1. The ins and outs of investing in an early-stage startup: Avoid these pitfalls in your investment pitch

The ins and outs of investing in an early-stage startup: Avoid these pitfalls in your investment pitch

FE Online spoke to Bhaskar Majumdar, founder and managing partner of Unicorn India Ventures, an early stage equity and debt fund, to understand what investors look for in a startup and its founders, and what convinces them to open up their cheque books

By: | Published: February 14, 2018 4:36 PM

The ins and outs of investing in an early-stage startup: Avoid these pitfalls in your investment pitch

Many entrepreneurs get anxious when it comes to raising investment for the first time. Even seasoned entrepreneurs get nervous while approaching investors. The process is not for the meek, as most experienced investors tend to be smart, skeptical, and diligent in reviewing opportunities presented to them. Despite there being a wide variety of startups operating in vastly diverse spaces, there are some common boxes that just about every investor likes to check before investing their money.

FE Online spoke to Bhaskar Majumdar, founder and managing partner of Unicorn India Ventures, an early stage equity and debt fund, to understand what investors look for in a startup and its founders, and what convinces them to open up their cheque books.

How would you value an investment?

We do early stage investments. Classically, we tend to invest where we are the first institutional investors. The business where standard methodology works, we take a pragmatic view. We evaluate that for a particular business to scale up, grow and provide us with an exit, how much funding would it require. At exit stage, we want the founders to hold certain equity. Post $5 million Series A, founder should hold 50-60% equity and in Series B he should have at least 20-25% equity. In India, thumb rule is 20% equity dilution in Series A. So we work top-down rather bottom up.

When you evaluate a business plan, what’s the most critical element/s you look for?

This depends from VC to VC and is more of a personal style. For me it’s a lot about personal chemistry with the entrepreneurs and among the co-founders too. There is a basic criteria that startups under evaluation should fit in. We don’t do single entrepreneurs and family backed business so that personal issues shouldn’t affect the business. The team then sees the deal and filters it. I personally like to spend time with entrepreneurs before we deep dive. Since we go in early, the entrepreneurs and their attitude matters because in a few years the business may be something different. They should be open to new ideas and pivot.

If it’s a B2B, like a typical SAAS model, we get industry expert to evaluate the idea. We also check international growth scope. After that we pass it on to the transaction team for further due diligence.

Would you want to invest in companies geographically near or far from your offices? And why?

It is a very US Centric thing. It is said that if an investor can’t drive to his entrepreneur’s office within an hour, then they won’t invest in it. Its partly correct because while video calling, teleconferencing technologies are there but personal facetime is quite important. So to address this, we have created satellite offices in major startup hubs. We are headquartered in Mumbai with offices in Delhi and Bangalore run by CA Principals and associates. They work closely with the portfolios and have freedom to decide. They work with them couple of hours every week and report back to managing partners. Among the managing partners, the portfolio is divided and then we also get involved at critical stages of the business.

The decision to invest in a company is made by the investment committee.

What makes an investment pitch, a ‘No-No’?

When I hear an entrepreneur using too much jargon without getting into the depth of the business, it’s a no-no for me. If an entrepreneur is talking only macro and not sharing much on operational side, it won’t get a go ahead from us. It’s important to have a vision but it is equally important to know how will one survive for the next six months because it’s a real challenge in the startup world. We also don’t invest in wannabe-preneurs who are still in the job and say that we are waiting for the funding to happen and then we will quit and start-up.

What makes a pitch ‘Pitch-Perfect’?

It’s the team behind the business that matters to us. If they can bring out their passion in what they say or are trying to fix, we get interested. Our modus operandi is that we spend 2-3 months with shortlisted startups before we even decide to invest in them. We work closely with the team and evaluate their team dynamics, skills during that time. If the team is not working out for us then the funding won’t happen. We are a very inter-personal and personality driven in that sense.

What are your views on gender equality and diversity at workplace?

We give this importance in all our portfolio companies. However, when we go in at an early stage, it is usually a small team – 7-10 people. At that stage, we don’t instill workplace diversity but post the funding, we look out for such balances in the team composition as we want our portfolio companies to be built where best business practices in terms of gender equality and diversity is practiced. In our current portfolio, we have two women led businesses and at least one woman co-founder in some other startups under our belt. From ecosystem POV, women-led businesses are being funded. In fact in India more women led startups are attracting VCs than overseas.

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