How does series A funding work for startups?

At a workshop for entrepreneurs organized by YourStory.in, seasoned investor Anirudh Singh shares his insights on series A funding and the importance of having clear-cut definitions of the startup business.
Written by Srinivas Kulkarni, Contributor

Once you've taken the plunge, you're all set, sailing across the sea! That's what it is to be an entrepreneur, always. Regardless of what you decide to do, you move forward--it's always a situation where you just can't stop sailing!

Yes, we all know that a majority of startups fail, especially if you are a first-timer. And also, that an entrepreneur always learns and keeps on learning, and those who are hustlers go all the way!

So how do we prepare for funding? A lot of folks who are new at this have many questions and certainly very few places where they could find answers. Although being an entrepreneur these days means they have to be enterprising, good at their research, and know their stuff from the Web, podcasts, meetings, and networking. 

I had the opportunity to participate in a session where a bunch of entrepreneurs came together at IIT, Mumbai, to find answers to such posing questions. YourStory.in had arranged for this workshop as part of YS Workshops for Entrepreneurs series.

Anirudh Singh, a seasoned investor, took time out to share his insights on how startups can secure series A funding. Many budding entrepreneurs were there to learn more about the funding aspects of startups, building their dream, and furthering their chance one step at a time.

Anirudh began the session by giving an introduction to his profile and why he was there to conduct the workshop. He currently is an advisor at Norwest Venture Partners, a global multi-stage investment firm that has funded many startups such as Quikr India, Manthan Systems, Komli Media, and Yatra Online. He was formerly associated with Canaan Partners too. He added a disclosure whithin the presentation stating opinions expressed during the workshop are solely his and don't represent what Norwest Ventures has to say.

Why, and why now

One of the striking things about his workshop was how he began the session with two of the most critical aspects of why a startup would receive funding, and what are the two things a VC look for. If you are an entrepreneur and you have an idea that you think is going to change the world, then you need to first ask yourself these two questions:

1. Why?
2. Why now?

When founders approach Anirudh about funds, he asks himself and them these questions as a VC (venture capitalist), "Why is this guy starting this company? Does he know what it takes? And why now?"

He gave an example of Indian e-commerce company Flipkart in 2010 compared to if Flipkart had been around in 2002 to drive home his point. Simply being a product that is a "want to have" at any given point in time isn't as fruitful as something that is a "need to have", at the right time.

He stressed the importance of having an opinion and a clear-cut definition in your mind as an entrepreneur. "Why do you need to have this solution? Does it solve real problems?" 

A real entrepreneur today, he said, is someone who has "the ability to hustle, the ability to relate to people, and someone who can plan for the long term".

Lifecycle of startups throughout funding process

With those questions out of the way, Anirudh went on to explained the lifecycle of a startup through the various stages from F&F (Family & Friends) bootstrapping, to angel/seed and early VC stages, right up till the exit stage--be it an IPO (Initial Public Offering) or merger and acquisition. 

Some of the key things he pointed out were how VCs are unlikely to make a bet on multiple risk factors, for example, team, technology, market or business model and product risk. He had a keen interest in the technology and e-commerce space, especially having spent a lot of time in some of those sectors.

He explained what various stages of funding a startup involved:

First 15 days: This stage is preliminary market analysis where internal and external factors of the pitch are evaluated upon.
30-45 days: Here, the VCs deep dive into the actual startup business to understand the team, how big is the target market, how well the product startup is set apart from other products, what its feasibility is, and how do the financials fare.
60-75 days: Once two months have passed, that's when the validation and funding process-- along with legal work--actually begins.

An intersting analogy that resonated with me was this one... Anirudh said: "A relationship between a VC and an entrepreneur is like that of being in a marriage." Quite a clear perspective I must say.

Entrepreneurs in the audience I spoke with also gave some really interesting insights. There were some who already had taken a plunge and wanted some additional insights. While they appreciated Anirudh's session, they stated that a lot of it were basics they already knew and which were theoretical in nature. Others said more application and case studies could have helped, considering the subjective nature of the topic.

Shrikanth Katkurwar, co-founder and CEO of Kapsica, mentioned that he already has a startup which he's bootstrapped and a lot of issues mentioned in the workshop were stuff he knew, but he certainly felt there were some new insights that he gained.

Pankaj Bhalerao, who was one of the most interactive participants who asked many questions, said the session was good learning for him especially since he has been operating his own technology service business, YantraSeva, for over 10 years in Pune, but now wants to scale and expand. So the session was useful to him overall.

Other key takeaways from the session include:

  • Series A checklist that kind of set the tone for the workshop.
  • Think like a VC. Ask yourself what would a VC like to see in his own business.  
  • Will your vision survive the napkin test? Can you share your vision in two sentences? 
  • Adapt to the trends of the market and see where your product fits into these trends.
  • Choose VCs which have similar interests and fund products in your sectors.
  • Get insights from other entrepreneurs, and identrify what VCs generally are interested in. 
  • Do your due diligence on your VC as if he would on you and your product.

Here are some questions asked by entrepreneurs in the audience and Anirudh's answers:

Q: What does it mean for the entrepreneurs if there's exit pressure for VC?
Anirudh: Entrepreneurs are not affected as much. The expectation from the startup and entrepreneur is that he'll be able to give back what he could. He is expected to keep doing his job and build his company.

Is there an expectation mapping that is established between a VC and an entrepreneur in terms of profit?

Typically a VC will want an optimum return on the basis of the company’s performance. However, the VC does not drive the entrepreneur in providing a pre-defined exit value.

What sectors are you bullish about?

SaaS and e-commerce 2.0. He generally felt offline industries adapted online in the tech space have a great chance of succeeding as well. 

If your product concept is something new (and unproven), then do VCs tend to avoid such ventures?
Not really, if your market is big enough and you're solving genuine or real problems and if the genuine need is there, then they generally won't refuse to take it on.

Anirudh also provided two quotes that still remain etched in my mind: "In the context of e-commerce, Market share today is revenue tomorrow." "No doesn't mean no forever."

I would love to hear what already invested entrepreneurs and aspiring entrepreneurs have to say. So do give me your feedback.

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