
Hence, while presenting, ensure that your pitch focuses on what you intend to do, how you plan to
implement it, how you will make money from it, what your scale of aspiration is and why you and your team is
the one they should bet on. In fact, your opening statement should clearly state what you do and for whom. I.e.
we are an online music discovery platform where independent artistes upload their music and consumers buy or
listen or we help small companies manage their sales processes.
Most entrepreneurs make the mistake of diluting the pitch with a lot of detail of the operations, which of course
will be of interest to investors but only after and only if they have an interest in participating in your journey.
The initial pitch presentation should not be more than 8 10 slides. Click here to see template of the
investor pitch presentation.
Investors are interested in the business case not just details of the concept or the product
A concept and product is different than the business case for the same. Most first-time entrepreneurs make the
mistake of thinking of the concept as the business. E.g. for someone presenting for a e-tailing venture, the
investor would be interested in knowing your competencies or plans on supply chain, warehousing, procurement,
customer acquisition, etc. Not just about how cool your web platform is.
One common mistake made by many first-time entrepreneurs is to elaborate on technical details.
Technical details of your product/concept, and operating details will be relevant in the subsequent presentation
which will come about only if the investors get excited about the opportunity and you as a team.
Focus on key aspects rather than fluff around your business case
In most cases you will get a 20-30 minute window to present. You will have 10 15 minutes to make your case
with 10 15 minutes for Q&A. In fact, in most cases, you would have either got their attention or lost them in the
first few sentences. Rehearse your opening lines once you get through this, the rest is the easier part. If you
dont get their attention and interest in the first few sentences, the rest really wont matter that much.
A business plan is a Plan for your Business. It is not a document that you make for the investors. It is a
document that you should prepare for yourself. Writing down your business plan helps you think through the
assumptions clearly, and often writing helps you identify impracticalities in the through process.
Yes, for investor presentations too, a business plan is necessary.
Broadly speaking, a business plan should communicate the following to an investor:
What are you selling and to whom?
How large do you see the company growing to what is your own aspiration for the company?
How are you going to implement it?
How are you going to make money?
Why are you the right team for the investors to invest in ?
Exit options
Exit Options is nothing but different ways through which investors can cash out of an investment. To understand
the concept of exit options, let us understand how Venture Capital works.
Angel investors, VCs and Private Equity Funds buy equity in a company when they make an investment. I.e. they
buy shares of the company at an agreed price. Let us say they buy 100,000 the shares of the company as a per
share price of Rs.100. Investors make this investment NOT to earn dividend but to have substantial gain through
increase in the value of the shares that they have bought.
Over a period of a few years, depending on the outlook of the investor, the investor would want to cash out of
their investment. For this, they will have to sell their shares to someone else. Who all they can sell the shares to
are what is called the exit options.
Typically, there is a hierarchy of exit possibilities. i.e. angel investors, who invest in the earliest stage of the
company, typically seek an exit by selling their shares to VCs who invest when the companys concept and
business model is proven. Often VCs would get complete or partial exits by selling shares to another VC who
invests in the company after the company has gained some traction and needs further capital to scale up.
In addition to selling shares to the next round of investors, the following exit options are available:
Sale to a strategic partner e.g. a travel services company may sell stake or be acquired by a large travel portal
Sale to a bigger brand in the space: e.g. a local online food ordering site may be acquired by a global brand when
they want to enter that market
Of course, doing an IPO is an aspirational exit option for many
Buy back: When the promoters or company buys back the shares of the investors. This is the least preferred
option for investors and is usually used when the company is not able to provide any other exit option to the
investors.
Related posts
Do entrepreneurs have to exit along with the VCs
What is a business model?
Simply put, if the idea is the what part, the business model is the how part of your plan. It is a clear statement of
how you are going to make money from your venture.
In other words, it reflects your thinking on the following broad parameters. Of course, the parameters will vary by
business:
Who is your customer
What are the revenue stream(s)
How much will they pay for the service
How much gross margin will you make on each sale
To illustrate with an example:
For an online toy store the business model can be as follows:
We sell & deliver toys to consumers who order online from our website. Our target consumer is the affluent
family with children below 7 years. Our average ticket size per transaction is INR 1000 and we expect our target
customers to buy 2-3 times a year from our online store.
We have a 50%+ gross margin on our products. Thus, we expect to make about INR 1000 gross per customer
per year.
Note: Once you have your business model detailed out, you will need to check if your concept and business
model has a business case. I.e. At the startup stage of low capital-intensive businesses, it will suffice to identify at
what phase does the business become operationally profitable.
Business models could vary, even for the same concept different companies could follow different
business models. Let us see with another example:
Possible business models for an outsourced HR management company:
One-time engagement for setting up processes
On-going, shared services model
On-going embedded employees model
Consulting services model
How much to charge your customers is a critical decision for entrepreneurs. I.e. pricing is a critical component of
your business strategy. While getting your pricing strategy right is no guarantee of success, getting is wrong is
one sure shot route for failure. Obviously, how much consumers are willing to pay is dependent on the value they
see in the solution you offer, be it a product or a service.
There are quite a few Revenue Models available for startups to consider:
Value based model: For products or services that do not have an individual unit price [e.g. Microsoft Office
software], the seller decides the price based on what they believe is possible to be charged from the consumer.
This is the toughest part and may require some experimentation and in-market tests to arrive at the price point
that you could charge.
Distribute the product free but customers pay for services: In some markets telecom companies follow this
model where they give away the telephone instrument for free, and people pay for the usage. In some cases, e.g.
printers, the base product is not given free but is offered at a very low price, often lower than the cost price, with
the hope of recovering it through sale of related products and services e.g. cartridges and printer servicing.
Free for consumers ad supported model: E.g. Angry Birds
Freemium: Free for basic, paid for premium services. E.g. sugarsync.com, linkedin, gmail, etc.
Cost Plus mode: where the seller decides the price of the product based on the cost of the product. This is
usually done for physical goods e.g. shoes, garments, computers, pens, etc. Doing this model for online services
is not feasible because there is no real cost of the physical goods. How much premium you can charge over the
cost is dependent on a number of factors including competition, alternate options, the overall value-proposition
that the customers see in your offering, and often, also the personality & equity of the brand.
Portfolio pricing or package price: This strategy is applicable when the seller has a range of products and/or
services and may want to engage the consumer for the entire portfolio. E.g. Insurance companies which offer for
corporates a portfolio comprising of life insurance + car insurance + fire insurance + health insurance
Subscription model i.e. users pay a per month/per year e.g. book libraries, dropbox and other online storage
sites, SAAS platforms, etc.
Pay-per-use model i.e. users pay as they use it e.g. Platforms like Webex have a pay per use model
One-time payment i.e. users buy a license to use e.g. Microsoft Office
Tiered or volume pricing: Typically used to group buying benefits. E.g. an enterprise software where the license
fee per user reduces as more licenses get bought. The pricing in this model is often defined in slabs as relevant
to the category.
Angel investors are individuals who invest their own funds in early stage companies or
startups, unlike VCs who manage the pooled money of others in a professionally managed
fund.
Angel investors typically invest at the power-point or paper concept stage i.e. at the very
concept stage of a company. In effect, they are taking a bet on the team and on their belief
that the concept would work.
Angels would most likely invest smaller amounts, which is usually sufficient to cover the
fund requirements for going past the proof-of-concept stage. Angel rounds will most likely be
followed by rounds of institutional funding like VC and strategic investment or acquisition.
At the stage at which angel investors invest, the risk is the highest. This is because neither is
the concept proven, nor the business model nor the teams capability to deliver proven.
Moreover, because angel rounds are usually followed by further rounds to fund the capital
requirements for growth, angel investors equity in the company gets diluted in further rounds
of investments.
Because their investments carry their highest risk and dilution, the valuation offered by angel
investors will be the lower than those offered by VCs in the subsequent rounds when the
business has been significantly de-risked.
Often, angel investors invest in domains they are passionate about, and therefore bring
invaluable experience to the startup through their participation as advisors and/or board
members. Angel investors, apart from capital, are expected to help startups with advice,
networking & introductions and oversight of business. Some angel investors also go to the
extent of representing the startup in PR or meeting important customers or in interviewing
potential senior employees. Most certainly, angel investors are expected to assist the startup
in accessing institutional capital for subsequent rounds of funding.
Angel investors are typically High Networth Individuals [HNIs], most often successful entrepreneurs or very senior
professionals. Some institutional investors also participate in angel funding in their individual capacity.
Angel investors are flooded with requests for funding, and because they invest in the highest-risk stage of
startups, they have to be selective in the deals that they invest in. One of the important criteria that angel
investors use is to seriously evaluate deals that have come from reliable references. It is also for this reason that
many angel investors prefer to go through angel networks like Angel Investors Consortium.
Apart from individuals who invest in startups, many angel investors are part of a network like the Angel Investors
Consortium [AIC] or the Indian Angel Network.
Angel networks like AIC help angel investor members co-invest in startups that have been shortlisted for
presentation to angel investors. Angel groups and their partners like The Hatch not just review and shortlist
startups from many proposals received, but they also help startups fine-tune their business plans, rework strategy
and make the business case more compelling.
As angel investments are a relatively new and emerging phenomena in India, there are only a handful of really
experienced angel investors. Maturity in understanding the investment process, especially while dealing with
challenging times during for the startup, is invaluable. Even when you get investments from angels who are
investing for the first time, it is prudent to have a co-investment from a more experienced angel.
Evaluate what the angel investor gets to the table in addition to capital: How willing is the angel investor
/ angel investor group willing to assist you in your entrepreneurial journey. But do remember that this can be a
double-edged sword. You want the advice and guidance, but do not need operational interference.
Does the angel investors vision match your vision, aspirations and goals: This is critical as a mismatch
in goals and vision could lead to conflict on the direction the company could take.
How read is the investor to lose his investment: This is a critical point. Angel investments carry the
highest risk, and most angel investments are not even able to recover their capital. While you would aim for
the best outcome, the angel has to be prepared for his capital to be fully wiped out. Hence, it is important that
the angel investor understands that they should invest only as much as they can comfortably lose.
What is the network of the angel investor with the institutional investors i.e. VCs: Angel investors with
deep connections with investor groups and investors are great help while raising the next round of capital
Do the paperwork well: even if it is limited paperwork, and significantly lesser documentation than would be
required in an institutional funding round, do evaluate the term sheet carefully. Even if the angel is not keen
on proper documentation, do insist on completing the paperwork. This is especially true in the case of a
friends & family round when the paper work tends to get ignored.
Obviously, this depends on the nature of the business, what is required to be done, your and your teams
capabilities, the competition, etc.
There is no one real number on the investment required as that number would be different not just for different
businesses but also would be different for different execution strategies for the same business plan.
In fact, there are startups in the online space which have done excellent progress with some angel investments,
while there are others which are scaling up nicely with crores in funding, largely for marketing investments.
Broadly speaking, concepts that have been proven and just need great execution + marketing to build a scale
business will need to raise larger capital. Concepts that have yet to be proven in the market place could do with
lower levels of funding in the initial stages. This is because you dont need senior employees and huge marketing
at pilot or proof-of-concept stages.
What is essential therefore is to have a realistic estimation of the costs and investments required to reach the
milestones.
Most often entrepreneurs go wrong in estimating funding needs. They are unrealistically conservative on costs,
and impractically optimistic about revenues. Underfunding your venture i.e. raising lesser money that is
practically required can have serious consequences as you could run out of cash sooner than expected, thus
leaving you without capital to continue the venture or having to rush to raise another round in a distress
situation.
One question investors are most likely to ask you is how much money you need in the round that you have
approached them for. While most entrepreneurs give a one-figure reply, my preference is for entrepreneurs to
provide a perspective of what can be achieved with different levels of funding. E.g. with INR 50 lacs [USD
100,000] you could develop the solution on a SAAS platform, hire a base team, prove the model in one market
and prepare the company for scale. However, if you had INR 200 lacs as a commitment, even if the first tranche
was the original INR 50 lacs, you could accelerate the hiring and scale up as soon as the key performance
indicators were on the right trajectory. On the other hand, if you got just R. 25 lacs [I.e. USD 50,000] you would
just develop the product, outsource the online marketing to an aggregator agency, and prove that the concept
works.
You need to bear in mind that if you business is successful, you are most likely to need MORE CAPITAL. Most
entrepreneurs assume that very quickly their business will be cash positive and that they are not likely to require
more capital beyond the first round.
Working on a realistic business plan is therefore critical in determining how much money you are likely to need
for your venture.
Raising your first round of funding is probably gong to be the toughest part of starting up certainly is for
most startups
Beak your fund requirements by risk stages as different classes of investors participate in different risk stages
of a venture
Angel investors
Participate at starting up stage they invest at a concept risk stage i.e. when the concept is not proven and
the capabilities of the team to execute the concept too is not proven
Investment amount is small enough to sustain operations till the venture becomes ready for institutional
capital
Usually take a bet on the entrepreneur hence quality of founding team is critical
VCs typically invest when the concept and business model is proven
Funding is usually for growing the business and scaling-up
Hence, in round 1, keep your funding requirements to just enough to prove the concept. In round 2, keep your
capital requirements to be sufficient to expand to a scalable model and in round 3, raise capital to fund the grown
and scaling up.
Angel investors can help reduce your funding requirements significantly if they assist you with things like
customer introductions, partnerships, infrastructures support, etc. Often an investor who takes up an active
advisory role can fill in a competency gap in the team.
Budget at least 3-months for a funding round to close IF YOUR CONCEPT HAS A STRONG BUSINESS
CASE AND YOU HAVE A STRONG TEAM
Raising too little capital or raising too much capital are both avoidable scenarios raising too little can keep
you strapped for funds while raising much more than required will dilute you more than required also,
attempting to raise more than required may make it difficult to get the funding
Angels and VCs buy equity in a company for a price and expect to make a profit by selling it at a higher price.
Just like it happens in the stock market, but in this case because your company is not listed, VCs make money by
privately selling the stock they hold in your company to someone else. E.g. an angel investor may exit by selling
his/her stock to a VC and later the VC could exit by selling the stock they hold to either a Private Equity firm or to
a strategic investor, or in rare cases by diluting their holding during or post an IPO.
The money that angel investors give is collateral free. I.e. you do not have to mortgage your house or something
to get money from angel investors of VCs. In case the company fails, investors lose their capital and
entrepreneurs do not have to return the capital. This is the one and only reason why angel investors and VCs will
evaluate plans thoroughly before making a decision to invest in a company. In effect, they are taking the following
risks about your venture:
That you and your co-founders are a great team that is capable of scaling up the business
That your concept will work
That the market is large and therefore there is potential to build a large company
Because of this, funds raised from angel investors, VCs and later from Private Equity funds is called Risk
Capital.
While angel investors and VCs provide capital without collaterals, and thus allow you to start up without having
your own capital or collaterals for a loan, it is probably the most expensive form of capital. Thats because you
are giving away equity in exchange for the capital you raise.
Let us understand this with an example. I am of course, simplifying and exaggerating for easier understanding,
but the principle is correct.
Let us assume company A raises INR 10 lacs [i.e. USD 20,000] from an angel investor and gives the angel
investor 10% equity in the company. Assume further that this company is able to successfully scale up and is
receiving a INR 5 crore [USD 1 mn] funding from a VC for a valuation of INR 20 cr. [USD 4 mn]. Assume that
the angel investor exists at this round by selling his stake to the VC. In this scenario, the VC would get about INR
1.5 cr for his/her share holding in the company. The illustration below gives a sequential view of the capital
structure of the company after every event i.e. when the angel invests, when the VC invests and finally when the
angel exits by selling his/her stake to the VC.
Share holding after angel investor invests INR 10 lacs and takes 10%
equity
No. ofPrice per
Entity Investment sharesshare % holding
If the angel investor sells his/her shares to the VC, then the VC would have
paid the angel investor a sum of Rs.150,00,000 i.e. Rs.1.5 cr to buy the
angel investors shares in the company. The capital structure of the
company would be as below.
No. ofPrice per
Entity Investment sharesshare % holding
When your concept is yet to be proven and can be proven with limited capital
When you too are unsure if you would like this to be your lifetime career and want to give it a shot
When you have the resources to go past the concept proof stage
When the capital required for the proof-of-concept stage is more than what you can garner from your current
resources
Even when you dont need the capital, it is sometimes good to pitch to investors as it gives you a good feedback
on your concept. If many investors say no, it may be worthwhile evaluating the concept and pan thoroughly
before diving into the game.
You may want to consider the points below before you take the decision to bootstrap:
Evaluate whether your idea has a good business case speak to some experts, pay attention to those who
are not excited about your idea. After all, even if it is not costing you a lot of money, your time invested has a
lost opportunity cost.
Prioritize: to bootstrap efficiently, you need to make your limited resources go far. Take a call on what is
critical and what can be put off till you receive adequate capital.
Keep the expenses side as low as possible. That means having a very, very lean team. That means hiring
multi-taskers rather than specialists.
Consider SAAS and outsourcing: Even if that is not your most preferred option, you should take a call on
what is important. Is getting something out in the market more important or getting The most perfect
product most important? SAAS platforms may not give you the customization possibilities, but often they can
shave off a significant percentage of your funding needs. You can always develop your own platforms after
you have proven the concept and the model.
Debt
In other words, taking a loan.
Institutional loans often require a collateral, which many entrepreneurs may not have. Even if you have the
collateral, do a real hard evaluation if the business model and concept is fully ready for you to take an individual
risk on. Often, getting other external investors gets you more parties to take strategic decisions with, and
provides an invaluable group to bounce ideas with.
Treat the friends & family round as a formal fund raising round too pitch to the interested investors as you
would to a group of angel investors or VCs
Complete the paper work and other formalities too issue equity shares
Manage the relationship as a professional investor relationship send quarterly reports, have a board, etc.
Adjacent opportunity e.g. Educational content platforms could be an adjacent opportunity for a large company
in the education space
Related opportunity e.g. healthcare services for the poor is a related product for a micro-finance company
A strategic investor, apart from providing capital, also helps validate the concept for external investors thus
making it easier for raising the next round of funding or for getting co-investors in the current round.