1 Year with Bertelsmann India: Learning and Reflections (Part 2 of 2)
This is the second part of a two-part series of my past year at Bertelsmann India. Folks can read the first part here before diving into this one.
Below I share a few reflections and learnings over the past year as part of the investing team at BII Fund. I hope it is useful to folks keen to enter the VC/ PE space, buy-side professionals, entrepreneurs looking to fundraise, and the curious many on how the VC world operates.
2. Investing & Closing a Deal
Borrowed conviction is the worst quality for a VC- At our stage, where we have meaningful data about the startup forming your own view is super important than getting to know which other funds are participating in the current round and getting influenced by it to partner in the deal.
Program management is super important in this phase- Once a term sheet has been signed, it takes 6–8 weeks to execute the deal and wire the money. During the phase you onboard diligence partners to do financial & tax, legal, technology, forensic (in some cases) diligence on the entity. As the deal lead, you need to ensure the wheels keep moving and program manage the entire deal closing aspect.
Invariably there could be challenges that crop up during the phase. Proactively managing them through constant weekly updates from the diligence partners, identifying any red flags from the DD studies, or solving for data gaps/ slowness in the diligence is your KRA.
You have to be humble while a top-notch negotiator- As a VC, one is negotiating frequently and it’s a learned skill acquired over time.
What has helped to reduce the negotiation process is that term sheets have largely become standardized across different funds and most of them strive to keep it founder-friendly.
From a VC standpoint, if you are able to explain to founders the rights most crucial to you as a fund and the rationale behind it and hear the same perspective from founders, that helps a lot. A fluid constant communication on what to expect in the long forms (SSA/ SHA) with founders is important to avoid any unexpected shocks later on.
Personally, for me, this is also the most enriching phase where you learn more about the founding team and what drives them. Do they have the speed & clarity to focus on what’s important and solve for it, do they get stuck on minor points, are they collaborative or feel negotiation to be a zero-sum game- these are all interesting facets that are uncovered during the process.
Overall, negotiation is a core and difficult skill. As a VC, you are constantly learning new things (emotional and financial) across each of the deals. However, the most important part is to be humble just as you enter into a long-term ‘professional marriage’ with the founders. The mindset should be to create a mutual understanding that ensures each party is rewarded for future successes and to optimize for value and not valuation.
3. Portfolio Management
Be value additive and let founders run the business- The best investors I have seen to date be it from an operating or non-operating background have full conviction in the founding team (the reason behind why they invest!). While they brainstorm and debate about the strategic choices, future direction, use of capital, etc. in board meetings, ultimately, they respect and go ahead with the collective decisions of the founding team.
As investors, they realize that their role is to be a professional mentor, proactively alert for any failsafe points, use their muscle memory of startup building to guide the growth journey and provide best suggestions on when to raise the next round, to prioritize growth or profitability, optimal ESOP allocation pool, evaluate M&A opportunities among others.
Gratitude and privileged to be on amazing boards- I have been super fortunate to attend board meetings/ MIS calls with investors that include Pankaj and Rohit from BII, Anand Daniel and Prayank Swaroop from Accel, GV Ravishankar from Sequoia, Hans Tung from GGV Capital among others whom I have followed over the last many years and learned a lot from them.
Attending these meetings with them is truly fantastic as one gets to learn from their decades of investing experience. A common trait I have seen in majorly all of them is that they always come well prepared for the meetings (despite their overflowing calendars!) and have an empathetic lens while discussing any challenges/ low lights in the startup journey with the founders. Overall, all of them display remarkable grace and maturity while discussing hard issues with founders as they realize that building and startup journey is extremely tough.
Being helpful is an inherent quality and not a learned one- In a startup journey, at any point in time it is going through innumerable challenges- there can be big fires or small ones. As an investor, you can try to help with the small problems/fixes in each call with the founder. Maybe they are looking for a new CTO and you have someone in your network, or they want to discuss which banker to hire for their next fundraise, maybe they are expanding to a new region where your fund already has local presence and experience, or they want to understand how a new regulation could impact their business and you have an expert to help them decode.
Countless issues could need help or fix and as an investor, it is your job to help solve for them where you can. Another area where I like discussions is on strategic reviews and future roadmap which makes you put on your thinking hat (as a VC of crystal ball gazing!) and combine past and current performance to guide on the possible future paths for the company.
Lastly, another super important trait is to just be there and listen as a mentor when the founder is frustrated, lost, confused, and act as an emotional buddy. Beyond the glitzy headliners on fundraises, startup building is brutal and founder depression is real. If an investor can be the soothing force in the yin and yang journey of the startup, nothing like it.
Tips for Founders when fundraising
1. Cash is the lifeblood for your startup. Always build a 3–6-month buffer in your business plan and account for contingencies. While founders are dilution sensitive, raising the ‘right’ amount for your business is critical at each of the stages. For when the money is running out fast and one is left with limited options, the choices for founders will be fewer and considerably worse with lower negotiating power.
2. Small things like sharing a pitch deck or short video pitch prior to the call are extremely helpful for investors to be better prepared for the first call. Also pitching is a two-way conversation and there has to be value alignment between both parties for fundraising. Founders should ask questions on investors’ thesis on a particular sector, why they invested in x company, what they bring to the table besides capital among other pertinent points in the pitch discussion.
3. Shopping for term sheets after execution is really looked down upon. VC industry is a small close-knit tightly linked industry. While we do compete for the best deals, most funds are largely collaborative. Hence when a founder goes about shopping (trying to get better deal terms) against a term sheet, the news often reaches the market. This is not the best of things and can even jeopardize the existing deal from the investor while giving a bad reputation to you as the founder.
4. If I have to talk about the top 3 qualities that stand out in the best founders who have pitched to us- they are great storytellers, high intellectual rigor, and vision/ passion/ unsatiable hunger to build something big. Storytelling is needed to attract employees, investors and get stakeholders' buy-in when you are going against the convention. Intellectual rigor is the ability to constantly absorb tons of information, move it through your mental models to distill clear insights, and confidently chart the path forward for your business. Lastly, hunger is what differentiates the best founders when the chips are down, when the naysayers are large, when they face multiple near-death cash run-out situations and when they are battling the Goliaths with limited capital and resources.
5. Even when you have raised money from top-tier investors, adorned Forbes 30U30 or 40U40 covers, and next rounds investors are chasing you, don’t let it all go to your head. Best founders have a marathon mindset and put on blinkers to avoid all the noise and execute ruthlessly. While doing all this, they stay humble and have equal respect for investors irrespective of their designation.
Conclusion: One framework which has helped me is the simple Four F one which is your day and night job as an investor. Finding (generating deal flow), Funding (selecting the right ones), Fixing (most companies need some guidance and often, major overhaul), and Fostering (continuing to add value, whether it’s by hiring, opening customer and partner doors, or other strategic as well as tactical issues)
Overall VC journey looks super glamorous from the outside but is centered on grit, delayed gratification, and handling constant failures from the inside!
As Bala Srinivas states, ‘it’s nearly impossible to predict the trajectory of a specific technological innovation given the number of variables involved. It is a game of long odds. Luck is a major contributing factor that weighs in on the side of the successful team — start-up and investor alike.’
That’s what makes startup investing a thrill ride- an exhilarating journey where the odds are stacked against you. Yet when your company fights all odds to become a category creator and/or enormously successful, there is an inherent delight like nothing else!
Here is looking forward to an equally exciting 2022!
Image Credits: Forbes
The views and opinions expressed in this article are those of the author and do not necessarily reflect those of any institute or organization he is or was previously associated with.
