What differentiates startup entrepreneurs from other management professionals is the startup entrepreneur is nearly always working with tightly limited of resources (especially financially) and learns to work around this. Can you startup or work towards getting your idea to market on a shoestring or virtually no initial capital? Although it really depends on the nature of the business plan, the answer is …yes..it’s happening all around us.

Just the other day I met with an entrepreneur who’s looking to launch and market his new web service application. As an entirely self funded startup, the first phase of designing, coding and developing the application was fairly simple. After all, he’s a software engineer and put in his own time and sweat into getting a working beta version of his product ready to go live. The second stage of getting the first few customers to sign up was not too much of a challenge either since he had a few contacts within his network to set him up for a few initial customers. However, now that it’s time to add on more customers more aggressively, it’s a bit more challenging especially when there is not much in the budget for online advertising campaigns, hiring sales people, marketing support and business development. This however, didn’t stop him in his tracks.

Being resourceful, he developed a partner plan which offered other entrepreneurial people with marketing skills a sizable revenue share in the subscription fees to the service so that talented marketing and sales professionals can use his technology platform to venture out and build a client base of their own keeping a good percentage of the revenues they bring in without having to invest in the technology aspect which is clearly not their forte. A win-win for both!

Take this idea / proposal to a professional marketer or salesperson and they would never understand it. Why should they put in their time or effort into selling with no guaranteed fixed salary each month?? Pitch this to a fellow entrepreneur with sales and marketing skills and it’s a business opportunity for them to consider investing in. Investment isn’t always about money. It’s about resources. In such cases, the resource is skills and talent so someone with business development skills can bring that to the table in exchange for revenue share, commission, preference stock options or even equity depending on what you’re willing to part with to have your vision materialize. Sometimes the answer may lie in bringing financial investors, other times it may be a non-financial investor that you need. Investors who buy into your vision or plan and would be willing to invest some part of their talent into your startup with an entrepreneurial compensation offer.

A Travel Writer looking to create a travel based web service with no clue on web design and development or marketing could:-

1. Give up just there and never see their idea materialize giving it no shot at turning into a business venture
2. Find a two like minded entrepreneurs with these skills and see if they would want to build this startup together in
exchange for a stake in this venture and structure a deal with them

The key to making starting up work like this is knowing where to look. Looking in professional circles will probably get you the talent but perhaps not those willing to invest that talent in a risk based / non-salary model. Looking in entrepreneurial circles like the those within our very own GrowVC community for example however will help you find talent that is more likely to be ready to invest in a startup if they see the potential. These are the support pools for entrepreneurs to tap into. You could find angel investors or investors of another kind. Either way, the resources are there to help your vision live on and grow.

If you’ve been keeping a tab on the IPO valuations over the last month or so it almost seems like billion dollar valuations have become the norm.

Zynga $5.5 billion

Linkedin $2 billion

Groupon over $6 billion

It makes you wonder if your own estimate for valuation of your own startup or funding requirement is too conservative. That could be whimsical thought! While it’s easy to compare with the big ventures that have made headlines, most startups are better off looking internally on a more grounded level to get a more accurate valuation and set their funding expectations accordingly.

First of all companies like Zynga, Linkedin and Groupon have been around for some time and have massive user bases so proof of concept, revenue model, adoption and traction are words their investors need not even factor in while valuing the business. For most early stage startups however, most standard business valuation methods are an estimate at best and there aren’t as many tangible measuring sticks to go by for investors.

As a result, there’s often a disconnect between the way a startup founder sees the value of his/her startup and how investors see it. This leads to founders feeling that what they have is being undervalued and investors are asking for too much equity share for their investment while from the investors vantage point, they feel there isn’t any tangible proof of success and it wouldn’t be worth the risk for a smaller share of the equity.

A useful yard stick for entrepreneurs is the ‘pie formula’ of deciding what equity to give to an investor. If a startup feels that the investor will add more value to business than the equity is he asking for it, then the startup may well accept it. For e.g. If an investor is asking for say 10% equity, and you feel that with his expertise, network and funds – he can actually take the potential valuation of your business much above the rate of 10%, then you may not hesitate in offering that equity to him. If that is not the case however, then you may need to further negotiate.

To understand what constitutes a fair expectation from an angel investor and how much is your startup valued at, it’s important to identify what phase you’re startup is currently in :-

1st – Idea stage / Concept Stage / Business Plan Stage /
2nd – Technology Developed / Working Model Stage / Pre Launch
3rd – Launched Product / Early Adoption / Building Traction Stage
4th – Scaling / Growth / Adoption Stage
5th – High Growth / Business Expansion Stage

At the first stage valuation purely using traditional methods is nearly impossible and largely dependent on belief in the plan, the team and potential of the startup to grow from a concept or plan to an actual business venture. The risks are inherent and the investor would need to have the upper hand while structuring a deal at this stage. As an entrepreneur it’s more likely that you would be giving up more equity at this stage and it may not always be realistic to assume that you can get an investment in exchange for a very small percentage of ownership.

At the second stage, there could be a little more confidence from investors since you have a working product or prototype making it easier to visualize the value and prospects that could emerge from the venture. Depending on the investors belief in the product and the team that there will be adoption and growth with the prospect of scaling it into a full fledged business, the leverage is more or less even with both parties being able to negotiate and structure a deal that suits everyone.

From the 3rd stage onwards, the entrepreneur has a little more leverage with the ability to show some initial interest, customers, adoption and a more realistic valuation becomes possible. A founder can expect to give away perhaps a little less equity and an investor would be more assured of significant returns in the coming years going by what has been achieved so far.

While most of us will still dream about valuations and deals like the Zynga’s, Linkedin’s and Groupons of the startup world, by determining where you stand in terms of what investors can tangibly witness and setting expectations accordingly, you can arrive at a valuation and funding requirements a little closer to home.

A lot goes into creating a detailed startup business plan and financial model that can be shared with potential investors. There’s budgets, projections, estimates of costs, sales, revenue, factors that could influence the plan and several other things that need to be taken into account. All that thinking and calculating finally results in a model that you can demonstrate to any investor you may meet and then after discussions, you’ll probably realize….you may not have factored in the investor and what he/she brings to the table!

We’re not referring to financially, but the non financial contributions of every investor can greatly impact certain parts of every business plan.

For example, Rajiv has developed a business plan and financial model for a Saas office productivity application aimed at enterprises. He’s projected completion of the application in 7 months, sales of just 10 units in year 1, 30 units in year two and 50 units in year 3 with the business breaking even at the end of year two by his plan.

The first investor he meets turns out to have strong contacts within the technology and development circles and working with them would probably mean access to a bigger development team and the ability to roll out a beta version in just 3 months or less.

The second investor has a large personal network of decision makers within large enterprises which would allow Rajiv to sell more than 50 units in the first year alone bringing the break even date forward significantly and enabling the startup to set far higher sales projections owing to the investors ability to make direct references.

A third investor could be a completely hands-off investor that may not directly impact the working of the startup.
In the first two cases, the business plan projections will change. What they bring to the table will impact the startups abilities in some way and as a result you’ll have to factor this in and re-build the financial model setting new targets.

With the exception of investors that make it clear their involvement will be purely financial, each investor brings something valuable to the startup whether it’s strong PR connections, legal advice, sponsorship network, existing customer base or something that can be extended to the growth of a new startup. Once it’s clear what an investor can bring in other than the funding requirement, it’s time to sit down again and re work the business plan. Some investors may also have different attitudes towards market – so while you may have gone to them with projections of say 100 product sales – they may want you to achieve a sales of 1000!

So what you do while first writing your first business plan and doing all the forecasting for the first time? After all, you don’t know for sure who the investor is going to be and write one accordingly. The simple (and perhaps only logical ) solution is to develop your business model assuming that you will be working with a passive investor and you’re on your own. Project the financials based on your own abilities and that of your co-founders stating what you can achieve based on your experience and plans. If an investor coming into the mix impacts the plan, those changes will have to be worked in and while it may involve more re-work, chances are…you plan will look better and more promising!

If this morning’s Economic Times news materializes, then August 2011 could bring about a new era for India as an entrepreneur friendly place.

The Economic Times article titled “Come August and you can start your Company in 24 hours; MCA proposal to spur entrepreneurship” is what we’re all excited about. The article says:

But come August, entrepreneurs dreaming about walking in their footsteps can float a company in exactly 24 hours, doing everything that’s needed online. At least, that’s the promise the Ministry of Corporate Affairs (MCA) is holding out to start-up aspirants across the country.

India hasn’t been a front runner when it comes to destinations to startup a new business venture. In fact, as the ET article points out ranking 165 out of 183 countries in terms of ease of starting up makes the word ‘frontrunner’ a terrible understatement. However, if this proposal falls through and the MCA really delivers on this making it possible to register and form a company within 24 hours without the hassle and red tape the earlier process is known for, then the country could potentially undergo a revolution as a destination.

We’ve talked about the various pitfalls and challenges in starting up in India with issues around paperwork, bureaucracy, corruption, trouble getting a phone line, an electric connection, negotiating a rent agreement and a host of other problems most entrepreneurs would rather not have to deal with when they have more important priorities as startup founders. This move by the MCA could ease one of the big worries for most entrepreneurs when it comes to starting new ventures and would be a remarkable first step in making India a destination of choice not just for existing entrepreneurs but new ones and overseas entrepreneurs as well.

Think about it…if you could setup a company within 24 hours, leverage the vast talent resources in India, benefit from the lower operating costs which are critical to early stage ventures, have a supporting startup eco system with all the resources you need to function and grow…then India could come across as a good place to start right? Ofcourse, we would still have to sort out all the other issues like shielding entrepreneurs from the corruption, delays in getting infrastructure setup and other issues, but with concrete steps, we can create a more startup friendly environment and seed the next generation of great businesses.

For now we have our fingers crossed that this new proposal by the MCA will come through and give entrepreneurs one of the fastest most efficient company formation processes anywhere!

As a startup Founder or CEO, one of your key roles is to INSPIRE others. Keep them inspired, motivated and cultivate a sense of belief in what they are doing. What about inspiring yourself?

That’s almost a self responsibility and one that is extremely important. Nearly every one of us needs a dose of inspiration wherever we can find it and that’s what fuels the drive of entrepreneur to succeed and make the next day a step ahead from the last.

We look for inspiration in news, blogs, stories of other entrepreneurs, discussions and interactions with others. It’s a process we use to “take something valuable” in the form of a new learning, a confidence boost or something that can help do better for ourselves. In all practicality, we can learn something or take away something of value from just about every other person around us whether a colleague, friend, acquaintance or mentor.

When it comes to inspiration, despite all the sources we can now source it from, books hold a very special place in the journey’s of many start-ups and entrepreneurs. Some books, more than others because the imprint they have left was so deep their influence made a difference. Some of these books impart valuable lessons, others may point out something you were doing wrong while still others may simply be so motivating, that it carried with your work. Nearly everyone of us has had a book (or a few books) that really had an impact on you and make you think differently about yourself professionally and personally.

So the question this brings up and the question we’d like to put out there for you is:

What are the books that had the biggest impact on the India Grow VC member community and you?

Hopefully, by sharing the books and resources that really influenced you, we can create a pool of books that others should really consider giving a read because these are books that can change a lot.

So what is (/are) your book?

Please share your favorite books in the comments section.

Startup founders who more often than not, end up taking up the CEO role as their startups form. While the role of a CEO is very multi-faceted and demands the ability to think from all the various functions as well as stakeholders the venture has, as individuals each of us come into it with a more dominant perspective.

This perspective is mostly influenced by one’s previous role, profession, educational background or simply interest area. For example, a design professional starting up a new venture will (even unwittingly) carry a design-centric approach / direction to growing the company. It’s only natural that emphasis on product design and development will be heavier than other areas such as legal requirements, commercialization or other functions.

Similarly, someone from a finance background may have a leadership style based more around business, financial planning, costing and capital management while not necessarily having the same level of focus on marketing, execution, human resources development or even product development.

So there are…

- Techie CEO’s
- Marketing CEO’s
- Finance CEO’s
- Sales Driven CEO’s
- Product CEO’s
- Operations CEO’s
- Legal CEO’s (Not that there illegal ones too)
- And others…

Each one brings a certain additional skill level to their leadership based on their core interest and preferred perspective and there is no right or wrong perspective here. There have been successful ventures headed by Techie CEO’s as there have been success stories driven by Marketing CEO’s and others.

The uniqueness of each one’s leadership style is a strength!

Herein also lies the weakness for many start-ups.

A techie CEO may have groundbreaking technology but could struggle when it comes to commercialization or handling a much larger operation once it grows. The Marketing CEO may be able to create a lot of traction and opportunities but could suffer when it comes to how well built a product is and incorporating technical changes to keep up with customer requirements. For a startup to transition into a constantly growing business, a founder needs to try and bring on board different perspectives and working styles which will complement theirs and widen the horizons.

Building the right team

While building a founding team, it’s good to identify:

1. What type of a CEO are you?
2. What kind of other leaders / skills could you attract to build competencies across the board?

Once you have that figured out:

Do what you do best. Delegate the rest.

It takes a leader to know their limitations and overcome them with the help of others!

The Techie Founder

The Product & Branding CEO

The PR & Branding CEO

You

What kind of founder are you?

(Tell us by adding a comment)

]]> http://india.growvc.com/main/2011/06/29/what-type-of-a-start-up-founder-and-ceo-are-you/feed/ 1 http://india.growvc.com/main/2011/06/28/startup-lesson-going-big-does-not-always-mean-investing-big/ http://india.growvc.com/main/2011/06/28/startup-lesson-going-big-does-not-always-mean-investing-big/#comments Tue, 28 Jun 2011 05:55:55 +0000 satish http://india.growvc.com/main/?p=1102

A lot of first time entrepreneurs have a preconceived notion that their business plan will really take off only if they get funding and that growth is directly proportional to the amount of funding they can raise from a VC or Angel Investor

An experienced entrepreneur will tell you otherwise…that there is exactly

- a right time,
- situation
- amount of funding

that’s needed sometimes at a precise point to accelerate growth. In no way does it mean that one can pump money into a business plan at any point and expect success. This notion is what leads to over-funding and often failure.

Perhaps one of the traits extremely successful entrepreneurs have is knowing the how to, when to and how much to when it comes to usage of capital and funding. They played their cards at the right moment and know when to hold back when required too.

Bootstrapping and frugality are real tools in an entrepreneurs hand and knowing when to use bootstrapping and when to use capital injection is a skill.

To see why this so important and yet often ignore one need not look further than the example of AdventNet Founder Sridhar Vembu who was behind the success of ZOHO. In an article in Forbes, acclaimed entrepreneurial writer Sramana Mitra wrote:

Vembu is a low-profile guy if there ever was one. He is also cheap as hell. Yet, of course, you know that among entrepreneurs, frugality is a virtue. A tremendous virtue.

Vembu has stretched this virtue to extreme limits, and added layers and layers of creativity upon it. The result? A 100%, bootstrapped, $40-million-a-year revenue business that sends $1 million to the bank every month in profits.

Almost all of us have heard of the Saas MS Office alternative ZOHO office suite but few would believe that it was a “bootstrapped venture” considering the 600 plus employees that work at their office in Chennai. Having turned down some of the crème de la crème of venture capitalists that have made bids to invest in him, he continues to grow this product based venture from strength to strength.

Among some of the most prolific female entrepreneurs and CEO’s is Rashmi Sinha one of the Founder of Slideshare.net which is right up there with YouTube and Flickr when it comes to sharing slide presentations and documents across the social web. In an interview Rashmi talks about how Slideshare.net which was founded in 2006 went from 0 to 32 million users and you’ll find her story doesn’t start with securing a large funding round either. In fact, she says the first version of Slideshare was built by her husband along with an intern quite frugally till it had really taken off. It was only then did scaling and investments come into the picture.

Going big doesn’t necessarily mean securing a huge round of funding. The timing, purpose and amount all have to fall into place forming the right combination in order to utilize funding well in your journey to create value and a growing business.

The great thing about starting up your own venture is often the enthusiasm and positive vibe about being committed to an idea you believe in. Sometimes (quite often actually) in all the adrenaline rushing, optimism and enthusiasm driven sprint to launch a startup and quickly “take it to a mega IPO” something very essential to all of this is lost…clarity in the business model.

How often has an investor or VC heard this from bubbly young entrepreneurs like this?
Watch this hilarious video (This is how a lot of ideas sound to investors)

While having the enthusiasm, business plan and confidence to follow it through are great qualities…every entrepreneur needs to ask themselves

What is my business model?

And we don’t mean like
- “I’ll monetize it with advertising!”
- “We’ll develop it it once we get the eyeballs!”
- “We’re going with a freemium model”
- “It’s going to be Saas with tiered pricing”

Those answers may work in the early stages but any serious investor would need more than that to understand how their investment is going to go to work. When you’re dreaming of heading for an IPO or building value, it becomes all the more important that you can clearly put down your business model and financial indicators into words with crystal clarity.

A recent article published on VCCircle.com quotes the business model from the IPO prospectus of one of the hottest IPO’s being talked about across the technology world. Groupon! Now it’s one thing for Groupon to say we’re a website that allows merchants to offer their services under location based categories with discounts and offers…etc. However, we’re talking about a billion dollar IPO here vague presumptions are not going to cut it when things get this serious.

Here is a paragraph from the VC Circle article which you can read here:

The Business Model

“Groupon is a local e-commerce marketplace that connects merchants to consumers by offering goods and services at a discount. Traditionally, local merchants have tried to reach consumers and generate sales through a variety of methods, including the yellow pages, direct mail, newspaper, radio, television and online advertisements and promotions. By bringing the brick and mortar world of local commerce onto the internet, Groupon is creating a new way for local merchants to attract customers and sell goods and services. We provide consumers with savings and help them discover what to do, eat, see and buy in the places where they live and work.
Each day we email our subscribers discounted offers for goods and services that are targeted by location and personal preferences. Consumers access our deals directly through our websites and mobile applications. Our revenue is the purchase price paid by the customer for the Groupon. Our gross profit is the amount of revenue we retain after paying an agreed upon percentage of the purchase price to the featured merchant.

The document goes on to cover financial metrics like gross profits and free cash flows as defined in the context of Groupon’s business model as well as detailed operating metrics to clarify to the subscribers and investors how Groupon is poised to run as a business on the scale that it has approached.

Can you define your business model based on your startup plan with this level of clarity?

Despite what stage a startup is at, being able to define your business model and have clarity of how your ideas translate into business will play an all important factor in the future of your startup. The earlier you have this clarity, the easier it will be to see for your stakeholders and you as an entrepreneur… where you’re going.

The process of heading a start up is convoluted and intimidating, with lack of certainty being a key factor. A good CEO does not get demoralized by looming prospects of instability and faces each challenge headfirst. The biggest question buzzing around here is the question of funding: Where can I find someone who will give me money to kick start my start up? Start-up CEOs have two large risks in terms of funding their business– over funding or underfunding. Learning to drive your business is a bit like driving a car, when it comes to funding. Start slow, with just enough propulsion to change gears and increase your speed. Being over funded as a start up could spell out many troubles, just as starting on fourth gear while learning to drive could.

So what should you look for in an investor?

- For a start, look for an investor that gels with your objectives and fits your business like a partner, don’t fall for the first person to offer you funding.

- It is important that the investor is accredited and has a good track record as an angel investor. There is more to an investor than just the amount he or she is willing to fund.

- You should also keep in mind the experience that investor has in your sector, and their contacts, which could benefit you in the future.

- A good rapport with the investor is crucial for good business. The worst threat a start-up faces is not competition, but problems with investors, which could send the business packing in a matter of a few meetings.

- There are many issues with investors that need to be dealt with, such as amount of funding, investor rights, valuation and liquidation preferences. Investors might be more comfortable adding to the senior management those with whom they have already worked previously. Such employment changes may add credibility to your company, but may also take your business on a different track.

Every investor looks for a different level of involvement and in the end it is your decision whether you are willing to meet such investor demands.

Where should you look for financing?

Many start-ups first go to their close ones, such as friends and family, for financing. These investors are usually highly supportive and trust in the business; a limitation, however, is that their funding may not be enough and their perspective could be biased.

So, the second set of investors is angel investors, who would provide seed funding, but in return for a large share of equity. These investors usually prefer to be active rather than passive shareholders.

The next step would be to opt for a venture capital fund. These funds are usually granted after set criteria, and are often made in limited partnership. Often this funding is the most beneficial as it brings a lot of experience and expertise along with it. The last stage, when your business is able to stand on its feet, is to find strategic partners, ie investors who have a business themselves. This relationship is strongly mutually beneficial, but should be dealt with carefully as often these investors may be competitors themselves.

Worried? Don’t be. Face each predicament one step at a time and things will start falling in place!

Rich Sloan, cofounder of Startup Nation, has one thing to say about elevator pitches:

“You’re never going to get to the audience unless you’ve got that killer elevator pitch.”

The elevator pitch is a mystical window of time that could spell out a step forward in your business endeavors, or send you back to LinkedIn, searching for another opportunity. As an upcoming entrepreneur, the elevator pitch could be the most crucial aspect of your professional life. After all, if you can’t sell your idea, what can you sell?

So how do you go about preparing to amaze a potential investor or hiring manager in just a few seconds? Let’s say that you’ve taken care of the basics. You’ve gone over your business objectives, your mission and vision. You know what you want from the person you’re in that enclosed space with for the next seconds, whether it’s a job or funding. So what should you remember to make your pitch irresistible? Here’s a list.

1. A.  First and foremost, know your audience! Build a rapport. It’s a lot to do in 15 seconds, but start a conversation that engages the other person.
2. B. Be memorable. Make an impact by saying something that sells you and your company. And don’t be afraid to brag! Just make sure to be subtle.
3. C. Make sure to speak about your credible information. If your company is already making profits, point it out!
4. D. Be passionate! Anyone who has a deeper connect to their profession is more likely to make a better impression.
5. E. Remember the four important M’s of Elevator Pitch and if you can mention them, you will be more or less home:
   1. How you can plan to Move people to your brand
   2. How can one Measure your success
   3. Who all constitute the Management of your team
   4. How will you Monetise
6. F. The elevator pitch doesn’t have to be limited to the elevator or job fairs. Talk about your ideas everywhere! At family gatherings, at the doctor’s office, at bars, in the men’s room… Opportunities come when you least expect them!
7. G. Keep it fresh and interesting. ET Now allows new start ups the chance to pitch their entrepreneurships on a segment called Elevator Pitch. Sid and Alex, co founders of MoneyVidya, an online financial community which “features members and their stock market recommendations,” were recently introduced on this segment. To gain more capital for this venture, Alex and Sid literally pitched their idea to the whole nation using an innovating two minute video summarizing their company and its potential.
8. H. Make sure that you make eye contact, offer a friendly smile, and that your shirt is tucked in.
9. I. Lastly, but most importantly – practice, practice and practice. Keep practicing your elevator pitch – while sleeping, while bathing, while doing anything…remember, this could be the most important sentence of your life – so you better be perfect at that – in respect of its tonality, where the emphasis has to come, how your expressions will change while speaking it out…make sure that your every move is well practiced.

Keep practicing, and keep an eye out for any opportunities, be confident and before you know it, you’ll be shaking hands over the finalized contracts!