Understanding Your Investor

Are you an Entrepreneur?

Do you have a friend who is an entrepreneur?

Do you know someone who is an Entrepreneur?

If the answer to any of the questions above is ‘yes’, then you must also be aware of the sweet and sour relationship between Entrepreneurs and Investors.

Imagine Tom and Jerry, brother and Sister or Husband and Wife. Can you think of one without the other? Most of you would say “No” and you are right.

They can fight with each other, frown at each other, shout at each other, blame each other but the reality is, they are meant to be together. If you go and talk to either side, you will find them complaining about the way other behaves, thinks or operates. Such is the relation between a startup and an investor. They need each other but blame each other. I have heard startup entrepreneurs fearing from sharing their ideas with Investors. The fear is that of the idea being stolen. ‘Idea being stolen!’.

Is this fear really for nothing? Should they not trust investors?

Many such questions keep coming to my mind and why not? After all I too am an entrepreneur (At least I like believing it) that too from one of the most struggling domain which has equally promising growth and returns.

So I decided, before we answer the questions above, let us understand what interests these investors have in the idea or startup. And even before that let us understand what all does investors deal with?

But, how? While I was struggling with this thought, there came an opportunity in the form of a design thinking workshop where we took up this topic on understanding investors.

So, how do we start? We first create a persona of investor.

A nice looking person generally with grey (uncolored) hair, dressed in business formals if a VC or in smart casuals or semi formals if an angel investor. A VC would look like a typical sales or banking professional and an angel on the other hand is relaxed person with carefree attitude, hard to spot unless you know s/he is an angel investor. A VC would show high value for the ‘rules of investment and data’ an angel on the other hand would most likely have a strong understanding of the industry s/he is investing in.

Let’s understand what we think they think when they say the following: hout the other? Most of you would say “No” and you are right.They can fight with each other, frown at each other, shout at each other, blame each other but the reality is, they are meant to be together. If you go and talk to either side, you will find them complaining about the way other behaves, thinks or operates. Such is the relation between a startup and an investor. They need each other but blame each other. I have heard startup entrepreneurs fearing from sharing their ideas with Investors. The fear is that of the idea being stolen. ‘Idea being stolen!’.

Is this fear really for nothing? Should they not trust them?

Let’s understand what we think they think when they say the following:

Is this the true?

Let us understand the job of an investor a bit more.

They:

• Explore new startups
• Raise funds from the limited partners
• Evaluate business plans
• Stay updated with tech, trends, consumer behaviors and many such facets of the ecosystem
• Assist and mentor portfolio startups
• Monitor Current Investments
• And the list goes on…

Entrepreneurs have many pain points in their journey. An entrepreneur needs to ensure the product development is done at the right pace; the consumers/users/customers must like it; startup must never run out of cash for which they always hunt for alternate sources of investments, how we can make our product better than that of the competition etc.

An Investor’s life is considered/ perceived to be very easy on the contrary.

• All they have to care about is ‘Only 1 out of 10 startups they invest in is going to give them enough returns’. So what?
• All they have to worry about are the limited partners whose money the VCs invest in the startups. How does it even matter?
• They will get the returns on their investment at the time of exit. Who cares if it generally happens after 5-7 years and that too if the startup is successful?

In order to ensure they invest right, the investors have the following touch points with the startups in the overall investment journey and this is how they feel at all levels:

Elevators Pitch

This is generally the first point of contact between an entrepreneur and an investor and mostly happens at a public event, a party or any such gathering where the investor is surrounded by many such enthusiastic founders trying to make an impression or get a chance. If we are fortunate you may catch hold of an investor in a lift, or a parking lot where he is possibly in a rush to reach somewhere. At these moments, there is no time to understand the idea fully and a pitch is the only thread that can establish get him/her curious.

Pitch Deck

Although a bit curious but uncertain an investor generally asks for a pitch deck which of course is more than just a statement. This deck helps in understanding the idea in great details, the team, the market size, the competitors, the growth plan, SWOT, and most important is the amount of efforts founders have made in creating the deck. It is not all about putting beautiful graphics and attractive numbers. A pitch deck is an outcome of an actual business plan which if diligently made acts as a reference level at all stages of business. When the current stage of startup is compared with the assumed stage in the business plan, gives us a validation of planning else helps us in redefining our goals and strategies. Pitch deck also gives an investor an idea of the growth potential a startup has. Because at the end of the day; what a VC cares about is “Return on Investment”.

Live Pitch

This is possibly the first point where an investor gets to meet with the “people” behind the startup. And during the engagement it helps the investor in evaluating if the founders/team members themselves are sold enough on the idea and possess enough courage and strength to sail through the tough times. This is where an opportunity of questioning the founders and knowing more about the business is explored. Somewhere in the process investors form first impression about idea and people, this to an extent helps in setting up the tone for the communication further.

Second Meeting

Once investor has spent enough time on Business plan it is generally time for a second meeting to dig deeper into the data and the facts presented. This may happen after a few days or week and one may expect to answer the amount of growth they have seen in the interval; what went as planned and what not? What are the new findings and how does it change the way ahead?

Now the investor is convinced and the founders have gained enough confidence. It is time for the good NEWS. ‘The investor is ready to Invest’.

Hold on!!!

• Are the customers really happy with the product?
• Is the balance sheet reflecting the same numbers as shown in the business plan?
• What business practices have been followed so far?
• Any Malpractices?
• How do employees (If any) feel about the startup and the founders?

Well yes this leads us to:

Due Diligence

Be ready to present investors with balance sheets, account statements, supplier details, vendor contacts, customer references, employee meetings and more data sources to reaffirm the confidence in the startup and its growth.

Term Sheet

Now Vision, Mission, Goals, Values are all agreeable and we can sign the term sheet.

The term sheets at drafted with utmost care as the VC needs to ensure that their interests are safe. The situations where investor’s interest can be compromised can be many but I have tried explaining the dilemma with the help of one scenario.

Will the founders stay put and not exit out of the startup at a price that does not justify returns on the money invested by the investor? Example: When an investor invests 1 Million in a business for 25% equity it is valued at 4 Millions. Now if the startups plan to sell it for 4 Millions would mean no returns for the investor and hence they want to avoid such a situation.

The bottom line is investors just like founders go through the roller coaster ride of emotions throughout the journey.

Finding an ideal partner (Investor/founders) is like finding a girlfriend who loves you back and turning her into your wife. Even after marriage there is no guarantee of agreements at all points. But the success of marriage (Startup) is defined by honesty, transparency, understanding and flexibility on both sides.

Wooing an Investor is like wooing someone you like. Be the best, send them roses, set the expectations right, show them determination and consistency and that will lead to the beginning.

Amit Jindal

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#Investor #VC #Angel #Funding #Startup #Entrepreneur