Food for thought for startups

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

Thought Stimulants for Start-ups
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IS IT FAIR TO RELEASE START-UP FUNDING IN TRANCHES? ..............................................................5
THE VALUE OF DUE DILIGENCE........................................................................................................7
WHEN THE CUSTOMER SAYS NO.....................................................................................................9
WHY DEALS FALL THROUGH..........................................................................................................11
MAKING SENSE OF TERMS SHEETS AND SHAS ...............................................................................14
HOW TO FIND THE BEST MENTOR.................................................................................................17
START-UPS AND MARRIAGE..........................................................................................................20
THE LOVE HATE RELATIONSHIP BETWEEN FUNDERS AND FOUNDERS ............................................23
HOW TO HIRE ROCK STARS AND AVOID THE PRIMA DONNAS! ......................................................25
WHY THE YC MODEL WILL NOT WORK IN INDIA ............................................................................30
THE FIRST-TIME ENTREPRENEUR VERSUS THE SEASONED ENTREPRENEUR ....................................33
THE ROLE OF INVESTMENT BANKERS IN THE START-UP ECOSYSTEM..............................................36
WHY DUE DILIGENCE TAKES TIME .................................................................................................40
WHY ARE ENTREPRENEURS SO OVEROPTIMISTIC? ........................................................................44
CLOSING THE FUNDING.................................................................................................................46
THE START-UP CRAZE....................................................................................................................47
WHY DO ENTREPRENEURS HIDE BAD NEWS? ................................................................................49
MANAGING MULTIPLE ANGEL INVESTORS.....................................................................................51
RISK MANAGEMENT FOR START-UPS ............................................................................................53
THE ENTREPRENEUR'S EGO...........................................................................................................55
STORY SELLING FOR ENTREPRENEURS...........................................................................................56
GRIT OR QUIT? .............................................................................................................................58
IS YOUR START-UP IDEA VIABLE? ..................................................................................................60
FUNDING A PRE-REVENUE START-UP ............................................................................................63
HOW TO SUCCEED AS A SAAS START-UP .......................................................................................67
HOW TO ASK FOR HELP WHEN YOU ARE STUCK ............................................................................70
CRITIQUING AN ENTREPRENEUR'S PITCH ......................................................................................72
FREE CUSTOMERS ARE NOT REAL CUSTOMERS..............................................................................74

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HOW ONE ANGEL INVESTOR LOOKS AT THE WORLD .....................................................................76
WHY I ADMIRE ENTREPRENEURS ..................................................................................................78
ENTREPRENEURS NEED TO HELP EACH OTHER! .............................................................................80
HOW DO YOU VALUE A START-UP?...............................................................................................83
THE ENTREPRENEUR'S BALANCING ACT ........................................................................................86
ANGEL INVESTORS NEED TO ADD VALUE TO THE ENTREPRENEUR .................................................88
WHAT I HAVE LEARNED FROM START-UP FAILURE ........................................................................91
BOOKS AS A BUFFET .....................................................................................................................94
HOW TO IMPROVE YOUR PITCHING STRATEGY .............................................................................96
FINDING THE RIGHT INVESTOR......................................................................................................98
ENTREPRENEURS NEED TO BE THICK SKINNED! ...........................................................................101
WHY ENTREPRENEURS NEED TO LEARN DESIGN THINKING..........................................................103
THE PROBLEM WITH FREE...........................................................................................................105
THE PURPOSE OF A PITCH ...........................................................................................................107
HOW TO CONTACT INVESTORS ...................................................................................................109

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Think of a start-up as an experiment.
Your early experiments are supposed to
go wrong - after all, you are trying to do
something which no one else has done
before! Your goal is to find out what
went wrong and fix the issues before
you run out of money!

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Is it fair to release start-up funding in
tranches?
Many entrepreneurs resent investors who want to release funds in
tranches, based on the milestones they achieve. They think of these as
unfair hurdles, and believe that this reflects an investor's lack of trust in
the founder. They believe that if a funder has faith in the entrepreneur,
he should go ahead and write the cheque for the entire amount
upfront, so that they have at least 12 to 18 months of runway, and
don't have to waste time and energy in trying to prove that they
deserve the second tranche.
However, I think a milestone-based disbursement of funds in tranches is
actually very valuable, because it provides a reality check about six
months after the initial funding. Are you on track? Have you been able
to achieve the goals you said you were? This staged funding makes
you much more answerable and accountable.
The good thing about having an investor looking over your shoulder is
that he can provide an objective 30,000 foot view, and explain to you
what you're doing right, and where you're going wrong. Just like
entrepreneurs want investors to trust them, why can't the entrepreneur
also trust that the investor will be willing to release funds if they perform
as promised? And even if he doesn't achieve 100% success in meeting
the milestones, most investors are understanding and will not be
unreasonable. After all, six months is more than enough for a founder
to be able to get the investor to trust him. And if he's not been able to
do that, then this reflects poorly on him, rather than on the investor.
Yes, founders are worried that the investor may change his mind after 6
months, and renege on his commitment. However, this kind of
milestone-based release of tranches actually makes sure interests are

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aligned. After all, investors want our entrepreneurs to succeed, and we
will not pull the plug unless there is good cause to do so!
Yes, there are other ways of achieving the same end - for example, by
putting the second tranche in an escrow account. And it's also
possible that in the future, we'll have blockchain-based smart
contracts where the funds get released automatically once the
milestones have been reached.

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The value of due diligence
Most entrepreneurs dread the idea of subjecting themselves to due
diligence by investors. They pride themselves on their autonomy and
domain expertise, and don't find the concept of someone digging into
what they're doing very appealing. Some feel threatened when an
outsider who has very little operational skills or real life experience
dares to ask them questions, and challenge what they've done so far -
and dispute their projections. And they resent having to be answerable
to investors just because they have deep pockets.
However, in the start-up ecosystem, as in other parts of life, the Golden
Rule applies - the person who has the gold makes the
rules! Entrepreneurs need to reframe their perspective and understand
that the due diligence process can actually add a lot of value to
them. Yes, it's true that you're likely to feel uncomfortable because
you're forced to expose all your weaknesses, but you can learn a lot
from an independent, intelligent outsider's perspective. Rather than
think of it as a confrontational or adversarial exercise, remember that
financial-savvy, experienced investors can provide you with valuable
insights, which can help you fill in the gaps which would otherwise you
to fail as time goes by.
A good investor will show you a brutally honest mirror. He will administer
tough love, and pick holes in your business plan - and not because he's
wicked or wants to pull you down. He has no interest in demonstrating
his superiority - don't forget, he wants you to succeed, and this is why
he is looking to invest in you! He's going to give you his hard earned
money, and he wants to be sure that your business is waterproof and
watertight. Even though he knows that the odds of your failing are
high, he is still willing to invest in you - please treat this is a marker for the
degree of confidence he has in you!

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He needs to make sure that you've thought about the potential
weaknesses in your business model, and that you are mature enough
to acknowledge these. He needs to find out if you are coachable, and
are willing to fix the gaps which will definitely crop up as you make
progress. Often founders find themselves stuck in the trenches having
to tackle the daily problems which confront a start-up, and they may
end up losing their perspective.
A well-structured due diligence exercise can help you whip your
accounting and governance in shape. Now these are not the things
which most entrepreneurs worry about routinely, because there are
too many other daily fires which they need to put out. However, unless
you address these, you're never going to be able to grow your
company successfully.
A well-informed investor can educate you about your competition,
and you can learn how they view the other players in your domain. He
can give you helpful insights, because he has a 30,000 view. Now you
may feel that it's not fair that investors who don't need to get their
hands dirty should be preaching to you from their comfortable ivory
tower seats, but you need to learn to take the entire due diligence
exercise in the right spirit. Yes, the investor may not have as much
expertise in your field as you do, but don't forget that he has helped
other start-ups to grow, and this experience can be invaluable in
preventing you from imploding! He can also help you to polish and
improve your business model, and help you explore new markets you
may not have thought of.
Think of the investor as being a consultant from McKinsey, who is going
to look into the bowels of your start-up, so he can help you fix problems
at an early stage, and help you make your foundation much stronger,
so you don't have to deal with organisational and cultural debt later
on. And the best thing is you're getting this opinion for free, so make
the most of it!

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When the customer says No
Many entrepreneurs get disheartened when a customer refuses to buy
from them. However, as a famous book advises, the sale begins after
the customer says No!
Customers have multiple reasons for rejecting you, so don't take this
personally. Sometimes the features your product offers may not be
good enough; or you may be too expensive; or they may feel that you
will not be around for long enough for them to take a risk on buying
your product, because you may not be able to support it if you go
belly up.
Many entrepreneurs give up when the customer says no, and they
complain that they wasted many months trying to pitch and adding as
many features as the customer demanded in their attempts to delight
him. When they find they are not able to close the order in spite of all
their efforts, they start feeling sorry for themselves and blame the
system for being start-up unfriendly.
Yes, it's true that life is unfair, but just because a customer says no it
doesn't mean you need to give up on him. The secret is to keep in
touch, and continue showing them that you are making progress. Thus,
if they wanted three additional features that you weren't able to
provide, show them that you are working towards adding these to your
product, so that you can meet their requirements - maybe if not now,
then in the next two months. This will signal that you value their business
and are working hard to win it. This will help you to earn their respect
and they will be more willing to treat you like a potential business. They
can see that not only are you making the effort, you're also willing to
be open and transparent by sharing share what you're doing , and
demonstrating the progress which you're making in order to with their
business.

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More importantly, it will allow you to retain your position in their share of
mind, so they will consider you as a serious contender when they finally
place their order. This way you're much less likely to lose the deal to a
competitor! If you sulk and just give up, they will assume you're no
longer interested, and will buy from someone else.
Yes, you have to be careful that you do this for serious customers only -
those who have the need and the capacity to pay - don't waste your
time on guys who just want to kick the tyres!

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Why Deals Fall Through
Angel investors are always looking for good
entrepreneurs to invest in, and when they finally do
identify a start-up which they feel meets their sweet
spot, they're quite happy to fund it so they can get
on with helping the founder to grow the business.
However, even after offering a term sheet, there
are times when the deal doesn't get consummated
and entrepreneurs push back. They refuse to
accept the money, because they're not
comfortable with the terms which are being
offered.
One of the stickiest issues is that of valuation. Typically, entrepreneurs
always feel that they're being undervalued, and their biggest worry is
that the investor, who has much more experience in doing these deals,
will take undue advantage of their naiveté. They believe they are
being offered a pittance, compared to the potential value which
they're bringing to the table, and they fear they will end up getting
much less than what they're really worth.
This is why founders use lots of different metrics in order to come up
with a valuation for how much they think their start-up is worth. The
truth is that valuing a start-up is extremely difficult to do, because it's all
about valuing future potential - and as well all know, the future is
uncertain. Entrepreneurs are always excessively optimistic that they will
be the one start-up which succeeds against all odds, while investors
know that the fact that 80% of all start-ups fails is the base rate which
should never be ignored. This is why there's often a gap between how
much the investor is willing to offer and the entrepreneur is willing to
accept.
Founders often get
fixated on a high
valuation when
negotiating seed stage
funding. This is short
sighted . Successful
entrepreneurs make
their money at the time
of exit, and they need to
be patient and work
their butt off to execute
flawlessly

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However, there really is no sound reason for the number which the
entrepreneur comes up with - or which the investor offers either, for
that matter, in all fairness! The founder obviously wants as much as
possible, and he may fall prey to an anchoring bias. Thus, he may insist
he is worth at least a million dollars (for some reason, Indian founders
still love discussing valuations in dollars), and insist that he get at least
this much. Their logic is "Our pre-money valuation should be at least $1
million, because in Silicon Valley it would have been at least $3 million."
One of the reasons he gets biased is because he only uses the
successful start-ups - the ones who actually get funding as reported in
the media - as his basis for comparison. However, the reality is that lots
of other start-ups which were in exactly in the same space folded,
even after raising funding - and some did not even manage to do
that.
The biggest fear of every investor is that he may end up losing all his
capital, which is why they need to be very conservative about how
they deploy their funds. After all, they need a ROI so they can continue
investing in other start-ups! They know that no matter how good the
team may be, how good the product ; and how passionate and
resourceful the founders are, the base rate for start-up failure is 80%,
and there's no reason to expect that this particular start-up is going to
be different from the rest !
This is why we prefer talking to entrepreneurs who are mature enough
to understand the importance of negotiation - they should want to
create a win-win situation. If they don't, they make it very difficult to
continue the conversation on an intelligent basis. As an investor, you
know that the only negotiation power you have is before you sign the
cheque, and therefore you want an entrepreneur who will try to help
you to win, rather than selfishly looking after his own interests.

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If he's very rigid at this time, before the cheque is signed, it's unlikely
that he will treat you as a valued partner after he gets the funds. If he
doesn't think that the investor brings a lot more value to the table than
just money, this means he will does not respect the investor's
contribution, and there's really no reason why a good investor would
want to continue having a conversation. Effectively, this means that
these entrepreneurs then usually end up getting stuck with an investor
who only looks at them as a source of money - someone who will want
a ROI by exiting, rather than trying to help them grow the company.

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Making sense of terms sheets and SHAs
Signing a shareholder agreement is a daunting task for the first time
entrepreneur because it's full of legalese. These are foreign terms which
he's never come across and he's not sure how to make sense of the
jargon. What's scary is that the term sheet and shareholder agreement
are usually drafted by the investors, and they are worried that all the
Greek and Latin they are stuffed with are designed to protect the
rights of the investors, and hand over control of their company to
them.
Every entrepreneur has heard horror stories about how greedy investors
are, and that they are out to take over the business, because of the
disproportionate power which the agreement gives them. They are
petrified that the investors will kick them out of the company which
they have spent their blood, sweat and tears on building up.
Now we need to understand that an agreement is precisely that - it's a
legal description of the terms you agree on. This is why the entire
approach has to be one built on trust - you have to trust that the
investors you're going to take money from have your best interests at
heart, and want your business to grow. The reality is that investors are in
the business of investing money so they can grow their capital - they
are not in the business of running your business, because they have
other things to do. Ideally, they would want you to run your start-up in
such a fashion that they don't need to worry about what you're doing.
Their dream is to find an entrepreneur who will continue growing his
start-up so well that they will become progressively wealthier without
having to worry.
However, the fact remains that entrepreneurs sometimes don't do a
very good job of managing a growing business, because this is outside

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their area of competence, and investors need to monitor them to
make sure their capital is being protected.
The truth is that after the cheque has been deposited; all the power is
actually in the entrepreneur's hand. He is the one who manages the
company on a daily basis, and makes the 101 decisions which are
required to run the business. The investor has very little say - and this is
as it should be - we don't want to micromanage the founder.
This is why it's so important for an investor to clearly specify what things
he wants to be involved, in so that the entrepreneur doesn't run the
company into the ground. Now these are pretty standard terms, and
include things like the terms under which new funds can be raised.
They are designed to restrict the ability of the entrepreneur to
mismanage the company and drive it to the ground, causing
the investor to lose all his hard-earned money - it does not affect the
ability of the management to run the company's routine business.
The purpose of the agreement is to protect the interests of both the
parties and create a win-win situation - one where the entrepreneur
has the freedom to do what needs to be done on a daily basis to
make sure the company is growing, while also giving the investor the
rights to stop the entrepreneur from doing anything stupid which would
cause the company to implode.
Having said all this, legal agreements have very limited value in India,
because we all know how effective (or should I say ineffective) the
judiciary is. If things go sour and there is a dispute, there is little effective
recourse the parties have. This is why the agreement is often more of
symbolic value - that the investor and the entrepreneur trust each
other.

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However, it's a very useful legal document as you continue to grow,
and need to raise fresh funds - this SHA will form the bedrock of the
relationships you have with future funders as well.
Some entrepreneurs shy away from the agreement, saying they don't
understand what terms such as voting rights, protective provisions, and
conditions precedent mean. This is not a good argument. No one
wants you to become a lawyer, but as an entrepreneur you need to
learn lots of things on the job, and one of them is making sense of a
shareholder agreement, and understanding the rationale behind all
the terms and clauses which a shareholder agreement has.
To help you make sense of the SHA, so you can understand more
about both the entrepreneur's perspective, as well as the investor’s,
the site at https://www.marsdd.com/mars-library/understanding-the-
term-sheet/ is helpful. You can also generate your own term sheet
at https://www.wsgr.com/WSGR/Display.aspx?SectionName=practice/
termsheet.htm. Talking to other founders is helpful , and you can hire
your own lawyer to draft a term sheet for you .
Reading the right book can help you immensely, because it will explain
to you how the shareholder agreement ensures that everyone's
interests are aligned, and I would suggest you spend time
understanding Brad Feld's book, Venture Deals. This will give you a lot
more confidence in your ability to make the right decision , and will
help you trust the investor more , when you will realize what he's doing
is in the best interests of your business.
Instead of worrying about all the things which can go wrong, try to
focus on what will go right, so your partnership with your investor starts
off on the right foot !

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How to find the best mentor
I have a friend who manages my portfolio , and his results over the last
5 years have been quite unbelievable. He's beaten the market by such
a huge margin that it's sometimes hard to believe that his returns are
real, but my bank balance can vouch for the fact that they are !
I was asking him why his performance is so much better than other
fund managers . He's a simple, straightforward value investor who
worships Warren Buffett. He selects small cap stocks and holds onto
them, but it's his ability to consistently pick winners which is quite
amazing, so I was very interested in finding out what makes him tick !
The first thing he said is, "I benefited a lot by not having a mentor," -
something which I thought was very counterintuitive ! He explained,
"Because I didn't have a mentor, I was forced to learn for myself - and
the best source of learning is from books ! I had to become a voracious
reader, and read all the books on investing , written by multiple
different authors , so that I could develop a style of my own."
He said that the problem with working with a hot shot fund manager
when you're young and junior is that you are very impressionable , and
you tend to adopt a lot of their bad habits, because you are so
dazzled by them. You don't even realise that you are aping them,
because you are so much in awe of them. It’s easy to get swayed by
someone who's a glib talker and very charismatic even though his
basic philosophy may not be sound.
Thus, you are far less likely to learn from someone who maybe a much
better investor , simply because he is much more laid back and not as
captivating. Because he didn't have someone who took him under his
wing when he was young, he was forced to fend for himself. Therefore,
he was forced to learn from books written by world class experts -
which is why his fundamentals are so sound. He also emphasised the

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fact that the lessons books teach you are far more enduring because
you're forced to engage intellectually when you are studying a book -
you don't get just carried away by superficial impressions.
He says, "My mentors were all virtual , and the person I admire the most
is Warren Buffett. Now lots of people say they follow Buffett's style, but
they aren't able to walk their talk. I've read Warren Buffett multiple
times , and the first time you read him, it's to try to understand his
philosophy - how he invests; what companies he picks ; and why.
However, the real lessons only come through when you read about
Warren Buffet the second and the third time, because what you can
really learn from him is his integrity , humility and simplicity ! What really
stands out is the way he leads his personal life - he's a straightforward
guy, who doesn't flaunt his wealth or his skills. I admire how he has
consistently stuck to his knitting and remained honest to his basic
philosophy. The most difficult part about following Buffett is not copying
his investing style , but adopting his impeccably high levels of integrity
and honesty."
He says - " What makes Buffett truly special in the financial service
industry is his emphasis on integrity , and this is what I want to emulate!
This is what makes him special - his refusal to compromise or take
shortcuts. Buffett can teach you not just how to invest, but how to lead
an honourable life. It's not just his personal integrity - it's also how much
he values integrity in the management of the companies in whom he
invests in ."
Interestingly, his favourite Warren Buffett quote is —" It takes a lifetime
to build a reputation but only five minutes to destroy it."
What he has learned from Buffett is the importance of becoming a
learning machine, which is why he is a voracious reader. In a way, it's a
bit like the story of Eklavya and Dronacharya, and he has a burning
desire to learn the best investing practices from the world's best . He

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doesn't have a MBA; he has not graduated from a brand-name
university; and he doesn't have a rich uncle who's given him a helping
hand - he has started from scratch and is completely self-made.
He's refreshingly transparent and honest , so that when he talks about
the returns on his portfolio, he specifies the client's returns - net of taxes
and fees - how much the client actually gets in his bank account at
the end of the say. This is such a contrast from other fund managers
who are happy to game the system in order to make a quick buck at
the client's expense. While everyone in the financial services industry
always talks about how they put their clients first, in reality it's very rare
to come across someone who says what he does , and does what he
says. Having someone who walks the talk is so refreshing - especially
when his returns are so dramatic. It does seems like honesty does pay
off in the long run , and he reinforces my faith in goodness.
For me, the most important lesson is that potentially, anyone anywhere
could follow in his footsteps, because you can pick and choose your
own virtual mentors by reading books !

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Start-ups and marriage
The funder-founder relationship is a lot like getting married, and that's
why it needs to be handled with a lot of love and care. While there’s a
lot of excitement during the dating phase, the problem is that a lot of
these end up in a divorce, creating a lot of mess and unhappiness for
everyone concerned.
Any marriage has its ups and downs, and there is often a rocky love-
hate relationship between entrepreneurs and investors. The good news
is there’s lots which can be done in order to help the marriage
become stronger and more stable.
Dating is a lot of fun, because you can pick and choose. You are
single, and there are lots of fish in the sea ! You feel you can select
whom you want, because you think you are a hot prospect, and any
investor would be happy to back you ! It's only when you realize that
there are lots of other prospective grooms out there, many of whom
are much more attractive than you, because they've got a better
pedigree or are more experienced, that you finally realise that raising
funds can be really hard work.
Dating can be hard work, because you need to groom and prepare
yourself. You need to be charming and persuasive, so he can see what
a great catch you are ! Yes, you will get better over time as you get
more experience, but you do need to do your research. Please don't
jump into bed with the first person who finds you attractive enough to
fund - there is no rush ! Remember that this is a long-term relationship,
and getting stuck with a wrong partner can be extremely expensive.
Beauty lies in the eye of the beholder, and it may take time to the find
the right match , so please be patient ! It's helpful to have a wingman,
who sings your praises - and your best bet is a paying customer, who is
happy to be your evangelist !

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The alternative is to go in for an arranged marriage, and this may
sound more boring , but it's far more likely to be stable. It does
take more time, but it’s often worth the effort, because a good
matchmaker will make sure that you're both on the same page. The
problem is that the matchmaker charges a fee - and sometimes he
cannot help you find the right match despite all the promises he makes
! And even if he does find someone who is interested in getting hitched
to you, you still need to be sure that the chemistry between you and
the investor is right !
So, you have finally found the right person, and you go off on your
honeymoon. Honeymoons are exciting, because you are in love with
each other, and you are looking forward to a great time together, but
do remember that honeymoons don't last too long ! The actual work of
making the marriage starts afterwards when you get back home !
While the funding gets a lot of publicity , and you’re like the new bride
whom everyone wants to show off proudly, you need to make sure
that you fulfill your end of the bargain, because a marriage is not a
one night affair. This is a relationship which needs to get stronger over
time, provided you are willing to give it the love and energy it needs.
Part of the problem is that men are from Mars and women are from
Venus - and this is true of founders and funders as well ! While some
marriages are a delight, where both partners complement each
other's strengths, others are a real mess. While there's little you can do
about how your investor behaves, there’s a lot which you can do to
improve the chances of the marriage being happy by focusing on
what's in your control, and doing your best to keep him happy. The
secret, as a marriage counsellor will tell you is simple - it's all about
communication ! Be open and transparent, and share everything- the
good, the bad and the indifferent, so that you create trust and
intimacy.

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Most investors hate the fact that entrepreneurs reach out to them only
when they’re running out of money. We like to hear about your success
stories too , so that we can participate at least vicariously in the fact
that you're doing well !
Yes, it's true that some marriages don't work out well. The relationship
suffers from neglect, and you may require counseling to make sure
things don't go sour. Rather than give it up as a lost cause, remember
that you selected each other , and it's worth putting in the effort to
salvage the bond - after all, divorce can be a really messy affair !
And even if it does end in a divorce, remember that people do get
remarried ! A second marriage is the triumph of hope over experience,
and hopefully you will be a better marriage partner the second time
around, because you've learned so much from your mistakes the first
time around !

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Angel investors give
entrepreneurs money. In
exchange, they give us
hope, so we can be
optimistic that the world
will be a better place
tomorrow I think we get
the better deal!
The love hate relationship between
funders and founders
A mature start-up ecosystem requires
that both entrepreneurs and investors
work together in order to flourish.
However, in India, relationships between
them are tense.
Many entrepreneurs feel investors take
advantage of their financial naiveté by
extracting their pound of flesh. They
believe that investors want to take over
control of their company, and will start
micromanaging them, as a result of which entrepreneurs will no longer
be able to pursue their dreams .
The other common criticism is that investors are not responsive - they
do not bother to reply to their emails .
Finally, they believe that all investors care about is the bottom line -
that they are heartless, and are not willing to support the
entrepreneur's passions and dreams.
However, every coin has two sides , and investors also feel that
entrepreneurs are exceptionally naive. Falling in love with a great idea
is not enough to run a business , and they need to learn to be a lot
more hardnosed if they want to become successful. They also feel that
founders need to be a little more respectful , and that they don't value
the investor's contribution enough - they think of them as being dumb
money-bags.

24 | P a g e
Unless we can get entrepreneurs and investors to trust and respect
each other, this ecosystem is never going to mature . The best way of
doing this is by understanding each other's perspective .
Interestingly, investors know that we cannot exist without entrepreneurs
, which is why we respect them , but don't forget that we aren't forced
to become angel investors - we choose this option. Start-up investing is
just one of the many asset classes which are open to someone who
has money - and most of these are far safer than becoming an angel
investor !
Angel investors are not just coaches or well-wishers or mentors or
cheer-leaders - they are willing to put their money where their mouth is
! Yes, we acknowledge that there is a lot which entrepreneurs can do
by their own, but they do need to work at earning the investor's trust if
they want to be funded. Just because an investor has money doesn't
mean he's going to sign a cheque when an entrepreneur pitches an
innovative idea !
This is why investors are very disappointed when they encounter
entrepreneurs who are extremely technically savvy , but who haven't
bothered to do any homework about how to run a business. They don't
seem to understand how to create financial statements , or report the
key metrics needed to track operational success.
These are gaps which are easy to bridge, but entrepreneurs need to
remember that the buck stops with them . Yes, it's not compulsory for
them to seek funding from investors , but if they decide to do so , that
then it's their responsibility to make sure the investor is confident that
the entrepreneur can deliver what he has promised.

25 | P a g e
How to hire rock stars and avoid the
prima donnas!
As the start-up grows, the founders need to add people to be able to
implement their business plans. However, the motivation of employees
is very different from that of the founders, and it's very hard for a start-
up to hire quality employees !
Joining a start-up is a risky choice, and good quality workers have lots
of options, which means it's hard for a bootstrapped start-up to attract
the right people. Initially, you will tap into your personal network, but
you will quickly need to cast your net further to find the right people.
Founders try to source employees using the standard recruiting
platforms, but these are designed to cater to the larger companies.
Using their personal network may work well for the first few employees,
but it's hard to continue to find good people as they grow.
Using interns is a useful stop-gap measure, but you can't run a business
using only interns ! Good interns prefer working for large companies,
where they are assured of long-term stability, and have a well-defined
career path. Hiring interns will also help you become better organised,
as you have to train them. This means you will need to set up SOPs, and
these systems and processes will help you scale up as you grow.
Yes, it's possible to use freelancers; and you can outsource work which
is not critical, but this can only take you so far ! It's hard to manage
freelancers remotely; and they will cost you both time and money,
especially if they don't do a good job; or if you need them to change
the delivered product.
One problem is that founders have very high expectations from their
employees. They expect that they will be as driven and passionate as

26 | P a g e
they are, but this is not going to happen - if they were that enthusiastic,
they would start off on their own - why would they join someone else's
start-up ?
The expectations which some employees have when they apply to
work for a start-up are often not well defined. Some want to work only
for a short time, as a stop-gap measure while they continue hunting for
a job at a large company; while others just want to add the fact that
they worked for a start-up to their resume, because they think this looks
cool !
People who work well in a start-up have to be wired differently. They
need to be willing to get their hands dirty; and be happy to learn new
skills which were not part of their original description, as the start-up
grows. They need to be able to work independently, and should be
willing to work overtime all the time, without expecting to get paid
extra for this !
Founders need to remember that great employees are worth their
weight in gold, and they can make or break the start-up. The truth is
that good employees have multiple choices - and you have to be
able to make them an offer they cannot refuse. Good people don't
work just for money - and this is actually your trump card ! As a start-up,
you can offer them autonomy and flexibility, so they can grow while
working for you.
It's very important that you take your time when hiring. You might be
desperate for warm bodies to make sure that work gets done, but
getting stuck with the wrong person can prove to be a very expensive
error ! Firing someone is very hard, and often causes sleepless nights for
the founders.
Finding the right applicants is a huge challenge , and you may have to
sort through hundreds of applications from various sources before

27 | P a g e
being able to select the right candidate. You may get fatigued, and
end up taking a short cut, but this will come back to haunt you later.
Add a practical test in the hiring process to evaluate their skills. Ask
them difficult questions to see how they respond under pressure. Try to
figure out their motivation for joining you ? Is it just the salary? Or are
they excited about working on the problem you are trying to solve?
Will they be able to deal with the daily chaos which characterizes a
start-up ? Or do they need close supervision ? Are they self-starters ? Or
will they treat this as a job at which they need to work from 9 to 5 ? This
will help you identify candidates who would be willing to go above
and beyond what the job description on paper requires.
Hiring well is just the first step. You then need to be sure you onboard
the new hires properly so they settle in well. The first few days are
crucial, and it helps to assign them a buddy, so they feel at home
when at work. Regular feedback is also crucial , since things change so
quickly, and you need to be sure everyone is on the same page.
It's not easy hiring and grooming people, but they are your most
valuable assets, and you need to do this yourself - you cannot
outsource this . Part of your job description is to help them to grow, and
you need to be able to inspire them. You have to lead from the front
by being their role model - they are watching you carefully, and will do
what you do - not what you say !
It can be hard to manage morale when things are not going well, but
it's best to be open and transparent. If things aren't going well, don't try
to hide the truth. Employees can sense your desperation, and while
they may forgive you for failing, they will not forgive you for lying to
them !
If you get funded, then employees will demand a salary hike - after all,
they want a slice of the pie as well. They may not understand that you

28 | P a g e
need all the money you have raised to make sure the start-up does not
fold, and will resent the fact that they are stuck with the same meagre
salary when they joined.
Also, as you grow, some will resent the fact that the founders get all the
publicity and money, while they are stuck with only a salary, as well as
ESOPs , which look good only on paper !
Today, many well-funded Indian start-ups have become bloated, and
their per-employee productivity metrics are poor, because they are
not able to attract the right talent. Most employees have no loyalty,
and are happy to move to a competitor if they get paid more. Many
will moonlight and freelance on the side as well, on the sly, to augment
their income.
Some founders will hire experienced executives who have worked in
large companies, to head their sales and marketing effort, because
they believe their experience will be valuable. Sadly, this often does
not work well in life. They are used to fat salaries; giving orders, and
having support staff to do their work for them - they no longer want to
do this themselves, which means they often end up becoming
expensive misfits, who need to be let go before they do too much
harm.
Human capital is the core strength of a company today, and this is
where social impact start-ups have an edge. They can attract loyal
employees with the right DNA, because they are inspired by the
mission of the start-up.
This post was inspired by a question asked to me by Vidhi Gupta , Co-
Founder at SyncSpire, who helped me to polish it
I asked one of my entrepreneurs, Anuradha Agarwal, who is Founder
at Multibhashi for her inputs, and this is what she kindly added

29 | P a g e
• There are two broad categories of candidates that I focus on:
o Freshers who knowingly avoided placements in big corporate
companies because they didn't want to become just a cog in the
wheel and are particularly looking for a start-up to work for because
some point later in their lives they want to become entrepreneurs
themselves
o Candidates with prior experience in a small or even a failed start-up;
not big start-ups because these biggies are corporates in their own
way
• The hiring process is short and straightforward; no multiple rounds of
interviews; one critical assignment followed by one interview. The result,
whether positive or negative, is clearly communicated swiftly. As a
start-up we have to take decisions quickly and value our own as well
as the candidate's time
• The biggest objective of the interview is to ascertain if the person is
really start-up material or just someone fascinated with the term "start-
up" but lacks the amount of drive, initiative, grit and hard work that it
requires.
• Once hired, the whole team becomes responsible for this
candidate's motivation or demotivation but above all as a leader, the
founder needs to "walk the talk"; be super prompt with feedback and
follow-ups, be present by the team's side for late night deadline chases
and find one to one time with every team member at least bi-weekly.
• Good hiring and managing becomes an excellent channel for
further hiring. Just like happy customers, happy employees refer more
people to join the team :)

30 | P a g e
Why the YC model will not work in
India
The start-up space has become extremely active in India today, and
because the ecosystem is still so immature, we're trying to learn from
the US. One of the outstanding success stories in Silicon Valley which
has created a great reputation for helping start-ups to grow has been
Y Combinator. Its unique business model has allowed it to produce a
large number of successful start-ups year every year, which is why it's
very tempting to try to replicate this in India. However, it's very unlikely
that this will work in India, because these are completely different
ecosystems. If we try to copy and paste, we will end up being
extremely disappointed.
For one thing, the US is flush with capital today. There's so much liquidity
that investors are willing to throw money at entrepreneurs. This is
typically what happens to YC-selected start-ups , who are able to
attract a lot of interest from funders , because they have mastered the
art of pitching. A very high failure rate is acceptable, because funds
have so much capital, and can afford to back highly risky start-ups .
Indian start-ups have much more limited access to funds, because
capital is much more expensive in India today, and funders don't have
such deep pockets. Silicon Valley's risk appetite is completely different,
because of their track record of success over many decades. This is
why ideas and start-ups which might get funded in the US would not
have a chance of attracting investors in India. Now, this doesn't mean
that Indian investors are stupid or that they don't understand how to
support innovation - it just means that they need to be far more
conservative, given the constraints they operate under. They know that
aping YC is a formula for disaster, which will just end up bankrupting
them.

31 | P a g e
The fact that the YC model may not work well in India is actually an
opportunity , because it means we need to start developing our own
models. However, if we keep on looking up to Silicon Valley and use
them as our benchmark , then we will continue doing a sorry job. Trying
to clone what works in the US is doomed to fail in India because
foreign bodies always get rejected.
Indian home-grown accelerator and incubator programs are trying to
develop their own recipe for success, but they're still struggling ,
because it takes time for an ecosystem to mature - especially in India,
where everything takes twice as long as it does in the developed
world.
Investors abroad are willing to take larger risks, which is why they are
willing to sign higher cheques at an early stage. In India, however,
where capital is a constraint, angel investors will typically sign a smaller
cheque at an early stage. This may end up benefitting Indian start-ups ,
as they are forced to grow their businesses frugally. They need to
remain focused and try to solve problems in a cost-effective manner,
because they don't have the luxury of having a lot of cash to burn. .
Fortunately, the cost of setting up and running businesses in India is
lower when compared to other developed nations. Talent is much less
expensive, which is why Indian start-ups have an advantage while
setting up businesses which are solving global problems. .
Indian entrepreneurs need to keep in mind that if they want to play to
their strengths, they should focus on solving the problems of Indian
customers. . They need to get their hands dirty, so they can develop
uniquely Indian solutions for Indian problems. Fortunately, the domestic
market is big enough, so they can do this profitably. With disposable
incomes being on the rise, start-ups can target a higher wallet share of
middle-class tech-savvy Indians.

32 | P a g e
As the Indian start-up ecosystem matures , and there are enough
success stories for investors, the risk appetite of Indian investors would
also increase. This in turn will encourage Indian entrepreneurs to take
larger risks.
Incidentally, Paul Graham is one of my personal heroes, and I admire
YC tremendously ! I believe they are flexible and agile enough to
create a new model for India - it will be interesting to see how they
adapt and evolve.

33 | P a g e
The first-time entrepreneur versus the
seasoned entrepreneur
Most entrepreneurs are first-time entrepreneurs. They have never done
this before, and are very excited about
starting a start up. These are usually young
students who feel that being an
entrepreneur is the best way of being able
to change the world. They're very gung-
ho , and are optimistic that they will be
able to implement the great ideas which
they have been working on, which is why
they go looking for investors to back
them.
Occasionally, the first time entrepreneur is
a more seasoned mature professional,
who has worked for a few years in a job,
and now wants to strike out on his own ,
because they want to be independent.
They are fed up of being stifled in a
corporate job, which strait- jackets them,
and want to be in charge of their own
destiny.
The other , much smaller group of
entrepreneurs , are those who are
experienced and seasoned founders, and
they also fall into two categories. Some
are the serial entrepreneurs, who have
had one of more successful exits in the
past. They enjoy the challenge of starting
a company from scratch, growing it to a
To reduce the risk
of your start-up
failing, you need to
learn from other
businesses. A great
tool is studying
pre-existing
analogs and
antilogs,
introduced by
Randy Komisar and
John Mullins in
their book, Getting
to Plan B. Copy
what works
shamelessly - you
don't need to
reinvent the wheel.
But please do also
learn from the
companies which
failed, so you don't
repeat their
mistakes.

34 | P a g e
particular size , and then letting someone else run it , because they find
management boring . They don't like getting bogged down in the
minutiae of setting up systems and processes, and supervising
employees. They would rather take on a new challenge , and they
thrive on the adrenaline of creating something from nothing. These
successful entrepreneurs find it much easier to get funding for their next
venture, because they have an established track record.
The other group of seasoned entrepreneurs are those who have failed
the first or second time, but have been able to gather up their
courage, bounce back , and want to start off again. They have a
much harder time , because once they have failed, this becomes a
blot on their track record , especially in India, where failure still carries a
huge social stigma . People are very reluctant to fund these failed
founders , because they think their chance of succeeding again are
very poor.
I have a slightly different perspective, and have a soft corner for these
entrepreneurs. For one, they are older, which means they're more
mature, and I find it easier to talk to them, since I am an old fogey too !
More importantly , because they've been through failure, they're going
to be very careful this time around about not repeating the same set
of mistakes which caused them to fail the first time.
They are much more careful about putting together the right team of
people; of respecting the value which investors add by bringing in
valuable funds ; and of monitoring their cash flow like a hawk. They've
learned all these lessons the hard way, and these are hard wired into
their brain . They are much more frugal and careful , because they
know they are not likely to get another chance, and are quite
desperate to prove themselves.
I am happy to back these entrepreneurs , provided they are upfront
and honest; can explain what mistakes they made in their earlier start-

35 | P a g e
up; what they've learned from them ; and how they're going to do
things differently this time around.

36 | P a g e
The role of investment bankers in the
start-up ecosystem
Start-ups often need to raise funds in order to grow, and most
entrepreneurs don't understand the fundraising process. It's all very
foreign to them, and they don't know how to pitch, or how to contact
investors.
This is where investment bankers can be
helpful - they help to connect funders with
founders. Good investment bankers have
cultivated relationships with investors, which
they nurture over many years. They
understand what investors are looking for,
and can help to bridge the gap between
entrepreneurs and investors . The reduce
some of the friction which founders would
otherwise encounter.
They coach entrepreneurs, and explain to
them what investors are looking for. They help
them to polish their pitch, and massage their
numbers , so that they are better prepared for
some of the tough queries which investors are
going to ask them. They provide many dress
rehearsals, so that the founder is better
positioned to be able to raise funds. A good investment banker
actually acts like a guide , and can play a key role in helping the
entrepreneur to succeed.
Good investment bankers take a lot of time and trouble to create a
good reputation for themselves. He understands what each investor is
looking for, because funders come in so many shapes and sizes. He is a

If an investor
refuses to invest in
you, rather than
criticising investors
for their lack of
insight, why not
accept
responsibility for
the fact that you
have not been able
to sell to them
effectively?


37 | P a g e
skilled at connecting the right entrepreneur with the right investor.
Because he's built up a lot of credibility in the start-up ecosystem, his
word carries weight, and he can help entrepreneurs to get warm
introductions to the right people.
However, because you don't require any special qualification to
become an investment banker , lots of middlemen are positioning
themselves as specialists in fund raising for start-ups. Sadly , they end up
taking undue advantage of raw entrepreneurs , most of whom don't
know how to differentiate between good bankers and bad ones.
They are sweet talkers and slick salesmen, who promise founders they
will be able to raise millions for them - after they have been paid their
fat fees. They charge a consultation fee; they charge a sign-up fee;
they charge a fee to vet the proposal; which means they keep on
extracting money from the entrepreneur.
These investment bankers want to make lots of money, which is why
they hang around at start-up conferences . They style themselves as
Investment Consultants , and make lots of promises, most of which
they're never able to fulfill. They get the entrepreneur's hopes up, by
arranging meetings with many investors in fancy hotels, but usually
these are not serious angel investors - not the ones who actually sign
cheques !
Many entrepreneurs waste not only a lot of money , but plenty of
precious time and energy as well . His confidence in the start-up
ecosystem takes a big blow, because he's been exposed to the wrong
people. He starts feeling the Indian start-up space is a sham , and there
aren't any good guys at all. This is tragic, and that's why it's so important
that entrepreneurs are able to differentiate between a good banker
and a bad one.

38 | P a g e
Bad investment bankers also make an investor's life difficult. They
mindlessly send the decks of all the companies they are raising funds
for to every potential funder on their list. Not only is this spamming bad
for their own credibility, it actually backfires, and ends up hurting the
founder. If a deal has been shopped around for too long, it becomes
stale, and serious investors will no longer be interested in evaluating it.
Good investment bankers do not take fees upfront. If anyone asks for
this ( often in the guise of "processing fees"), then this should be a red
flag. To make sure your interests are aligned, good bankers only make
money when they are able to help you raise money, so what they
should charge should be a success fee, which they get only after you
have received your cheque.
A good banker will take the time and trouble to study both you and
your company. He will act as your champion, and he should know as
much about your company as you do, so he can be an advocate for
you. You don't want someone who takes on too many clients, because
he will not be able to give you the personalised hand-holding and
attention you need. Good bankers are in great demand, and they
are quite picky and choosy as to who they will sign on as clients. They
should add value to your life, and it should be very obvious to you
what this value is. Just like the chemistry between the funder and
founder is so important, the chemistry between you and the
investment banker you select is also critically important.
The truth is that you are very vulnerable as a first time
entrepreneur. Any time anyone promises to help connect you to an
investor ( especially when they call him by his first name !) , you are
happy to clutch at straws. Some of these bankers are extremely slick
salesmen , who are happy to help part you from your money. This is
why you need to be on your guard . Please check out their reputation ,
and see what their track record is . Talk to entrepreneurs who they've
helped to raise funds for in the past, before signing up with anyone,

39 | P a g e
because making a wrong decision can prove to be extremely
expensive for you.
I asked Devendra Agarwal of Dexter Capital for his comments. He is
unusual, because he wears two hats at one time - not only is he a very
thoughtful investment banker, he is also an entrepreneurs who is the
founder of InstaOffice !
* I feel investment banking for start-ups below a certain size is very hard
for good knowledgeable bankers , especially if they want to build an
organization (as that entails incurring a fixed cost every month , and
good people are expensive)
* Most good investment banker will charge a fixed fee to ensure that
they are dealing with only serious entrepreneurs . However, good ones
will not take wrong mandates just in order to earn the fee, because
they don't want to jeopardise their reputation.
* Yes , their final fee should be paid once the entrepreneur has
received the money , but often entrepreneurs do not pay even after
having signed a contract . For all practical purposes, contracts are not
enforceable in India's legal system today, and some entrepreneurs
take advantage of that fact
* The investment needs of a start-up looking to raise seed vis-a-vis Series
A vis-a-vis growth capital is very different
* Many time investors by-pass the banker, and even entrepreneurs feel
happy about this, because it saves them the banker's fee, but this
leaves the banker high and dry.
* A good investment banker adds a lot of value during the negotiation
of the term sheet, and can help to expedite documentation and the
closing process , as often the entrepreneur and investor get stuck on
many legal points

40 | P a g e
How to evaluate
entrepreneurs Start with
being as sceptical as
possible, and share your
doubts and worries with the
founders, so they can answer
your concerns ( which I am
sure they have answers for,
since they have been doing
this for a few years). Be as
blunt and straight-forward
as possible. Then, suspend
disbelief, and go and meet
them, and give them a
chance to win you over to
their side - allow yourself to
fall in love with the
entrepreneur! If you decide
not to invest, that's fine, but
you should be able to argue
his case persuasively
Why due diligence takes time
The way an investor looks at time
when doing his due diligence on a
start-up is very different from the way
an entrepreneur does. For an
entrepreneur , the negotiation with an
investor is just one of the many hurdles
which he needs to cross in order to
make his start-up successful. He wants
to pitch and get the money, so that
he can then focus on what's
important - moving on with growing
his business. He is looking for an
investor who will give him the cheque
as quickly as possible, at his chosen
valuation. He wants to expedite the
due diligence process quickly,
because speed is important . The
longer he spends on raising funding ,
the less time and energy he has on
building his business and delighting his
customers. This is why entrepreneurs
think of funding as a distraction -
something which is painful, but which
they should get over with as quickly as
possible.
An investor's viewpoint is obviously completely different. He is taking a
big risk in deciding whether he should be giving you his money or not,
because he doesn't know enough about you. For him, time is his friend.
The more the time he spends on doing his due diligence, the more he'll
understand about you, your team, your business , your weaknesses,

41 | P a g e
and your strengths. He will be able to judge whether you're capable of
compensating for those weaknesses and implement your business
plans.
As an entrepreneur , you're naturally going to be very biased. Everyone
entrepreneur thinks his start-up is the best in the world , and that
funders should line up to give them funding, because they have such a
cool idea , and are so accomplished.
However, this is not the way the investor looks at the world. You are
one of the many start-ups who is pitching to him, and because he has
limited funds, he needs to decide whom to give them to. It's quite
possible that even though you may be an A grade founder, there is
someone else who is an A plus, who he thinks is more likely to give him
a better return on his investment. This is why he selects him over you.
While investors understand your anxiety about moving on with the due
diligence process quickly, you must understand that it takes time to do
this properly. You can't hurry this up. The investor needs to look you in
the eye; to check the chemistry between you and him; assess how
stable your team is and whether you work well together. This is a time
consuming process, because he has other start-ups to evaluate as
well.
Trying to take shortcuts in the due diligence process ends up hurting
investors , and we have learned this the hard way. Also, investors work
as a team, which means even if one person in the team likes you a lot,
but someone else doesn't, then there's very little you can do about it.
The truth is that everyone on the investor team has to agree before
they will actually sign that cheque, because there's so much at stake.
The sooner you accept this reality , the better for you. Yes, this can be
frustrating because you have one person on the team who seems to
play the good cop , and is very enthusiastic and excited about
funding you, while someone else plays the bad cop , who finds 50

42 | P a g e
reasons why you're not the right person. Every time you feel, "Oh great
the deal is closed; I’ve answered all their questions and doubts, and
finally they should be happy," when a new set of queries comes up the
next day !
Now it's not like investors are trying to harass you, but it takes them time
to get up to speed about exploring your domain and your start-up. As
they dig deeper, they will have more questions, and you just need to
be patient.
If you are mature and learn to look at the world from their perspective
it makes complete sense as to why they're doing this systematically
and methodically. In fact , this is in your best interests too, because
they will be able to pinpoint what's wrong with what you're doing. They
can highlight what your weaknesses are, and you can use this
feedback cleverly in order to do a better job. It's like getting the
advice of a McKinsey consultant - for free ! Even if they end up not
funding you, thoughtful insights from an expert investor will help you
run your start-up better !
Yes, it's true that not all investors are well-organised; and some even
seem to take a perverse delight in leaving entrepreneurs hanging for
their replies. This is sad, and these investors harm the entire ecosystem,
which is why you should be picky and choosy about whom you
choose to raise funds from.
I agree it's not much fun when you hear a No from an investor ,
especially after you have spent so much time and energy on the due
diligence process. Yes, it can be heartbreaking , because that means
you have to start the exercise all over again with a new funder.
However, you will get incrementally smarter, and it will become easier
for you , because your pitch will be more polished , and you will have
better answers for many of their questions. You will have learned

43 | P a g e
exactly what they're looking for , and will be able to tailor your
presentation accordingly.
Lots of honest entrepreneurs will agree that their start-up has become
much better because they went through the trial of fire by due
diligence, and if done well, everyone benefits from this process.

44 | P a g e
Why are entrepreneurs so
overoptimistic?
Most entrepreneurs are very sure that the start-up which they are going
to start is going to change the world. Everyone dreams they are going
to found the next unicorn, otherwise no one would ever go down this
path !
I think it's important that you have a lot of optimism , because the truth
is that you do need to be a little crazy in order to have the courage to
found start up. However, some of this is misplaced.
This is partly because first-time entrepreneurs are usually students
who've been extremely successful academically, which is why they are
not used to handling failure. The naively assume that just because
they've been very successful in school and college, they will continue
being successful in the real world as well. However, we all know there is
no correlation between academic success and real world success, but
this is not something which they've learned as yet.
The other problem is all the Kool-Aid which they're used to drinking
because of all the hype which surrounds the start-up ecosystem. They
read all the success stories which the media highlights; they soak up all
the praise which is showered on the start-up founders who have made
it big; and they binge on all the Shark Tank shows.
Sadly, few people talk about the failures and hardships which
entrepreneurs need to endure. Even successful entrepreneurs convey
a very rosy picture of their journey, because they want to show how
heroic they have been in overcoming all the obstacles they were
forced to surmount. They usually downplay all the near death
experiences which they've had.

45 | P a g e
Investors, on the other hand, are acutely aware of the fact that lots of
start-ups fail. Most investors have invested in companies which have
gone belly up, even though the start-up was very well positioned and
the founder seemed to be very bright, and had all the right things
going for them. Even after being able to raise funds from sceptical and
cynical funders , they still end up failing - often after burning through a
lot of money. This is why there's such a huge difference in the world
view between the battle-scarred seasoned investor , and the first-time
entrepreneur !

46 | P a g e
Closing the funding
It can be very exciting when an investor agrees to fund you, but you
need to understand that this is just the first step on a new leg of your
journey. There is still lots of stuff which needs to be accomplished
before the cheque hits your bank account, and you need to be on
top of things to make sure that this process gets expedited. Think of it
as a project with multiple moving parts, and you need to take
ownership to make sure that nothing falls between the cracks . Things
can change quickly , especially when you are dealing with many
investors, and you don't want to lose momentum.
Because there are multiple players (your lawyer, their lawyer, their
analyst, the many complex forms ; and the multiple signatures ) the
process can seem complex and this can unnerve you. It’s a good idea
to set up a list of deliverables; define who is responsible for which task;
create a timeline; and then share this with everyone proactively , so
that everyone can track progress. The fact of the matter is that
investors are busy, and there are lots of different things going on in their
life. Unless you make this your personal priority , things will take forever
and ever to happen.
You need to keep on pushing and pulling to make sure that things
move quickly, because you may find that the ball gets dropped
because no one is very clear who's supposed to be doing what. This
lack of coordination can come back to hurt you.
There are lots of tools available to help you manage the closure of the
deal effectively. Once you put down the tasks on paper and add a
timeline to it, what you need to accomplish will become a lot clearer ,
and you'll be able to remain on top of things.

47 | P a g e
The Start-up Craze
There are many reasons why the start-up
ecosystem is booming in India.
The Indian government is pushing the idea of
entrepreneurship as being the answer to
creating new jobs to kick-start the economy;
and because of all the adulation which the
media lavishes on successful founders , the
new generation of entrepreneurs (the Bansals,
Vijay Shekhar Sharma and Bhavesh Agarwal)
have become the new role models for
students. The start-up space is hot and
happening, and everyone wants to become
an entrepreneur !
Another contributing factor is that the jobs in
the IT companies have dried up. Engineering graduates are finding it
hard to find employment, which means that they need to create jobs
for themselves by creating start-ups. Since there is so much interest in
entrepreneurship, lots of accelerators and incubators have now sprung
up, which are helping students to create a business , by teaching them
how to craft business plans and to pitch to investors. Finally, to
complete the virtuous cycle, lots of investors are joining the
bandwagon as angels, because they think this is a great way of
getting rich quick.
A very important catalyst is the fact that the barriers to entry to starting
up have become extremely low. It's become quite inexpensive to start
a start-up these days. Thus, when you need an office, you no longer
need to spend hours negotiating with brokers and landlords to find
space you can afford. You can walk into a co-working space which
Are you cut out to be an
entrepreneur?
Willing to take risks?
Can bounce back from
failure?
Able to sell?
Can't stand the politics
in a large firm?

48 | P a g e
provides you all the amenities you need, and you are ready to go ! IT
infrastructure has become a cheap commodity, and you can get
reliable server space from Amazon or Microsoft for a few thousand
rupees per month. Finally, it's possible to get freelancers to build the
technology you want, which means you only need a very lean and
mean team to create a minimum viable product.
Also, as the system is maturing, the successful entrepreneurs who have
made money are happy to encourage the next generation of students
from their college, because they have a soft corner for their alumni.
When they go back to give lectures at their colleges , they inspire a lot
of students to follow in their footsteps. They are happy to fund the
bright ones, and provide them with mentoring as well, and this support
can be priceless.
However, a big problem is that we end up glamorizing
entrepreneurship , as a result of which young entrepreneurs have very
unrealistic expectation of what is involved in running a start-up. They
think it's all fun and games , and that all you need to do is find
someone to sign a cheque, and you're in business ! They all think of
themselves as being the next Steve Jobs, and believe their idea and
passion will help to disrupt the world.
However, the reality is that running a start-up is a hard grind. It's a lot
of work which involves sleepless nights; and having to deal with cash
crunches, unhappy customers, and angry investors. It's not something
which should be taken lightly, and we need to bring some sanity and
reality back into the system. The truth is that most people are not cut
out to be entrepreneurs, and they will just be miserable trying to run a
start-up. They will end up wasting a lot of their time and energy, and
will end up being unhappy and disillusioned.

49 | P a g e
Why Do Entrepreneurs Hide Bad
News?
Entrepreneurs are responsible people , and when they raise funds from
investors, they want to do their best to make sure that they can return
the money back to the investor with a profit. They work hard to make
this happen, but the truth is that shit happens, and life it not always
predictable. Bad things do happen - especially in a start-up , when
there are so many moving parts. It's very hard to predict where the
next problem is going to come from, which is why entrepreneurs are
always is fire-fighting mode.
Now whenever something bad happens, the knee jerk reflex is to hide
it. This is the natural response of every child, who wants to conceal the
fact from Mummy that he broke the vase while playing with a ball,
even though he was expressly forbidden to do this. The entrepreneur
too tries to tackle the problem himself , without bringing it to the
attention of the investor. Often he's optimistic that he'll be able to solve
the problem by himself, so why cause the investor sleepless nights by
giving him reason to worry, when he can fix the issue at his level.
This is why he works extra hard in order to nip the problem in the bud .
Most founders are very independent, and they don't really want an
investor looking over their shoulder , telling him what do to. And no one
likes hearing criticism, and it's no fun having an investor censure him for
telling him that the problem occurred because he was careless and
wasn't able to anticipate it.
Sadly, this cover-up just makes a bad problem worse. If you can't solve
the problem, it spins out of control, but because you are so busy trying
to tackle it and hide it from the investor at the same time, that it often
balloons up , until it blows up in your face . You are then forced to go

50 | P a g e
back to the investor and tell him about the mess you find yourself in,
because you need his help.
By the time you reach this stage, the investor's not likely to be very
forgiving . He's naturally upset about the fact that you didn't bring it to
his attention when the problem was small, and could have been
handled easily. Because you were not open and transparent, you
allowed the problem to fester, as a result of which it become big and
unmanageable , and it's much harder for him to help you. What burns
him up is that you contributed to the problem by refusing to share the
facts. This is why he's not inclined to help you at this stage, because
you have lost his trust. This is often the beginning of the end for the
start-up.
This is why you need to create a culture of openness and transparency
in your company. Not only should you encourage your employees to
be brutally honest with you, you need to be frank and forthright with
your investors as well. Yes, it's not fun having to listen to all the hindsight
wisdom which they will give you, but this is far better than being forced
to shut down because you are in deep doo-doo. Please don't try to be
Superman - your investors are on your side, and want you to succeed,
and will help you to do so, if you allow them to !

51 | P a g e
Managing multiple angel investors
When you need to raise funds, you will often need to approach
multiple angel investors to fund your seed stage round. Because angels
usually have limited personal funds, they have to band together in
order to meet your requirements. This means you will need to talk to 10
or more angels at one time , to convince them to give you the money
you need, because one may not have the capacity to be able to
fund you.
As with everything in life, this has its pros and cons . Many heads are
often better than one, and each angel brings his own network along
with him when he invests in your company. He will share his industry
perspective and domain expertise ; and will be able to connect you to
lots of people within the ecosystem, because most angel investors stick
to a space in which they have some experience. However, you still
need to work on them one at a time, because if one person signs on ,
the others are much more willing to follow his lead as well. After all,
most investors indulge in group-think , because they are human too.
When you have many angels, they bring multiple different
perspectives, and this gives you the chance to listen to lots of sensible
voices , and then pick and choose what you think works well for your
start-up. In one sense, your angel investors are paying for the privilege
of mentoring you. Their advice is often sound, because they have skin
in the game.
However, the downside is that every time you need documentation (
for example, when you need to raise your next round) , you will need
to talk to multiple different people. This can consume a lot of your time,
because most angel investors are quite idiosyncratic, and have their
opinion about how you should be running your company. They will
often not agree with you - or with each other either !

52 | P a g e
They will want things done in a particular way, which means you need
to justify your actions to them, and this can create a lot of bad blood
and angst , especially when things aren't going well. This is one of the
downsides of having to have to deal with many people on your
cap table.
The good news is there are lots of tools available to help you manage
a group of investors. This is one of the big advantages of dealing with
established angel networks, because they have got their act together,
and have well-defined processes which run smoothly.
Ideally, you should get your investors to act as a syndicate , so that
there is one voice who speaks for all of them. This way they behave as
a team, rather than pull you in many opposite directions ! You then
need to speak to just one person - the lead - who can then interface
with the rest of the investors on your behalf. This will make your life
much easier . Angel investors prefer this as well, as the lead is someone
they trust, and he is taking responsibility for managing their investment
in your start-up.

53 | P a g e
Risk Management for Start-ups
We all know that start-ups are risky. There's no certainty that they will
succeed and, even after putting in four or five years of hard effort and
spending a lot of money--either your own, because you've
bootstrapped , or money taken from investors--you may still be forced
to shut down, because you've not been able to become profitable.
This is the nature of the beast, and we need to accept it if we want to
go down this path.
However there's no point in taking senseless risks.
The problem is that lots of founders admire entrepreneurs like Steve
Jobs, and they believe that the reason he was so wildly successful was
because of the outsized risks which he took. He becomes their role
model, and they selectively remember these stories, simply because
they are so unusual. However, we need to understand that a lot of
these stories get distorted in the telling, especially when they are retold
by a successful founder, who sugar-coats everything. He hides a lot of
the false starts and errors which he made, so the final sanitized version
which the media reports is very different from reality. The press also
loves publicising these kinds of stories , because they want to give the
hero a larger than life personality. This is why entrepreneurs get misled
about how risks need to be managed. Yes, it's important to dream big,
but that doesn't mean you need to be stupid or take unnecessary risks,
because this can come back to haunt you.
Intelligent risk management means that you need to do stuff one step
at a time. Yes, it's true that you cannot leap a chasm in steps, but you
do need to identify the stones one at a time when crossing a river. You
need to understand what you can afford to lose; and create a safety
net, by being acutely aware of your risks when you try something new.
You need to be able to take affordable risks, so that even if you fail,

54 | P a g e
this does not spell the end of your company. The successful gamblers
are the ones who know how to manage their risks, so that they won't
go all in unless they are sure they will win. They spend a lot of time
thinking about the downside , and what they will do in case things
don't pan out as expected, so that they can live on to fight another
day.
Unfortunately, reality gets distorted in the start-up ecosystem, because
everyone is trying to glamorise the successful founders. Managing risks
involves a lot of discipline, and is boring mundane work - not the stuff
which makes for racy reading ! It requires that you use a structured
process to make sure that you don't do stupid things. This is why having
an investor who provides adult supervision can be so useful. He can
curb your unrealistic enthusiasm, and make sure that you don't end up
going 100 miles per hour into a brick wall, simply because you're so
passionate about your dream, that you have lost touch with reality !

55 | P a g e
The entrepreneur's ego
Entrepreneurs need to be made of a different metal from the rest of
the world. You have to have the courage of your convictions; you
need to be irrationally optimistic; you need to be resilient; you need to
be willing to accept the fact that most people will not understand
what you're trying to do; and you need to willing to take risks, because
you have a bee in your bonnet, which you want to pursue more than
anything else in the world.
This is what makes entrepreneurs so special, and because she needs to
ignore what the rest of the world thinks, her ego can be her strong suit.
He has belief in himself, and is confident that he can succeed, which is
why he doesn't get fazed , no matter how many rejections he has to
listen to. He keeps on going, because he's sure that he's headed in the
right direction. Yes, it's possible that he may still fail in spite of all his best
efforts, but at least he will have peace of mind knowing that he did his
best, and was true to himself because he followed his own path.
Unfortunately, for some entrepreneurs , their ego becomes their
weakest link in the chain. They feel that they have all the answers and
don't need to listen to anyone else. If anyone disagrees with them,
they believe it just means that the other person is too short-sighted to
understand the big picture. They will refuse to engage with people
who have the temerity to criticize them or to disagree with them.
This can become a sticky issue, which can lead to their downfall. While
their ego can be your friend, entrepreneurs also need to remember
that their ego can be their worst enemy as well.
Yes, I'm sure lots of entrepreneurs will have less than flattering things to
say about the investor's ego as well.

56 | P a g e
Story selling for entrepreneurs
Some entrepreneurs feel that it's very unfair that while some founders
find it very easy to raise gobs of money, they have an extremely hard
time doing so. They often attribute this to their lack of the right
credentials, and believe that people who have an IIT or an IIM degree
have a much better chance of raising money. Because they have a
better network, they find it easier to connect with investors. And it burns
them up that even though they work much harder and their product is
far better, investors don't seem to realize their potential or give them
due credit for it. Their commonest complaint is that investors continue
funding IIT and IIM graduates, even though all they do is create me-too
start-ups, which have nothing novel or unique about them.
Please remember that no one said life was fair. It's not supposed to be,
and you better grow up and accept this reality. Complaining about it
is not going to change anything. Let's not forget that lots of IIT
graduates don't get funded either !
The entrepreneurs who are successful at raising funds are able to tell
their story well. They're able to connect with the investor, because they
understand his perspective. They're empathetic, and try to make it as
easy for him to sign a check as possible, by reducing friction for him.
They anticipate what his needs are, and have financial statements
prepared and ready , because they know he is going to ask for them.
They give him as much information as possible , so that there's no need
for him to ask more questions , and this reduces the time taken for the
due diligence process.
This kind of openness and transparency shows that they're willing to put
in the hard work and effort which is required to create a successful
business. They understand that a business is much more than an idea -
that it requires financial discipline and structured processes, and

57 | P a g e
they're capable of following these. This gives the investor a lot of
comfort, and he is much more likely to back them, as compared to a
disorganised entrepreneur.
It's a bit like eating a steak. If you serve it raw, no matter how prime the
cut, no one will be able to eat it. You do need to add sizzle to it, to
stimulate the investor's appetite, so that he wants to bite !
This is why just building a better mousetrap doesn't help. You need to
have a story, and be able to tell it well. Please remember that your
story cannot be a fictitious narrative . You need to be able to back it
up with numbers , so that the investor can see that there is solid sense
behind what you're saying.
There are lots of great books which will teach you how to tell a story in
order to connect with your audience ! The Science of Story Selling by
Gideon at https://www.amazon.in/Science-Story-Selling-Prospects-
Purpose-ebook/dp/B00XFUREOW is a good starting point.

58 | P a g e
Grit or quit?
Most entrepreneurs are taught that grit is a virtue that you need to
keep on going, no matter what obstacles you encounter. We are told
that " Winners never Quit and Quitters never Win" ; and " When the
Going gets Tough, the Tough get Going". The resilience of Steve
Jobs and his ability to bounce back from failure are the stuff of
entrepreneurial folklore.
However, the truth is more nuanced, and there's no point in repeatedly
running into a brick wall. Sometimes, it's better to make a fresh start,
rather than digging yourself deeper into the hole which you have
created for yourself.
The truth is that you need a lot of maturity to step away from a start-up
in which you have invested many years of your life, and poured in
money, blood, sweat and tears. This is partly because of a misplaced
sense of ego - you are ashamed that the world will think of you as a
failure. However, waiting too long to accept reality can be expensive,
because of the opportunity cost this entails. Sometimes the
courageous thing is to say, “I just can’t do this to myself anymore.”
You should be gritty, but there's no point in being suicidal. Don't get
locked into trying to achieve an unattainable goal - sometimes you
need to acknowledge that luck is not on your side. The most intelligent
response is to let go and aim for a better goal - there's no shame in
changing direction, as long as you have peace of mind that you gave
it your best shot. When the odds are stacked against you, discretion is
often the better part of valour . If you retreat and regroup, at least you
can live on to fight another day !
Don't think of it as failing or giving up. You need to reframe your
thinking - you are choosing to move on because circumstances have
changed. You’re evolving, and are pursuing a new path that offers

59 | P a g e
more opportunities. Please re-read the poem, The Charge of the Light
Brigade - it will remind you that being pig-headed and stubborn can
lead to disaster .
So how do you know when to grit or when to quit? How do you act
with that grace and dignity? You need to turn both inside and outside
for help in making the right decision. Meditation and mindfulness will
help you to listen to your heart; and mentors and coaches can help
you explore your options wisely.
As W C Fields pointed out, if at first you don't succeed, try, try again.
Then quit. There's no point in being a damn fool about it.

60 | P a g e
Is your start-up idea viable?
Many young entrepreneurs have an idea which they feel is very clever
and unique, and they want to create a start-up in order to bring that
dream to reality. However, there is a
big difference between having an
idea and being able to implement it !
How can you evaluate how well your
idea will work in real life ? Will
customers pay to use your solution
? This is the million-dollar question,
because ideas are cheap , but being
able to execute them well requires a
lot of hard work. Young first time
entrepreneurs don't really have a good
sense of what is involved in running a
business, and tend to overestimate
their ability to cross all the hurdles
which they're likely to face.
Please learn to be open. You need to
share your idea, and discuss it with as
many people as possible , so that they
can give you feedback . You need to
specifically ask for criticism, otherwise
people will tend to sugar coat their true
opinion , because they don't want to
hurt your feelings. Ask them point-blank
- why is this likely to fail ? This may hurt your ego, but you don't want to
waste years and lots of money in pursuing a futile idea - this would be
much more expensive in the long run !
The caste system
plagues the Indian
start-up space as well,
and IIT / IIM graduates
do have an unfair
advantage because
they are perceived to
be smarter than
others. Yes, this sucks,
but one sign of
maturity is when you
learn to accept that
life is unfair! Learn to
play to your strengths
rather than whine
about the head start
they have - don't
forget that they
worked hard to get
into IIT/IIM!

61 | P a g e
Many entrepreneurs are in love with their ideas, and are jealously
possessive about them. They are scared that someone will steal them ,
and they will lose their "first-mover advantage" . They naively believe
that no one in the world has ever had such a clever idea before,
because they live in their own little bubble , because they have very
little real life experience. They often lack business sense , partly
because they are so young, and haven't worked so far.
One way of evaluating the idea is to pitch it to lots of investors and see
what they have to say. While investors may not have expertise in your
specific domain, they listen to ideas all the time from lots of
entrepreneurs. They will be able to tell you whether your idea is original;
what makes it different; and whether it's likely to work or not. However,
before you approach an investor, please do your homework , so that
you show that you are thoughtful and well-prepared, and understand
what's happening in your space.
It's important to have skin in the game, so please spend some of your
own money in showing that you have done your best to implement
your idea , no matter how limited your funds maybe. An investor needs
to see that you are willing to work hard, and if he can see that you
have done much more than just sit in your chair and create an
attractive Microsoft PowerPoint presentation or plot lots of numbers in
an Excel spreadsheet, he's much more likely to respect you and give
you a patient hearing.
Finally, remember that investors don't have all the answers. The only
way to actually validate an idea is to put it out in the real world and
see whether customers are willing to pay for it. This is the final arbitrator,
and until you actually do it, no one really knows whether your idea is
going to work or not. Lots of great ideas don't work in real life for
multiple reasons - for example, your competition may outclass and
outspend you , and there's nothing you can do to reduce this risk of
failure.

62 | P a g e
Conversely, what seems to be a terrible idea at first blush can go on to
become a wildly successful company, because the founders were
willing to slog and pivot as needed.
You need to find the answers for yourself, and this is part of your job
description as an entrepreneur. It's scary to have to deal with
uncertainty, but the buck stops with you, and you need to have the
courage to move on , irrespective of whether you get funding or
not. You need to be both irrational and optimistic if you want to
succeed.
Whether or not your idea works, I can promise you your journey will be
an exciting and interesting one, and you will learn a lot - not only
about yourself , but about the real world as well. Running a start-up will
teach you far more than an MBA, and will help you become wiser and
more mature.

63 | P a g e
Funding a Pre-Revenue
Start-up
One of the hardest things to do in the
start-up space is to estimate a fair
valuation when investing in a company.
This is even harder when the company is
pre-revenue because there aren't any
tangible metrics we can use to assess the
worth of the business.
The entrepreneur wants to be valued on
the worth of his idea ( which every
founder believes is unique and earth-
shattering); and the hard work he has put
in so far. He wants you to fund him based
on his future potential, which he feels in
unlimited, because he is so optimistic !
Many entrepreneurs want to be paid a
market salary; and feel their valuation
should be on the basis of comparables -
on what other start-ups are raising. They
forget that the media only reports the
successful deals , which are hardly
representative of typical valuations,
because these are the outliers.
However, entrepreneurs will do well to
consider the angel's perspective. Angels have seen lots of clever ideas
go up in smoke, which is why they are much more hard-nosed and
realistic . They do not want to waste their limited funds in paying the
founder a salary while he/she explores ideas when there is no
evidence that these can be monetised - an investor would much
Angel investing is
emotional and
irrational. While
angels will talk
about their
investment
hypotheses when
funding start-ups,
the truth is that
even though the
rationale sounds
very persuasive and
convincing, the
decisions are
usually made by
their lizard brain.
You first fall in love
with the
entrepreneur, and
then your frontal
cortex finds reasons
to justify why you
should back him

64 | P a g e
rather the founder does his /her early stage experimentation on his/her
own dime ! He is worried that too much money ends up burning a hole
in the founder's pocket , and he ends up spending it stupidly - "easy
come, easy go " ! When there is cash in the bank, the founder ends up
wasting money on : marketing ; adding unnecessary bells and whistles
to his product; and employing a sales staff, rather than going out and
hustling himself !
It's important to find the right balance , and I'd like to suggest an
alternative which my firm Malpani Ventures is experimenting with in
Indian conditions.
It's very easy for a pre-revenue company that has not yet proven
product market fit , to burn a lot of money in trying to acquire
customers , and they often end up chasing the wrong customers, and
going down a rabbit hole. We don't think that is the right way of
building a successful company. You need to be frugal, and you need
to use intelligent hacks and hard work to find paying customers , rather
than throwing money after them , because this only leads to disaster in
the long run.
Rather than use the top down model which the entrepreneur presents
( based on spreadsheets which are full of unproven assumptions and a
lot of hope) , we prefer using a bottom up model.
Our hypothesis is that it is possible to run a start-up frugally for about Rs
4-6 lakhs per month in India . You can use a co-working space, and
everyone takes only a basic minimum salary to keep the home fires
burning. A cheque of Rs 25-30 lakhs gives you a runway of about 6--9
months, which we think is sufficient for you to find out whether your
product can attract customers who are willing to pay for it. This means
that with this initial funding of about Rs 25-30 lakhs, it's possible for us to
decide whether this is a company which we are willing to fund further
or not. Because it's a pre-revenue company, we will give it a lower pre-

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