Tag Archives: entrepreneurship

What does a series A funding strategy and plan look like?

This post is the first in a series that I am planning to do on fund raising. I have successfully raised money 3 times (to a total of $29 Million – series A, B and C) and failed twice (once trying to raise $2 Million series A and second time $3-$5 Million series B).

As a background please read Elizabeth’s great post on “Behind the scenes of a seed round”.

Fund raising is one of the most difficult parts of a founder’s job. Getting money from investors of any type is hard. Dont be fooled by stories of entrepreneurs talking to investors and getting checks in 10 minutes. Those are truly black swan events.

The first thing you have to realize is that you need to develop an comprehensive plan and strategy to raise your series A. Think of it as an effort that’s similar to the launch your product. For purposes of this discussion lets call series A, as your first institutional round. I am also making the assumption that you have a working product, paying customers and are targeting a very large market (>$1 B for US, >$250M in India). If any of those criteria are not met, dont bother trying to raise money in this environment.

What are the 3 most important elements of your funding plan?

1. The pitch deck – a 15 slide PowerPoint presentation which summarizes the market, problem, traction and investment requirements. This is needed only for the face-to-face meetings.

2. The target list of potential investors – a Excel spreadsheet which has investor’s firm, name of partner, list of 2-3 recent investments (in the same general space as yours), email addresses, phone numbers, admin assistant’s name & email address, investor connection (people who can give you warm introductions to the investors), status and notes fields. You could use a CRM tool like Zoho if you like, but its overkill for this purpose is what my experience tells me.

3. An email introduction (40 – 100 words) and a one page summary. A simple text file with no images or graphs (something that the investor can read on their mobile phone (most have blackberry, although that’s changing). This can be sent to your connections to introduce you to investors or directly to known investors.

What should your strategy be?

1. Who should you target by role?: Investment firms have partners (decision makers) and associate / principals (decision enablers). Partners make decisions so if you can, get a introduction to a partner. If you cant, its not all doom and gloom, since many partners rely on their associates and principals to source deals for them.

2. Who should you target by investment thesis: Every investment firm has an investment thesis (how they will deploy funds to get best returns for their investors). This should guide you as to whether you’d be a good fit for the firm. Example: An investment firm might say we believe India’s broadband access and huge number of consumers with high disposable incomes is a great target for Indian eCommerce companies. So, they will deploy a certain % of their funds in eCommerce companies. Similar theses exists for big data, SaaS, etc.

Example: if you are an education startup focusing on India, Lightspeed (thanks to their success with TutorVista) should be on the top of your list. If you are a SaaS firm targeting US, Accel (thanks to Freshdesk) should be on your list. If you are a travel technology startup, Helion & Saif (thanks to Make My Trip) should be obvious targets.

A word of caution: If a firm has invested in a company in your sector, they will very likely ask you to speak to the CEO of their portfolio company to perform cursory due diligence. You may decide that company might be competitive and likely to execute your idea better since they have more resources. So proceed with caution and dont reveal any thing during your due diligence that might hurt you later.

Many investors invest in a sector because they “need one of those in their portfolio”. Example: Every firm has a baby products eCommerce company. So, I also recommend the “herd rule”. Which means, you should talk to other investors if your competitor has been funded by your first choice investor.

3. Who should you target by investment stage: Although every Indian investor claims to be sector agnostic and stage agnostic, there are a few early adopter VC’s. If you are the “first” in a new space, then consider an early adopter investor, else any investor who has not made an investment in the sector will suffice.

In a next post I will outline what the series A funding process should look like. This post will include information about whether you should follow a “back-to-back” process, or do a “listen and tweak” process.

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Being a tough negotiator is overrated, be articulate at convincing instead

Early in my entrepreneurial journey I would hear a lot of Silicon Valley folklore about certain founding CEO’s (Larry Ellison and Scott McNealy’s name would come up a lot) who were “tough as nails negotiators”.

The other thing I head from the guy I bought my first car from (yes, I would take advice from anyone) was a pithy “You never earn what you deserve, you only get what you negotiate”.

I resolved to be a bad-a** negotiator and wanted to cultivate a fearless reputation as being difficult to crack under pressure.

I even signed up for one of those negotiation training seminars, which you see in the center-fold of airline magazines.

Boy was I ever more wrong. (Actually I have been more wrong consistently, but that’s another series of blog posts).

Here’s the deal. As an entrepreneur you rarely have the position to have the “upper hand in any negotiation”. Realize that quickly and you’ll be more humble and have less chutzpah.

There are 3 main constituents you have to deal with to negotiate frequently – customers, investors and employees. Realize that when you are small and new they have all the leverage and you have, well, your vision, energy and some potential stock which may or may not be valuable.

When I founded my first company, I had a prospect we were chasing for several months. Eventually after a lot of effort we got to the “negotiating table” after the technical team had given us the go ahead, and asked us to “hammer out the details” with their finance and procurement team.

I was adamant on price, which we believed we deserved a premium for, because we were “proven”, so there were 4-5 clauses we were negotiating. One of them was being a reference, second was payment terms and some others were inclusion of maintenance and support for the first year (it was 19% of the license sale).

After multiple phone calls and getting nowhere, they and I realized we were stuck and I pulled the “I am going back to the technical champion and tell him we cant work out a deal”. I was seriously under the assumption that they had no alternative solution so I could “throw my weight around”. I was willing to give on some parts of the negotiations, but was deemed as inflexible by the procurement guy at the other end.

Well I did go back to the technical champion and he asked me to go back to the procurement person else they would “build it in house”.

This time the procurement person was even more inflexible and suggested a 15% discount on top of our negotiated price. I stuck to the price and focused on the other terms, only to find that the entire deal was up for renegotiation. Every term and clause was up in the air.

My intention to be a “hard negotiator” lost us 6 weeks of payment and cost us 8% discount on prices.

After the deal, the procurement person (a much older and smart individual) gave me a tip on the “Japanese way of negotiating”. He said, first admit that you have little negotiating leverage (this is totally opposite to what most entrepreneurs in the valley will tell you) and then have them work with to give you want they want and you have the ability to give them what they want. Then mention to them that here are the 3-4 things they need and ask them for the 3-4 things they need from the deal. Then it becomes more of a convincing opportunity as to why you need those 3-4 things as opposed to a confrontational hard negotiation.

Its a different technique (and there are several I admit) that works very well for the party that does not have much leverage in a negotiation.

The 3 biggest causes of stress for entrepreneurs and how to deal with them

An entrepreneur’s life is fairly stressful. Most of it (in my perspective) is self induced, so the best advice I have ever received is “take a deep breath”. That said the first step to reduce stress is to pinpoint the sources of stress.

1. The stress of “expectations”. This causes serious heartburn and is the biggest cause of all stress. Most entrepreneurs believe they can be successful in their own right and when their own “expectations” of self defined success dont match with the progress of their startup, they tend to go into a vicious circle of blame, guilt and introspection.

Expectations from family – parents thought you’d be making good money by now, as opposed to eating Ramen noodles (they fed you much better) and guzzling oodles of Red Bull (drink milk instead).

Expectations from friends – many of whom got a good job at a larger company with a steady paycheck, (mostly) defined hours of work, a “life” after work and health insurance, while you sleep on the bean bag under your desk.

The expectations from friends and family can mostly can be ignored.

The expectations that you set for yourself, comparing your progress to Airbnb for e.g., either in terms of your product, traction, funding or hiring will cause you more sleepless nights. I have seen many folks couch this under the category of “benchmark against the best”, but its hugely unproductive.

“There will be people much better than you and those that will be much worse than you. Deal with it”.

2. The stress of “competition”. I worked at Mercury Interactive (bought by HP) for the longest stint of my professional career in one company (side note, my dad worked at two companies for 20+ years and he claims I worked at 20+ companies in two years). At Mercury, I got to work with an immensely talented bunch of engineers based in Israel. After their mandatory 2 years at the armed forces, they were so “battle hardened” that they LOVED competition. They (David Reichman & Boaz Chalamish) taught me how to really compete in hugely competitive markets. Here is the secret of their teachings condensed in 1 line. You ought to pay me for this in gold, BTW (Feel free to send me a beta invite to your product instead).

Rule #1 – Dont care what they do. Rule #2 – There are no other rules. Rule #3 – What? Are you still looking for more rules? Go back and read Rule #1.

My suggestion, the stress from what competitors could do, would do, will do, should be the least of your worries. I am not suggesting you ignore competition – just dont get stressed about them, because you can largely not control what they do. You can only control your own actions, strategy and plan. Focus on that.

3. The stress of “closure”. We have all been in this position. You email that certain angel investor, advisor, customer, potential key hire, then call them, drop them a voice mail, send them a LinkedIn invite, stalk them on twittter, only to get largely ignored. I send so many emails and get so few responses that if I had a penny for every email sent and 2 pennies taken away for every email I received back, I’d still be super rich.

The best way to counter this stress is to keep going. Develop “Temporary Forgetfulness” – which my wife can attest I am awesome at.

Most of all – “take a deep breath”.