Team, Idea, and Money are the basic requirements for a startup, in that order. While you gather the team and start working on the idea, the money part generally tends to be less under your control, unless of course you have a rich father-in-law.
So it’s natural to get excited if an interested investor calls you up on day one. While first-time entrepreneurs see this as a godsend, the more seasoned ones know exactly what’s happening at the backend. I have been blogging about and reviewing Indian startups for over three years now. At times I would get calls from founders of startups I wrote about thanking me because my article got them some attention from VCs and that a couple of VCs had called them immediately after the post was published. I’ve started up on my own now and my product, FindYogi.com, recently got covered on a number startup blogs in India. Similar to what other founders experienced, I also got calls/emails from at least three well known VC firms active in India. As a first-time entrepreneur I was excited, but on discussing it with my mentors, I found they probably weren’t calling because they were interested in funding my startup.
Here are some key points I learned that will help you keep your false hopes low. And they’re just as true whether you’re based in Silicon Valley or Bangalore.
1. They call everybody, their job is to discover
Yes, they call everybody who seems even half serious, and at this stage you’re just one of them. If you think they noticed something great in you, the truth might be that you just popped up in their Google Alerts. VC firms have full-time roles primarily dedicated to discovering potential startups, and you are still at point 0 with them. Be sure to note who exactly is calling. Unless it is partner who is interested in you, there is no deal happening.
So set your ego boost aside and get your feet back on the ground.
2. These are the exact temptations that all startup gurus have been warning against
Now that you’ve got an email and they want to meet you, all co-founders will huddle up. You will discuss pitching plans, think of getting a spreadsheet, even a hypothetical one, in place. Once you realize that the numbers are not going over a million, you’ll inflate things to make it look like a serious big business. Instead of 1-year predictions, you’ll crystal gaze a 3-year journey on the spreadsheet. You’ve given in to the temptation.
Responding to potential investors and keeping them warm is a must, but avoid those Excel sheets and unnecessary burdens for the first couple of meetings. Raising funds is a time-consuming process you would only want to get involved in when you’ve built some traction. Keep a tab of the collective time that you put into this. Imagine putting that time into the product. The numbers — and the VC interest — before vs. after building traction are always miles apart.
3. Conflict of interest
This is not a widely discussed issue, but quite few (pseudo) investors have been acting on behalf of industry leaders, who at times are potential competitors, to get more info out of you. Not that you can do much about it, but it’s good to be careful about how much you reveal and when.
NDAs, etc. are not much help. This conversation on Mark Suster’s blog warns against even asking for an NDA. Just dodge those well-framed questions. Speak English and not numbers at times. Avoid naming vendors; it’s fine to name bigwig customers if you have any, but not account size.
4. It’s not you
A lot of times it is not you/your product that triggered the call, it is their peer investors’ portfolio. They are just interested in knowing what their competitor invested in. Also, chances are that VCs call you to understand the industry so they can analyze your competitor who pitched them. I experienced this when one of the VC analysts I met inquired about one of our competitors. The relatively inexperienced analyst asked more questions about the other founder than me and ended up disclosing information about their funding that was still not public.
Remember that cute girl in college who calls you at 10PM, only to get your roommate’s number?
5. No one is giving away free money
You know this well. There is no money being given to you. It is being invested in a business that you will be responsible for growing. You will be answerable to your investors for your moves. You are hiring a boss who will ensure some financial cushion for you, but beyond that, he’s as good as any other boss.
I realize these points portray a very horrid picture of such an orgasmic moment, but it is good to be prepared beforehand. Entertain your VC caller, but keep your excitement in check and know where to draw the line.
Go build something useful. Money will follow.
Naman Sarawagi is the founder of FindYogi.com — a product comparison engine for India. He has been first employee and product manager at 500 Startups Funded ZipDial and Sequoia Capital funded Freecharge.