Start-up Tips for Founders and Investors

Thought
Stimulants
for Start-ups
Volume 2
A compilation of posts and
Articles of Dr. Anirudha
Malpani
Curated by V Rameshwar

Thought Stimulants for Start-ups Volume 2
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HOW TO PISS OFF YOUR INVESTORS .......................................................................................................... 5
MAKING YOUR PITCH MEMORABLE ........................................................................................................... 8
THE SECRET SAUCE TO DELIGHTING YOUR FUNDERS .................................................................................10
WHEN YOUR START-UP IS DOING BADLY...................................................................................................13
DREAM BIG OR PLAY SAFE - THE START-UP FOUNDER'S DILEMMA?...........................................................17
CAN ENTREPRENEURSHIP BE TAUGHT? .....................................................................................................19
WHY START-UPS LURCH FROM CRISIS TO CRISIS........................................................................................21
THE IMPORTANCE OF DOING ANTI REFERENCE CHECKS.............................................................................24
EVOLVING AS AN ANGEL - LESSONS LEARNED OVER THE PAST FEW YEARS ................................................26
WHY ENTREPRENEURS AND INVESTORS NEED TO WEAR BIFOCALS ...........................................................28
PRICING A BRIDGE ROUND........................................................................................................................31
MILLION DOLLAR VALUATIONS AND MIXED FEELINGS...............................................................................34
HOW TO NOT GET FUNDED.......................................................................................................................36
FOUNDERS NEED TO GROW UP ONCE AN INVESTOR SAYS YES ..................................................................38
CREATING FINANCIALLY VIABLE START-UPS - WHICH PROBLEM SHOULD A START-UP TACKLE?..................40
DATA ANALYTICS - THE WHEAT AND THE CHAFF .......................................................................................42
ARE INDIAN ANGEL INVESTORS TOO RISK AVERSE?...................................................................................44
MAKING SENSE OF VC VALUATIONS - A GUIDE FOR THE PERPLEXED..........................................................46
HOW TO MAKE THE MOST OF START-UP CONFERENCES............................................................................50
WHY DO MOST START-UPS FAIL? ..............................................................................................................52
THE PROBLEM WITH PASSIONATE FOUNDERS...........................................................................................54
THE ONE QUESTION I ASK ALL ENTREPRENEURS........................................................................................56
MY MOST VALUABLE ASSET AS AN ANGEL INVESTOR................................................................................58
WHEN YOU HAVE TO SHUT DOWN YOUR START-UP..................................................................................60
WHY I PREFER FUNDING THE MATURE DOWN TO EARTH FOUNDER..........................................................64
SOCIAL IMPACT INVESTMENTS CAN BE VERY PROFITABLE!........................................................................67
THE WRONG REASONS TO BECOME AN ANGEL INVESTOR.........................................................................70
THE INSPIRING STORY OF A SUCCESSFUL DOCPRENEUR ............................................................................73
WHEN FOUNDERS FIGHT...........................................................................................................................76
A COMIC BOOK EVERY ENTREPRENEUR SHOULD READ..............................................................................80

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THE PROBLEM WITH BEING RIGHT FOR THE WRONG REASONS .................................................................82
USING PEOPLE ANALYTICS TO BECOME AN EFFICIENT LEARNING ORGANISATION .....................................85
VCS AS VILLAINS .......................................................................................................................................90
EMOTIONAL MATURITY FOR FOUNDERS...................................................................................................93
ENTREPRENEURS NEED TO DO A PREMORTEM BEFORE THEY START UP ....................................................96
FOUNDERS NEED TO REMEMBER THAT ACTIONS HAVE CONSEQUENCES...................................................98
WHY START-UPS NEED TO DIE.................................................................................................................100
RAISING MONEY FROM ANGEL INVESTORS IN INDIA...............................................................................102
HOW INVESTORS EVALUATE FOUNDER RISK ...........................................................................................106
THE ADVANTAGES OF BEING AN INTROVERT...........................................................................................107
ADVICE ON HOW TO ASK FOR ADVICE.....................................................................................................109
STORYBOARDS FOR START-UP FOUNDERS ..............................................................................................112
HOW TO IMPROVE START-UP PITCH EVENTS...........................................................................................114
SHOULD START-UPS SPEND ON PR? ........................................................................................................117
THE ROLE OF ANGELS IN THE START-UP SPACE........................................................................................119
WHAT BOOKS ARE YOU READING?..........................................................................................................121
BEING AN ANGEL INVESTOR IS HARD WORK! ..........................................................................................124
HOW ACTIVIST SHOULD ANGEL INVESTORS BE?......................................................................................126
HOW TO SHUT DOWN A START-UP .........................................................................................................130
THE GRIEF OF SHUTTING DOWN .............................................................................................................131
PROFESSIONAL ADVICE...........................................................................................................................133
MINDFULNESS FOR FOUNDERS...............................................................................................................138
THE LAZY WANNABE ENTREPRENEUR .....................................................................................................139
WHY BEING A DOCTOR MAKES ME A BETTER ANGEL INVESTOR ..............................................................141
IDEAS, ENTREPRENEURS AND INVESTORS ...............................................................................................143
START-UP SCAMS ...................................................................................................................................146
WHY I AM HAPPY TO FUND FAILED ENTREPRENEURS..............................................................................148
BRIDGING THE FOUNDER-FUNDER GAP...................................................................................................150
WHEN RAISING MONEY IS A BAD IDEA....................................................................................................153
INNOVATION VS. IMPLEMENTATION ......................................................................................................155

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WHY DO ENTREPRENEURS DREAD DUE DILIGENCE? ................................................................................157
LOOKING FOR ENTREPRENEURS FROM SMALLER TOWNS........................................................................159
ARE YOU COACHABLE? ...........................................................................................................................161
WHY DO ENTREPRENEURS MAKE SUCH POOR USE OF THEIR INVESTORS?...............................................163
RAISING MONEY IS A NEVER ENDING STRUGGLE FOR ENTREPRENEURS...................................................166
BOOKS VS. CONFERENCES AS LEARNING TOOLS ......................................................................................169
FIXING FUNDER-FOUNDER FRICTION.......................................................................................................171
MASTERING THE ART OF NEGOTIATION ..................................................................................................175
ARE YOU SURE YOU WANT TO BE AN ENTREPRENEUR?...........................................................................177

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How to piss off your investors
While there are a lot of areas of friction between founders and funders, one
of the trickiest areas is that of sharing information about what's happening at
the company after the funds have been transferred.
As investors, we expect the founder to keep us informed about how the
company is progressing on a regular basis - what the highlights are; what the
low lights are; what's going well, and what's not.
This is not just a question of the investor asserting one of his rights as specified
in the shareholder agreement. Founders need to remember that one of the
reason angels invest in a start-up is that they want to see it grow. They want
to help it to become successful, but they can only do so if they know what's
happening. They need to know the unvarnished truth, which is why they
want regular reports from the founder.
The trouble is that most entrepreneurs are very reluctant to share
information, especially when things aren't going well. They may feel that
they need to bury problems under the carpet, because they don't want
investors to lose faith in their competence and ability. Also, because they
are entrepreneurs, they're usually very optimistic and believe they will be
able to solve it on their own, without getting the investor involved. Some
may feel that they should not be troubling investors with their problems,
because they're big boys, and should be able to tackle these themselves.
They are worried that asking for help reflects poorly on their competence. It's
true no one likes sharing bad news, which is why they prefer not talking
about it.
This is why sometimes investors feel that getting information from the founder
is like extracting teeth. They have to send regular reminders to the
entrepreneurs, so they can figure out what's happening. I can't understand
why founders aren't more proactive about communicating regularly.

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When things are going well, entrepreneurs should share good news with their
investors - after all, we want you to succeed, and are happy to share your
joy. This is something which should be done on a regular basis - not just to let
investors know that things are on the right track or to show off how
competent you are, but also to establish an emotional connection.
Founders need to understand that early stage funders don't just give money
- they want to be more engaged and one of the best ways of doing this is
by sharing information proactively.
Sharing information when things are going well is easy, but it's critically
important when things aren't going well. This is the time when you really
need help - when you find you are in a soup! And who better to help you
than your investors, who have skin in the game, and want you to succeed as
much as you want to? Yes, they may have opinions which differ from yours,
but two heads are better than one, and you should actively seek out their
assistance. You may be worried that they may end up micromanaging you,
but you should be mature enough to be able to listen to different
perspectives, and then finally decide on what's right, because it is your
company after all.
Refusing to share information doesn't help at all, and in fact gives off all the
wrong signals to investors. When they find out that things aren't going well,
and that you have hidden the truth from them, they're likely to be resentful
and angry. Often founders wait until they are running out of cash, but by this
time the damage has already been done, and there's very little which they
can do to correct it.
That's why the secret for success is to over-communicate. Maybe your
agreement asks for a report once every three months. Why not do this once
every month? It is especially when you find yourself at an inflection
point that you should do this even more frequently. This is not only to help

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your investors to help you, but also to help them feel that you are keeping
them in the loop and respect their views.
It doesn't take much time to prepare a report, especially if you do this on a
regular basis. Remember, that the easiest person to fool is yourself, and it
can be hard to see the writing on the wall when you are putting out fires on
a daily basis. Providing updates is a discipline which will keep you grounded,
and your investors can help you to ensure that your company is on the right
track.
For most of us, asking for help does not come naturally, but you must put
your fears and ego aside if you hope to learn quickly. Respect your investors
as valuable resources. Update them on your business and let them
challenge you. This will not only make you sharper, it will help you to get
mired in your own bullshit. They can act as a trusted sounding board, and
their feedback will help you course-correct faster if you’re heading down a
tricky or sticky path. And if you don't trust and respect your investors, then
shame on you for raising money from them in the first place!

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Making your pitch memorable
Most founders get only one chance to raise money from a particular
investor, which is why the pitch they make is so vitally important. The trouble
with all these pitches is that because all the founders read the same books
and use the same templates to create them, they end up looking very
similar to each other. This is why they often end up putting the investor to
sleep.
Founders need to work on their pitch in order to stand out from the rest of
the competition. You need to think about what makes you different - what
makes you memorable. This is why less is more - there is a reason why
miniskirts attract more interest than gowns! The purpose of the pitch is not to
get the investor to sign a cheque - it is simply to arouse interest, so you can
keep the conversation going. This is why you can't afford to pad your pitch
with the same boring clichés and platitudes which everyone else does.
If you have a generic slide in your presentation, then please take it out.
What is a generic slide? It's a slide which any founder can use, because it's
full of weasel words and jargon which mean very little. They often serve only
to switch the investor's brain off, because he's heard it all before.
What you really want to do is to make the investor think. You need to
provoke him a bit, and the best way of doing this is by asking intelligent
questions. For example, if you wanted to create a better online grocery
delivery start-up, your first slide should ask - Why are companies like Grofer
still losing money? This will get his attention, and force him to think, which
means he will start actively listening to your presentation. You then need to
provide him with a counterintuitive answer, so that whether or not he funds
you, at least he will respect your depth of knowledge, and will be happy to
continue engaging with you. This is not easy, because you need to have a
lot of expertise and a contrarian point of view. It is hard work to come up

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with an origin al perspective, and you won't be able to use canned
presentations.
You need to polish and tailor your pitch, depending on who exactly you're
pitching to. You need to prove to the investor that you've done your
homework - that you understand his sweet spot and investing
thesis. Anticipate his objections, and answer his questions even before he
asks them, so he can see you are capable and competent.
The trouble with a lot of pitches is they're usually peppered with fashionable
buzzwords. For example, the current crop of buzzwords is artificial
intelligence / deep learning / neural networks/ machine learning. Don't
forget, investors aren't dumb. We have good bullshit detectors, and it's easy
for us to figure out when the knowledge of the founder is shallow. We can
sense when the founder is using jargon only in order to impress the investor,
rather than because he actually understands the space.
This lack of depth can backfire. When we ask more probing questions, you're
not going to be able to answer them, and you will end up with egg on your
face.
Be creative and innovative when crafting your pitch - make it an original
work of art. Take a few risks! After all, if the definition of an entrepreneur is
someone who takes intelligent risks, then why not use your pitch to show
investors that you fit the bill!
The good thing about giving presentations is that you will get progressively
better, if you ask for feedback. Try to make your presentation short and
sweet, so that you leave enough time for the investor to ask you questions.
Winston Churchill said it best— 'A good speech should be like a woman's
skirt; long enough to cover the subject and short enough to create interest.'

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The secret sauce to delighting your funders
Raising funds is a major milestone in the history of every start-up, and you
should congratulate yourself for doing this successfully - after all, only a very
small percentage of founders manage to get to this stage. After you've
patted yourself on your back, accepted the congratulations which pour in,
and issued the press releases to let the world know that you are on your path
to building a world-class company, you then need to then get down to
brass tacks.
The problem is that after founders get their first cheque, they're so focused
on fine-tuning their product and marketing it, that they forget that they also
need to take care of their investors.
Here's a simple solution - make sure you send a weekly email to all your
investors on a regular basis, updating them as to what's happening to the
company.
You can use a basic template which covers all the major areas - product
updates; hires and fires; revenue and cash burn; your plans for the next
months; and what help you need from your investors. Lots of the headings
will be blank, and that's fine too.
Talk about both the highlights and lowlights, and don't gloss over
problems. This is stuff which you live and breathe on a daily basis, so you
won't need much time to do this - all you require is discipline! Not sure what
to put in and what to leave out? The rule is simple - more is better, so over
communicate, rather than censor. It won't take your investors much time to
read through your email, and they can always skip the stuff they aren't
interested in.
You could start off by saying, "I'm really excited to have all of you as our
partners on this journey and I'd like to share information with you on a regular

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basis. Could you please give me permission to do so?" And then you should
send them the email every Sunday. Providing regular updates is part of your
share holder agreement (SHA) in any case, but doing more than is required
is a great way of standing out!
Are you scared that this will consume a lot of your time? It really shouldn't. It's
just a question of compiling the information you already have on your
fingertips on a regular basis. This is the Open Management concept, where
the founder has a dashboard which he uses to track the pulse of his business
and shares with all his employees - you just need to share this with your
investors. The weekly report only contains the key operating numbers - the
tactics, insights and strategy will be reserved for the monthly MIS.
Will your investors get worried and lose faith in you when you describe the
fires you are having to put out? No - we know you will run into problems, and
would like to know how you plan to deal with them, before they become
unmanageable. Will they want to start micromanaging you? Again, this is
unlikely - we have enough on our plates already, and are quite happy to
give you the freedom to run your company, if you can show us that you are
doing a good job!
This kind of regular contact is good for your investors because it will help
them to trust you. It will show them that you are open and transparent, and
are behaving like a real partner. This exercise demonstrates that you don't
just want their money - that you also value their expertise and feedback. The
benefit is that the next time you do run into trouble (and I promise you that
you will!), they'll be much more inclined to help you as compared to the
other founders that they have given money to, because you're going to
stand out.
You should do this not just for the sake of the investors, but for yourself as
well. The right time to fill your bucket with goodwill is when you don't need to
- when things are going well. Sharing updates regularly is a sign of respect,

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and by keeping them in the loop, it's much easier for you to ask for
additional assistance when you need this. You'll be surprised how helpful
investors can be if you adopt this approach, rather than run to them for help
only when you run into problems.
This is also a great way of stepping back on a regular basis, so you get an
overview of how your company's doing - you will get a 30000 foot
perspective as to how you are evolving. It'll help you to stay on track and
remain grounded, so that you can no longer fool yourself about your failure
to deliver what you originally promised (and I can promise you that there will
be hiccups along the way!).
And on a personal note, it will be fun to share your journal with your
grandchildren when you finally become a millionaire.

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When your start-up is doing badly
The life of a start-up is full of uncertainty. There are often going to be rough
patches, when nothing seems to be going well. In order to sail through the
turbulence, the founder realises he needs to pivot, but is not sure what to do
next. He may have lost his confidence because his earlier attempts have
failed, and he is full of self-doubt.
At these times, a supporting investor, who has the benefit of having a 30,000
foot overview, can be very helpful.
However, sometimes you may disagree with the path which the founder
wants to follow. The problem is that hard to know how to disagree tactfully.
You don't want to upset him, because it is his company after all. He is in the
trenches daily, getting his hands dirty, while you apply your mind to his
problems infrequently.
However, it's important to speak up, because you do have a fiduciary
responsibility to do so. I've realized that mature founders are quite happy to
listen to feedback. They want you to question their assumptions because it
helps them to sharpen their thinking. If they can answer your objections, not
only does your confidence in them increase, their confidence in their own
business model increases as well.
As an investor, you don't want to take over control of the company - you
have too many other things to do in your life! You just want to be sure that
the entrepreneur is being thoughtful; has considered all possible alternative
options; and has a good reason for choosing the one he has selected. We
all know that the future is uncertain, and whether his choice will turn out to
be any better than yours is hard to predict.
We can all be wise after the event, but every start-up is an experiment
where N = 1. We can't forecast what will happen, because they are

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complex adaptive systems, characterised by volatility, uncertainty and
ambiguity.
It's important to learn to be tactful when you disagree with the founder's
choice. You need to do it one on one, in a face to face meeting, rather
than in front of other people, or at a board meeting. You need to find the
right balance between being completely hands-off and allowing him to do
what he likes (which is fine if things are going well), or being much more
hands-on when he's running into trouble.
Of course, you can't force him to do what you think is right. That's a decision
which he has to make for himself. However, if he's responsive and
responsible, even if things don't go well after the pivot, you may still be
happy to offer him a lifeline to help him recover from a near- death
experience, which may leave him wiser, more resilient, and therefore more
likely to succeed.
Using dashboards to manage your start-up
Every start-up is an experiment and the reality is that most of them fail. This is
because they're complex systems with multiple moving parts, all of which
have to work properly to make sure that the company continues to grow.
This can be extremely challenging for the founder, who has to juggle
multiple balls, and make sure he doesn't drop any of them. This is daunting
task, because you need to learn on the job - which is why it's very hard to
know whether you're on the right track or not. Are you chasing the right
customers? Is your product delighting them? Is your competition catching
up with you? Will you be able to find investors to fund your next round? It
can be extremely hard to track all this stuff, especially when there is so much
uncertainty, and it's easy for things to fall between the cracks.
Because there are no pat formulas you may find yourself disagreeing with
your investors - for example, if you should go international, or whether you
should stay in India. The only way to find the right answers is to run low-cost

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experiments, and track the results, so that you become progressively
smarter. This is why tracking the key metrics is vital - so you can quickly see if
you are on the right track or not.
Most founders use Excel to monitor their company's vital signs, but a
dashboard can be much more helpful.
The secret is to follow open management principles, and keep an online
dashboard which is accessible to everyone. This way, all employees can see
how the company is doing; how it's progressing; what their personal
contribution is; and what they need to do to make sure that the company
continues to grow. It's far better to put it all out in the open, even when
things aren't going well. You may be worried that this will affect morale, and
that your staff will quit, but the truth is that most of them can sense when the
company is doing badly, and they are already worrying anyway. It's far
better to acknowledge this, rather than try to hide the truth from them,
because this just makes matters worse. Being open about it will help to dispel
rumours and gossip; and will reassure them that you have a plan of action to
deal with the crisis. Even better, it will bring them all together and help them
to pitch in, so that you can tackle the problem as a united team - there is
strength in numbers, and employees should be empowered to provide
solutions!
The dashboard should be simple, and should focus only on a few key
metrics. You need to define what these are, because they will vary from
company to company. You will also need to modify them as your company
evolves. The beauty is that a dashboard creates a sense of ownership
amongst all your staff.
As a CEO, your dashboard allows you to check how you've progressed; and
whether you're headed in the right direction or not. You can set up access
privileges, so if there's some information which you think is confidential (for

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example salaries), then you don't need to put that up on the publicly
accessible dashboard.
Even better, a dashboard allows you to share information with your investors
proactively, without your having to do any additional work. They will be
happy to provide support and insights when they can see you are treating
them as partners in your journey.
A dashboard can be a very useful tool, and you should explore the
available options. The standard is www.geckoboard.com, and there are
many inexpensive alternatives as well, such as http://finalboard.com/. You
can use also the open source JSlate code
at https://github.com/rasmusbergpalm/jslate to create your own free
customised dashboard as well
As a start-up founder eloquently said, “Without a dashboard, running a start-
up is like flying a plane through fog with no instruments.” Life as a founder is
hard enough as it is - why handicap yourself even further?

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Dream big or play safe - the start-up
founder's dilemma?
Start-up founders are sometimes forced to lead a schizophrenic existence.
They have big dreams, and the reason they want to create a start-up is
because they want to change the world. They've been told they need to
think big, because the magic mantra today is disruption. Their icons are
larger than life figures like Steve Jobs and Elon Musk, who succeeded by
breaking conventions because they had the courage to challenge the
status quo.
Now the only way you can disrupt much larger companies is by battling
them on their home turf. This requires a lot of guts, and is often doomed to
fail, because the odds are always stacked against David, no matter how
brave he may be. While start-up founders want to create a big splash by
shaking up the entire system, the reality is that because they have limited
funds, a lot of their dreams never come to fruition. They will usually run out of
money before tasting success, and this is a constant source of tension, both
for the founders as well as the investors.
On one hand, you have one set of investors who tell the founder, "We will
give you as much money as you like - we want you to create something
completely new. We need you to think out of the box, so that you can
dream big and be innovative. We want you to experiment, because this is
the only way to succeed - by daring to be different."
On the other hand, you have investors who tell founders to think about
profitability and unit economics. They preach the importance of being
frugal, so they can conserve their funds. They advice them to run low-cost
experiments and fail fast, so they can survive and live to continue the
unequal battle.

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Both the options make sense, which is why the founder faces a dilemma.
Though he has lots of hopes and dreams, he's never sure whether he should
go all in and take a big bet. If that fails, then he is back to square one, and
everyone will blame him for running the company into the ground. On the
other hand, if he doesn't have the courage to take a big bet, then how can
he call himself a daring entrepreneur?
As usual, there are never any right answers - they depend upon the
circumstances the founder finds himself in, and this is usually out of his
control. All one can do is empathize with his quandary, and help him to find
the path which is correct for him.

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Can entrepreneurship be taught?
Entrepreneurship has become fashionable and the start-up space has
become hot. It you're young and ambitious, you no longer just want to work
for a large company - you would rather become the founder and CEO of
your own company.
All this is fine, but the question is, "Can you actually teach entrepreneurship?
Is it possible to create entrepreneurs? Are entrepreneurs born, or can they
be made?"
The start-up space has become the newest bandwagon, and everyone
wants to get on. This is why you see lots of incubators and accelerators,
which promise to teach young founders how to become successful
entrepreneurs. Even the IIMs have got into the game, and have started
offering courses on learning entrepreneurship. These are also available
online, from leading universities such as Stanford.
This brings us back to the question, "Is entrepreneurship something which can
be taught?"
I think it's a bit like leadership. It's one of those intangible qualities, where
everyone wants to create leaders, and everyone wants to be a leader
themselves, but is it possible to actually teach someone how to become a
leader?
It's not that people haven't tried! There must be at least a thousand books
on how to become a leader, lots of whom have been written by icons
who've been leaders themselves. However, I don't really think reading
books, attending MBA courses or attending workshops will helps founders to
succeed.

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The only way to learn is by experiencing the daily grind of a start-up, so you
understand the ups and downs you will have to cope with daily. It all looks
very rosy from the outside, but the reality is far grimmer. Yes, some people
who graduate from accelerator programs will become successful
entrepreneurs, but often this could be in spite of the training - not because
of it.
The best training is still the 'School of Hard Knocks' - and if you want to be a
successful entrepreneur, plan to work for a start-up, and then start up you
own once you are confident you will be able to survive the emotional roller
coaster ride.
I believe entrepreneurship cannot be taught, but it can be learned - and
when the student is ready, the teacher will appear!

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Why start-ups lurch from crisis to crisis
I'm an angel investor in quite a few start-ups, and often I feel like I am on an
emotional roller coaster ride. When the founder presents an update at the
Board meeting, you get the feeling that everything seems to be going
extremely well. At the end of the review, everyone is on a high, and you pat
yourself on the back because you were smart enough to invest in such a
clever founder.
However, after a month, he calls to let you know that he's running out of
cash, and desperately needs another infusion of funds. This is why angels
feel so lost and confused.
Part of the problem is that founders are very interested in moonshot ideas -
these are far more sexy and exciting! They want to hit fours and sixes,
because they want to win as quickly as possible - getting rich in a hurry is
much more fun that getting rich slowly. They feel they are competing with
the other wildly successful founders who are featured in the press all the
time, because they are raking in the millions. They too want to be seen as
being winners by the rest of the world, and they don't want to keep on
waiting and waiting until their company matures. They are young, and easy
to understand why they're in such a hurry.
Unfortunately, that's not the way successful businesses are run. If you want to
win a cricket match, what you really need to do is hit lots of singles safely
and steadily, rather than take outsize risks and get bowled out while trying to
hit a six. While the crowd will cheer for the flamboyant batsman who hits a
lot of boundaries, this can be a risky way to play a match. Unfortunately, you
only understand this after many years of experience, as you grow a little bit
older and more mature. This difference in perception is one of the reasons
for the conflict between founders and funders.

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The best way to be right is not to be wrong, and if you minimize your risk of
failure by not trying to heroically swing for the fences every time you come
to bat, you'll automatically increase your chances of winning.
Unfortunately, this is not a very sexy way of doing things. It takes time to
achieve results, and most founders are young men in a hurry who want to
get to their goal quickly. There's no glamour in the daily grind, and it can be
very tempting to try to pull off a moon-shot. The problem is that a lot of these
are doomed to fail - after all, there's a reason they are called moon-shots!
The media exacerbates the problem by highlighting the outliers - the guys
who achieved success very quickly by making millions within a few years -
after all, these stories attract many more readers! What's the point in writing
about the typical founder who achieved overnight success after slogging
for 15 years?
We don't want to pour water on our founder's dreams and it's okay to try hit
sixes, but it's sensible to do this only when you have a huge lead. In real life,
when you have enough money in your bank account, you can afford to
take lots more risks, so that even if they fail, your company doesn't go to
pieces. However, it takes time to build up enough of a buffer, and you need
patience to get to that stage.
The problem is that a lot of founders feel that investors are old fashioned and
stodgy - that they're trying to clip their wings and drag them down. They feel
they are acting as hurdles in their path to success, and this creates
friction. The reality is that there is no shortcut to winning - and while hard
work is not sufficient to succeed, it is necessary for most of us. Hope and luck
are not useful strategies.
This is why investors will not get carried away by your brilliant ideas and rosy
projections when you pitch to them. They understand that the key to

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success is your ability to get your hands dirty on a daily basis, and cope with
the endless grind of running a start-up.
It's fine to build castles in the air, but you also need to build foundations
under them. While being a tortoise maybe boring and old fashioned, there's
a good reason why this fable has been taught to many generations!

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The importance of doing anti reference
checks
We all know that one of the most difficult things to do is to judge the honesty
and integrity of a start-up founder. If you choose to back someone who's
either a crook or who's incompetent, you're going to end up in deep
trouble. The problem is that you're not going to realize this until it's too late,
because everyone wears rose coloured glasses during the 6-month
honeymoon period after funding has been raised.
This is one of the reasons why investors will perform so many reference
checks as part of their due diligence process, in order to judge which
founder to back. You don't want to be taken in by a glib, smooth talking
imposter.
Typically, most reference checks are done as a standard “check the box
“exercise. The entrepreneur provides a list of people who will vouch for him,
who are either professors, or his earlier bosses. Because these are people he
has selected, usually they will have good things to say about the founder.
This is why the reference check usually just becomes a perfunctory task
which is delegated to a junior analyst, and doesn't provide much useful
information.
This is why it's so important to do what I call anti-reference checks. You need
to ask him for names of people who will not say complimentary things about
him. This could be a boss whom he used to work for whom he didn't get
along well with; or a senior who fired him from his job; or a customer whom
he failed to sell to. These are the people you should actually be talking to,
because they are much more likely to give you the unvarnished truth.
One tip: If anyone has anything negative to say about him, please give this
a disproportionate amount of importance. Typically, most people are very

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reluctant to say anything unflattering about anyone else, and their
comments are quite likely to be very guarded, because they want to be
politically correct. You can always ask the founder to provide an
explanation for any criticism you unearth.
Unless you triangulate, you're not going to be able to get a 360 degree
view, and you may get carried away by some of the positive things which
the people he selected have to say about him. They are likely to be biased,
which is why they fail to provide any useful information about his
weaknesses.
This is the strength of LinkedIn. It allows you to check his credentials with
independent colleagues and seniors in his previous jobs, even if he doesn't
volunteer this information. Digital trails make doing reference checks much
easier!

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Evolving as an angel - lessons learned over
the past few years
I have been an angel for quite a few years now, and every year I try to look
back and reflect over what I've learned during the journey, and how I've
evolved.
Initially, the idea of being an angel was very romantic. The hope was that
you could sign a cheque based on a dream which an entrepreneur sold to
you on the back of a napkin, and you would then be able to discover the
next Google. While this is a tempting fantasy, I've realized that it's also
exceptionally naïve. Just getting cool ideas is not enough - implementing
them is much harder. This is why I'm no longer so fussed about the idea
itself. While I admire and respect creativity and innovation, I now realise that
they are neither necessary nor sufficient for a start-up's success. Moonshot
ideas are fun to read about, but extremely hard to pull off.
I've realized that it's the entrepreneur who makes or breaks the company,
and that if we can identify the right founders, our chances of succeeding
will increase enormously.
Though we've become better at doing this, it's still a time consuming,
complicated exercise. In the past, we took pride in being able to sign a
cheque quickly. Today, our mantra is we will say no quickly if the fit is not
right, but we will take our time about saying yes. We need to make sure that
we can trust the entrepreneur before handing over the money.
We've also realized that it's important to double our bets when we think we
have a winner. While we will not pull the plugs on the losers, we will not
continue investing in them.

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Finally, we think the best way of reducing our risks is to make sure that we
invest in a company which has demonstrated traction. We are looking for
founders who have paying customers, which means their product is mature.
We are longer willing to fund just the idea - we want to fund the scaling up.
Does this mean we are boring and conservative because we are not willing
to back an ambitious founder with a great idea? Yes, perhaps this is true -
we cannot be the right funder for every founder who comes to is. After all,
this is personal money I am investing, and I don't have the deep pockets
which a VC has. The benefit is that our model allows us to be nimble and
agile, and I can afford to be idiosyncratic in placing my bets, but it also
means I have limits as to how much support I can provide. I think of our role
as nurturing the start-up until they are mature enough to hand off to a VC,
who can then hold their hand from then on.
What about the possibility of striking it rich by backing the right founder? I
think this is a fantasy, and while I am not averse to hitting the jackpot, I am
realistic enough to accept that the odds of my doing so are very slim. Now,
this doesn't mean that I am willing to throw my money away - it just means I
am fine with being patient, and don't think of angel investing as a "get rich
quick" scheme.
The good news is that the Indian ecosystem is still growing, which means
there is room for many players along the way to success, as the start-up
grows. Each one needs to identify what works best for them, so they don't
burn their fingers because they had unrealistic expectations.

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Why entrepreneurs and investors need to
wear bifocals
Every start-up is an experiment, and since the future is uncertain, it's never
clear which path they should take. Start-ups are agile and nimble, and they
have lots of opportunities, because they are starting with a clean slate.
While this can be very exciting, this also means that the danger is that they
can get lost because they get tempted to go down many rabbit holes.
This creates tension. The founder wants to do lots of different things, because
he dreams big; while the investor wants to make sure that the entrepreneur
doesn't run out of money in the pursuit of his dreams. This is why they often
seem to be at cross-purposes.
It's important that they use the bifocal lens framework which aligns their
interests, so they can dream big, but start small. It's helpful to think of this as a
two step process. Initially, you use a divergent model, where you brainstorm
and use lots of Blue Ocean thinking to come up with all the possible options
you can explore. Then, you need to use convergent thinking, where you
focus on what one thing you should be doing extremely well. The magic
sauce is learning what to say no to.
This is something which entrepreneurs aren't very good at. It can be
heartbreaking to be aware that they have a great opportunity right under
their nose, but they do not have the resources, the time, or the bandwidth to
be able to explore them in the present. However, that's the nature of the
beast, and founders need to understand that given their constraints, they
can't possibly be doing everything, because this leads to disaster.
It's important to shoot stuff down. A lot of it you can eliminate straight away,
because it's either irrelevant to your core business; it's tangential to your
goal; or there are too many other people doing it. It's very helpful to have

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someone else across the table who will tell you what's wrong with some of
your ideas. This is why investors will deliberately play devil's advocate, and
mature entrepreneurs understand the value an investor brings when he
chooses to disagree with them. It's not that he's trying to be difficult - he's
ultimately doing it to improve the chances of success for the company. The
tension arises because he has a long term perspective, as compared to the
founder's short term view of chasing the newest shiny object.
This bifocal perspective can create success, provided you're both aligned. I
always remind my start-ups that they need to focus on cashflow and
profitability, so that they are no longer dependent on the whims and fancies
of the investor, and don't have to waste valuable time raising the next round
of funding. This involves getting their hands dirty and doing the daily drudge
work. It's true that the daily grind which is boring, but it can actually be very
exhilarating to reach the milestone of cash flow profitability. Once you
achieve this state, you no longer need to depend on your investor's
generosity for further funding. The trouble is that when times are good, your
investor will promise you the earth and the moon. However, when you can't
deliver and things go sour (often for reasons beyond your control and
despite your best efforts), he may turn around and say, sorry I'm not giving
you any more money. You're then completely at his mercy, and this is never
a good situation to be in. As an entrepreneur, you need to understand that
your ability to experiment is directly proportionate to how much money you
have in the bank. The more the money you have (especially customer
generated revenue), the greater your flexibility to bend lots of rules. This
buffer will give you a lot more breathing space and the courage to fail as
well.
The truth is that investors respect entrepreneurs who've generated revenue
from their customers. This is true even if they goad you to pursue market
share and growth at the expense of profitability.

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If you want to make sure that you're coming from a position of strength,
make sure that you become cashflow positive first. Yes, there will be
opportunities which you may have to pass on, but don't worry - if you are
willing to be patient, new ones will appear as you evolve. This way you're
never going to be starving for oxygen because you don't have enough
money.
So what are the right paths to explore? Because this depends on hundreds
of variables, the answer is going to be unique for each company. However,
investors don't have the right answers either! We really can't tell you what
you should or shouldn't do - we can only ask you intelligent questions, so that
you can find the answers for yourself. If you realize the critical importance of
cashflow, you will be able to set your priorities intelligently, so that you will be
able to achieve both your short term goals as well as your long term dreams.

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Pricing a Bridge Round
Most founders are very excited when they successfully raise their first round
of funding. They're very optimistic that they will be able to meet all their
Excel projections now that they can start implementing their business plans.
They are confident they will be able to get traction, and raise a Series A in a
few months at a much better valuation.
In reality, this usually doesn't happen, because most founders underestimate
the complexity and the difficulty of running a start-up. Timelines in the real
world are much longer than they anticipated, and everything's a lot more
expensive and complex than they thought it would be.
This is why they start running out of money before they have met their
projected milestones. When they realise that their bank balance is
dangerously low, they start scrambling to raise what is euphemistically called
a "Pre-Series A" or a "Bridge Round."
This can be hard to do; you're not in a very strong position to negotiation
effectively when you have no money in the bank. However, you think your
valuation should be far higher than it was during the seed round, because
you have accomplished some of your milestones and been able to partially
prove that your business model works. Because you have made some
progress, you feel that you deserve a higher valuation. You want investors to
give you credit for your accomplishments, and give you more money.
This is very naive. The reality is that this is a market, which means the right
price is a balance between supply and demand. When you're running out
of money, your ability to negotiate is markedly impaired. This can create
tension blood because founders feel that investors are taking unfair
advantage of their helplessness.

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However, from the funder's point of view, you're the one who created the
projections; you're the one who asked for a certain valuation which was
given to you; and you're the one who's failed to deliver on your promises.
Therefore, you should be penalized for not being able to implement
successfully. The only way to do this is to reduce your valuation so you need
to accept a down round. This is hard for most founders to swallow.
It's very hard to know what the right number is for valuing the bridge round is.
The reality is that valuing any round - whether it's the seed round, or the
Series A, or the bridge round is equally hard. Everything is intangible and
nebulous, and there is no metric or formula which you can use. Beauty lies in
the eyes of the beholder, and the price depends on gut feel; and your
judgment about the capabilities of the founders.
It's hard for existing investors well. You don't want to be seen as greedy and
unfair, especially if his heart seems to be in the right place; he is chugging
along in the right direction; but has failed to meet his revenue targets
because of the external environment.
This is why this scenario can create a lot of bad blood. It sucks up a lot of the
founder's energy, who has to scramble in order to raise the next round.
When the initial investors are not willing to give him more money, he's going
to find it extremely hard to get new investors to give him any.
One solution is to discuss this scenario when funding the seed round and
saying, “If you are not able to accomplish the following targets, then we
give you more money only if you are willing to accept a reduced
valuation." A clawback provision could also be included in the agreement.
The chance for possible conflict further down the road is reduced because
the founders have agreed upfront that this is a scenario they're comfortable
with.

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Making sure that the founder's and the funder's interests remain aligned is
extremely complicated when things aren't going well. What do you think is a
fair way of dealing with this?
Actions have consequences, and if you cannot meet the goals which you
set for yourself when raising funds, then you should be willing to accept the
fact that you will pay a price for this. How steep the price will be will depend
upon many factors, including how good the chemistry between you and
your investors has been so far. Have you been open and transparent with
them? Do they trust you? Are they convinced that you have put in your best
efforts?
Most investors will have an anchoring bias, and will use the valuation you
accepted when raising your seed round as their benchmark. They will want
to reduce the premoney valuation, because you have failed to deliver as
promised. This is what causes the tension and friction, because while you
may feel that you have made progress, they feel that you have failed to live
up to your promises. As a founder, you have to be flexible - when you
desperately need oxygen, you cannot afford to be picky and choosy.
Otherwise, you may find that the bridge you need to cross is too far off!
One way in which angels can overcome their bias is to treat the request for
additional funding as a completely new investment opportunity. If you
hadn't invested earlier, would you invest in the company at this stage? Start
with a clean slate. If you believe that even though the founder could not
generate the projected revenue, if he has run experiments successfully
which demonstrate that he has improved his product- market fit, then you
should be willing to be more forgiving, and continue backing him. However,
if you feel that he is not reliable, then it's best to cut your losses, and look for
other investment opportunities.

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Million dollar valuations and mixed
feelings
It can be quite inspiring to read the success stories of first generation
entrepreneurs who've grown their company from scratch, and made millions
of dollars by selling it. These are the founders who provide hope for the next
generation of entrepreneurs, and everyone wants to emulate their success
stories. But we also need to remember that these stories generate other
feelings as well.
For one, there is the feeling of jealousy amongst other founders who wonder
why they're having such hard time raising money, and why they can't seem
to get any traction.
Another feeling is that of envy. This can be especially acute amongst the
colleagues and classmates of the founder who has hit the jackpot. They
know that they have worked as hard as he did, and are brighter than him -
and they are left to wonder why life is being so unkind to them, and why
they've been so unlucky.
Some classmates feel a twinge of regret, "Perhaps if I had taken the risk and
ventured out on my own, I would have been in the same position, as
compared to being stuck in my current dead-end job."
When the entrepreneur strikes it rich overseas, the founders who chose to
stay on in India may feel frustrated and angry that they are having such a
hard time in running their company and raising money. When their friends
who ventured overseas in search of green pastures cash out, they feel
they're being penalized for being patriotic and deciding not to immigrate.

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It is hard to deal with these feelings. It's not easy to see someone else's
success without feeling a tinge of ache and envy and heartburn - after all,
we're all human!
Hopefully, after going through all these, your final emotion will be one hope -
after all, if he can do it, then so can I!

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How to Not Get Funded
There are lots of articles which advise entrepreneurs as to what they need to
do in order to impress investors, so that they get funded. There are guidelines
on how to seek introductions to VCs; how to prepare their pitch; how to
polish their business plan; and how to answer objections and not lose hope.
There are plenty of blog posts, online courses and books which describe this
stuff, a lot of which is extremely valuable.
However, the list of what they need to stop doing is much longer. Part of the
problem is that because the start-up ecosystem in India is still so immature,
lots of founders make very basic mistakes which rub investors the wrong
way. This is why many end up saying no even before even giving the
entrepreneur a chance to be heard. Sadly, most entrepreneurs don't even
realize they're making these mistakes until it's too late.
There are lots of red flags which will signal to the investor that you're
immature, and when he encounters these, he's quite likely to turn you down.
After all, he needs to filter as many deals as quickly as possible, so that he
can focus on the ones which are likely to be valuable. Don't forget that the
investor's default response is always no, unless he has a convincing reason to
want to say yes. If you make it easy for him to say no, then you're the one
who's going to lose out.
A classic example is to ask for an NDA (a non-disclosure agreement) before
talking to an investor. This clearly signals that you have no clue about how
the start-up game is played, and investors don't want to spend their precious
time teaching you the rules. If you really think that your idea is so unique and
original that you will not share it with an investor unless he promises to seal his
lips, this just shows that you are very naive, and no serious investor will talk to
you.

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Similarly, when you send an email, please take the time and trouble to send
it to a specific person. A Dear Sir / To Whom It May Concern email is very
rude, and will not get answered. Have the courtesy to do your homework
about the investor before emailing him. Why do you think you are right for
him?
Another pet peeve of mine is that most founders do not bother to follow up
each phone call and meeting with a thank you note and a summary of the
discussion. This is best done within 24 hours, when the investor still remembers
you.
Finally, if you do want to get funded, remember that Charlie
Munger's reversal rule applies - the best way to get funded is to not make
the errors which would cause an investor to refuse to fund you!

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Founders need to grow up once an investor
says Yes
Raising funds from an investor is a major burden for any start-up founder.
When you finally do encounter an investor who says, "Yes," and is willing to
sign a check, that's a huge hurdle which you've crossed, and you feel like
celebrating. In fact, you should celebrate, but remember the yes is just the
beginning of a long series of steps which you now need to take in order to
make sure that the transaction goes through smoothly.
It's not that the investor will change his mind - it's just that now there's a lot of
additional responsibility on you because you're taking someone else's
money in order to run your company. Your answerability has increased
enormously, and you need to accept this.
Funding is a major milestone for your company, and gives you a chance to
grow. It's also a great opportunity to get your act in order. When you are
bootstrapped, you don't bother too much about legal niceties or technical
minutiae because you're doing things by the seat of your pants, and have
more important things to think about.
However, now that someone is willing to fund you, you need to make sure
that your governance is in place. You need to use the services of an
accountant and a lawyer to make sure your paperwork is in order and your
agreements are water-tight.
I know this is not stuff which most entrepreneurs enjoy doing. A lot of them
think of it as a chore - after all, who wants to waste time worrying about
paperwork when you are busy building a great company?
This is the wrong attitude. Once you've taken money from someone, you
now have a fiduciary responsibility to manage that money properly. You do

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need to report on a regular basis what you're doing with it, and how you're
spending it.
Communication with your investor is extremely important, so you need to set
up systems and processes to make sure that your company grows and
scales. This is now no longer just a hobby you are pursuing. Running a start-
up is a full time job, and you need to dot all the "i"s and cross all the "t"s if you
want to be successful. It may not be as much fun as tinkering in the lab or
selling to customers, but it's an equally key ingredient, and you cannot
neglect this area.

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Creating financially viable start-ups -
which problem should a start-up tackle?
A start-up founder starts with a clean slate, which means he can tackle any
problem he selects. Often this is a problem he is very passionate about
solving - but he hasn't bothered to find out if anyone will pay for the solution.
This is a big issue with techie founders who create a clever product because
they're in love with their technology, and then look for someone whose pain
point it can solve. However, finding product market fit can be extremely
difficult when you put the product first.
It makes more sense to reverse this if you want to be a successful
entrepreneur. You need to look for the market's pain points, and identify
which problems customers will be happy to pay you for solving for them.
Let's look at the banking and financial services industry for example. It's
broken in lots of places which means there are lots of gaps which could be
addressed efficiently by a fintech start-up. This is why so many founders are
getting into microfinancing or example. This is an area which traditional
banks have ignored, and they see this as being virgin territory, which offers
them an attractive opportunity.
I think this is short-sighted, because you're competing with banks on their
own turf - after all, their core competence is lending money! While it's true
that microfinance is of minimal interest to banks today, as the segment
grows and starts becoming profitable (thanks to the start-ups which invest in
growing this market), they will start competing for their customers in this
space. Because the bank's cost of raising funds is much less than that of
start-ups, the entrepreneurs will find themselves at a disadvantage, which
means their terminal value after 10 years is likely to be poor.

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Others take pride that they can use technology to disburse loans in a few
minutes. I think this is a great marketing gimmick, but am not sure what
difference this makes in real life. Instant gratification is hardly a desirable
goal in financial affairs, and can lead to consumers taking loans to indugle
in impulsive spending, which they then find hard to repay. Also, technology
is becoming a commodity, and while a start-up can implement much faster
than an established player, it won't take much time for the banks to catch
up, which means this is not really a defensible competitive moat.
This is why it's far better to find a problem for which banks will be willing to
pay - something which causes pain to their customers, but is not part of their
core competence. A good example of a bank's customer's pain points
would their customer onboarding process - for example, when someone
applies for a loan. Banks need to get them to fill in a KYC because this is a
regulatory requirement, but this can be quite a time-consuming painful
exercise which no one likes doing. It's a cost for the bank, which they are
forced to bear.
Since the KYC is never going to be part of a bank's core competence, they
have to outsource it so someone. If a clever start-up finds a technology-
based solution which allows them to do the KYC more efficiently, quickly
and less expensively as compared to the traditional process, lots of banks
who will be happy to pay them for their solution.
So does this mean you shouldn't dream big? No - it just means that you need
to be a realist, and understand that you do need to generate revenue to
make your dreams come true! If your solution is one which no one is willing to
pay for, then you need to ask yourself - Are you addressing a problem which
needs a solution in the first place? Or is it just a pet hobby horse you are
riding? Once you have enough money in the bank, you then have the luxury
to be able to follow your heart's desires, but till then you need to obey the
market's dictates!

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Data analytics - the wheat and the chaff
Data analytics has become a hot area, and everyone wants to know how
they can use machine learning (ML) and artificial intelligence (AI) to make
better decisions. We are drowning in data, and want to know how we can
make use of it intelligently. How do you transmute Big Data into knowledge
and then convert that into actionable insights? This is the promise which
data analytics offers.
Data analytics falls into four buckets. We can analyse incoming data, and
this is called descriptive analytics. This is fairly straightforward, and you need
to create dashboards so it's easier to visualise the trends - after all, real time
graphics are worth a thousand words.
You can then apply an intelligence engine to the data, to run diagnostic
analytics. These help with correlation which can lead to causation, so you
can understand why certain trends occurred in the past.
This then leads on to predictive analytics, which is what we're interested in.
How can you extrapolate from the past into the future, so you can follow a
path which has a higher probability of leading to success?
Finally, when your model is mature, you can use prescriptive analytics, which
actually tell the business owner what to do next. This is the Holy Grail of data
analytics, and we are slowly but surely getting there.
Part of the problem is that because big data, ML and AI have become
buzzwords, lots of companies which talk about providing insights through
data analytics often confuse correlation and causation. Mindless data
mining leads to overfitting of data, and this can lead you down the wrong
track. This is a big risk when you place too much reliance on the data and
stop using your common sense.

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Also, they often tell you things which you already knew - stuff which is so
obvious that it is of no use because it doesn't changed your decisions or
actions. Often, this ends up being pointless academic information which just
reconfirms your biases, and this is of no use to the business owner.
The key question every data analytics company needs to answer is - what
actionable information are we providing to the business owner which he
would otherwise would have overlooked or misinterpreted? How will our
insights help him to become more successful? If they can answer this
question intelligently, they're far more likely to succeed.

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Are Indian angel investors too risk averse?
Lots of Indian entrepreneurs feel that Indian investors are very
backward and timid. While they're happy to fund copycat clones, they're
not willing to back a courageous solo entrepreneur who has an earth-
shattering idea which can change the world. Lots of them compare Indian
funders unfavourably with fabled Silicon Valley investors who are known to
sign cheques after meeting a clever entrepreneur in a cafe, simply on the
basis of an idea sketched on the back of a napkin.
These stories make for interesting reading, but I think they are often the stuff
of fairy tales. While it's fine to admire their courage, we also need to
understand that this is not a disciplined or systematic way of making
investments. While it may work every once in a while, the fact that these
stories are the stuff of legend obviously means that the vast majority of the
time this is an approach which is doomed to fail.
Part of the problem is that entrepreneurs overvalue the value of their own
ideas. They think their ideas are original and unique because they live in their
own little bubble. They are consumed by their idea, until they start believing
that no one else in the world has ever had such a good idea.
This is obviously not true, because investors are deluged with clever ideas
from bright founders all the time. We have learned that an innovative idea is
simply not enough - you need to be able to execute it, and this is a hundred
times harder in the real world.
Entrepreneurs believe that funders don't give them enough credit for their
dreams and their drive. They can't understand why rich investors aren't
willing to part with their money to back them. This is why lots of Indian
founders believe that Indian investors are stingy and don't have the courage
to be able to take outsize bets.

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The truth is that when you are spending your own money, you have to be
careful about whom you give it to. Just like entrepreneurs feel that investors
undervalue their ideas, investors also believe that entrepreneurs treat their
money very cavalierly. They worry that because it's the investor's money,
they spend it way too casually - easy come, easy go! If it were their personal
money, they would be much more frugal. We don't want to kill their dreams,
but we do need to keep them grounded.
This is the gap which needs to be bridged. Ideas are important, and so is
money! Each of us needs to value what the other brings to the table so that
we can co-create something which is more than the sum of our
contributions.

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Making sense of VC valuations - a guide
for the perplexed
In the start-up ecosystem, VCs are the cock of the walk. They're at the top of
the pecking order because they are the ones with all the money. All
investors aspire to become VCs because they are the big boys - the alpha
males who have the financial firepower to back unicorns, and become
amazingly rich in the process.
VCs are thought of being the super-smart whiz kids, who identify the next
Googles and Facebooks of the world. They are wined and dined; and
invited to all the start-up conferences to give the keynote speeches. After
all, if they are so rich, they must be very bright! Everyone wants to
understand their perspective and benefit from their insights. Since they
control what going to happen, everyone wants to anticipate their next
move.
This is why it's so hard for the ordinary investor to understand why the
behaviour of VCs often borders on what seems to be irrational to them. They
back companies which are burning cash in order to increase their market
share without earning any profits - something which flies in the face of
common sense.
It's easy to grab market share by burning cash when you are spending other
people's money. They feel the business model for the VC is based on
bubblonomics - sacrifice profits for growth, and when you become huge,
then sell to a bigger fool.
When people question their rationale, the standard answer is -" This time it is
different". The media provides a veneer of respectability to actions which
seem to be illogical and short-sighted. When you can spend tons on PR, it's

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easy to create buzz, so you can fool lots of people a lot of the time by
getting them to put lipstick on your favourite pig.
Yet, VCs merrily continue funding loss-making companies - and raising even
more money to allow them to continue to grow unprofitably. This is why
many observers start doubting their own sanity when they read about these
fund raises at stratospheric valuations. What do these VCs see in these
companies that they are willing to back them? What are we missing? These
guys are rich and smart, and they must see something which you don't.
We need to be empathetic, and understand that VCs are riding a tiger and
they can't get off. They operate under lots of constraints, which is why they
are often forced to do stuff which makes little sense to an objective
outsider.
VCs understand the power law - their returns are going to come from a very
small proportion of their companies. The problem is that it is nearly impossible
to identify in advance which these companies are going to be. This is why
they bet big on potential winners; and encourage them to grow
aggressively, even if they haven't honed their business model as
yet. They hope is that they will fix it as they progress. Their formula is -
Go Public, or Go Broke. They want their companies to achieve escape
velocity, even if they blow themselves up in the process of trying. Even if ten
of the companies they back go down the tube, the winner will more than
make up for this. Seen from this perspective, they are behaving very
rationally.
This is why the VCs with deep pockets are forced to chase the few eligible
companies who fit into their sweet spot. They are compelled to compete
with each other, which is why they get into bidding wars. VCs are
competitive, and thanks to group think, they will often go all in and take
outsize irrational risks. Once they have backed a company, they can't afford
to back off, even if it doesn't seem to be going anywhere. They are forced

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to speculate on a few big bets, and cannot afford to be left behind,
because their reputation is at risk if they lag behind.
The problem arises because every VC wants to raise as much money as he
can - not as much as he should. This is why they often end up biting off more
than they can chew. After all, the more the money you have, the greater
the prestige you command. If you have raised a billion dollars, you are more
of an alpha male as compared to someone who has only half a billion
dollars. Also, the more you raise, the richer you are, because your
management fees are 2% of your AUM. Also, since you need to return the
LP's money in 10 years, this is the limit of your time horizon - you need to be
able to engineer an exit (liquidity event) in 10 years. And while the rest of the
world looks up to VCs with awe, don't forget that they need to answer to
their limited partners. They have the duty to provide them with outsize returns
if they want to maintain their reputation and raise their next fund.
The problem is that when you raise so much money, the choice of
companies you can choose to invest in becomes extremely limited. Thus, if
you encounter small companies which are very profitable and are likely to
do very well in the future, you don't have the luxury of being able to invest in
them, because they're not going to be able to affect the needle as far as
your returns go.
10 years may seem a long time, but the day of reckoning does finally arrive.
The only way they can perform is by keeping on backing these large
companies, no matter how they perform. They need to ensure that they
continue becoming larger and larger, until they can hand them off to a
bigger fool. This is often another VC firm, because they are happy to help
each other out. It's a close knit community, and they will buy each other's
lemons to keep the ball in play. As far as the rest of the world goes, the
valuations keep on increasing, irrespective of the fact that the business
model is completely hollow. Their expectation is that hopefully things will
work out in the end.

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The Holy Grail is an IPO, but that's becoming increasingly hard, because the
average investor is no longer as naïve as they used to be in the past. They're
able to look past the smokescreen and figure out that the intrinsic value of
the company is poor, no matter how huge the company claims that their
market share is. After all, it's easy to buy customers when you offer discounts
and cash back schemes, but won't they leave once the easy money runs
out?
While it's all very well to boast about how revenue is increasing
exponentially, if you need to burn money in order to acquire customers and
grow your market share, how is that going to be a sustainable model?
While the last 20 years have been great for VCs, think their business model
has had its day. It needs to evolve and adapt, just like all other industries
need to. The VC industry is also due for a disruption, because when models
don't make any financial sense, they will collapse. Yes, they may take much
longer than you expect, because the world is awash with cheap liquidity,
and everyone is hungry to find an edge, no matter what the risk.

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How to make the most of Start-up
Conferences
Like everyone else, I enjoy attending conferences. They're a chance to get
out of the office, take a break from regular work, and meet lots of exciting
like-minded people. At start-up conferences, you hang out with founders
and investors and swap war stories. If you are an entrepreneur, you can let
your hair down and complain about how hostile the funding environment is,
and how unsupportive investors are. If you are a funder, you can gripe
about the immaturity of founders, and how unrealistic their expectations
about their valuations are. It's great to hang out with people who
understand the volatility of a start-up system is, and who can empathise with
your ups and downs
Of course, you also attend the lectures and the panel discussions and the
debates, and hopefully you learn some stuff during the conference.
However, the truth is that the content in these conferences leaves a lot to
be desired. Usually, you hear the same old tired stuff, because it's the same
old familiar faces who speak on the conference circuit. The truth is that you
could find these pearls of wisdom much more efficiently by reading a blog
or a book.
This is why you need to ask yourself, "How much value does a conference
add to your life? Is it really a good idea to attend? Shouldn't you be
spending more time in your office, improving your product and finding
customers, so you can actually make money?"
I agree that listening to successful founders at these start-up conferences
can inspire you, but unfortunately the motivation is very short-lived.
Please be honest with me and tell me how much you benefited from the last
conference you attended? Did it have any lasting impact on the way you

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run your company? The reality is that while you will be on a high while
attending the conference, most of these offer very little tangible outcome.
You swap visiting cards and promise to remain in touch, and when you
return to work, you send out email invites and LinkedIn invitations. However,
most people don't bother to respond and you never hear back from them,
and you wonder whether it was really worth all that time and energy you
spent.
I think it's a good idea to attend conferences when you are starting off. It's
helpful to develop a network of friends, peers, mentors and coaches -
people who've been there and done that. However, your return on
investment on the second and the third and the fourth conference is going
to become progressively less, so that over time, you need to learn to
become picky and choosy. Don't forget that your time is your most valuable
asset, and you cannot afford to fritter it away at a conference. Even if the
attractively produced sales brochure may promise you a whole lot, most of
it is froth. There are few insights you will get which will help you increase your
revenue.
The biggest value these conferences provide is that they help you to
expand your network, for which face-to-face meetings are invaluable. They
give you a chance to meet people you would never be able to connect
with otherwise. If you are lucky, you may bump into an enthusiastic investor
by serendipity, but if you want to increase your chances of success, you
cannot afford to rely on chance alone, because everyone forgets whom
they met as they get sucked into their daily routine once the conference is
over. This is why you need to work hard before the conference to set up
these meetings, and this needs a lot of preplanning.

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Why do most start-ups fail?
It's a sad fact of life that the vast majority of start-ups are doomed to fail.
If you stop to think about it, this is quite surprising. After all, entrepreneurs who
choose to found a start-up are usually bright, confident, and willing to take
on risks. Even though they know that the start-up mortality rate is so high,
they are happy to challenge the existing players in the market, because
they feel they can do a better job than the incumbents. They're well-
informed and expert, and the very fact that they've been able to raise
money from funders means they are charismatic and can do a good job
convincing mature investors that they have a dream which is worth
backing. Also, one would expect that the combination of an accomplished,
ambitious hard-working founder who has considerable domain expertise,
along with seasoned investors with deep pockets should make for a winning
combination!
After all, very few people are capable of tacking the multiple challenges
which starting your own company engenders. These founders have kick-
started their company from scratch, which means they've proven that they
have abilities which most of their colleagues lack, which is no mean feat in
itself. Then why do they fumble?
While failed founders are happy to trot out the same old excuses, I feel it's
usually not because of external market circumstances; or because they're
technically incompetent; or because they ran out of money. I think the truth
is that it's usually an ego issue, which means that their immaturity comes in
the way of their success.
Many entrepreneurs think of themselves as being supermen. They believe
they should be able to handle all their problems by themselves, which is why
they're often not willing to ask for advice until it's too late. For example, they
think of their investors as clueless moneybags, who only understand cashflow

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and financial statement. They don't have a very high opinion sometimes of
their employees because they think as CEOs they're in control, in charge of
everything else. They're not willing to delegate. They often end up
micromanaging as a result of which they become the biggest bottleneck in
the progress of the company. This is why they either stall or fail.
This is a huge tragedy, and it breaks my heart when you can see that it's the
founder's immaturity which is causing him to shoot himself in his own foot.
You would think this should be such an easy problem to solve. All you have
to do is point out the deficiencies and he'd be able to fix them. Of course,
it's very hard for a person to identify their own faults. The very fact that
they're emotionally immature means they don't have enough self-awareness
and don't even realize the harm which they're doing themselves by being
blissfully unaware of what's happening. They refuse to confront reality until it's
too late. Then they go around scrambling trying to raise more funds, or a
bridge around by which time they've burned so many bridges that no one is
willing to back them anymore. Then their entire house of cards comes
tumbling down which is so sad.
I don't really think there's a very easy solution for this except for deciding only
to back founders who've proven that they have emotional maturity. This is
not easy to gauge. I think a founder who is experienced, who's seen some of
life's ups and downs is much more likely to be emotionally resilient, and
willing to reach out for help when he finds that he's floundering and does
not think it's below his dignity to ask.

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The problem with passionate founders
Investors know that trying to pick the right start-up to fund is a hit and miss
affair. We do a lot of due diligence and analysis, but the truth is that it's
usually a gamble because it's impossible to predict which one will succeed,
and which one won't. After all, at such an early stage, there are very few
metrics one can analyse, so we are forced to go by our gut feel.
This is why the rule of thumb is that you should back the founder - which is
why the bet is always on the jockey and not the horse. This is why we try to
assess the founder's charisma. Is he capable of selling his dream? Attracting
the right team? Does he have the X Factor which blows you away?
That's why we pay so much importance to how passionate the founder
is. This is key, because running a start-up can easily consume all your
energies. It need to be the most important thing in your life if you want to be
able to pull it off successfully, which is why single-minded focus and passion
is so important.
However, as with all things, too much passion can backfire too. The trouble
with someone who's too passionate about his solution is that he may get
obsessed with it. He may start believing that his product is the only
correct answer for the particular problem that he's addressing. He has spent
years researching the market, and cannot understand why other people
don't get it - why they don't understand his vision. He is frustrated when
customers aren't willing to buy his product. How can they be happy to
muddle along with whatever suboptimal jerry-rigged solution they have
been using for many years, when his is so much better? Why aren't investors
willing to fund him? Can't they see how superior his product is as compared
to the competition? He gets trapped in his own thinking, and his passion
becomes a prison which affects his ability to be able to think clearly. He can
no longer understand the way the rest of the world thinks because he is no
longer on the same page as them.

55 | P a g e
Now, he may still get lucky (I'm using the word very deliberately, because a
lot of start-up success depends upon being in the right place at the right
time). He may be able to get someone to buy into his vision and succeed,
even though the odds are stacked against him. This is the reason why
people like Steve Jobs and Elon Musk are such heroes for today's young
entrepreneurs - because they have been able to translate their passion into
reality.
However, they are outliers, and trying to model your start-up on them is
doomed to fail. Passion is definitely not sufficient for start-up success - and
may not even be necessary. In fact, it can backfire because the founder is
so convinced that his vision is the only right one that he refuses to listen to
reason. He is not willing to accept advice from anyone else. He becomes a
bit monomaniacal, and this is one of the reasons why start-ups fail.
While being passionate is fine, you need to marry it to calm reason if you
want to create a successful company.

56 | P a g e
The one question I ask all entrepreneurs
Lots of entrepreneurs reach out to me because they want to raise funds,
and I am happy to interview them. When they pitch, they spend a lot of
time talking about their market; their product; why they think they will
succeed; and why I should fund them.
While all these are important, the one question I ask all of them is, “Which
book are you reading right now?"
Many entrepreneurs are surprised by this query. What does this have to do
with their ability to found a successful company? Why should this influence
my decision to fund them?
A surprisingly common (and disappointing) answer is, "Oh, I have been too
busy to read a book for a long time."
I think this is a red flag, because I believe every entrepreneur needs to be a
learning machine - you have to be flexible, agile and nimble, so you can
respond to changing circumstances. The only way to do this is to be curious
and humble, and be willing keep an open mind so you can absorb wisdom.
Reading is the best way to be able to learn a lot. You can learn from history;
biographies; and first person accounts of successful founders. You need to
keep on top of what is happening - not just in your domain, but in other
industries, and in other parts of the world as well. As a CEO you will need to
learn a lot of stuff on the job - how to manage employees; how to write a
business plan; how to negotiate with vendors; how to sell to customers; and
how to find the emotional resilience to deal with the daily ups and downs of
a start-up. These are the bread and butter problems which will confront you
daily, and unless you read, how are you ever going to be able to do all of
this?

57 | P a g e
As the CEO, you are the chief everything officer, and you need to learn this
stuff, even if you don't need it right now. The most cost effective way of
doing this is by being an avid reader. Reading provides the best ROI on
learning - and it sets up a positive virtuous cycle. The more you read, the
faster you will learn, and the sharper your mental models will become.
Books are inexpensive, and thanks to Amazon, everyone has access to
pretty much any book. I love the fact that they make learning so
democratic, and think of them as being a great equaliser. You don't need
to attend IIT or MIT if you want to read a textbook - you can absorb the
information it offers on your own! A well-written book can form the core of
your knowledgebase, and you can then build on it using supplementary
materials such as podcasts, videos and online courses.
Yes, there are exceptions to this rule. I know successful founders like Branson
have a reading disability, but they have been able to use other strategies to
compensate for this shortcoming. If you don't have a disability, then what's
your excuse for not being a voracious reader?
My final question is - Which book would you recommend I read so I can
understand more about your field? This way, I get to learn a lot too!

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My most valuable asset as an angel
investor
As angel investors, when founders reach out to us, we try to be helpful,
because we think that's part of our role in the start-up ecosystem. We try to
provide them with useful feedback, so that even if we are not the right
investors for them, we hope that interacting with us will help them to
improve their chances of polishing their pitch and finding another investor.
This sometimes backfires. We say No politely, but when the founder keeps on
asking for advice or guidance, this can be a little frustrating. My most
important asset is my time. It's the one irreplaceable resource which I try to
conserve, and I need to make sure that I deploy it effectively. I am a full-
time practicing doctor, and my patients come first, which is why I try to
provide mentorship only to those companies whom we've invested in. I try to
be focussed, because this is where my interactions are likely to have the
biggest impact. I need to think of a return on investment on my time, just as I
think of a return on investment on my money.
The problem is that a lot of founders don't understand this. The one thing
most start-up founders don't have a shortage of, is time. When they do find
someone who replies to them, they think that's a marker of potential interest,
and they try to nurture that relationship. The hope is that at some point I will
perhaps write a cheque, which is why they continue seeking coaching.
Now, unfortunately, I'm not a full-time investor, which means I need to be
frugal with the way I allot my time. While I would love to be able to mentor
tons of people, the fact of the matter is that I need to be picky and choosy.
I don't want to be rude when saying no, but I think founders also need to
understand that investors value their time. We try to guard it jealously,
because it's our most valuable resource. The value we add is not just the
money which we invest in a company - it's the hand-holding we provide

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when they run into a rough patch, and this means we need to lavish time
and energy on it.
As a founder, when an investor says No, accept this gracefully, say thanks,
and then move on. Try to learn from the refusal, so you can do a better job
with the next investor you pitch to. If you want, you can ask for permission to
send regular updates, and most investors will agree to this, provided you
don't expect them to respond.
However, don't keep on pestering the founder, because that sours the
relationship. Not only does it irritate the person you're pestering, it also
wastes your energy. You could deploy this better by trying to find another
investor who understands what you are doing, and is happy to back you.
The good news is that there are lots of investors in the ecosystem today, but
it can take time to find the one who is right for you. Every time you get a
refusal, you get a chance to improve, which means you are also getting
closer to a Yes - and you only need one Yes to make up for lots of Nos!

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When you have to shut down your start-up
One of my founders just called me. He was feeling extremely guilty and
ashamed about the fact that he was going to have to shut his start-up
down, because he couldn't make ends meet. He had tried every option he
could think of, but everything had failed. He was embarrassed; and was
scared that I would berate him. I was his largest angel investor, and he felt
that he had let me down by burning through all the money, and having
nothing to show for it.
I tried to offer him a balanced perspective. “As an angel investor, I
understand that most start-ups will fail - after all, this is the fate of most of
them, so you don't need to beat up on yourself. As an angel it's impossible to
identify which start-up will succeed, which is why I assume they are all going
to fail when we invest in them. Now this doesn't mean that I like throwing
away my money. It's just that I need to be realistic, so why would I get upset
because your particular start-up has failed. Logically, no matter how hopeful
and excited I am when I sign the cheque, there is no logical reason to
expect a particular start-up to be the exception (though I do agree that
hope springs eternal in the human breast, and every angel feels that they
have identified a winner when they sign their first cheque)."
What upsets me is not the fact that the start-up failed, but that the founder
refused to communicate with his investors even though he could see his
start-up was spiralling downwards. Rather than fulfill their fiduciary duty of
keeping their funders in the loop, many founders clam up and enter
prolonged periods of radio silence, during which the investors have no clue
what is happening. The sanguine ones naively believe that " no news is good
news", and trust that all is well, which is why they get a rude shock then the
founder tells them he is going to have to shut down in a few weeks.
Investors, like all of us, hate surprises - especially unpleasant one! They have
no idea what you have been trying; why you are failing; what you are trying

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out as your Plan B; and why nothing seems to be working. Investors will
forgive failure, but they will not forgive failure to communicate. Not only is
this a sign of disrespect, it also means you have betrayed their trust by hiding
the dark truth from them, and this is not acceptable.
It is specially when things aren't going well that you need to be radically
transparent and honest. Interestingly, this is the time when a good angel can
be worth his weight in gold. It is when you are at your wit's end that you
need an empathetic sounding board - someone who can help you think
through your options objectively and thoughtfully.
The problem is that most good entrepreneurs feel guilty when they find they
are failing. They try to hide this bitter reality - sometimes, even from
themselves. They beat up on themselves, because they feel they've let
everyone down - their employees; their customers; their family; themselves;
and their investors. There's no need for me to add to their angst - this is hard
enough to manage as it is. And in any case, I'm a big boy. I understand that
angel investments are a risky investment class, and lots of them will fail.
I don't think he had any reason to fear that I would give him a whiplashing. I
am okay with forgiving failure - after all, I have failed many times in my own
life. However, I am not okay with his trying to hide the truth.
I counselled him - You are young, and the end of your company doesn't
spell the end of your life! Even if the outcome of your start-up was unhappy,
as you worked hard and did your best, there's nothing to be ashamed of. As
we all know, shit happens - life is not always fair. Sometimes you were just
unlucky; or in the wrong place at the wrong time, and there's nothing much
anyone can do about this, so you need to accept your lesson from the
school of hard knocks, and move on, rather than wallow in self-pity. Having
to shut down your start-up can be emotionally devastating, because you
feel like you've been forced to kill your first-born. It takes time to recover, but
if you learn to be kind to yourself, you will bounce back quicker.

Start-up Tips for Founders and Investors

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