Open your kimono- Lessons by JumpStartup's Sanjay Anandaram
Namitha Jagadeesh -
Monday, July 21, 2008 2:43 PM
More notes from the fourth edition of Proto.in
Venture capitalist Sanjay Anandaram, who co-founded early-stage VC fund Jump Startup in the dotcom era, had an unfortunate post-lunch, drowsy slot but did a pretty good job of keeping the crowd awake with his blunt talk. Anandaram, who along with his co-founders did not raise a second fund with Jump Startup, keeps busy these days "helping some start-ups, advising a couple of funds and teaching entrepreneurship at colleges". His session was on the near impossible task of 'Reconciling investors and start-ups'.
The professorial streak was evident, as he explained the basics of startup-VC dynamics in an interactive classroom session of sorts.
Lesson 1: Be careful of your expectations
What do you expect from your VC?
(Audience answers) - Bring money to the table, add value, help me monetise my product, help with customer contacts and relationships, help with hiring
If you want the VC to do all this, the VC will ask you what the hell you are going to do for the company. The VC's job is to write you a check to back your vision. Don't take check and let him modify your vision and execute it for you.
Lesson 2: If the chemistry isn't right, the arithmetic will not work.
Chemistry with your VC is the most important thing. The bad news is, the VC has the money, is on your board and has a lot of veto rights (such as first right to refusal of stake in future) in his favour, so make sure it's someone you get along with. Being a CEO/Founder is a lonely job, and a VC should be part-psychiatrist, part good friend, part straight-shooter.
Lesson 3: Have a common gameplan.
You might want to build a company for your grandchild to inherit, but no VC will ever invest in it. Keep in mind, VCs have to return money to their investors in 5-7 years, so there is pressure on them to exit. The ideal investment for a VC is to invest money, forget about it and after three years, everyone drives a BMW. So even if it's someone you like, make sure both of you are working towards a common goal.
Lesson 4: Open your kimono
You cannot be coy about sharing financial information with a VC doing due diligence. You have to open the kimono (mimicks the action with his hands) and show the VC how much you made last year, your revenues, profits....he is investing in you, he has the right to know. Once the investment has been made, you are both on the same side, because if the company doesn't make money, the VC doesn't make money, neither do you.
Lesson 5: Steer clear of 'founderitis'.
One of the biggest mistakes founders make is they tend to believe "What's good for me is always good for the company". This need not be true, as there might be decisions in the interest of the founder but not the company. Some might be hugely emotional decisions, such as "Am I the best CEO for the company?" On the other hand, what's good for the company is always good for the founder.
Lesson 6: Your VC need not be a techie.
Don't imagine that VC doesn't understand your pathbreaking technology and is therefore not investing in you. He's not in the business of understanding your technology, his job is to invest money and get the best returns.
Lesson 7: Educate yourself about the termsheet
For some reason, one of the most closely guarded secets is negotiation between a start-up and the VC. It's not such a secret - every VC issues a termsheet. As part of investor rights, most of these terms are not negotiable, because a VC has no recourse. The VC writes a check, cash is in and tomorrow you could be vacationing in Hawaii. These terms may typically be:
You can't give others stake without my approval.
You can't hire ppl above a certain salary.
You can't buy office space in Noida, say.
Once it is issued, lawyers on both sides will go to war. The termsheet is simple if you take the trouble to educate yourself.