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6696

Employee Stock Option Plans (ESOPs) are part of policies to attract, motivate and retain employees by organizations. Thanks to the startup ecosystem, ESOPs have become a famed instrument amongst new emerging organizations. Earlier, they were usually offered to senior employees for their long-term association with the organization but in this new age, it has become a tool to attract the best talent by startups. An ESOP is a plan that offers an option to the employees to purchase the equity shares in an organization at a discounted price. Startups need to design the ESOPs scheme before granting options to the employees. For startups, it is imperative to fix the number of shares to be granted in an option rather than fixing the percentage stake because the equity stake will be subjected to dilution with further fundraising or another option plan. The option has to be exercised during a specific period and must have a termination clause followed by the exit of an employee from the organization. Learn MBA Courses from the World’s top Universities. Earn Masters, Executive PGP, or Advanced Certificate Programs to fast-track your career. ESOP is an instrument that helps save cash for a startup in its initial phase. There is no denying the fact that every startup wants the best talent for its venture. However, the best talent comes at a price. One may be required to design a very competitive compensation structure to attract them. But ironically, startups are usually not in a position to shell out a huge amount of cash on salary cost. At an early stage, ESOPs come into play for cash conservation. The potential employees are attracted by giving them the option of purchasing an equity stake in the company. On the contrary, they are made to sacrifice on their cash component of salary structure to an extent where it does not affect their lifestyle. The instrument has proved to be beneficial as it aligns the organizational goals with the employees’ personal goals. The employees holding the ESOPs are motivated to work towards the success of the organization. They take the onus of fulfilling the business’s vision and mission along with the founder(s). They become the part owner of the company and thus, would be liable to the share of company’s profits. Due to this, the employees’ give their best shot to grow and nurture the startup and take it to the next level. As an entrepreneur, when you are hiring talent from the industry – you would typically ask the individual to take a 20-30% haircut in their existing salary and make up for that gap through ESOPs. For the early hires, the cash component in their salary remains low as the startups try to balance it out by offering ESOPs. There is a risk associated with such plans. There can be a decline in the value of equity that an employee holds if the startup is unable to show up the requisite results. On the other hand, for founders – ESOPs lead to equity dilution of their holding. Although it might involve dilution for existing owners and future uncertainty for the employees, the benefits from such plans outshine its downside. They have even been successful in compelling the talented employees working with big and stable organizations to leave their existing jobs and join a startup. Such can be the power of ESOPs if designed diligently. Top reasons why the ESOPs are important Attract employees who can be posed as potential assets to the company Helps in minimising the attrition Align employees towards the organisation’s vision and mission Brings employee loyalty into the picture  Types of ESOP Plans for startups Employee Stock Option Scheme (ESOS) Employee Stock Purchase Plan ( ESPP) Restricted Stock Units (RSU) Stock Appreciation Rights (SAR) Phantom Stocks  The ESOPs in Indian startups are a way of providing an opportunity for the employees to participate in the company’s growth.  The ESOPs act as an additional source of income for the employees. The esops for startups are a great way to retain and attract talent into the organisation.  If you want to learn more about marketing and entrepreneurship, Liverpool Business School & upGrad offers Master of Business Administration (MBA) Liverpool Business School which helps you to transform your career. The program provides 1-on-1 mentorship from industry leaders, a 1-week immersion program at the University campus, dual credentials (MBA from LBS & PGPM from IMT), networking with peers at offline basecamps, and more.

by Himanshu Puri

25 Mar 2023

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5402

“Why do so many founders build things no one wants?” – Paul Graham, Co-founder, Y-Combinator  It’s surprising to see the number of entrepreneurs that do not consider getting their idea validated before hitting the market. The result is no one buys their offering leading to the failure of yet another start-up among many. As per one of the studies conducted by CB Insights on start-ups in Silicon Valley, approximately 90% of start-ups fail. Among many reasons evaluated, the top reason was the lack of market need for the prospective product. More than 1,000 startups also failed in India in the last two years. The prime reason has been the inability of the team to carry out sufficient work to validate the idea. Thus, testing the market’s acceptance of the product, through validating the idea of it before building the product, is critical. Check Out UpGrad’s Entrepreneurship Certificate Program Even if you feel that you have a very strong idea, you need not jump straight into creating the product or launching the service. The idea may be workable or non-workable in the market as that depends upon numerous internal as well as external factors. It’s always better to validate your idea before introducing your product or service to your potential customers. This will save you valuable time, effort and money, which is always in scarcity for any aspiring entrepreneur. Idea validation is a process where you can test out your assumptions relating to your initial business idea with minimal time and cost involvement before investing huge amounts of money in building the final product. Indian Start-Up Ecosystem Today: All You Need To Know Learn Online MBA Courses from the World’s top Universities. Earn Masters, Executive PGP, or Advanced Certificate Programs to fast-track your career. Here are 7 ways in which you can validate your business idea: Look for potential competitors As soon as you have an initial product idea, and if you belong to the Digital Generation, one thing you should ideally do, instinctively, is to take your smartphone out, type Google in the browser and look for any product/service similar to your idea that is available in the market already. You need to get an answer to the question – “Is there anyone else in the same business?” If the answer is “No,” then re-think your idea as to why there is no one solving the problem that you intend to address. “Competition validates you. It creates a category. It permits the sale to be this or that, not yes or no.” – Seth Godin, Co-founder, Yoyodyne & Squidoo And if the answer is “yes”, then go ahead and think about how you can be better than them. Finding such differentiation will require you to carry out a comprehensive competitor analysis. There is nothing wrong with entering a market where competition exists. But entering the market with something different and better becomes critical in such a case. Give consumers a better version of what they are already getting. In the year 2003, MakeMyTrip studied one of their prime competitors in the online ticket booking domain. They saw that the Indian Railway’s IRCTC was doing fairly well in India that time. IRCTC was the pioneer in getting people comfortable enough to make travel bookings online, which helped MakeMyTrip validate their decision of entering the online ticket-booking market in India. By 2005, they officially launched MakeMyTrip in India. And today, we all know how convenient it is to book tickets (not just train tickets anymore) through their portal as compared to booking from the IRCTC website. Look for the initial set of customers Another aspect to consider when it comes to idea validation is your potential consumers. Therefore, the second question that you need to find an answer to is – “Will anyone be buying what I’m offering?” If you are doubtful, then you should go out in the market and identify your initial set of customers. Start-Up Founders Listen Up! Freedom at Work is the Key to Success Beware of launching your product or service if you see no customers as takers of your offering. On top of this, you may have to evaluate your customer’s willingness to pay for your product/service. This helps validate that there are people in the market that face the pain points that have been identified by you, to base your solution on. “Validating the demand for your product is more important than ANYTHING. Without market validation, you’ll have a product that no one will pay for.” – Mitchell Harper, Co-founder, Bigcommerce Before launching their company, the founders of OLA cabs identified that there were many young working professionals in urban areas of India who faced the problem of finding and hailing a cab. That was a vast and growing consumer base for them. Such initial identification helped them validate their app-based offering as there was ample opportunity among such user groups. Talk to others Another great way to get your idea validated is to talk to others about it. You can begin with discussing your idea with the people you know. Such sharing of ideas will help you get many different insights, which will help in refining the idea more and more. The more you share your idea, the more mature it will become. You may feel uncomfortable sharing your ideas with a complete stranger, which is understandable. But you need to understand the fundamental difference that separates you from others – they don’t share the same passion about your idea. Moreover, the execution plan is likely ready in your mind and, in most cases, only you are prepared to take it to completion. Plus, if you feel that your idea is entirely original and nobody else has ever thought of it then you are being naïve. The thing is that others don’t want to or rather can’t take your idea to the market. Thus, you should share your idea as much you can. The Road to Entrepreneurship: Perspectives of our Leading Ladies You can also start a discussion relating to your idea on websites like Quora to invite diverse viewpoints. It’s a very useful forum to ignite human interaction around the topic or agenda of your choice. Discuss your idea with others in your network, experts, friends and family and even strangers to get relevant feedback.  “Get five or six of your smartest friends in a room and ask them to rate your idea.” – Mark Pincus, CEO, Zynga Shraddha Sharma of YourStory is of the view that one should share their prospective ideas with as many people as possible during the idea validation phase. She did a similar thing after coming up with the idea of a web portal for people sharing their start-up stories. She believes that your idea can’t be stolen as it’s not just about the idea. It is also about the execution and your crazy passion. It’s about your internal fuel that will propel you to reach your dreams. She met a lot of interesting people who gave her great feedback which helped YourStory improve upon its initial idea. Analyze market potential You may identify some customers in the market who will be willing to pay for your offering. But this is a very crude level of validation. You would be required to analyze the extent and size of the market that you intend to enter. An idea catering to a small market is not a business idea at all. There have been many cases where the market is there, but it’s not big enough to create multiple opportunities for an entrepreneur to sustain the venture in the long term. The market for the offering needs to be sized to know its potential for future revenue generation and growth. You should focus on the idea that either has a huge market or is able to expand/create the market with an innovative offering. “Saying that you’re aiming for x% of a $y billion industry is unambitious – great companies change the y, not the x.” – Benedict Evans, Partner, Andreessen Horowitz Timesaverz validated their idea primarily through extensive consumer research studies. But another important task they did was sizing the market to know the potential of the opportunity. The Start-Up Guide: What Do Investors Look For? In 2013, there were 20 million online shoppers in India. Online services by itself was a very metro phenomenon at that time. So, Timesaverz researched their target group, which was tech-savvy, urban or city-dwelling couples. Thus, as per their estimate, 12 million online shoppers (around 60% of the total 20 million online shoppers in India) stayed in the metros or the urban cities. Then, they determined the target group of tech-savvy people to be around 25% of the 12 million which is a 3 million audience. Also, through research, they found out that on an average, households spend close to Rs. 20,000 per year to take care of the home chores that fall into the various segments of cleaning, handyman repairs, beauty and laundry etc. So, it turned out to be an approximately Rs. 60 billion market, which proved the potential of the market and validated them to proceed with the launch of their prototype. Get your idea validated by users After you have identified the initial set of potential customers, you should approach them and share your idea to get answers to the following questions – Will the prospective offering solve their problem? Will they prefer buying it once it is introduced in the market, over its competitors? Would they like to have any other, additional features along with the core product/service? Are they be eager to pay for it? And how much? Will they want such an offering to be available in the market immediately or after some time – weeks/months, etc.? Such an exercise will give you great insight into your product/service idea and will help you judge the utility of the same for prospective consumers. Users are the primary source for idea validation. You should create a well-thought-out questionnaire on the basis of which you can conduct user research – either through an online/offline survey or one-to-one interviews. There are various online tools such as Google Forms, SurveyMonkey, Typeform, etc. which can be used to conduct online surveys. How to Avoid 17 Mistakes Entrepreneurs Make While Pitching to Investors You cannot ignore interviewing consumers as the data points you get from such interviews can help enormously. “Wonder what your customer really wants? Ask. Don’t tell.” – Lisa Stone, Co-founder & CEO, BlogHer MobiKwik wanted to solve for payments and not just for recharge. They wanted to do this across different use cases like payment for utilities, bill payments, peer to peer transfers, payments to merchants on their websites, or on their apps. They understood their users. Once they realized that users are keeping money in the wallet to pay their monthly recharge bills, they would want to use the same money wherever they go and whenever they are ordering a pizza or buying a movie ticket or paying for a cab, etc. They should be able to use the same money, and they could get the same seamless payment experience when they are doing a recharge. This user research helped them validate their idea to foray into the mobile e-wallet space from being just an online recharge portal. Build a mini-MVP You may share your idea with others and conduct in-depth user research, but a working prototype for that idea is always preferred to test the real market’s response before getting into the market in a big way. Such a working prototype is called a Minimum Viable Product (MVP). In fact, you can even build a mini version of such an MVP for initial idea validation at a very early stage. For instance, rather than creating a completely basic MVP web portal, you can just have a landing page set up to test in the market. Validation through a prototype will get you much better results than anything else. A user will be able to give much better feedback if he/she is shown the actual prototype than just an idea. You can get your idea validated very early with your first product as a mini MVP. The first product will not be a good one. The feedback on it will help you validate what you are building and get you on the right path and improvise. “If you are not embarrassed by the first version of your product, you’ve launched too late.” – Reid Hoffman, LinkedIn co-founder ISayOrganic initially launched a very basic website and did some elementary level of telemarketing to gauge potential consumer’s interest in consuming organic vegetables. They validated their idea, and based on the responses they got from the first thousand odd customers, they launched their portal for selling organic vegetables. Take pre-orders At the time of conducting user research, you may encounter a scenario where the prospective consumer shows willingness to buy your offering when it will be available in the market, in the future. But in reality, they may not convert to being your buyers if given an option to purchase right away. This is standard user behaviour. Such an issue can be resolved by actually pitching for sales of your product/service. If you are building an online business, you can create a landing page with the product information and provide the option of buying the product/service too. You can accept orders and payments even before the product is launched in the market. This will help you get a fair estimate of the number of pre-orders you can get and evaluate the attraction of your offering to actual paying customers. Sale of a product that is yet to be completely built is a big validation in itself. To create a pull for people on your landing page you can use Google AdWords or something similar to create a campaign and run that on various social media platforms like Facebook, Twitter, LinkedIn, etc. An early digital presence and pre-selling efforts help validate your idea. “Pre-selling is the online version of relationship-building. Pre-selling warms up (your product/service) and builds trust and respect (with your customer).” – Ken Evoy, President, SiteSell Dropbox, which is in the business of simplifying the way one creates, shares and collaborates with, computer data; tried pre-selling their services. They got thousands of consumers to sign up on their landing page, even before they created their prime offering. You may be in a tight spot about whether to leave your well-paying job before taking the entrepreneurial plunge – full-time. But it’s very important to make a calculated and wise decision. You should leave your job only when you are assured of the idea and have validated it – and indeed the outcome of such validation is positive. The validation approach may not be easy and may even involve some expenses, along with a strict timeline. But trust me, it’s worth spending every penny to save wasting a dollar in the future. This type of validation may not lead you to 100% success, but it is sure to increase your chances of success. All the best! Comment below to let us know your thoughts on business idea validation and if you have any ideas we may have missed that could help struggling entrepreneurs – we may even publish it in this post! If you want to learn more about marketing and entrepreneurship, Liverpool Business School & upGrad offers Master of Business Administration (MBA) Liverpool Business School which helps you to transform your career. The program provides 1-on-1 mentorship from industry leaders, 1-week immersion program at University campus, dual credentials (MBA from LBS & PGPM from IMT), network with peers at offline basecamps and more.

by Himanshu Puri

03 Mar 2017

Blogs

5644

Funding is critical for early-stage ventures to scale up. After utilizing all the bootstrapped money and the funds acquired from friends and family, entrepreneurs are always on the lookout for an external investor(s) to invest in their idea. Entrepreneurs consistently face one challenge: that of convincing investors of, and impressing them by, their innovative idea, strong founding team and sound business plan. All of this, of course, is apart from actually setting up the business. To make all of this possible, they are expected to make an amazing pitch to the investor. “Fund-raising is a brutal business“ – Praveen Chakravarty, Co-founder, Mumbai Angels & Political Economist, IDFC Institute The Rush To Start-Up As correctly said by Mr. Chakravarty, there is a big hustle among entrepreneurs to claim investor funds. The number of start-ups in India, pitching their ideas in order to receive funds, has grown significantly. In India alone, angel investors (excluding VCs and other investors) have around 5,000 to 6,000 ventures approaching them, in a year, to pitch for angel funds. The whole Indian startup ecosystem is growing dramatically with the number of start-ups and investors growing year on year. As per a study conducted by NASSCOM, India has been ranked 3rd with regard to the global startup ecosystem – having more than 4,200 start-ups. India is expected to have around 10,000 start-ups by the year 2020. In addition, the number of active investors is also on the rise. The number of investors in the country has doubled from 220 in 2014 to 490 in 2015. Putting The Key Into Ignition: Pitching For Funds Pitching simply means presenting a business idea by an entrepreneur to the investor(s) who make investments in exchange for an equity stake in the firm. Pitching is both a science and an art. You, as an entrepreneur, need to be logical in your thought process – when it comes to the idea, its opportunity and scalability. You also need to be creative and skillful to make the pitch interesting and captivating for an investor. This requires you to be artistic too. If you see the pitch deck of Airbnb, you will realize that their founders have very logically presented the problem statements in just three bullet points. They have also described the solution, market size, competitive advantages, etc, through infographics for their venture idea. Now that’s called being creative entrepreneurs! Learn Online MBA Courses from the World’s top Universities. Earn Masters, Executive PGP, or Advanced Certificate Programs to fast-track your career. Ankit Pruthi, CEO and Co-Founder of Unicommerce, talked about the top three ingredients for the right pitch deck, in an interview with UpGrad. As per him, the first element is a strong team. Thus, entrepreneurs must pitch their ‘team’ rather than themselves. They should pitch the opportunity, which should be big enough to excite the investors. And lastly, they have to pitch their product. It follows that ‘TOP’ (Team, Opportunity and Product) are the three essential ingredients of an investor pitch. If you feel that you have a great idea and will be able to crack the funding issue, then allow me a word of caution. It’s not as easy as you think. Investors typically fund only 7% of the proposal that comes to them, maybe even less. What you need is a perfect blend of a good and scale-able solution/idea for a relevant pain point; a strong team; a decent amount of traction; ideally a prototype; and a logical plan to achieve the financial projections that could impress an investor. If you have reached the phase of pitching your idea to investors, many people will tell you what you should do, and it’s tough to decide what advice to take and what not to take. How To Not Break Out In A Sweat Before Pitch Day: An Entrepreneur’s Guide So, we have tried to make it easy for budding entrepreneurs, by providing a list of 17 things you should AVOID (& what to do instead) to make your ‘pitch perfect’: NO: I can handle it easily! (YES: It is critical for me!) Pitching is not just about making a presentation. Rather, it is an opportunity for new age, young, enthusiastic and ambitious entrepreneurs to achieve the goal of a lifetime. If you have bagged a chance to pitch your idea to an investor and are taking it lightly or sensing overconfidence, then beware; you must take every such opportunity extremely seriously. Your attitude should reflect the seriousness and the passion that investors most often look for. I distinctly remember a pitch presentation that I was once evaluating. There was no doubt about the work that the entrepreneur had done for the venture, but his attitude caused concern. Despite his confidence, he was too casual in his pitching. That attitude ensured his pitch was unable to deliver the right impact. One should not take pitching so lightly. The path to achieving success is never easy. “I was taught that the way of progress was neither swift nor easy” – Marie Curie, French Physicist & Chemist NO: I should just go for it! (YES: I should prepare, prepare and prepare!) You may be passionate about your idea and confident enough to pitch it, but you can’t predict the scenario on your actual pitch day. You may be confronted with questions that you may not have been prepared for or predicted. In such a case, you may feel stuck or like the pitch may be slipping away from you. One simple suggestion that could help to avoid such a situation is preparing well beforehand. Try to assimilate each expected question that could be asked of you and gauge the best answers, and what course you should take, in your preparation. You must practice your pitch at least a couple of times before the finale. A well-practiced, rehearsed and prepared pitch has a better chance of grabbing investor funds. At the time of pitching, if you say that the companies in the selected industry will grow 200% year-on-year when in the past, the businesses in that industry have grown by 50%-60% – it will show ill-preparedness. It gives the impression that you have not properly researched the industry that your company will belong to. If you put forth some facts, make sure that you have strong sources to justify your point. Investors attach a lot of importance to entrepreneurs preparing and rehearsing their pitch before presenting it before them. NO: I need not know about the investors! (YES: I should research the investors, well!) Preparing for the pitch also includes researching the right audience (investors) whom the pitch is for. You have to understand what type of investments they make, in which sectors/industries do they typically invest, which aspects of a venture interests them more, etc. If you know the investor, you can work on your deck and pitch accordingly to suit their expectations. Debadutta Upadhyaya, CEO and Co-founder, Timesaverz.com talked about this very aspect, in an interview with UpGrad. He suggested that entrepreneurs have to be very precise or specific regarding the funds or investors that they want to reach out to. Some funds are tech-focused, some are focused on social impact, and there are funds which are focused on high asset-based kind of growth phase. Thus, entrepreneurs need to be very clear as to which is the fund/investor that they need to go after and get their pitch ready for them, specifically. (Check out the Leadership & Management program now, for many more such insights from leading entrepreneurs!) NO: I should pitch as early as possible! (YES: I should pitch at the right time!) There is a right time for everything. Anything done at a wrong time never yields desired results. This rings true for pitching as well. If you think pitching as early as possible will help your business to grow soon, then let me officially be the bad guy and burst your bubble – that is not the right way of thinking at all. You might end up wasting your time in pitching an idea that is not well nurtured. Instead, you should conduct a comprehensive study on your idea, validate it and develop a running prototype to show something tangible to the investor. A business idea which has received some initial traction by hitting at least a small market always has a better chance of receiving funding. The experiences of many founders suggest that these days new entrepreneurs should have some proven traction for their venture before approaching investors. “Almost all the capital in India is growth capital and not risk capital. Investors want proven ventures. They like to come to the rescue of victory.“ – Sramana Mitra, Founder, One Million by One Million The Start-Up Guide: What Do Investors Look For? NO: I should ask for high funding & high valuation! (YES – I should not give undue attention to money and valuation!) Image source: Funders and Founders At a very early stage, valuation has no meaning. It is tough to assess the value of any business when it is just an idea or a prototype. Moreover, at a later stage too, your focus should not just be on the money. Everyone understands that pitching happens to get monetary investment for the business, but putting unnecessarily high emphasis on the amount of funds and valuation would dilute the strong impact your idea could have made. By means of proper negotiation, the valuation and funding amount can be taken care of at a later stage. But the prime focus while pitching must be on swaying investors towards your idea, team, opportunity and plan. Sharing your vision is of utmost importance, rather than money. “Chase the vision, not the money, the money will end up following you” – Tony Hsieh, CEO, Zappos NO: I must go on and on and on! (YES: I must keep it short and crisp!) One of the biggest mistakes many entrepreneurs commit is failing to keep track of the time while pitching. If you think that you know hundreds of things about your idea, industry, competition, etc, and can impress investors by sharing all of them, then you could not be more wrong. A good pitch has to be short, crisp, and yet effective. An ideal pitch should be made in around 10-15 mins. In fact, your pitch should not be more than 20 minutes in any case. Utilize the little time you have, properly. Rather than just being bland and plain, you should add some exciting elements in your pitch for investors. “Spend 40% of your time on what makes your business most exciting to invest in” – Vani Kola, Managing Director, Kalaari Capital NO: I have a jazzy and funky PPT! (YES: I have a formal PPT with the right aesthetics!) Image source: PowerPoint Ninja If you are proud of creating a PPT with lots of cool pictures and images, you should be. However, don’t fool yourself into believing that this will seal the deal with your investors – something that has such high stakes riding on it. There is a thin line between a creative PPT with the right aesthetics and a jazzy PPT which may look cartoonish or over the top – taking away rather than adding to the key points. It’s important for you to support your PPT deck with the right set of pointers, tables, infographics and images that look creative, catchy and impressive rather than too funky or as though going overboard. The time allotted to you to pitch is usually very limited. You also have to try and maintain the number of slides to around 10-12. More slides than these will require you to have more time to be spent, which you may not have, and is not such a good idea anyway. Guy Kawasaki, a Silicon-Valley based speaker, author, evangelist and entrepreneur, has suggested having 10 slides in a pitch deck. “You have a very short amount of time to make a first impression.  If you’ve got a long rambling slide deck…you’re done” – Naval Ravikant, Co-founder of AngelList NO: I can sit, relax and present! (YES: I should present in the most enthusiastic way!) The style and the way of presenting gives entrepreneurs a chance to showcase their passion, enthusiasm and zeal. It is imperative for you not to look like a lazy, laidback and lackluster person. You must have and display a strong conviction about your business idea, and that can only happen when you present using the right body language and gestures to support a strongly projected voice. Just imagine an entrepreneur sitting on a chair and reading out the slides in the deck.  Would investors ever be engrossed in such a pitch? Good communication becomes critical while pitching. A clear and perfect diction, along with a strong message must be delivered to investors. “If you want to glide toward money, you have to make sure your message is clear as a bell, and you need to ensure that you have a unified team capable of communicating it” – Alejandro Cremades, Co-founder & Executive Chairman at Onevest – ‎The Art of Startup Fundraising The Idea Called UpGrad: A Start For Start-Ups NO: I must crack this one way or another! (YES: I should try not to sound too desperate!) Desperation can kill your pitch. Try and avoid desperation creeping into your mind and subsequently your voice and demeanor. You do not have to be desperate to get funds. Instead, you have to have faith in your venture idea’s strength in attracting investors rather than trying too hard to attract them. Moreover, don’t ask them upfront what it is they can offer. Rather, be confident regarding your projections and justify the amount that you truly need. NO: I should focus solely and only on my idea! (YES: I should talk about every critical aspect!) Although, the foundation of every new business venture is its idea, i.e. the solution for catering to a relevant pain point or gap in the market; there is a gamut of other things about the idea that needs to be considered and explained while pitching. If you think you can impress investors by just explaining your idea, well, think again. A perfect pitch should include some critical elements. You have to voice the following aspects while pitching: The problem which you plan to solve through your venture idea/solution Opportunity and potential market size for such a possible solution Existing competition and differentiation (secret sauce) Credentials of your founding team Revenue model i.e., how you plan to earn Logical financial plan covering cost, revenue and profit projections Traction achieved till date “Occasionally, an entrepreneur hoping to launch their first business puts so much thought into the concept that he or she neglects the financial and legal plan—and unfortunately, this often becomes apparent early in a meeting, when an investor can lack clarity in what exactly the proposed deal is going to look like” – Richard Branson, Founder, Virgin Group NO: I will give an amplified or exaggerated picture of my idea! (YES: I don’t have to exaggerate things!) One lie is bigger than a hundred truths. You have to give an accurate representation of your idea. Investors are smart and experienced, they can catch exaggerations or the slightest falsehoods immediately. It is always advisable to speak truthfully and present all the correct facts and figures. The assumptions made for any estimation have to be logical and thoroughly researched. If an entrepreneur presents an idea of say, developing a smart and automated bed for luxurious homes in India, then saying something like ‘it is an 800 Billion US Dollar market’ will sound foolish to investors knowing the extent of the high-income category, in the country. Entrepreneurs usually exaggerate financial projections to venture capitalists and angel investors. They feel that higher projections will help them attain higher funding which may not be right. One should start slow and gradually grow. NO: I will earn/take over everyone’s share in this industry! (YES: I must do an extensive competitor analysis!) Investors are of the view that when an entrepreneur approaches them and says that they don’t have any competition, it gives them a chance to laugh. A statement like this makes them think that either the person has not done the competitor analysis properly or is arrogant. Every company will have competition. Even the innovative offering will replace some older product, or there would be some overlapping components or prospects. You have to show how your business is different from others after talking about the real competition. Let me quote one of the instances that took place with Deepinder Goyal, Co-founder, Zomato. He presented his idea (of Zomato) to investors and was asked a question – “How are you different from the others?” There was a straight reply. Nothing about the fancy features on his website or any such thing – “We’re not different. We are better. And we have a million customers every month to speak for us.”  Hence, it’s not just thorough competitor analysis that is required but also the development and sharing of the secret sauce that will make you different or set you apart from the others. “The competition slide in your pitch presentation is important but so is your differentiator slide” – Sandeep Aneja, Founder & Managing Director, Kaizen Private Equity Indian Start-Up Ecosystem Today: All You Need To Know NO: I have another business idea! (YES: I have to focus as much as possible on this one idea!) While pitching, sometimes you may get the sense that investors are not looking too impressed by your pitch. You may have an alternative idea that can be presented. What would you do? Would you present that alternative idea to them? If your answer is yes, then you shouldn’t expect that investor to come back to you. Sometimes, even if the idea is reasonably good, the pitch may not have other strong elements and thus, the investor may like to give you constructive feedback on the same. This still keeps the door open for approaching the same investor after you have worked on their comments. Straightaway sharing another idea will lend the impression that you have no passion for your business and fluctuate between ideas, just for the thrill of being an entrepreneur. Moreover, many entrepreneurs feel that their job is a backup. If they are unable to get funding, they can go back to their well-paying jobs. This is a major blunder any true-blue entrepreneur can commit. While pitching, you should shy away from saying that you want to work on your job till you get funds. “Never say – I’ll quit my job when I raise money” – Emmanuel Amberber, Co-founder, FlyingCocoon NO: I can hide my deficiencies! (YES: I should be open to acknowledging shortcomings!) Every business plan may not be 100% full proof. If investors find some loopholes or flaws in your business plan, you should be open to acknowledging the same. Ideally, you should be ready with a counter or response by sharing a plan of action to correct these deficiencies identified by the investor. For instance, when investors point out that you do not have a strong product head in your team, which can be essential, you should be able to respond with your plan of hiring for such a position. This will place the investors’ confidence in you for having the requisite knowledge of key business issues and immediate plans to resolve them. “After presenting the benefits of your proposition, end by addressing the critical issues. Most presenters avoid these, but there’s always a critical guy in the audience who will bring them up. You’re much better positioned if you bring them up first and point out how you’re going to find the right solution together” – Steli Efti, CEO and Co-founder, Close.io NO: I will give 100% guarantee on returns on investment! (YES: I have to show them a great chance for worthy future returns!) This is one other major mistake entrepreneurs tend to commit. They become so confident (read overconfident) that they get ready to give guarantees for a specified percentage of returns to the investors. By doing so, you are not just fooling yourself but fooling investors as well. Investors are experienced enough to know that nobody can really guarantee future returns. The better approach for you would be to present your idea in such a strong way that should give them an indication of having high probabilistic chances of getting good returns in the future. “While a trend shown in the past is a fact, a “future trend” is only an assumption.” – Benjamin Graham, Economist and Investor NO: I will move investors with my emotions! (YES: I should keep pitching professional and business oriented!) You may be in a situation where you are to make your 100th presentation after 99 failures. But please avoid mentioning that you are emotionally broken now to attempt to pitch properly any further, for funds. You should also avoid sharing any emotional stories with investors, at the time of pitching. They may not care and what’s worse, it could work against you rather than going in your favor. You have to keep your calm and be as professional and business-oriented as you can while pitching. “Any blatant attempt to manipulate the investor will almost certainly kill the deal” – Soorjoo, Founder, Pitch Clinic Can Entrepreneurship Be Taught? Yes, And Here’s What It Takes NO: I will ask investors to sign a Non-Disclosure Agreement! (YES: I should not present investors with an agreement to sign!) You will make a mockery of yourself if you ask an investor to sign a non-disclosure agreement at the time of pitching. Investors are in a business where they hear and evaluate numerous new ideas every day – they are not in the business of building products themselves. Any sophisticated and serious investor would not like to be presented with such an agreement, in fact, it might hurt your prospects. You risk losing their trust in the very first meeting. “As a potential investor, I won’t sign an NDA until I know that the business meets my investment parameters.” – Ken Forster, Managing Director of ThingMUSE Evidently, pitching is not a cake-walk for entrepreneurs. There are a lot of mistakes that can be made but I have tried to list them out in such a manner that they can be avoided if one is careful. Let me quote Sanjay Sethi, CEO and Co-founder, Shopclues.com in one of his interviews with UpGrad. “For every successful pitch, there are probably 3000 failed pitches. All you need is one person to say yes, but be ready for hearing NO.” – Sanjay Sethi, CEO and Co-founder, Shopclues.com This quote aptly portrays the hardship that goes into making a pitch, perfect. Hence, entrepreneurs should stay patient and continue working hard towards their goal of getting the perfect investor in the bag, through a perfect pitch of their business ventures. Good luck! If you want to learn more about marketing and entrepreneurship, Liverpool Business School & upGrad offers Master of Business Administration (MBA) Liverpool Business School which helps you to transform your career. The program provides 1-on-1 mentorship from industry leaders, 1-week immersion program at University campus, dual credentials (MBA from LBS & PGPM from IMT), network with peers at offline basecamps and more.

by Himanshu Puri

06 Jan 2017

Blogs

5300

“Investors are pinched between two kinds of fear: fear of investing in start-ups that fizzle and fear of missing out on start-ups that take off” – Paul Graham, Co-founder, Y Combinator The perspectives of investors vary towards start-ups at different stages of their journey. Investors’ prime job is to look for and invest in start-ups that can provide them with the expected returns. They neither want to lose out on an opportunity nor incur losses on their investments. On the other hand, funds are like the life blood of any new age start-up or venture. Every kind, source and amount of funding is critical for a start-up. In India, young start-ups raised 3.5 billion dollars in the first three quarters of the year 2016 through 815 deals according to a YourStory research. This represents the strong inclination of entrepreneurs to raise funds in India to either start or scale up their venture. Investors see India as one of the biggest markets for start-up investments. “Entrepreneurship is now mainstream. There have been around 4,000 startups founded in 2015 in India, a 400 per cent increase from 2010. Everyone knows someone who’s a founder. No wonder that newspapers now have pages dedicated to the VC industry” – Vani Kola, Managing Director, Kalaari Capital To begin with, every entrepreneur looks for arranging funds from their savings- also known as the bootstrapping stage. Flipkart which has grown into a big billion business today was a bootstrapped company from 2007 to 2009 handling approximately, a hundred orders a day. Next, entrepreneurs seek funds from their family members and friends. Funds from family friends may give an entrepreneur the required courage to go ahead and plunge into the risks that come with the typical entrepreneurial life. Learn MBA Courses from the World’s top Universities. Earn Masters, Executive PGP, or Advanced Certificate Programs to fast-track your career. A similar thing happened with Richa Kar, Founder of Zivame. She raised INR 35 lacs from her friends and family including her savings. Such type of funds may take the form of a gift, loan or equity. The friends and family members may expect nothing or many things. They might expect some interest on money lent with the principal amount or even part ownership in the start-up: Before the investors came 1. Gift – Close friends and family members may give money as a gift. They usually do not expect any real output out of this. They consider it as a favour that may not give them any tangible returns in the future. So, an entrepreneur doesn’t have to pay the money back. 2. Loan – This is one of the optimal ways of transacting with friends and family members for investing in a start-up. They may expect the money to be returned with a decent amount of interest on the principal amount, which can also be locked in with a formal, legal document. 3. Equity – For some friends or family members, an entrepreneur may not pay back the money in cash and instead make that person a business partner, as per their expectations. Also Read: Why Market Research Is A Must For Start-Ups As any entrepreneur moves ahead in their journey, more funds are required to create a prototype of the product and come out with a Minimum Viable Product or MVP and test it out in the market to assess basic assumptions. At such a stage, entrepreneurs rely upon seed funds usually provided by angel investors or small venture capitalists. Angel investors are usually wealthy or rich people/successful businessman who invest their own money into a prospectively rewarding business opportunity. On the contrary, venture capitalists (VC) are the organisations that invest more in mature start-ups and, typically, come with larger funds. VC funding is preferred after the product has achieved some traction. At an early stage, start-ups usually do not have a significant track record. Naturally, this makes the job of angel investors extremely difficult, i.e., to evaluate them for investment without a proven track record. Considering this, there are three key elements that investors focus on while judging any start-up in its early phase: Checkboxes 1. Idea – The early stage financer looks at the uniqueness of the solution provided by the venture. The solution provided must be centred around solving a relevant pain point in an interesting and innovative way. OLA envisaged the idea of aggregating the taxi services in India which was one of its kind – which is a challenge that many face. Ola made the process of searching and hailing a cab extremely easy and convenient for consumers across the globe. 2. Opportunity – Angel investors are interested in start-ups which have an idea that is scalable in the industry. Opportunities arise from a considerable gap that exists in the market (that the idea aims to plug; eg: washing machines shifted us from a hand-washing clothes world) or from the introduction of a new product altogether that simultaneously creates and fills that demand (eg: The Apple computer or Mac products are often touted to have done that). Startups with the mountable idea in the market have the possibility of providing good returns to the investors. 3. Founding Team – The founding team of the start-up is valued a lot by the investors and plays a big role in the decision to fund or not. Investors perceive that a prodigious founding team even with a mediocre idea can create a big billion business. Rather, even if the idea fails, a great founding team can come up with a new idea and make it work. Sequoia, a big VC firm, mentioned that Kunal Shah and Sandeep Tandon, who co-founded FreeCharge in 2010, are an improbable set of founders with deep conviction in their approach. They are incredibly grounded, creative and an open-minded founding team, willing to learn about building a mobile and internet business. Bottom line is: “What an investor wants to see – an entrepreneur working on a big problem, with a good business model and satisfied customers.” – Nikesh Arora, Former President & COO, SoftBank Series infinity When a product is accepted by target consumers, getting good initial traction, entrepreneurs usually think of scaling up to the next level. After a venture consumes the seed fund in developing the first product and reaching out to their first set of consumers, they require more resources to expand, for which they look for a round of series funding from Venture Capitalists. Series A round is the name usually given to a company’s first significant round of venture capital financing. After that, there may be other rounds in succession, named as Series B, Series C, and Series D and so on, depending on the need and justification for expansion. Every series funding is critical, and the start-up needs to prove itself at every hurdle. The investors at every round of series of financing are serious about the traction achieved by the start-ups, considering future estimates and projections. Investors will only be convinced of the money they have to invest once they are shown tangible traction and metrics that can be tracked in the form of data, etc. “Wait until companies have an initial prototype, have shown that they have the potential to be profitable and have the ability to scale. That’s the best time to invest.”- Dave McClure, Founder 500 StartUps While pitching for any series funding, entrepreneurs need to tell a story about their business journey and support it with meaningful metrics. At every round of series funding, the investors are always concerned with the metrics that will prove the past success of the venture with the future growth estimates. While we have already covered some of the broad indicators that affect investors’ decision to invest or not; there are certain key, more specific metrics investors look for in a start-up pitching for any round of series fund. Let’s look at some of these business and financial metrics: Deeper cuts 1. Gross Merchandise Value (GMV) – This is one of the most commonly used metric for online marketplaces. GMV is the total value of goods traded in a marketplace within a specified period. It should not be mixed up with revenue. The cost of creating the product will need to be deducted from the GMV before arriving at the revenue figure. It indicates the quantum of business the venture is doing, to the investor. 2. Revenue Growth – Revenue is the money dependent on the amount of sales an organisation generates, in a year. Again, this should not be jumbled with bookings. Let’s take an example of a firm that may have received a booking from a customer for 12 months at Rs. 100 a month which makes the booking value to be Rs. 1200. Suppose, this booking gets cancelled after four months then the revenue to be considered will only be Rs. 400 and not Rs. 1200. 3. Gross Profits – Another important metric after revenue is the gross profit. It is essentially a figure that one gets after deducting the direct expenses from the revenue. The direct expenses usually include the manufacturing cost, logistics cost, etc. This metric helps the investor understand the profitability aspect of any startup. 4. Customer Acquisition Cost (CAC) – CAC is the cost involved in acquiring a new customer. It can be easily derived by dividing the total money spent on sales and marketing, in a year, by the number of customers acquired in the same year. This metric may be high because of heavy marketing spends during initial years. 5. Life Time Value (LTV) – LTV essentially means the amount of money a customer gives, over the period of the relationship with the organisation. The LTV should always be more than the CAC to be a sustainable business. Naturally, an investor would not be interested in funding a start-up whose CAC is more that the LTV. 6. Burn Rate – It is the amount of cash a start-up is spending in running the business on a monthly/yearly basis. This metric provides an estimate of the time till a start-up can sustain itself before the next round of funding, based on the available cash with them. Apart from business and financial metrics, investors also put emphasis on product and engagement metrics. Keep ‘em tuned in 1. Active Users – They are the number of users engaging with the venture’s product or service actively. Investors are usually interested in knowing the figures for daily/ weekly/monthly active users. An increasing number of active users is a positive sign for investors. 2. Churn Rate – It is an indication of the rate at which the business is losing customers, monthly. Investors usually have a fair idea about the churn in many industries, and an entrepreneur should know how to defend the churn rate for his venture. The larger churn your business experiences, the more challenging it is to achieve revenue growth. 3. Downloads/Page views – In the case of an online company, the unique page views or the number of downloads are important metrics to track the engagement level of consumers. This kind of traffic metric will help investors evaluate the scale of the venture. Also Read: UpGrad’s Entrepreneurship Impact Story As you can probably decipher from this long list of prerequisites and conditions for funding – one of the most key steps to get your start-up on the road – impressing investors and getting everything right is a gargantuan task for most entrepreneurs. However, with our informative, go-to guide on what investors may be looking for, we hope that you feel a little more ready to take on this challenge and set off on a fascinating journey. Planning to startup? Gain clarity for your entrepreneurial journey through structured frameworks and insights from India’s leading entrepreneurs and industry experts. Explore real life case studies, group assignments and opportunities for networking and collaboration with UpGrad’s online entrepreneurship program – Leadership & Management program. If you want to learn more about marketing and entrepreneurship, Liverpool Business School & upGrad offers Master of Business Administration (MBA) Liverpool Business School which helps you to transform your career. The program provides 1-on-1 mentorship from industry leaders, 1-week immersion program at University campus, dual credentials (MBA from LBS & PGPM from IMT), network with peers at offline basecamps and more.

by Himanshu Puri

15 Nov 2016

Blogs

5165

A start-up may sustain for an initial period with its own funds being bootstrapped by the founder(s). But for scaling up, every entrepreneur requires more funds and thus, seeks external funding. This article covers the key aspects to keep in mind for early-stage funding – pre-series A/angel /seed funding. At such an early stage, it may seem simple to approach an investor with a brilliant idea and raise the requisite amount of money. But it’s easier said than done. Try putting yourself in the shoes of a Venture Capitalist and you will soon realize where the difficulty lies. At this initial stage, start-ups do not have much of a track record which makes the job of VCs difficult to evaluate them. There are many parameters an investor looks for in a start-up. Your idea is just one of them all. Let’s look at the 3 key elements and skills which an investor focuses on while judging any start-up in its early phase. How Crowdfunding is Changing the way Startups Raise Money? The first thing which Venture Capitalists look into is the uniqueness of the solution provided by the start-up. The solution being offered in the form of a product or service has to be centered on resolving relevant consumer pain point. Such pain point should be shared by a large number of consumers in the market making the solution/idea scalable. The solution must also offer a distinguished value proposition to the customer. For example- Uber envisaged the idea of aggregating the taxi services which was unique of its kind. This is a pain point that many individuals face. They made the process of searching and finding a cab extremely easy and convenient for consumers across the globe. How To Train Your Mind To Think Just Like An Entrepreneur? Venture capitalists are interested in start-ups which have an idea that is scalable in the industry. Unless there is a big opportunity available for an entrepreneur for solving a problem, the business idea or a solution may have very few funders. Startup with a scalable idea in a large market has the potential of providing the right returns to the investors. Uber knew that their idea was scalable as they were entering the multi-billion dollar market of urban transportation by offering on-demand cab services. 17 Mistakes Entrepreneurs Make While Pitching to Investors What skills do venture capitalists look for in early-stage startup & entrepreneurs? One of the most important things the investors would like to dig deeper into is the founding team. The Venture Capitalist may allocate funds to a prodigious founding team even with an average idea. It is usually presumed that a great team can generate significant returns from a mediocre idea, supported by strong execution.VCs look for the founding teams with strong leadership and people with different complementary skills. VCs also give priority to the team’s ability to execute their plans. Do You Have All the Skills Required to Start a Business? A start-up having a strong idea in a large market with a strong team to nurture has a great potential to succeed in attracting investors. Featured Program for you: Doctor of Business Administration from SSBM

by Himanshu Puri

14 May 2016