Business founders like to look at partnerships with investors as a marriage. But it doesn’t always work out like that. Or perhaps it does — if a few marriages do land on the rocks or go down the tubes, so do some founder-investor unions.
That’s inevitable when partners jostle for control, money comes in with strings attached, there’s a fair bit of cheating on both sides, and the investor view of the company differs from that of the founder — the former will be always be more dispassionate than the founder.
In 2010, when Make-MyTrip was planning to get listed, the board, co-founders and investors were split down the middle on where the public issue should be done — in India or the US. Two large investors and some of the independent directors were keen on a US listing, whereas another investor and an independent director were emphatic on an India listing. Both sides held strong views. some of the founders and investors currently locked in ugly spats. Whilst not all of them get reported, according to media reports, PE deals worth roughly `3,000 crore are estimated to have been stuck in litigation at the end of fiscal year 2014.
1. Angel investors look for experienced management teams.
Exceptional management is vital for any business. Three-quarters of survey respondents said the management team of a startup was their biggest consideration for investing.
“Startups are not only about the technology or business idea but also very much about the people behind them,” said Swati Chaturvedi, CEO and co-founder of Propel(x). “A compelling, experienced team that can sell the vision and the potential impact is key to success, and something savvy angels look at closely.”
Some exceptional qualities to have as part of a management team are integrity, clarity of strategy and approach, professionalism, and determination, Chaturvedi said.
2. Angel investors need to understand your product or service.
We all want to know where our money is going. Angel investors want to understand exactly what they are financing, especially for startups in the tech field. Since angel investors are investing their own money, building their trust and establishing a relationship with them are key to gaining their support. More than 50% of respondents claimed this as one of their top reasons for investing, and 94% find it helpful to have subject-matter experts explain the technologies within their company before investing. In fact, many choose not to invest in specific businesses due to their inability to grasp their technology.
“The easier we make it for angel investors to discover, evaluate, and participate in science and technology startups, the more we’ll see money going into these worthy companies, and the benefits to humanity accrue,” Chaturvedi said.
3. Angel investors want a clear path to realize a return on investment.
Naturally, angel investors look for opportunities that will benefit them as well. Before anyone gives you angel funding, they need to know your predictions for their return on investment, or how much money they stand to make in comparison to how much they’ll risk on your business. Potential ROI was a top motivator for 49% of angels when making investment decisions.
While some investors are indeed looking for financial compensation, not all are primarily interested in the money. Some want a different kind of return: the ability to solve the world’s biggest challenges through the businesses they fund. Nearly one-third of angels choose to invest in a company based on its connection to important social issues.
Clearly, feuds and fallouts are an inevitable part of a startup boom, one that India is firmly in the grip of. According to research firm, VC funding in India surged 261% in 2014 to touch $3.86 billion against $1.06 billion in 2013. Some 1,200 new ventures emerged last year, and venture funds, which raised $1 billion in 2014 to invest in India, are on the road to raise another $2 billion for this year. As startups mushroom, the number of investors too is burgeoning, with over 70 PE and VC funds, 62 angel investors and over 80 incubators and startup accelerators present in the country. Not all, of course, will end up fighting with founders.
When it works well, it is bliss. It is relationship like one with a life partner. You must learn to look together at the future world. Entrepreneurs have at times accused investors of forcing them to sign one-sided deals. Some also allege dishonest intent. While doing due diligence before investment, investors have access to a lot of confidential information. And then they go and invest in the competitor.
Despite the routine legal cover like nondisclosure agreement (NDA) clauses, the entrepreneur is completely exposed. Sanjay Mehta of Social Wavelength, a social media analytic firm, says stories abound on anonymous social network apps of such short-changed entrepreneurs venting their anger against their investors.
Investors, for their part, have their own horror stories to share. Cautious and suave, most refuse to talk of specific cases but without. Taking names they related tales of entrepreneurs who cook numbers and hide information.
The Silicon Valley View
India’s startup ecosystem, though maturing, is still far behind the evolution that the Silicon Valley has undergone. For instance, investors there are far more colblaborative. They often become partners in fundraising, bringing along other investors. In India it is largely a single investor deal. Another big difference is the background of the investing community.
Their entrepreneurial background comes handy in their role as an investor. In India, investors have a banking skew, with many coming from investment banking.
Their risk appetite to make bets on new unproven areas is low. As a result, a big consumer internet company — such as. Facebook, YouTube, Instagram — is unlikely to come out of India in the near future. These consumer internet companies must have investors with risk appetite and long-term horizons. This is still not easy in India.
But things are changing in India. “We have all grown up — startups, investors, funds and even the ticket size.
This is bringing in new complexities in the investor-entrepreneur relationship. For one, entrepreneurs are better networked, more experienced and have higher expectations from their investors. Investors in turn are building organisational depth to meet their needs.
To be able to understand young entrepreneurs, it is deliberately hiring young staff. Helion has at least five executives in their 20s today as compared to just one five years ago.
Clearly, it is difficult for startups to attain size, scale, fame and fortune on their own. Sooner than later, the bold and the ambitious will have to tie the knot with an investor.