In the tenth part of our 12-part series on entrepreneurship, author and strategic advisor for startups and SMEs Subu Venkataramanan explains why external validation of the startup idea is extremely critical.
Your startup has succeeded in attracting investment from either angel investors or venture capitalists depending upon the state of development of the business.
Just remember. Very few startups reach this stage where they attract investments from beyond the close circle of their relatives and friends. So you already belong to the elite minority of startups that have reached the funding stage.
This does not mean success is assured. It only means the business now has resources to pursue the venture in full measure and the additional responsibility of meeting the expectations of the new investors. So the co-founder / leadership team now in a fiduciary responsibility vis-à-vis the investors as trustees for the funds invested.
The investor could be someone who only provided the financial resources or it could be someone who will provide technical, marketing or any other support in addition to financial investment.
In this article let us look at the life of a startup venture post investment.
At the risk of repetition, let us again address the subject of goal congruence. The founders have a vision in mind. It is essential that the investor’s share this vision. Otherwise, the post-investment phase will turn out to be a disaster, sooner than later.
Goal congruence can be ensured by the startup clearly outlining its business plan “as it is” and not window dressing it with the objective to gain funding. As an example, the business model may involve “burning of cash” for the next say twelve months. If this is not included in the business plan, just to make the financials attractive, then it becomes impossible to explain the actual financial to the investors in the post-investment period.
A startup founder or co-founder is his own boss. Many a time, a venture is started because the co-founders want to be independent and do not want to report to a boss.
With the investment coming in, this is going to change. If this is not understood and accepted in a matured fashion, the life after attracting investment is going to be difficult.
The investors will rightly expect that the business plan elucidated by the startup is flawlessly executed with the funding and other support provided by them.
What not to do?
There is a humorous story about a start-up obtaining investment from a venture capitalist and receiving the funds on a Friday and when the investor called the co-founder on Monday morning, the entire start-up team was holidaying at a beach resort!
You get the point, right? Even if it was a well-deserved vacation, assess it from the angle of the investor. This is definitely not the way to start off the relationship with an investor.
So once the funding is received the co-founders and their team need to get on with the job of executing the plan that was presented to the investors.
Once the investment is received, there are certain legal compliances that need to be taken care, especially if the funding is from a foreign country. These steps will include convening and conducting a board meeting, a general meeting of the shareholders, issuing the offer letters and share certificates to the investors and necessary compliances as per the regulations laid down by the Reserve Bank of India.
Ensure that you have access to sound legal advice in this regard and all compliance requirements are fulfilled.
The business plan, that was communicated to and accepted by the investor “prior” to investment, is now the bible. This plan also would have laid down how the new investment will be spent. Post-investment this plan should be executed well.
At times, the plan may need fine-tuning or even a drastic change. The same should be done only after a detailed dialogue and approval of the investor. This is all the more necessary if the investor holds a substantial stake in the startup.
Communication with the investor
It is important to have a one-point contact for the investors. Usually, this is one of the co-founders. This will avoid confusion and misunderstanding when multiple communication channels are kept open.
Lay down formally a schedule of communication to the investors. It is normally a monthly MIS with the key performance indicators and a more detailed assessment of the business every quarter.
Be as transparent as possible in these communications. It is better to agree on the format and content of these reports in advance. Cover all the critical aspects of the business and not just the financial metrics.
He is the one who invested his money but will not be taking any active part in running the venture. Such investors need periodical assurance that commitments of growth, profitability and cash flow indicated in the business plan are being adhered to or, if not, the deviations are explained to their satisfaction.
Any unreasonable commitments made earlier will come to haunt the co-founders.
He is an investor who, in additional to financial investment, will also provide other support to the venture like technology, marketing, strategy support etc. Normally such involvement is agreed to in advance before the investment is made. Thus, the investor brings with him the missing skills and capabilities of the venture.
How such involvement of the investor in the day to day running of the business will be handled needs to be clear to all. In many instances, lack of clarity on this account this has led to conflicts that may derail the venture.
What are the key communication points to the investors?
Obviously, this will differ based on the business model. However, the following will be common to most businesses:
a. Hiring of key personnel;
b. Expansion across geographies;
c. Development of customer / user base;
d. Achievements of milestones stated in the business plan;
g. Financial information top line, gross mar-gins, net profits / losses, cash flow etc;
h. Key deals signed;
Pivoting is a very common scenario in the startup world. Pivoting means the initial business model is either not working at all or not working to the extent it was anticipated. So there is a need to rethink the business model and make such changes as may be needed to make the venture a success.
Pivoting in some instances could be delicate fine-tuning. It could also be a major change in the business itself. So pivoting is nothing but successful adaptation.
One example of such successful pivoting is YouTube. It started as a video dating service. As this did not work out the way it was thought to be, it became a video sharing site and is highly successful and acquired by Google for the US $ 1.65 billion.
It may also be possible that pivoting could happen by the unexpected way the market uses a product or a service that even the venture did not initially think of.
Why are we covering the subject of pivoting under the section “post-investment” scenario? Pivoting costs money and the funding you have just gained will help you to change the direction of the business. However, this should have been part of the business plan presented by you and the investor must have invested fully knowing the pivoting needs, unless of course such pivoting is necessitated at a much later stage.
With the funding in place, the startup is now in a position to employ and bear the cost of skilled personnel. If such hiring was part of the business plan, it is crucial that the hiring is done as soon as possible. Only with such hiring the execution of the business plan will happen.
In the next article, among others, we will address the subject of product launch, customer segmentation and, a most important topic, watching the cash.
Subu Venkataraman is a finance and general management professional with close to three decades’ inter-national business experience. He is also a budding e-book author on leadership and management subjects and has created a book series, Sixty Minute Series. He is currently Strategy Advisor to Startups and SMEs.
He can be contacted at firstname.lastname@example.org