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VCs

Are VCs Biting Into the Stake of Startups More than They Should?

"It's a conscious call that a founder has to take according to the priorities and demands of industry"
Are VCs Biting Into the Stake of Startups More than They Should?
Image credit: graphicstock
Entrepreneur Staff
4 min read

You're reading Entrepreneur India, an international franchise of Entrepreneur Media.

Almost every entrepreneur can relate his/her journey to the characters of popular web series TVF Pitchers that vividly depicted struggles of startup in Indian ecosystem.

The tale of success and failure of a bunch of men who proved that age is not a bar when it comes to starting a business made the show made it a hit within a few day of its streaming. 

In one of the episodes, we saw how a VC gets convinced by the characters’ startup idea, but with a rider — demanding a major stake in the company’s equity, which the founders are reluctant to give.

Naveen, Jeetu, Yogi and Saurabh Mandal’s story echoes the problem that numerous startup founders face. Pitchers was successful in presenting this great dilemma realistically. 

Again, a vast majority of successful startups fall in non-VC funded category. Entrepreneur India throws light on the viewpoint of some startups that had gone through the same process and are now expert in discerning a right and a wrong move.

‘It’s Our Hard Work, Why Should a Large Stake go to VCs?’

An organic smoke startup that has the vision to fight the ‘ITCs of the world’, Mea ame talked about the company’s growth hurdles.

Mea ame thinks that smoking nicotine could soon be passé, in view of the rising health concerns associated with tobacco smoking.   

The company offers organic smokes, which ensure a low nicotine intake. In just two years of operations, the company has seen a speedy growth of 350-400 percent. But this #startup has a problem — it’s the VCs.

“Whenever we pitch to a set of funders, whether entrepreneurs, VCs, or angel investors, they a demand a large stake, which for us is not fair. We have worked on our own idea, started from scratch, endured all the pain while starting up, but now investors suddenly would want a board seat next to you with a major equity stake in the company,” said the founding team in an interview.

From then to now, Mea ame has seen 1.5x growth but what mitigates the startup’s growth is the VC funding, which they are not getting. According to the Mea ame team, some VCs try arm-twisting tactics to push through their way of managing the deal.    

The company is taking its USP ahead in market of being organic in nature. They consider themselves as the first and only player which has introduced something called organic smoke. ….., founder of Mea ame said, “The better option is to go slow and steadily than giving over your stake of company. Franchise India could help us getting more dealerships and business.”  

When asked about the competition in market, the company said, “We are making the world tobacco free and we have a complete belief on it. We are hoping that in the upcoming year, we are going to be big.”  

‘At times, VCs are unreasonable’

Sandeep Jaiswal, co-founder of India’s popular travel-tech startup, MiStay said,"When we were in the process of raising fund, we did come across some investors who wanted a bigger stake in the company and were unwilling to accept the valuation we offered given the traction we had was limited. In the early stages, VC s should not judge a company by the traction but rather by its team and potential of the idea, whether the idea is going to be up in the game or not."

The company refused to disclose its funding and stake of investors in equity but accepts that startups generally end up losing the control on the company if they give away the major stakes to investors.  

'If you want fast growth, you gotta make deal’

Talking about the same, Anuj Kacker, co-founder of Money Tap said, "The reason why startups bootstrapped is not only because investors demand for a larger share but it largely depends on which industry you are in, whether that industry depends on the VC’s funding or not and many other things. Besides, If you want to grow faster, you will have to make deals with VCs. It’s a conscious call that one has to take according to the priorities and demands of company.

It’s not a one-time investment; it’s going to be there for years, so one has to be very careful with it and ultimately it depends on a lot of factors like industry trends, priorities of founders, market fluctuations etc.

From Founder to Funder: How his Experiences Prompted This Entrepreneur to Become a VC