Sumanth is the founder of Deck.
One of my long-standing peeves with the startup ecosystem in India is that there is very little discourse and even less transparency – there are not many folks who are comfortable sharing insights and ideas, much less facts and figures.
There are two major problems with this opacity:
Firstly, there is no credible way to have a comprehensive overview of the ecosystem and draw any kind of meaningful inference from it. iSPIRIT’s index for software products is a good start but we still have a long way to go before we have a clear picture of the industry as a whole.
Secondly, this lack of sharing makes it difficult for other startups to learn from each other’s experiences.
Against this backdrop, it was refreshing to see one startup share their numbers in a wonderfully transparent manner – Kudos to Frrole for this.
While it is to be seen if Frrole achieves its objectives for sharing its numbers – build a great culture, create a respected brand, attract the best people etc – it feels like sharing these figures openly is an end in itself as it fosters more transparency and openness.
So in the interest of contributing our 2p towards this transparent ecosystem, I am sharing our startup’s specifics and further, annotating each point with a brief commentary that will hopefully add some context to how and why we did the things we did.
We raised our seed round about a year ago. In this, we raised $500K at a pre-money valuation of $2.3 million. We had previously secured a convertible note of $100k from Qualcomm by virtue of winning the Qualcomm QPrize and as per the conditions of that investment, it was converted to equity in this seed round at the same rate as the new investment.
How much to raise
When we started attempting to raise our seed round, we were originally planning to only raise $300,000.
The idea was to provision for a burn of $400k ($300k seed investment plus the previous $100k convertible note) over eighteen months at an average of $22k per month.
Why eighteen months?
Simply because that was the standard prescribed by most of the blogs that we had read.
As part of winning the Qualcomm QPrize, we had the ear of Karthee Madasamy who heads Qualcomm Ventures in India.
When we updated him on our fundraising plan, he gave us two pieces of advice that we are immensely grateful for.
Firstly, he told us that $300k is too low and asked us to bump it up to $500k.
We had arrived at the $22k monthly burn figure by projecting our expenses and revenue for the foreseeable future. Karthee pointed out that as entrepreneurs, we are genetically programmed to be optimistic but more often than not, things don’t pan out the way we want. Therefore it is always better to underestimate your revenue and overestimate your expenses before arriving at the figure you want to raise.
There are many startups in India who have raised seed rounds of $100k to $250k – the problem with this is that while it undoubtedly cheap to start a company and launch a product, it is far tougher to scale it and take it to a point where it is ready for a Series A investment. So companies who raise less are often forced to raise an intermediate round, usually at onerous terms, to bridge the gap.
Therefore, it made a lot of sense to attempt to raise $500k in one shot rather than have to do it in two different rounds with the attendant overheads and perception problems.
Secondly, Karthee shared from his experience with other portfolio companies that in India, it takes a lot more time to build a track record that can merit a Series A round.
So while eighteen months might be a reasonable number to provision for in Silicon Valley, in India one should provision for at least two years.
How much to value our company
Once we arrived at this $500k target, the question was to figure out how much to set the pre-money valuation for.
One rule of thumb that we know of is that companies usually dilute 15% to 25% of their equity in each round. We pinged our network to figure out what sort of numbers are in vogue in India and quickly discovered that aspiring for diluting only 15% (implying a pre-money valuation of ~$2.8m) was going to be tough given that most investors are extremely sensitive to the entry price.
So we decided to shoot for a $2.5m pre-money valuation so that we end up diluting 20% of the company post the fund raise.
The idea was to not price ourselves out of the market and simultaneously not under-sell ourselves by diluting a lot more than what we ought to.
From whom to raise your funding
When we set about raising our round, we that we already had a token investment from Qualcomm and Karthee was kind enough to offer to pick up 50% of our round. This is admittedly a luxury that most other startups wouldn’t get and we consider ourselves very fortunate to have had this privilege (and just one more reason to apply for the QPrize contest!).
We were planning to raise the remaining 50% of our seed round from angel investors and seed funds and started talking to a few folks.
The first thing we learnt as we started these conversations was that the average pre-money valuation in India is far lower than we had pegged it.
Angel networks were habituated to investing money at sub-$1m valuations.
Predictably enough, the seed funds that we pinged (Blume, Kae Capital) also had similar expectations around valuations (NB: “Predictably” because these funds are run by folks who were earlier angel investors and had since “graduated” to running small funds which invested other peoples’ money in addition to their own – so their worldview towards investments were largely similar to those of angel networks).
Karthee suggested that we talk to a few VCs to see if they might be interested and connected us to a few folks. We also managed to get some inbound interest from a few other firms and spoke to them as well.
Experiences with Indian VCs
As we started talking to the Indian VCs who showed some interest, we realized two things:
Most Indian VCs look for evidence of meaningful traction before they invest and given that at point of time, we were only a few months into full-time operations, we were far too early to have these conversations. (NB: This was more than a year ago – I understand that many VCs have since become far more bullish about investing early and are making far more seed bets than before…a development that augers well for Indian startups looking to raise funding today).
Secondly, raising an amount like $250k is neither here nor there – it is an amount that is not anywhere close to being a Series A round and more than the $100k type of seed investments that some VCs make.
So, as it turned out, we didn’t get a mandate from any Indian VC.
In the interest of transparency, I am sharing some specific experiences and impressions of the VCs that we interacted with (NB: Please note that this is not any kind of indictment of the VCs named…this is just our experience and your mileage may vary greatly!):
Was invited to meet them (inbound interest). When we went there, we were told that the partner was busy with something else and wouldn’t be able to join, so we pitched to the associates. When we were almost done with the pitch, the partner walked in and asked us to restart.
We did so duly but the partner seemed more interested in his Blackberry than in our pitch (which in hindsight tells me that we didn’t do a particularly good job of pitching!).
Once we finished pitching, he asked us only one question – what does your cohort analysis look like?
While this might have been okay in other circumstances, the fact that he was asking this of a company that had only just started operations seemed somewhat incongruous and anachronistic.
Needless to say, I winged my way out of their office as fast as I possibly could and predictably never heard from them again.
Pitched to their full partnership. They got back after a few days saying that they weren’t comfortable enough to invest at that point of time and said that they might want to talk again once we reach an MRR of $50k.
Now one of the cardinal precepts of fund-raising is that you shouldn’t take rejection personally (after all, the nature of the game is such that you end up with far more folks rejecting you and just one or two investors actually giving you a positive mandate – so even in a successful fund raise, the number of folks who rejected you is likely to be far higher than the ones who backed you).
But in this case, I don’t mind confessing that I was very disappointed – simply because, I knew one of the partners personally and had worked with him professionally previously and would have thought that he would vouch for me (probably rather naively in hindsight).
The twist in this particular tale is that we hit the $50k MRR rather fairly quickly thereafter – I did inform them about this when we reached the milestone but didn’t ask them to follow up on their earlier “offer”.
One aspect of fund-raising that is often overlooked is that when you search for investors, you are searching for believers – kindred souls who share similar aspirations and folks you would enjoy going to battle with…if the investor’s decision to back you is built primarily on the traction that you can demonstrate, you are better off not having such partners. Not that such investors are bad folks per se but chemistry usually trumps arithmetic!
We also had conversations with Lightspeed, SAIF, Matrix and VentureEast – all of whom passed rather summarily.
Fortunately, we still had the support of a few US-based angel investors – most notably Sabeer Bhatia – who picked up most of the round.
We also got the backing of two angel investors in India – Amit Gupta, co-founder of InMobi, who invested in us after just one meeting and Neeraj Goenka, a Mumbai Angel, who decided to participate in the round without meeting or talking to us even once!
I guess there are truly some angels around even if they are fairly hard to find!
We ended up with meeting our target of $500k and had to decrease our pre-valuation ask only marginally from $2.5m to $2.3m.
Aftermath – post funding
It’s been a year since we closed our seed round. In this period, we have grown to a 30+ member team and have crossed the $50k MRR figure. Approximately half the funding is still in the bank and while we could be profitable if we wanted to, we are currently ticking along at a burn rate of around $10k per month which we are comfortable with.
I cannot say yet that we have reached product-market fit but we now have a well-informed hypothesis about how to crack the market we are targeting and the future looks brighter than ever before!
Footnote – NBC
Since this entire post is in the nature of trying to “pay it forward”, I thought that it might be pertinent to mention a somewhat orthogonal but related development here.
In the recent past, a number of “ecosystem enablers” have sprung up in India – these range from accelerators to incubators to bodies like Nasscom and iSpirit.
However, one big hole in the ecosystem is the absence of a completely “non-transactional” community of startup founders – a network of doers supporting one another without any vested interests or hidden agendas.
Fortunately, one such community has emerged here in Bangalore, almost serendipitously – we call it “NBC” short for “Nanda’s Boys Club” (NB: The use of the word, “Boys”, is incidental and in a genderless intent – no misogyny!) – a group of founders who meet monthly at a run-down restaurant in HSR Layout…there is no agenda and it mostly consists of shooting the breeze but when needed, we silently support one another with specific things – lend a ear to listen to a problem, make connections when possible.
There are no stars in this group and most of us are in a sense, struggling founders, but the sense of camaraderie and kinship strengthens each one of us imperceptibly but palpably!
It is great to be part of the NBC and I hope a hundred such NBCs bloom and grow in every Indian city where startups are titling against the windmills to make their dents in the universe!