DARE - Because Entrepreneurs Do

Laura Parkin , Executive Director, National Entrepreneurship Network

You have been on all three sides of the table (as described above). What are the most common points of disconnect between VCs and potential investees? Where is it that things go wrong most often, during the pitch?
In India, more so than US, a fundamental disconnect is that many people who approach VCs have businesses that would simply not work for VC funding; usually because the companies are not scalable. I presume this happens because VC-backed entrepreneurship is relatively new in India and entrepreneurs are not as familiar with the VC investment model.

Otherwise, obvious though it may sound, if the VC is comfortable with the opportunity and market size, the disconnect is simply that the VC can’t get comfortable with the team. Either they think the team will not be able to execute, or they feel that they would not be able to work with the team.

Is there any difference in the way Indian VCs act compared to western ones?
Indian VCs and US VCs are becoming one and the same! With the advent of Matrix, NEA, Sierra, Canaan and other US firms, differences in behavior are fading. However, I would say that perhaps the average US VC may be able to add more value to portfolio companies, and may be able to realize value through exits more effectively, simply because more US VCs have had the advantage of decades of experience in building and selling companies. Even the young VCs in the US have more opportunity to "apprentice" with experienced VCs.

VC firms in India seem to be looking at investments in later stage companies than VC firms in the US. That’s probably driven by several dynamics: one, the amount of funds that VC firms invest — VC firms in India seek to invest between $2-5 million per deal. In India, that is a very large amount of money, though in the US it’s a startup amount. Another driver is simply that the opportunity exists to invest in later stage deals that have not previously received institutional funding.

Smaller number of savvy entrepreneurs here in India – though that is changing with more experienced senior managers stepping out to start companies. But generally, there’s just a much larger pool of experienced entrepreneurs and senior managers available in Silicon Valley and Boston/Cambridge and other entrepreneurial "hot spots" in the US.

In the US, it certainly helps to be part of the network. Business plans that come in "over the transom" – or without connection – have basically no chance of getting funding.

In India, perhaps the entrepreneur or the team doesn’t have to know the VC, but they should be known in the industry, or to someone the VC trusts. It’s a relatively small world, so if you’re operating in an industry, and a VC is investing in that industry, there should be some connection, if not directly then atleast one or two hand-shakes away. Given that VCs are really not looking to fund raw young entrepreneurs, it’s even more likely that they would at least know of the entrepreneur or part of the founding team that they are considering funding.

Once the investment is made, what are the key milestones in the relationship? Any advice to entrepreneurs on handling these?
As long as the company is hitting targets and milestones, then it’s pretty easy to have a good relationship with your investor. The true test comes when the company misses some targets – almost inevitable in a start up with aggressive goals. Best advice is to keep the investors informed. As soon as something looks like it’s not going as planned, bring the VC into the picture. Don’t wait. Make the VC part of the solution.

Of course, the biggest potential source of conflict between an investor and an entrepreneur comes when the VC feels that the company has "out grown" the entrepreneur and would like to bring in more seasoned management. The VCs probably discuss this eventuality with the entrepreneur during the due diligence process – but at that time the entrepreneur usually thinks, "let’s just get the cash, and I’m sure we can work things out..." When the reality hits, it’s a whole different thing and can result in real conflict.

At some level, the entrepreneur must understand that by taking funds from institutional investors, he or she has lost independence and control of the company. A VC’s ultimate control, in most cases, is the ability, as part of the Board of Directors, to fire the entrepreneur.