Had a couple of very hectic weeks with TiECon and couple of our partners visiting India. The opportunity to go around, see 10 “shortlisted” companies with some of my partners last week gave a good sense of contrast between what is expected in a mature venture system like the valley, and what is available here. One of the things that stood out was the lack of detail on pitches. What is interesting is that most of the missing detail did not seem to be a function of articulation, but of ignorance – people who had missed the details had not thought about those aspects. Also, most of the people who had missed details had not operated in those markets before. Nine out of ten presentations had no competitive analysis whatsoever — some more mentioned competition but with a dismissive tone.
I have noticed some of the same contrast in my visits to valley pitches. And if I may draw a parallel, I have seen similar lack of detail in corporate environment here in India — VP level plans and presentations get approved often without sufficient level of detail and analysis.
In terms of our education process for entrepreneurs on venturewoods and elsewhere, we have long focussed on “what all to cover” which again leads to a shallow view of the plan — entrepreneurs look at a question, and answer it at a high level, and they are done. We need to start putting more emphasis on the level of detailing. Maybe if someone can share their pitches, we could do a critique. I have a lot of, what in our view are, good and bad pitches, but I dont have the right to share any of them… Any volunteers?
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Krish and Alok,
Thanks a lot for that insight into a VC’s mind.
and thanks a lot for mentioning that liquidation preference is a downside protection mechanism.
I totally agree with your stress on value proposition, market research, testing the product/service.
What i want to understand is the meaning of “FEW CUSTOMERS” ?
I mean, incase, the product/service is aimed at corporates as clients then i guess even 3-4 customers would mean a lot.
1. But incase it is a B2C service (say a e-retail venture with a very strong value-proposition), what would few customers mean ?
5x -10x liquidation preference!? I am getting confused now — liquidation preference is a mechanism of downside protection, not an upside guarantee. Personally, I havent seen any deals with these kinds of terms…
I have seen 1-2x liquidation preferences, and participating structures… Mostly depending on how aggressive the current valuations are landing up being.
Rick is doing a series of posts aimed at explaining the VC financing process.
I’m going to try to give you, the entrepreneur, some documents, a diary of happenings, advice, meeting highlights, etc, with the goal of giving as much insight to the process as possible.
Read on…
http://ricksegal.typepad.com/pmv/2006/10/musicip_the_vc_.html
Entre,
Besides all the resources for your own education and understanding provided by our fellow commentators here, you must understand that Liquidation Preference is a much misunderstood term. In practice, Liq.Pref is a highly subjective component and much depends on what stage of a venture that its founders seek VC participation.
If you are sufficiently bootstrapped, got your project beta tested and have attracted some early customers willing to pay, you clearly reduce the element of risk to the VC. At such a stage, your need is clearly momentum capital to service a strong order book of `repeat’ as well as `new’ customers. Remember, VCs are mostly erstwhile entrepreneurs with a pressure to deploy their funds in strong projects founded by brilliant teams and earn a decent return in a near term horizon of say 3 -5 years. Their accent is clearly on relatively low risk or fairly de-risked ventures like the one mentioned above. As such, they may not insist on a 5x or 10x Liq.Preferences. You can play hardball during negotiations and if you are wise enough, you could as well be talking to multiple VCs who shall only be more than willing to co-invest. ( That way, their funds won’t be remaining idle and undrawn ).
All these terms should worry you more at a valuation stage than founding stage. In India, most of our start-up founders start worrying about valuation even before they clear proof-of-concept and then complain VCs are not cooperative. The Focus should be primarily on roping in some early customers and building a strong order book in the first place. This can be done only by developing a product / service which delivers a clearly differentiated and valuable User Experience. It’s more a question of getting our priorities right here. All other things including Valuation, Liq.Preferences etc., should be late stage worries.
Entre,
this blog could be of help in understanding the Term Sheet clauses
http://www.feld.com/blog/archives/cat_term_sheet.html
An other good resource is the survey conducted by Fenwick West quarterly on venture financing in the Bay Area, here is the link to the Ist quarter ’06
http://www.fenwick.com/docstore/VCSurvey/Q4_05_VC_Survey_Trends_Report.pdf
All the best