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Sanjay Nath, Managing Partner and Co-founder of Mumbai-based seed stage venture firm Blume Ventures puts in perspective key elements including product validation, fundraising cycle, and the otherwise complex entrepreneur-investor relationship for start-ups planning their first or follow-on investment.
Putting Money Where Mouth Is
Unlike a late stage investor that bet on an emerging category leader in its Series C and beyond funding rounds such as Practo in health tech space, early or seed stage investor like us come in quite early. Late stage investment has a very different level of risk-return curve when compared to an early stage investment. For us, the growth curve on a relative basis is more important than the absolute level of traction in a start-up.
All entrepreneurs love to talk about their product (as they should), but it’s our task as investor to probe deeper and test how potential customers and the market will value their product. We usually make three-four introductions after every meeting. There’s no better validation than constructive user feedback. Such validation is the missing link that helps us evaluate the difference between what entrepreneur says about the product and how it actually perceived.
Stretch out Your Runway
There is no dearth of capital for startups but its infusion is now preceded by even more stringent and prolonged due diligence and product scrutiny.
So, it would be wise for start-ups to stretch the capital they have in hand for the current year. Earlier, we’d advise our portfolio start-ups to raise for a runway of 9-12 months. Today that advice has changed to 12-15 or even 15-18 months. Moreover, start-ups don’t have to overstress themselves about getting the “perfect” valuation. Given the tight market condition, it is far more important to find a long-term investor
rather than go with an investor who just pamper you with high valuation.
Get Into a Long-term Relationship
The ecosystem that an entrepreneur is trying to build is like a jigsaw puzzle, where, though an investor is important, but he/she is not the only stakeholder. There are customers, business partners, employees, and suppliers/vendors as well.
As the well known Sun Microsystems founder-turned venture capitalist Vinod Khosla puts it aptly, “My job is simply to be a coach, a type of venture assistant that guides entrepreneurs,” the most important aspect for entrepreneurs to realize is that this is a very long-term relationship. Good founders know when to reach out to their investors. Similarly, good investors know when to push, probe, nudge and also step back too. They are self-aware when mentoring borders on interference.
In India, founders find it difficult to share bad news, as we are all used to only talk about and hear good news. One of our fund investors interestingly observes that, “Only good news travels up the elevator, while bad news is always banished to the basement.”
The best partnerships are defined when investors can go up to the founder and say, “Listen, we know what’s going right, tell me what is going wrong, where your gaps and red flags are, and let us focus on fixing those.”
This openness defines a good investor-founder relationship. I would like to summarize by saying the best entrepreneurs are self-confident but also very self aware of not just their strengths but more importantly of their gaps. They seek out help to fill them and complete that jigsaw puzzle necessary for success.
This article first appeared in the Indian edition of Entrepreneur magazine (June 2016 Issue).