Tips to avoid failure in startups

Investment or mentoring - Which should be first?

In 2016 and H1 2017, over 200 visible startups in India failed. It is not that all of them failed due to non-availability of funds, but infact otherwise.

On analyzing the invested startups, we can draw conclusion that many startups failed either because they got more money they could chew or they were starved off the funds. let me explain.

Many Hyperlocal companies like PepperTap, LocalBanya, GrocShop shut their shop in 2016 and 2017, due to splurge in customer acquisition, to the extent customer acquisition costs were higher than lifetime value of the customer!

PepperTap got $50m including $36 from SnapDeal and they continued their operations on negative transaction cost over a long period, inviting it attracting for local grocer to make a purchase, pocketing a discount of 20% (offered in the name of new user discount) and sold to his customers as otherwise he would have. Operations were not reviewed and trends not seems to have been analysed. This problem occurs when money is available in plenty and our desire is to scale fast, even fulfilling artificial KPIs.

On the other hand, food delivery startups, who started with promise as last mile delivery is still a issue to be resolved efficiently, TinyOwl, ZuperMeal, iTiffin, BiteClub all folded up, as money which was easily available last year, isn't available this year that easily, as investors have tied their purse, witnessing bloodshed at the marketplace. Scale of these startups needed, as per design, higher infusion of capital and that was not available this year.

In both of these situations, somehow, the trust between founder and investor got broken.

I am of the believe, before investing, due diligence should happen over a period of time when founders should understand the investors and like wise the reverse. This can happen when mentoring happens before the investment in the venture.

With this view, we have structured our next accelerator program, different from the market offerings. Accelerators generally give money first and then mentoring take place. The Startup Board is coming up with a accelerator program in which about 15 founders and over 30 top industry CXOs will meet every Saturday for 16 weeks, and virtually thereafter for over a year, to not only expose connections, guide as board of directors guide the management team, but also hand-hold on strategic direction and resolution of strategic issues. This approach will be better to build trust and consequent investment, when maximum weight investors have started giving on the execution capability and value system of the founders.

I would love to get your views.

Cheers! Ashish Jain

Insane valuation of Start-ups

India is witnessing immense activity in the start-up eco-system. Buzz is no longer confined to Bangalore or amongst the college pass-outs. Many professionals – men and women, fresh graduates, US returned NRIs, and domain experts are joining hands with fellow colleagues and launching their own venture – giving them freedom of expression and sense of fulfillment.

Each of these ventures needs funding, at angel, seed, growth or late stage. Three important questions come to any entrepreneur mind. One, which is the optimum stage any venture should seek funding at?  Two, what is the ideal valuation and third, what percentage of equity can be offloaded to investors?

This subject as much important as it is, has been written as exhaustively and widely. Still right answer eludes everyone. It is akin to a price at which you sold your shares invested in a listed company and still feels you sold it cheaply. There is no right price. However, I will share some established and informal models doing the round.

Key factors for consideration in valuation of unlisted companies are

1.   Idea – demand, scalability, IP protection, entry barriers to competition

2.   Team – education, experience, complimentary skills, values, maturity, vision and passion

3.   Product stage – idea, development, pilot, traction, launch, growth

4.   Finance stage – own money, family & friends, individual angel, established angel, seed fund, growth fund, late stage

5.   Sales figures, if available (for sales multiple)

6.   Debt in the venture

Some of the established methods include discounted cash-flow (DCF) model, cost-to-recreate model, and market-multiple-model. However, market-multiple model works when sales or comparative data is available from another company.

One friend of mine, who quit his plum job and jumped into setting up a new venture in healthcare, has an interesting and simple valuation method to tell. He pegged the valuation at Rs 6 crore, considering 2 Cr for his IIM-A educational background, 1 Cr for having set up his company, 1 Cr for putting in his 15% investment into the venture, 1 Cr for having developed the product (yet to launch) and 1 Cr for initiating contractual agreement with some 20 partner-vendors in South Delhi. Basis this, he has roped in 8-10 investors, giving less than 10% equity to them collectively.

Nathan Beckford, founder of Venture Archtypes and Mahesh Murthy, who funded 50 plus startup, offered stage-of-development as a proxy to the kind of investment a venture can command, and thereby arriving at the valuation and then applying any adjustments. Here is what they have to say, simplistically speaking.

Stage	Investors	Funding Amount	Equity Offered	“Post” Valuation
Concept / Business Plan	Self or Friends and Family	Rs   5 to 25 Lakhs	1% to 10%	Rs 50 to 200 Lakhs
Technology Developed	Angels, Seed VC like Blume, Venture Nursery, Mumbai Angels, IAN, Kae etc	Rs 20 to 300 Lakhs	10% to 20%	Rs 2 to 15 Cr
Launch / Early Consumer Traction	Seed VC, Series A VC like Seedfund etc	Rs 2 to 25 Cr	25% to 33%	Rs 8 to 75 Cr
Scaling and Adoptation (Cash flow negative)	Series A, B, C VC like Nexus, Sequoia etc	Rs 5 to 50 Cr	25% to 40%	Rs 20 to 200 Cr
Rapid Mass Expansion (Cash flow positive)	Late Stage funds like Matrix etc	Rs 50 to 200 Cr	25% to 40%	Rs 200 to 800 Cr

Another interesting model of valuation variation has been exhibited by https://angel.co/valuations in which difference in valuation has nothing to do with many of the venture stages discussed above. It has data basis college (Stanford, Berkeley, Harvard, Mumbai university etc), incubator reputation, past employers of founding members, location (Silicon valley, Bangalore, Mumbai, New York City, Western Europe etc) and markets these startup cater to (Big data, hardware, mobile commerce etc).

These methods do not matter in the later stages of funding. Simple calculation goes, how much money is needed by the venture, for equity that it is willing to offer. For example, if $ 600 million is needed in stage X and equity that venture is willing to offer is 2%, valuation becomes $30 billion. All the earlier investors should be notionally making money at this price. 

Clearly start-up valuation is an art, not a science. Grey area lies in the valuation of the non-tangibles. Individual perception and hype both contributes, to help inflate the valuation, to exit on a “high”.

Some of the Indian e-commerce companies are valued very high. Housing.com currently valued at Rs 1500 Cr, Quickr at $1 billion (Rs 6000 Cr), Paytm at $1.5 billion (Rs 9000 Cr), Snapdeal at $ 2 billion (Rs 12000 Cr), Ola at $ 2.5 billion (Rs 15000 Cr), Flipkart at $15.5 billion (Rs 93000 Cr) are such examples. Would they sustain the kind of valuation even after listing? In a perspective, Indian Oil Corporation (IOC) is valued at Rs 94000 Cr currently and except for top 20 Sensex companies, all other companies would have valuation lesser than Flipkart.  Makemytrip.com, once the bell-whether of Indian e-commerce bandwagon is no longer cynosure of investor eyes. It reached to a valuation of $ 800 million just after listing and is currently valued at $ 450 million.

Will this insane valuation of Indian startups sustain, is a big question mark. Big foreign money is entering India and chasing only the chosen few, considering them “safe”, and increasing their valuation unrealistically. There are many ventures that have huge potential but are still lurking in limbo, in the absence of visibility. It is better to make a correction, diversifying and going beyond celebrated few, to value appropriately, instead of bringing the whole eco-system down with bad examples.

Ashish Jain

Published in Financial Express on 28^th August 2015

http://epaper.financialexpress.com/574095/Indian-Express/28-August-2015#page/11/2