Industry estimates suggest that nearly two startups are born daily in India adding to the already existing pool of strategically placed companies knocking on investors’ doors. However, in recent times, the country has seen a tilt, with investors taking interest in startups that have proven product/service profile for ideas gaining ground with Internet-savvy consumers looking for consumer and lifestyle needs.
India has heard of competitive turnarounds in fundraising aspect in recent times, with valuations and adjustments being the buzzwords.
Some notable names have had significant markdown of their valuation before convincing the investors to shell out money. Corrections help the heated markets cool down, thereby making investment scenario little tougher. Nonetheless, the pleasant news is that valuations did not dip as much as to stop the deals altogether. Given the sentiment, the investment community has become further prudent and deals worth their value are still being signed. This has led to a longer gestation period to examine and recheck the values or prospects of a good business idea.
Nonetheless, the winning survival strategy is to keep building the business with profit for all relevant stakeholders. In any case, it becomes more important for startups to really scrutinise the way in which they approach investors. At a time when VCs tighten their purses and examine the expenses closely based on business models adopted and raise questions on self-sustainability, let us revisit the dos and don’ts of approaching a VC investor.
Timing and valuation
The mind of an entrepreneur is always torn between looking after the business and raising funds. Sometimes they wish to first establish themselves a bit and then go for raising money and sometimes it is the other way round. While a proof of concept is important for investors and fundraising, it is really for the entrepreneur to decide what stage he/she believes it to be a concept-ready product. It is a stronger case if one has run a company almost bootstrapped and shown profits or good growth figures with an established set of clientele over a period of time before approaching the investor.
One of the prime reasons widely discussed in the investment corridors is hyped-up valuations. The investor likes the team and approves of the idea but disagreement on higher valuations stalls the talks.
Usually, startups come up with a really big number and go down with their ask for fund raise with time, as they begin to realise that such a number is in fact unrealistic. This obviously indicates that there is a need for startups to consider this number very carefully. The fund raise ask clearly needs to be backed by the financial and operational traction achieved so far and those expected from a realistic future budget.
It is good to contact investors who have domain experience and deal in the kind of business model to better fit the criteria. Complete homework should be done on the mindset, goals, and track record of the investor to see if he could provide the necessary guidance, network, and funding rather than seek share control in the company. Beyond funding, investor’s business is about helping the business work through its problems. Do keep in mind that an investor coming on board is going to be a partner for a long term – and a very important partner. The entrepreneur would be letting someone share one’s vision and journey, so it is important to do the homework and make sure that there is a convergence of mindset as well.
When approaching the VCs, it is always best to have a presentation deck handy, as they are probably receiving dozens of ideas in a day and it is impossible for them to remember your company the next time they meet you without looking at the presentation. It is better to be prepared with a demo while presenting for the right kind of impact.
Presenting the idea
Beyond the number crunching, investors always look for the motivation and driving force behind a venture. Presenting the passion balanced with required professionalism with clarity and conscious manner is most likely to generate interest among the investors. The entrepreneur should be able to explain the business quickly and accurately for the right impact.
It is often seen that the presentations start with the entrepreneurs citing huge market size figures to create the impression in the minds of the investors that there is definitely a need. This is not a very good idea as the investor is probably someone who has a fairly good idea about the market and has agreed to listen to the entrepreneur with that in mind. The overselling generally does not work well and it is better to even skip that part politely while alluding to the market size briefly.
It is also seen that when preparing the projected financial figures, startups generally tend to become a bit too optimistic. It does not really help and can become a source of projecting over confidence. It is important to have the business model based on market opportunity at present and future, which would grow the company and make it profitable.
A judicious way of making the business and its model explainable to the investor is important rather than keeping things secretive with the fear of someone stealing your idea. It is pertinent to note that the challenge lies in execution. Additionally, the risks need not be downplayed but one should present a plan to mitigate them.
Mostly, the interested investor would give some signal in the first meeting itself. In case of a rejection, you may look to convince the investor again, but that usually does not work. However, the feedback, if any, should be taken seriously to address the flaws for interaction with the next investor or before pitching to the same investor again after some time. Feedback from the investors (even negative) can be extremely valuable to the business as they are the people who really know what’s going on in the industry, so it should be taken in a positive manner without being defensive about one’s idea/product.
If the investor gives the nod, it is a long road ahead for the entrepreneur. If the investor has said no, or kept things on a standby for some reason, it is advisable to keep in touch and there is absolutely no harm in keeping them updated about one’s activities/ awards/recognition/new client onboard etc. This helps to remain on their radar and keeps the possibility alive so that they come back if things keep looking good.
India’s startup ecosystem has seen the phase where investment was mostly with the big contenders with potential to become number one in a particular space. The new phase would be about entrepreneurs who could manage the business with lower burns and beat competitors simultaneously. A recent announcement by the government to form a working group to make things easier for startups in the country is a welcome move. The startup policy to be announced in the near future should reflect the Indian government’s commitment to entrepreneurship and take into account delays in incorporation and winding up of business, employee stock options, lack of initial funding, cumbersome foreign exchange documentation and access to external commercial borrowings, and easy compliance norms, among others.
Both entrepreneurs and investors together need to build a sustainable business for the long term and earn profit and respect for all relevant stakeholders. While the entrepreneur needs to judiciously use the money to build a strong and efficient management team and infrastructure to roll out market relevant product/services, the investor’s focus should rest mainly on adequate mentoring of the entrepreneurs, especially the first timers. The startup ecosystem grows when there is adequate coordination between entrepreneurs, investors, employees, and regulators.
Source – YourStory
It plans to assist the startups in India through one-on-one interactions, workshops, boot camps, and mentorship programs. DigitalOcean has also created a special cloud credit program as an incentive for the startups associated with the Nasscom 10,000 initiative, which will offer cloud credits worth $10K to the selected startups in the program. The cloud credit will also be extended to subsequent batches of the initiative later.
DigitalOcean recently appointed Prabhakar Jayakumar as the India Country Manager to help grow and support the local startup ecosystem. The company is also launching its first data center in Bangalore, which is being set up at a cost of $5 Mn. The company also announced a fundraise of $130 Mn credit facility in April this year to purchase more servers and continue its global expansion.
Nasscom 10,000 Startups is an initiative by Nasscom to incubate, fund and support 10,000 startups over the next ten years. Last month, Nasscom partnered with Invest Ottawa for the launch of a startup exchange programme to connect entrepreneurs’ community, innovators, and investors to the emerging startups from India. It had also partnered with Facebook to focus on assisting the innovation ecosystem, helping product-based companies to build solutions in key sectors where technology can play a transformational role.
Source – Inc42
If the proposed levy on online advertisements is actually implemented, it would translate into startups ending up paying 6% over the 14.5% service tax. This equalization levy on online advertisements can burn a hole in the pockets of early stage startups for which online advertising makes more because of its targeted reach and lower cost. Manik Mehta, cofounder Leaf Wearables, a startup that works in the area of women safety through smart jewellery says:
“The levy puts us in a precarious position because all these companies-Google and Facebook- which are the most popular advertising platforms for us, are going to make us pay more at the end of the day,”
In the month of March this year it was proposed by an eight-member committee on taxation of e-commerce, that services ranging from online advertising and cloud computing to software downloads and web hosting be subject to an “equalisation levy” of 6-8% of gross payment if the provider of the service is a foreign entity without a “permanent establishment” in India. The rationale behind the levy was given as a way for the government to get foreign internet companies such as Google and Facebook to pay taxes in India. Rashmin Sanghvi, who was part of the equalisation levy committee and is a chartered accountant and an expert on international taxation and taxation of e-commerce has said:
“Under the existing law and double taxation avoidance treaty, India will not be able to tax them. How can India allow this kind of revenue loss?”
However, the impact of this can be that – because of the nature of the levy, the companies will not be eligible for credits in their home countries, which means the levy is likely to be passed on to users of their advertising platforms, such as startups and small and medium businesses. Sarita Singh, who is the founder of Gurgaon-based Corpus Digital highlights how this levy could mean increased difficulty in collecting payments and eventual loss in business-
“Typically, for an SMB client, the media spend is between Rs 50 lakh-Rs 1 crore a month. The taxes are over and above this cost- service tax is 14.5% and 10-15% is the agency’s commission. Collecting this money is also painful sometimes, and now if a further 6% is added , small businesses that we deal will might decide to change the structure of their digital spends altogether, and we could end up losing business,”
The levy committee members say that all those issues related to startups being impacted have been discussed in detail before finalizing the levy. They also said that being burdened by the additional levy or not, will depend on the negotiation of the startups with these providers. It is also being said that government wants to “test” this levy with online advertisements to begin with, and will have to find an alternative to get non-resident companies credits, similar to the way the Mauritius treaty has been re-negotiated.
Source – KnowStartup
The new Intellectural Property Policy is in compliance with TRIPS. Finance Minister Arun Jaitley released India’s National Intellectual Property Rights (IPR) Policy recently. The Policy which is in compliance with WTO’s (World Trade Organisation) agreement on TRIPS (Trade Related aspects of IPRs), aims to sustain entrepreneurship and boost Prime Minister Narendra Modi’s pet scheme ‘Make in India.’
Here are the highlights:
- The Policy aims to push IPRs as a marketable financial asset, promote innovation and entrepreneurship, while protecting public interest.
- The plan will be reviewed every five years in consultation with stakeholders.
- In order to have strong and effective IPR laws, steps would be taken — including review of existing IP laws — to update and improve them or to remove anomalies and inconsistencies.
- Special thrust on awareness generation and effective enforcement of IPRs, besides encouragement of IP commercialisation through various incentives.
- India will engage constructively in the negotiation of international treaties and agreements in consultation with stakeholders. The government will examine accession to some multilateral treaties which are in India’s interest, and become a signatory to those treaties which India has de facto implemented to enable it to participate in their decision making process, the policy said.
- It suggests making the department of industrial policy and promotion (DIPP) the nodal agency for all IPR issues. Copyrights related issues will also come under DIPP’s ambit from that of the Human Resource Development (HRD) Ministry.
- Trademark offices have been modernised, and the aim is to reduce the time taken for examination and registration to just 1 month by 2017. The government has already hired around 100 new examiners for trademarks. Examination time for trademarks has been reduced from 13 months to 8 months, with the new target being to bring the time down to one month by March 2017.
- Films, music, industrial drawings will be all covered by copyright.
- The Policy also seeks to facilitate domestic IPR filings, for the entire value chain from IPR generation to commercialisation. It aims to promote research and development through tax benefits.
- Proposal to create an effective loan guarantee scheme to encourage start-ups.
- It also says “India will continue to utilise the legislative space and flexibilities available in international treaties and the TRIPS Agreement.” These flexibilities include the sovereign right of countries to use provisions such as Section 3(d) and CLs for ensuring the availability of essential and life-saving drugs at affordable prices.
- The policy left the country’s patent laws intact and specifically did not open up Section 3(d) of the Patents Act, which sets the standard for what is considered an invention in India, for reinterpretation.
- On compulsory licensing (CL), India has issued only CL for a cancer drug. Mr. Jaitley said, “We rarely exercise this power.” The statement assumes significance as developed countries, including the US, have raised concerns over India issuing the CL. As per the WTO norms, a CL can be invoked by a government allowing a company to produce a patented product without the consent of the patent owner in public interest. Under the Indian Patents Act, a CL can be issued for a drug if the medicine is deemed unaffordable, among other conditions, and the government grants permission to qualified generic drug makers to manufacture it.
- The IPR policy favoured the government considering financial support for a limited period on sale and export of products based on IPRs generated from public-funded research.
Peter Thiel is an american entrepreneur, venture capitalist and hedge fund manager. He founded Paypal with Max Levchin and Elon Musk and served as its CEO. He also co-founded Palantir, of which he is the chairman. He became the first outside investor in Facebook, when he acquired a 10.2% stake in 2004 for $500,000.
He serves as president of Clarium Capital, a global macro hedge fund with $700 Mn in assets under management; a managing partner in Founders Fund, a venture capital fund with $2 Bn in assets under management.
Here are 10 rules of success from the illustrious techpreneur:
You Are The Entrepreneur Of Your Life
An individual should believe in himself and take charge of his life. “You should never forget that you have tremendous amount of freedom to make these very basic decisions on what you can do with your life and you can start anytime you want.”
Do One Thing Uniquely Well
The most critical thing for a startup is to do one thing uniquely well, better than anybody else in this world. “If you are starting a business than first question that you must ask yourself is what do you know that nobody else knows is true, or what great business you are building that nobody knows it exists.”
Make Sure People Align Properly
Structure of the company is an important element and one must focus on aligning teams properly. Both formal and informal alignment should exist in the company. Also, there must be genuine bonding between the founders and the existing team. “There’s always a question I like to ask founders which is how did you describe the pre-history of company before you got started. A bad answer is something like this: “We met a week ago at a social networking function, and we thought of this idea to work together as we both wanted to be entrepreneurs.”
Aim For Monopoly
According to Peter Thiel, one should always aim for monopoly. An entrepreneur should always aim to build a company that is so differentiated and disruptive that it doesn’t even face any competition.
Don’t Be A Fake Entrepreneur
As said by Peter, he has met many people who end up trying to be fake entrepreneurs. “Saying that I want to be an entrepreneur is somewhat like I want to be rich and famous. But they really don’t have the mindset to become so.” To start a company means to provide solution to an existing problems, or fill up the gaps. If you are starting a company just for the sake of doing anything to give you a label of entrepreneur, then you are faking it.
Value Substance Over Status
It’s always really good if you are doing something that you are incredibly passionate about, and that the people pursue that. One might go to prestigious business schools or start working with a famous brand, but he should always ask one question – why he is doing this? If the answer is more biased towards the status or prestige and not to the inclination towards learning new things, then it’s time to think over again.
Don’t Lose Sight Of What’s Valuable
When you compete ferociously, you will get better at it. But, you will always narrow down your focus to beating the people around you and this often comes at very high price, thereby losing sight of what is important or perhaps more valuable.
Trends Are Overrated
One must not rely only on trends for his decision-making. Many startups have failed within years of starting because of this. “ I invested in Facebook because it was different from most social media platforms and trends at the time. Most social media websites had nicknames or avatars or another identity code names.”
Don’t Dwell On The Past
Failure is not something that we can very much learn from. Things are different all times. For example, if you find that your current team was the reason for your failure, then, starting again with different team, will not guarantee success. “When you fail at something, start with something new and don’t dwell on the past.”
Find The Secret Path
The best entrepreneurs know this. Every great business is built around a secret that’s hidden from the outside. A great company is a conspiracy to change the world; when you share your secret, the recipient becomes a fellow conspirator.
Source – Inc42