Businesses Need Money To Grow. Is Venture Capital Right For You?

July 11th, 2011 Comments off

The goal of every business is to be successful in their efforts and continue to grow. However, they often come to a crossroads where they are going to have to invest more money if they want to experience growth and additional profits. It may be money needed for new equipment, a larger building, or a number of other items that can be found to keep a business operating at its very best.

Many business owner’s turn to venture capital in order to finance the such ventures for their business. This is a type of loan that comes from a private investor rather than a traditional lending institution. The lender offers the necessary cash and in return they receive shares of ownership in the business.

They often ask for 2% of the profits during the time it takes to repay the funds as well so venture capital lending can be very profitable. In addition you will still be paying the principal balance and the interest on it. However, this 2% is to cover their risk on such an investment.

Business owner’s may have no choice but to look into venture capital options if they are considered to be too high of a risk for a traditional lender to offer them the funding they need. It could be due to the business being new, the business owes too much money to other lenders, or they have a poor credit history that traditional lenders can’t accept.

There are also times when a business needs funding in order to purchase items that aren’t tangible. Since the lender can’t use them as collateral they find the venture to be just too high of a risk. Some common items that may be involved are software programs for operating computers in the business and research that is necessary for the business to successfully grow.

However, it is important to realize that venture capital may not be a good option for your particular business and financial needs. You are going to have to be able to present information that shows there is a very high chance that your business will be quite profitable if you are allowed to access the funds necessary for your business to expand.

Keep in mind that your information also has to show that these additional earnings will be evident in the allotted time frame. In most instances the investors of venture capital will give you a minimum of three years and a maximum of seven years for that growth to occur and be profitable.

Venture capital should always be a last resort when all other options of securing funding have failed. In those instances it can be a very valuable tool which can decide whether you get the funding you need to expand your business or not. It is estimated that more than $6 trillion in loans under the category of venture capital take place each year in the United States. The process is available in many other countries as well but not nearly to the same extreme as in the United States.

Raising Venture Capital? Seeking Angel Investors?

August 3rd, 2009 Comments off

Start-Down.com helps companies learn how to raise capital and a valuable resource for entrepreneurs seeking capital to start up a new business.

Venture capital firms usually require a high rate of return on their investment (20%+ per annum) and finance provided to the business is typically in the range of $500,000 to many millions of dollars.

An angel investor generally wants less control of your company and a slower return on investment, however the criteria for investment are likely to be similar. Angel investor groups are great sources of private capital and frequently invest angel money into new companies.

It follows that both venture capitalists and angel investors are looking for capital growth and revenue increases and evidence that your business can deliver continued growth over time, to provide a return on investment.

The current venture capital market is rebounding nicely, from the past setbacks of the “dot com bubble” and “real estate bubble.” Venture capital remains a viable source of funding for startups, which are able to deliver the necessary growth that investors are looking for. Past events should certainly not discourage entrepreneurs who have genuine winning ideas and business plans from looking for funds.

Startup Spotlight: An Interview with Kashyap Dalal, Co-Founder and CEO of Inkfruit

August 3rd, 2009 Comments off
After walking into a movie theatre and seeing someone else wearing the exact same t-shirt, Kashyap Dalal came up with the idea for what ultimately has become Inkfruit (www.inkfruit.com), a company he co-founded and which he is now the CEO of.  Inkfruit which might be likened to an Indian Threadless is an online marketplace where artists and t-shirt lovers can design, buy, and vote for new and innovative tees. Inkfruit has a simple, yet according to Kashyap, highly effective model; designers upload their creations and join monthly design competitions while users vote on their favorite designs. The best designs then go into print and are sold for a limited time only!

Seeing the need to provide India’s talented design artists with a venue to showcase their work, as well as a place for users to purchase high-quality clothing, Kashyap teamed up with Navneet Rai, a classmate from IIT-Mumbai, to found Inkfruit.  I  recently sat down with Kashyap to talk about Inkfruit, it’s ambitious growth plans and the challenges of succeeding in an increasingly competitive personalization market in India.

 

 

Briefly, please tell us a bit about yourself. Specifically, what gave you the motivation and conviction to leave the safety of your previous job to start Inkfruit?

After I graduated from IIM-Lucknow, I went to work for Hindustan Unilever (one of India’s largest Consumer Goods companies). The whole idea for Inkfruit started in a really light way, actually. A couple of friends of mine and I were at a movie when I saw someone else with the exact same t-shirt as me. At that point, we realized that there’s really quite a dearth of creative brands in India, and we wanted to do something about it. We played around with the idea of launching a business in the merchandise space, and tossed over quite a few models amongst ourselves. More important than anything was that we needed to create a brand with a competitive advantage – one that would never grow out of popularity. Conventional brands have 5-10 designers and after a while, the same types of material are going in and out. But, we thought of giving individual designers a platform to showcase their own designs, and have a mechanism to ensure turnover of new designs month to month. Inkfruit is powered by User-Generated-Content, and we have monthly contests in which users submit and vote on the best designs. This way, we always have something unpredictable and new. Once we got initial confirmation from both local design students and consumers that this idea was appealing, we became infatuated with the thought of a site run by the people itself!

What is the Market Opportunity in the personalization space as you’ve defined it?

Actually, we don’t see ourselves as a player in the personalization market. (Personalization, among other things, grants a user the ability to design an upload their own artwork, and get it printed on a medium of their choice.) We don’t allow people to take single prints of their own designs. Rather, we work on a different model. We’ve generated a huge designer pool and a huge number of t-shirt lovers, and we really see ourselves as a company given to the population. Once we provide the tools, and platform for users to carry out their artistic needs, we sit back, and let things unfold.

As we know, Internet penetration in India is not as significant as in the U.S. How has Inkfruit dealt with this?

Right. When we started in the Indian context, we positioned ourselves to be a purely online brand, but two issues came up. First, internet penetration is much lower in India than in the US for instance (where similar companies like Threadless.com have been taking off) and thus the Internet cannot be the only source of customers. Second, there is still a general mistrust among consumers with enacting credit card payments online. This may take quite some time to overcome with the Indian consumer, so in order to grab market share early, we had to shift our operations offline as well.

Could you talk a little bit about the decision to go offline and the strategy for how you did so?

We wanted our product experience to remain largely online but in order to make our products available to customers who may not have found us online yet, or are not comfortable making online purchases, we pursued tie-ups with local retail vendors to sell our shirts. We’re based out of Goregaon, Mumbai, and so far we have over 250 stop points all over India now.

While the Indian market is getting acclimated to E-Commerce, what are your offline expansion plans for the next few years?

We’re looking to expand offline in three major ways. First, we looking to increase our tie-ups with retail outlets. In the next two or three years, we hope to have around 400-500 outlets selling our t-shirts. Second, we’re looking to expand our product range. Increasing our entire inventory bandwidth is something we’re keenly pursuing; though we’ve been selling t-shirts as of late, we want to start selling sweatshirts, hoodies, and some completely unrelated items such as wallpaper, canvases, and bedsheets – all of which are designer run. Thirdly, we’re also looking to set up exclusive Inkfruit outlets as well.

How far down the line will the first Inkfruit outlet be up and running? What part will the exclusive outlets play in promoting brand awareness and reach?

We’re actually expecting the first outlet to be up and running by the end of this year. The outlets serve as physical places that set the imagery for what we believe Inkfruit is. People can come and actually feel and see what Inkfruit is. It’s a great way to introduce Inkfruit to those who haven’t come across us on the web.

Furthermore, we plan on self-funding and promoting about 5-10 outlets ourselves. Our eventual goal is to give entrepreneurs the opportunity to take on an Inkfruit outlet themselves. Using the franchisee model, we hope to have about 100 outlets in total in about 5 years.

There are quite a few players in the Personalization market in India. To run down the list, you have Myntra, DilSeBol, Pringoo and on the photos side, there’s Itasveer and ZoomIn. It’s safe to say:  the markets fairly saturated; how has Inkfruit dealt with such competition and how do you differentiate yourself?

There are a couple ways in which we differentiate ourselves which we think are extremely critical. First, we invest very heavily into our designer base. We strongly believe that having a strong, talented and motivated designer base is critical to attracting people to the designs and making purchases. As such, one thing we do is run designer workshops and we have tied with up Adobe and created a contest where the winning designers were given free high-quality software from Adobe. Also, with the kind of scale we have, with over 250 retail outlets, we provide a very attractive and immediate way for designers to get their art immediately public and available to the masses. Finally, we believe that we are the strongest player in Asia in this market. The US has companies such as Threadless and Europe has it’s own players, but in Asia, we believe that we are the leading player, and therefore offer a global platform for our designers to be recognized.

Where is Inkfruit presently? More specifically, how many designers do you have registered on the site, and how many t-shirts are you selling monthly?

Currently, we are selling about 15,000 to 20,000 t-shirts on a monthly basis (T-Shirts go for about Rs. 350/each) only within the Indian geography. We have about 10,000 designers who are active and contributing on the site.

Like a content-based sites values Unique Visitors as it’s most important metric, what does Inkfruit keep track of?

Right now we have a strong designer community of 10,000 but even more than that we keep track of how many people are registered on our site, but may not be actively creating creating and submitting designs. There are about 100,000 of those people and we hope to increase that amount in the future considerably.

Here’s an off-beat question. If you knew that you wouldn’t be able to raise more capital, how would you fund your ambitious growth plans?

In the initial stages of our growth, that would’ve been quite a bottleneck. We first raised money from family and friends and once we had some success, we raised further money from two of our seniors at IIT-Mumbai. Now, however, we feel we’ve reached a size where, if that were the case, we’d be able to deal with it. Obviously, we could always take up debt, but even more than that, there would be other ways of raising capital. First, as mentioned before, we have over 250 retail outlets, who are our partners. It would be mutually beneficial for our vendors to invest in us because we drive significant portions the sales at their outlets as well.

What have been a few challenges you’ve faced as an up-and-coming start-up?

I think there were two phases of challenge for us as a company. In the first phase, where we were rapidly expanding and trying to increase our human resources to keep up, we found that it was a challenge to keep the same energy and passion that we had when it was just the founders, myself and Navneet. The energy and passion is quite a strong backdrop on which to build, so when expanding a team, it was hard to ensure that we could keep that backdrop.

The second phase dealt with more consumer-facing challenges. As we scale and continue to expand, we want to ensure the same level of personal service that we’ve had in our early stages. Crafting that delicate balance between scaling up while seeming small will prove to be quite challenging to us in the future.

As we’ve mentioned a few times before, Internet penetration is still budding in India. But, what is your prediction for when it will really pick up and become the primary driver of Inkfruit’s revenues?

I think it will take about 3 to 5 years until it really starts growing exponentially, and I think it will reach the kind of scale it has in the US about 5 years later.

By the time Internet penetration becomes a significant revenue source, your offline plans will have also materialized. Do you foresee any issues with already having well-developed offline establishments when people start shifting their point of purchase?

I’m not sure that online traffic will ever really become the primary driver of our revenues. I’m not sure of the exact statistic, but something like only 25% of retail sales are made online even in the US. More importantly, we believe that our offline outlets will be sustaining us and our e-commerce business will be primarily supplementing us even in the future. For now, people are still not entirely comfortable with making online purchases, which is why we are aggressively developing a hybrid model.

There are many talented entrepreneurs in India who have great ideas and the ability to develop high-quality websites.  But as you’ve mentioned, initially grabbing market share through offline channels may be the key to future success. What allowed Inkfruit to venture into such areas where other budding entrepreneurs may be uncomfortable entering?

The offline expansion has really been a barrier to entry for many, and there are a few things that allowed us to do this. First, Navneet has experience with the garments business. He has spent time working there in the past, so when we started out, he really knew how to handle that aspect. Second, having worked for Hindustan Linkfruitever for some time, I have experience with scaling and distribution models, having understood the networks that need to be in place for promoting a product and the systems to develop them. Our previous experiences combined gave us the required competency we needed to push forth.

This is a guest blog post by Arjun Bhimavarapu,  a Wharton School of Business student currently working in India.  He will be interviewing promising young venture-backed startups in India over the next several weeks.

15 States Without Venture Capital Activity in Q2 ‘09

August 3rd, 2009 Comments off
15 States that Saw No Venture Capital Activity in Q2 ‘09

As we reported in our Q2 ‘09 Venture Capital activity report, the US saw a 61% jump in VC activity over the prior quarter.  In the quarter, 35 states saw companies resident in their borders receive venture money.  The top five as we showed in the post detailing the VC results were many of the usual suspects including California, Massachusetts, Washington, New York and Colorado.

And then we got an interesting inquiry from a few folks.  Which 15 states didn’t see any venture capital money in Q2 2009.  The list is below.  It is worth noting, however, that we did see investment activity in many of these states, but the money didn’t come from venture capitalists and instead came from the likes of angel investors, incubators, state grants and other public-private partnerships which the states have created.

 

But for the purposes of our Q2 ‘09 Venture Capital report, only VC investments were considered and on that basis, here is the list of states without any venture capital activity in the prior quarter.

  • Alaska
  • Arkansas
  • Hawaii
  • Idaho
  • Iowa
  • Maine
  • Mississippi
  • Montana
  • Nebraska
  • Nevada
  • New Mexico
  • North Dakota
  • South Dakota
  • West Virginia
Categories: VC News, Venture Capital Activity Tags:

How to Raise Venture Capital

January 21st, 2009 Comments off

by Neil Patel on January 21, 2009

venture capital

Raising venture capital isn’t the easiest thing to do. With my first software company, Crazy Egg, my business partner and I spent 6 months doing a dog and pony show in front of 21 venture capitalists and none of them were willing to give us money.

We thought we had everything venture capitalists (VCs) wanted. We had a unique product that solved a pain in the market, there was a lot of good buzz about us in the blogosphere, our user base was growing, and we even had paying clients. To take it one step further, people talked about how our product was so good that Google should buy it. And on top of that I had well-established relationships with VCs such as Guy Kawasaki. 

So why didn’t Crazy Egg get funded? Crazy Egg wasn’t an idea that had the potential to be sold for anywhere near 100 million dollars. The business model that VCs have is that they convince rich people to invest in them and they take that money and invest it into a handful of companies. The majority of those companies will fail, but a few will end up selling for large sums such as 100 million dollars. The money that they make from the companies that sell usually covers their loses and the money they owe their investors.

Now if you failed at raising money, like I did, it doesn’t mean you should quit. Just because someone tells you “NO” the first time, it doesn’t mean they won’t say “YES” in the future. For example one of the venture capital firms I pitched Crazy Egg to was True Ventures. Although True Ventures said no to Crazy Egg, 6 months ago they invested in a company I co-founded called KISSmetrics.

The Venture World

Before you go out and start raising money, there are a few things you need to know:

  1. Venture capitalists don’t want to hear about ideas; they want to see your company lunched before you ask them for money. If you weren’t willing to put the time and money into launching a beta version of your company, why would they want to give you money?
  2. VCs aren’t the smartest people out there, but it doesn’t mean they are dumb either. Don’t blow smoke in front of their face or else they will call you out on your bullshit. Be honest every time they ask you question and if you don’t know the answer, it’s OK to say that you don’t know.
  3. There are 3 different types of capital you can get: early stage, expansion capital, and buyout capital. Before you start your dog and pony show, make sure you know what type of capital you are going after.
  4. If you are trying to raise a few hundred thousand dollars, you are better off pitching angel investors. Most VCs tend to shy away from investing small amounts of capital.
  5. Business plans are bullshit. You may think they are great but I haven’t seen a VC ever read a business plan or fund a company based off of one. I could be naive, but I think they would rather have you spend your time on launching your company compared to writing a 30-page document.
  6. People are scared to give money to people they don’t know. If you don’t know any investors you better start getting to know them. You can easily do this by reading and commenting on their blog or by striking up an email conversation with them. Or you could ask your friend or lawyer if they can introduce you to a VC (good lawyers know a ton of VCs).
  7. In most cases VCs are using other rich people’s money to invest in companies and not their own. This means that they have a boss. So if you hear horror stories about companies getting screwed by them, it isn’t the VC who is being mean. They have to cover their ass as well.
  8. Make sure a 5 year old can understand your business model. If you can get a 5 year old to understand what you are doing, then a VC will understand what you are doing.
  9. There are 2 types of investors out there, the first can just provide you with money and second can provide you money and knowledge. The second type of investor is called a strategic investor; ideally you should only take money from a strategic investor.
  10. If you are looking to raise a few million dollars or more, you usually won’t get it all from one venture capital firm. You will have to get money from multiple VCs, but the good news is they believe in the herd mentality. This means that if one VC sees that another VC is interested in giving you money, then they too are naturally interested in giving you money.

The Deck

Now that you understand how the world of venture capital works, you will need to create a power point presentation (also known as a “deck”) that you can use to pitch VCs. Here is an example of a good deck:

When you’re creating your deck, make sure it includes the following:

  • Mission statement – a simple sentence that explains what your company is about and what you are going to do.
  • Team – you need more than a one-person team if you want money. If you can’t convince people to join your company before you get venture capital, you won’t be able to convince a VC to give you money.
  • The problem – creating another me too company won’t do any good. Make sure there is a pain your business can solve that others have not.
  • The solution – don’t just go into how you are going to solve the problem you talked about in the previous slide, show it. You should include some screenshots of your product, even if they are rough.
  • Competition – even if you don’t think you have competitors, you do. List out your closest competitors and talk about how your solution is different.
  • Market size – go into detail on how big the problem is. How many people are experiencing this problem? How are you going to go after those people?
  • Business model – you have to make money sooner or later. If you don’t have a strong sense of direction on how you will make money, list out the possibilities.
  • Marketing – how are you going to go to market? You need a clear plan of act. Make sure you don’t say something stupid like you are going to get on TechCrunch and thousands of people will then come to your website. TechCrunch is a great site, but that isn’t a marketing plan.
  • Financing – how much money do you need and why? Unexpected things usually happen, so make sure the number is large enough to account for them.
  • Milestones – if someone gives you money they will want to know when they will see something more tangible.

After your presentation is over, you are going to get bombarded with questions. There is no way you can be prepared for all of the questions. Just be honest and have faith in yourself. If you know your business like the back of your hand, you shouldn’t have any problems. The most common questions I have been asked are:

  1. Why do you want to raise money?
  2. Why should I give you money?
  3. What makes your product or service different than your competitors?
  4. What is stopping your competitors from doing what you are proposing?
  5. What would you do if you weren’t able to raise any money?

Conclusion

Guy Kawasaki once said that the probability of an entrepreneur getting venture capital is the same as getting struck by lightning while standing at the bottom of a swimming pool on a sunny day. No offense to Guy, but I think your odds are much higher than that. It doesn’t matter what skin color, age, or education you have. All sorts of people have raised money and you can too.

From what I can tell the entrepreneurs that are the most successful in raising money tend to be scrappy, quick learners, cheap when they need to be, and most importantly know how to execute.

Best of luck!