Coverage by Bhat Dittakavi of Variance.AI on “Startup’s path to Heaven” by Sanjay Jesrani on 18th January 2018 at T-HUB
Sanjay Jesrani, founder and CEO of Go North Ventures, started as a tax advisor for entrepreneurs before joining a startup team at Sierra Atlantic as CFO. Sanjay has overseen, over 18 years, Sierra grow from $100,000 to $100 million, taken it public, turned it private again, assisted in key acquisitions, overseen Hitachi Consulting acquire it and finally took over as CEO of Hitachi Consulting India.
As an angel investor in 15 Startups, Sanjay is highly experienced and organized. Add knowledge of abundance through his continuous learning to it, you will know what makes him special in startup circle.
“Sanjay called in three minutes ahead of a scheduled call and arrived at the venue way ahead of the start time. This is what makes this learned man of wisdom ever cheerful and energetic.”
What defines a Startup?
A team of founders, with industry and business knowledge, that addresses a must-solve problem with an elegant and differentiated solution by leveraging frugal capital with high innovation in order to drive value to the clearly identified customer universe.
It shall drive disproportionate value to all the stakeholders including team members, customers and investors making it worthwhile for them to have participated in the venture.
Startup’s Path to Heaven
Not every Startup can be a unicorn. Aim for your second or third venture to be a unicorn. In the mean time, make your venture successful with good returns for all the stakeholders. This is how a typical successful startup founder does it.
1) Raise and deploy $3-5 million in aggregate over 5-7 years while retaining close to 50% of the equity over the journey.
2) Allocate the capital efficiently so you move from idea to paying customers to profitable business to scaling at a business valuation of $30-100 million.
This helps you set the goal and have tangibility.
What do investors look for?
Does anyone here put money in a venture that has less than 5% of success within three years after investments? Understand the perspective of the investor also. There are “me too” Startups. As early stage investments are highly risky, investors have some tools to leverage.
Only 30% of their portfolio gives them successful returns. Softbank at $100B fund got the same ratios. Money raised from a bunch of limited partners, a.k.a., investors, needs to make returns in 8-10 years. Is the addressable business long enough? Do the founders have fire in the belly? and so on. Let us see the levers.
1) What is the business problem which is being addressed by the Startup?
2) What is the size of addressable market both in India and in the world?
3) What is the business solution and how differentiated it is? Can the business achieve top 3 leadership status in its market?
4) What is your Competitor landscape? Are there barriers to entry?
Not enough research is done by many on competitors. Identifying competition doesn’t mean your Startup won’t be attractive for the investors. Most say there is no competition. Even if there show competition, they say they are in the top northeast corner. Interesting! Apple can do it with lot of investments on building a market. Understand your market and players so you can differentiate either in customer delight or providing an element of personalized solution.
5) Pedigree and breadth of founders? Does the team has the passion and domain experience and drive to build and scale the Startup to a winning size?
Have complementary skills sets among the founders. All three cofounders being techies means they have a blind side to go-to-market, finance and operations. Equal amount of equity among cofounders is not needed, but a complementary skill set is. If you are all techies, you need to give away equity and cash which is sparse to CMO and others.
6) What is the operating business plan? What will it take to acheive it? Does the team has the vision to run the marathon?
Hone your business as you run it.
7) What are the risks involved and how equipped is the team to manage them?
8) What is path to glory? IPO, Acquisition, buy back?
9) Can the Startup provide its stakeholders a return of 5x to 100x over 3-5 years?
Raising Capital -Benefits and Costs
“Outcome health” that bootstrapped over ten years has raised first round funding of a whopping $500M at $5B valuation. They are into healthcare education that reduces insurance claims.
How many here would like to raise capital during the first three years? OK. Around five to eight founders. Good. This is a tough call to manage resources for three years. When you raise capital, you are diluting ownership. Governance and rigor changes too. When we went public at Sierra, we had shareholder meetings, quarterly earnings calls and so on. Items to comply will kick in. When you raise capital, pressure on performance happens. Investing is an eight to ten year journey and investors must be ready if they enter startup world. If there is an investor out there who never invested before in Startups, he may pressurize the founders by being impatient.
Benefits include go-to-market and financial discipline.
Costs of capital
Shortgun marriagesDo you know shotgun marriages? This happens in Behar where the gtoom is forcibly married with a bride. When VC portfolio has a member company on down spiral, a well-to-do member Comoany is forced to acquire it!
Stages of capital
Alternate avenues of funding
Strategic investors: In a large company too much capital builds lot of corporate cholera d Startups are the once that break it like Statins. Corporates may own large customers but they can’t execute every ask of their customers. At Hitachi we looked for a startup with lot of IoT experience to quickly launch a solution for a big client.
A Hyderabad logistics company invested by Adani ports that gave them 60% of business too.
Crowd Funding: This applies to products.
I have a food-startup in Chennai had raised 25 lakhs of initial capital. They were struggling. They were not able to excited investors as they don’t have a high return model. One of their customers liked their product that they invested 2 crores. The boat was waiting and delighted customer put their boat in ocean.
Venture debt: Over the last two years, I see the valley of death hitting hard even for those that raised upto million dollars. Capital leads to renew expectation that made the investors invest. The bar got raised, and VCs expectations tripled. Not having follow on round by the same investor means they are stuck in no man’s land. Now there are avenues for venture debt here. Lot of government of India programs are encouraging banks to get into debt offering to startups at a 10% or so collateral. This is a double edged weapon.
SME Listing: Mature Startups can get listed in SME listing on NSE and BSE. Almost two hundred listed on the platform.
Special programs: Biotechnology and medical devices get funding by governments and private research.
Celebrity investors: Amitabh in Justdial and so on.
Cap table for a mid size venture
Path to glory
It is OK to have a romantic view by looking at the success of a unicorn, but it is fine to sit and understand the industry thoroughly before jumping in.
Convertible with Floor: 4 crore pre-money at one crore investment is 20%. This is direct. Convertible is that I will convert this one crore within 18 months as your value goes up. This is valuable for founders if the founders are confident. This could cut the other way too. Exceed the projection, take the reward and miss the projection take a higher cut in the equity.
Don’t go with excel-driven numbers. Lot of Startup founders ask me that investors won’t invest if we don’t show big numbers. You are better off jot to go with that investor who wants fancy numbers. Go with the realm of aspirational projection of your revenues. Set three curves of best middle and worst case scenario of projection. Going beyond the best case affects your credibility. Not xt round of funding gets dry, take all the stakeholders with you.
Anti Dilution: In future round is at a lower valuation, you are not affected.
Liquidation: Why are large investors investing at fancy valuations?
Sometimes when you are having an opportunity to be a top three player with tremendous growth, it is next sicker theory of funding. They think the next investor will come up with a higher valuation. The latest investor gets 2x liquidation. This gives disproportionate preference. He is the first in line when the distribution of sales proceeds happen as first two billion goes to this 500M investor.
Veto: Every shareholder has representation and rights proportionate to the share holding. They get veto rights on certain provisions such as selling the business away. Investor can block the sale if you want to sell.
Governing law: Keep it as your home base. Dispute means you have to travel to the court of investors city that may duck IP your time.
Founders Vesting: At least three Startups I knoe go through disputes among the cofounders. Each founder put 10 lakhs each and five of them and all agreed to leave the corporate in an year. One founder who took deep dove took 20%. So is the other one and other three never moved in. First one raised two crores and diluted 15% and now as they want to raise the capital, 3 cofounders who own 60% aren’t coming in. Solution is that when an outside investment comes in, you need to have founders reverse vesting period. In your SHA, it says this equity of 90% would be vested over a period of 4 years. This is reverse vesting.
Founder 1) 45%
Founder 2) 45%
If founder 2 leaves, company is doomed.
Methods of valuation
Valuation is in the mind. It is about negotiations, you and your team, business, addressable market and more. No math for early stage valuation.
Tell the investor why the next round be at a premium and also at what premium. Insure the confidence in the investors based on your past background and experience.
Discounted Cash Flows: This js based on future growth rate, inflation and rate of profitability.
Earnings or profit multiple:
Past losses get washed out and valuation is on recent 12 months.
Comparables: if your peer got a verifiable valuation, you can use it.
Liquidation: Asset reconstruction companies buy at 40% and build it back to 100%.
Corporates are offering Startup ecosystem programs across acceleration, collaboration and investments. Corporates have that big company syndrome where there is fatigue or big cholesterol set in and Startups are the statins to break that cholesterol. Win-win.
Analytics (Customer, Health, Predictive)
Neurodiversity (auticism means higher attention)
India’s Healthcare spend is 3% of GDP. India spends $50 per capita on health which is 10% of what China spends per capita on health. Huge opportunity in India.
When a fund is raised there is a pressure on the fund manager to invest the fund.
Good or bad market, your business will raise the fund if you do your job well. Ignore the macro trends and don’t make them an excuse. Work hard on what you are doing. Get the idea to right stage. Have deep understanding.
In the pursuit of Maniacal focus versus Money, first one wins hands down. Whatever money you raise, divide it by 10. Monthly spend goes up. At the end of 10 months, treasure gets empty!
Bathing your car in gas is a disaster waiting to happen. Laws of gravity still applies if you have money load on your head.
It is very difficult to break into B2B. Get an executive sponsor. Mentors can get you a sponsor with his good will. Value determines corporate sponsors.
Q) At what stage can I go to a VC?
I was under the impression that idea stage founder can’t go to VC. Find an investor who can connect with your solution and there is a high chance that potential investor can assess you, team and idea and that will give you higher chance of funding even at an idea stage. My friend took a call and invested in hedge app space.
Q) I am in agriculture disintermediation space. We are about to do 30 crore business with 3% few and are passing the receipts to the farmers quickly. What stage do I go for funding and from whom?
Let your revenues grow first. Make a plan for the need of funding. Understand the core aspects to achieve the revenue target and funding needed for them.
Western India vegetables product Company was listed and invested by dealers and customers. This is now Wipro. You may raise from the community itself. You can also raise from your retailers.
Q) How about founders remuneration? What would be the right amount?
I have 15 investments. Investors have no problem if founders take reasonable living expenses as salary. Founders can’t pay themselves the market value. They should draw say one lakh per month to manage day to day living needs of the family such as school fees and so on. 1-2 lakhs is the maximum you can take. Investors want their founders to operate at the free-of-stress level.
Q) What sort of home work a founder needs to do?
Business plan is the most important documents for yourself. It is a working document and reference to chart your future journey out. How do your lines of revenue move at 80% accuracy in next three years. What are the resources do you need to achieve these numbers. Business plan gives constraints and critical path in your journey.
Online selling means there is cost of customer acquisition but no distribution cost. As you get funding, you may say after initial 10 crores funding, you do offline sales too that will have 40% distribution cost and you need factor in your price this cost in your business plan.
Business plan will allow you to think through and project forward. What would senior people cost? Equity or cash or both. This gives gap in the funding. This is the fund you need to raise investments.
I summarise Pitch deck in two phrases:
1) Why now?
2) Why you?
Take Paperboat, a juice company that could imagine to carve out 5-6% of soft drink market share. I admire their model. They took the nostalgia positioning with new flavors. They sampled in indigo and bunch of airlines and did the sampling in their segments.
Q) When an investor puts the money, who gets it?
Not the founder but the company gets it as it is the fuel to drive growth in business.
Startup is like climbing Mount Everest. Resources change at each base camp or mile stone. Each mile stone needs a different sherpa and differnt equipment.
Q) If we built a successful offline and profitable business, what would be the involvement of a VC if we bring in?
Zero. Most investors want to invest in a capable set of founders who got experience.