Tag Archives: seed stage

Does raising institutional money at the seed stage help or hurt?

In 2009-2010, during the peak of the eCommerce bubble in India, there were very few seed stage options for raising funds for startups. You could either get money from angel investor or look to raise money from large VC’s, hoping they would put money at the seed stage so they can be part of the later round.

During that period, larger firms in India, such as Sequoia Capital and few others did many (over 15-20) deals in a year. The typical check sizes were about $500K in India (about 2 CR that that time).

The main reason why entrepreneurs were looking to raise money from institutional investors,  besides needing the cash and finding not many other options was the belief that “if they were in early, they would be an automatic in the next round”.

Of the over 40 deals  that were done by institutional investors in 2008-2010 in the early stage (largely in eCommerce), only 4 are still around. Of the companies that took money from institutional investments in their seed round, only 5 secured investment from the VC in their post seed round.

This weekend I had a chance to read the ET survey on Why startups are raising seed stage capital from VC firms.

The average % of the company that entrepreneurs gave up is about 15% and the amount they raised from VC investors at the seed stage is about $500K.

There are many good reasons to raise money from traditional Venture investors, but assuming they will definitely invest in the later round, is quite possibly wrong based on previous history.

If you are looking to raise money and you have an interested later-stage VC investor willing to put money in your company, by all means you should take it.

Assuming they will invest later is a big leap of faith.

There are, like most things in the startup world pros and cons to this approach.

The pros include the “name brand” value of the VC firm on your cap table early on, the ability to tap into the expertise of the VC investors and also access to their network and connections.

The downsides are the signalling effect if they refuse to invest in the follow on round, the likelihood of them investing in other competing startups in the same space in later round (since they understand the market) and finally the smaller pool of investors available for you (since many VC’s wont invest if a lead VC investor passes on the follow on) in the next round.

While I dont think there are many options in India for entrepreneurs, the best bet I would still recommend is to get the right investors at the right stage of your company. At the early stage, angel and seed stage firms make sense, and later on using their help to get VC’s is a good approach.

Credit: Paul Martino, Bullpen Capital
Credit: Paul Martino, Bullpen Capital

Paul Martino of Bullpen capital puts this week in the chart above.

Given that seed is now a perpetual and continuous process until your series A, I would recommend you raise constantly and raise often.

5 traits of a great angel investor

Over a startup event Bangalore a few weeks ago, I had the chance to talk to over 50 budding entrepreneurs about the seed funding scenario in India. It is well known that there is a lot more demand for investments at the seed stage than there is supply. The number of angel investors in India is estimated around 500 (informal estimate) and the number of active investors is less than 50. The number of new technology companies alone in India (software & services) total over 500 every year. I have personally talked to several high net-worth individuals (HNI) about looking at investing in new entrepreneurs and believe it will be only a matter of time (2-4 years) before investing at the seed stage becomes more prevalent.

The top 3 reasons for not investing, I hear from most HNI is the lack of exits, better or equal returns at lower risk with other asset classes or their desire to “invest in their own business than someone else’s”.

What will increase the number of angel investors in India is simple – more people making big money (I can easily see another 15-20 employees of Flipkart, Snapdeal and InMobi becoming angel investors in 2-3 years) and specifically more entrepreneurs themselves having exists.

So if you are a HNI and are looking to help young entrepreneurs become successful, what else would make you an ideal angel investor that entrepreneurs seek out for money?

  1. Relevant experience and knowledge of the space that entrepreneurs are looking to build companies in. This is the biggest value add you can provide, more than the money. If you have built a company in the same space, the value that you bring to the table is a lot more than any “dumb” money. In fact one could argue that your experiences are nearly worth twice the money you put into the startup.
  2. Network and connections. Great angel investors don’t just write a check and disappear. Once you put your money in, there’s a responsibility to commit to the success of the company. The bevy of lawyers, accountants, bankers, marketers and other connections you have made in your career are worth their weight in gold. That’s an amazingly attractive incentive for any entrepreneur to rather take money from you than other investors.
  3. Willingness to learn as much as you are willing to teach. Being an angel investor is more a lesson in learning than in teaching. I am pleasantly surprised with the insights I hear on hiring techniques, investor / board management and online marketing from young startup founders.
  4. Ability to provide time and empathy during the tough times. Every startup goes through a sine-curve of emotions. In fact if you have been an entrepreneur you know the experience well. Besides requiring a flash report on sales, hiring plan, product strategy and other company related metrics, the angel investor has to be available to his entrepreneurs. This does not mean having to spend 10 hours a week on the startup, but being available for that call or having a cup of coffee with the entrepreneur when you have a moment helps go a long way.
  5. Long range thinking. Angel investing is certainly not for the faint of heart. Market timing rarely works so most good investors I know invest the same amount every year for 5-10 years before they are able to spot patterns and obtain exits. The thrills of helping young entrepreneurs succeed though, more than makes up for the short term uncertainty.