A lengthy discourse on Fundraising (suitable for ages 6 and up)

First off, a bit on how VC funds work:

VC funds aren’t free capital, they are raised from Limited Partners (LPs) who are typically Pension funds, sovereign funds, ultra-high-networth individuals (or family offices).

These folks typically invest 2–5% of their investible assets (generalization) across private markets (PE + VC).

The reason they do this is effectively taking a bet to increase their returns. The bulk of their funds are invested in safe assets, generating yields of 4–7% (if this sounds low, it’s incredibly hard to achieve at the sizes of these funds while controlling risk).

Hence they are looking for returns north of 25% IRR to justify the risk of investing in assets like VC funds, with a ten year horizon (4 years deployment, 6 years farming)

This means that a $100mn VC fund needs to return $300mn+ just to justify their existence. In addition to this, VCs typically charge 2% of AUM as fees annually + 20% carry (basically 20% of the profits)

Assuming (for the sake of simplicity and ignoring fees, carry and dilution), 10 portcos, equally distributed, $10mn each, for 20% at Series A-B across years 1–4

8 out of 10 will typically fail, returning: ~$50mn (acquisitions). (year 7)

1 will return a slightly better return : ~$50mn (year 9)

All eyes are on that final company which needs to return $200mn to the fund to create a return of $300mn by year 10, which would just about hit 24.6% IRR, enough to make investors happy and earn the partners a decent chunk of change.

Why did I just write a micro-thesis on how VC funds work? Because it plays a big part in defining what comes next…

A quick rule of thumb on what constitutes a VC backable business (Avik’s five rules)

1. The potential to be BIG — If you can’t potentially become a $1bn + company, there’s no feasible way you can return enough money for a fund, which means you’re automatically disqualified from most ICs (more about ICs later).
2. BIG is a factor of : Market size X market fragmentation X scalability (my own definition)
3. Several founders tend to overestimate TAM (total addressable market size) by a large factor (everyone eats therefore my target market for $10 hyper energy balls is 8bn people, which is blatantly wrong).

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1. Scalable, Repeatable — There’s a reason why investors go ga-ga over SaaS businesses. The cost of each incremental $ of revenue isn’t linear.
2. To explain this further, if I sell cameras, my cost to sell 1 camera will be $10/camera, my cost to sell 100 cameras may go down to $9/camera but there are still variable costs (cost of the camera, logistics etc) that are unavoidable. In addition, there are risks that once everyone from my target market owns one, there are limited opportunities to sell them other things, which leads to the GoPro problem (namely, I’ve run out of new customers who want what I sell).
3. Taking this further, I get 100s of mails from X design agency, Y recruiting firm. Services businesses (that rely on human capital) can be massively profitable (think McKinsey, Bain, BCG) however the probability of building a new consultancy at that scale is infinitesimal, hence bad candidates for VC funding.
4. // The potential solution to this problem can be found through the Ansoff Matrix
5. However, once I build a software, my cost to maintain that software will not scale at the same rate, allowing software businesses to generate gross margins in excess of 80%.

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1. Team, team, team — One of the most important factors I evaluate when looking at companies is The Who x The Why
2. The Who — While folklore celebrates college dropouts turned entrepreneurs, the data (crunched lovingly by Harvard Business Review here) paints a fairly different picture, showcasing the average age of a successful startup founder at 45.
   Peter Theil himself, famous for Paypal, founded it at 32.
3. Across my own experience, I see greater success from founders with a few years (or more) of work experience for several reasons, namely they’ve built up essential business skills and a network that makes scaling a business much quicker (easier to pick up the phone and call a business contact than endless ‘hustle’ to get your product out there, as well as access to better talent and the reputation to bring them in)
4. They have also seen the ups and downs of a business cycle, with experience in team dynamics and people management (core skill required of founders over time)
5. The Why — This is my favourite question to ask a founding team. Teams that have experienced a pain point in their professional/personal lives without a good solution tend to build products to solve that pain point.
6. Odds are, if they faced a particular challenge, so did others, which brings about your addressable market.
7. Example time! Take Ryan Peterson, founder of Flexport. Growing up entrepreneurial, he started importing various items from China to sell in the US, butting heads against an archaic and opaque system of freight forwarding, where everything operates through paper, excel and relationships.
8. Realizing that these pain points cannot be unique for small businesses, he set about learning more about the industry (while building an import data business, ImportGenius in parallel). He quickly realized that it wasn’t just SMBs that had no software, the entire industry was operating on pen and paper. He went on to build Flexport, an $8bn behemoth working with global brands
9. Traction — Leaving aside accelerators (more later), the ideal scenario in VC is a business with traction. In terms of what excites folks:
10. No traction < Free Users < Letters of Intent/waitlist (for paid) < Actual paying users
11. How you’re acquiring these customers makes a significant difference as well.
12. One of my earliest investments, Posist, founded by Ashish and Sakshi Tulsian, is the best example of this (story of their journey here).
13. They began by building a point-of-sales software to use at their own restaurant. This helped reduce wastage (controlling inventory and ordering), reduce pilferage (a big problem in F&B) and give managers and owners visibility into trends (most popular dishes/drinks, least popular, granular profit margins etc).
14. Nearby restaurant owners heard about it and clamoured for the software, so much so that they shut down their existing software building business to focus on Posist.
15. —
16. Mindset — Mindset is the best catchall term I could think of. Do the team (everyone considered core, not just founders) have Grit? (see my article here on the importance of Grit). Do they understand the dynamics and conditions that come attached with the venture backed journey?
17. Do they have the understanding of their market and the vision to use every venture dollar to scale the business efficiently?
18. —

What to raise, how and when?

Traditional VC follows the following model:

Seed — Founding team (maybe 1–5 employees as well), early version of product ready on the market with paying customers and early feedback

Series A — The startup is shaping into a business, have identified ideal customer profiles, need resources to build out their product and bring in critical hires

Series B — The business is growing well, repeatable sales processes have been put into place, the core product is selling well, capital is needed to improve the product, add additional features and increase sales efforts (people/campaigns/marketing spends)

Series C — The business has matured, is looking to bring in specialists to bulk up the C-suite and C-1s, potentially expand into new product lines (to upsell existing customers) and increase geographical footprint

And on and on…. till Death, Acquisition or IPO

However..

The recent growth in the ecosystem has built a host of new fundraising channels, so I’ll share some below:

1. Accelerators — Antler, Entrepreneur First, 100xVC, Y Combinator and a whole bunch more. These are ideal places for younger, first time entrepreneurs looking for pre-revenue funding. They can even help you match with co-founders and flesh out your idea. Typical terms are ~$75–150,000 USD for 8–15% of your company.

Steep but then they are taking a bet on you, and providing early financing, when no one else will, not to mention the guidance and networks they open up.

2. Angels+Syndicates — Angel investors are typically folks from your network who are willing to take a bet on backing you (because they like you or you have some SERIOUS dirt on them). Individual investors would typically invest via warm introductions or their own personal contacts.

Angel syndicates, which are collections of angels investing together through a loose or formal group, are getting more prevalent and are a great source of early capital, from folks who can help expand your network (introduce customers, talent, VCs for next round etc). Some prominent ones across SEA + India include XA Network, Ascend Angels, FAO (I’m part of), Indian Angel Network, TiE Angels (reach out to local chapters of TiE, me for SEA).

Terms vary completely on traction / team / stage and negotiation but a good rule of thumb is up to $1mn for 10–20% equity

3. VC funds — Far too many to name. Giving a shoutout to a few I’m close to, Capfort Ventures (I helped build it), Square Peg, Riverwalk Holdings, Artha Ventures, Saison Capital

The most important factors when looking for funds are to understand their mandates.
Funds are built with mandates, which are effectively commitments from the General Partners to their investors on where and what they will invest in. They will not invest outside these mandates as a rule (rare exceptions happen, see more on mandates below).

4. Corporate Venture Funds (CVCs) — These are typically strategic funds that are investing in the ecosystem around their core business (Example! MS & AD Ventures, backed by MSIG insurance, focused on insuretech businesses globally).

CVCs typically invest in startups that are around Series A-B, however some do go earlier as well. There’s a big advantage here to leverage on the knowledge and capabilities of the group company, as well as a potential pathway to being acqui-hired into the main business.

Terms are similar to traditional VCs, however CVCs tend to be more patient capital as well as willing to value businesses based on the synergy effects that can be unlocked.

5. Family Offices — An increasingly prominent force in venture, FOs used to traditionally LP into VC funds, now several are investing/co-investing directly into startups. Outreach to FOs tends to be slightly harder as they don’t market themselves or their decision makers actively. FOs also come in two flavours:
A. Mature FOs that have been LPs or invested across companies, who understand when to support and when to be hands-off and patient
B. New FOs, they tend to want to have a greater say in business operations, decision making etc.

Something to keep in mind across all investors (applies even more strictly to VCs), every investor will tend to have mandates or investing rules, which they largely adhere to.

Mandates include -

1. Geography: If you’re in a country the fund doesn’t invest, you’re completely wasting your time.

2. Sector: Funds make this obvious in one of two ways. The first is declaring it on their website “We invest in Fintech businesses”.

The second, if they claim to be a generalist, is through their portfolio. If you open a generalist fund’s portco page and see 20 healthtech companies and 1 consumer, odds are you shouldn’t pitch to them if you’re a consumer business.

3. Stage and Cheque Size: While multi-stage funds are becoming more common, most funds have clear stages they invest in. If you’re pitching to Sofina at Seed, that conversation is going nowhere, since they invest growth capital ($20mn cheques upwards). Similarly, a company looking for $20mn would have a hard time pitching to angels as most angels prefer to come in with small cheques at early stages.

4. Conflict: Investors typically avoid investing in conflicting businesses, so if the fund you’re looking at has invested in your #1 competitor in the region, ideally avoid.
There are a few folks who would have a chat just to understand your business (and perhaps share with their portco)

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The Overall Bargain:

Raising any form of investment means that you’re giving up a certain amount of control while taking on an expectation of a return.

Investors aren’t putting money into startups hoping for a small dividend or % of profits (there are folks like this, different business model entirely).

If it looks like you’re leading the company down a pathway your Board of Directors doesn’t approve of (yes, you need to build a BoD once you raise), depending on the terms, they may have the power to remove you from control (CEO/employment) in the company.

You’d also agree to various terms (all subject to negotiation) including but not limited to:
- When and how much you can hire
- Can you launch a new product
- Can you launch into a new market
- When and how you can sell your shares

Aaaaaand many more.

At the end of the day, you need to decide whether funding is right for your business AND whether your business is right for funding.