Jan Koum and Brian Acton had nine years of experience in Yahoo when they applied for jobs with Facebook in 2009. However, Facebook rejected both of them.
Dejected, Koum and Acton developed a mobile app of their own. Five years later, Facebook bought their startup for a whopping amount equivalent to Rs 1.1 lakh crores. The name of their app is WhatsApp. This was the costliest takeover by Facebook ever. It is also the finest example of the potential of startup firms.
Each startup should be developed to fulfil a need. Instead of registering a company straight away and setting up an office and posting staff, the idea should be given a concrete shape. The market value of the problem that the startup is supposed to solve has to be calculated. This value is more important than the number of customers.
It should also be examined whether the idea would be relevant even after five years. Consultancies can be helpful in this regard. Daily news should also be followed to keep a tab of the developments. If it is felt that the idea is not strong enough after considering all these factors, there should be no reluctance to dump the plan.
Any investment has to be made only after all these steps are clear. Till then, extreme thrift needs to be exercised.
Elevator pitch for investment
The first round of investment has to come from angels. However, the startup founders may get only a limited time to speak with investors. Suppose the meeting takes place in a lift. Within a few seconds, the idea should be attractively presented before the angel investors. In other words, the investor has to develop trust in the founder after hearing three or four sentences. The size of the market and the problem the startup would address have to be made clear.
Pitch deck crucial
Another means to contact investors is a pitch deck. It is a presentation in less than 10 slides introducing the company to the investor. This presentation can be mailed to the investors and should be simple enough to be downloaded on the mobile.
Points to remember
While preparing the pitch deck, the following may be kept in mind:
When the investor reads the deck, the slides should be self-explanatory. Remember that the startup entrepreneur will not be present in person at that time.
Jargons related to company management can be used in the slides.
It should be explained how this team can implement the idea.
A fund deployment plan has to be included explaining the target of fund collection and likely expenditure.
When an investor is impressed with the deck, the startup entrepreneurs would be invited for a detailed presentation. On this occasion, the founder should be a good storyteller. Around 15 minutes may be granted for the presentation during which a mention of competitors could be made. Never try to prove that there are no competitors at all as it would give the impression that you have not studied the market. In case an investor likes the project, a two-year business plan may be sought. This is meant to judge the capacity of the team.
When the startup founders receive angel investment, they can take a token payment but market salary is best avoided. The shares given in place of investment can be limited to 20% at this stage. If the first round funding is for 24 months, the founders can focus on product development till the 18th month and start looking for the next round investment from venture capital (VC) firms during the next six months. This funding is termed ‘Series A’. Similarly, Series B, C and D would follow.
The success of a startup firm rests on the profit investors make while selling their shares and exit the company. There are several VC firms like Unicorn India Ventures, SEA fund, Exceed Fund, Indian Angel Network and others. Recently, Unicorn India Ventures dedicated Rs 100 crore for startups in Kerala.
Robin Alex Panicker, venture partner, Unicorn India Ventures, has the following advice for startup founders: “Startups need to look for investors who can not only provide funding but also connect them to the market as well as offer expert advice. These investors may be able to link startups to venture capital funds after the angel funding. Never offer a big share of equity at a low price even if you are short of money. After three rounds of funding, the founders should hold at least 30-40% shares.”