Sanjay Mehta’s commandments for entrepreneurs
As the startup culture matures in India, there is an inflow of funding for sure. However, many entrepreneurs also seem to be shutting shop overnight. They find that their vision alone is not enough to carry them forward and create a sustainable enterprise. What can they do to survive? In an exclusive chat with Swati Soni, Sanjay Mehta, a leading angel investor doles out some useful tips on how to be a successful entrepreneur.
Could you give us a few pointers on survival for startups?
Getting investors to back the founder’s/founders’ vision with their money is the first step to survival for startups. Ideas are fragile, to make them solid they need to be cultivated with capital. The number one reason a startup idea fails is because it runs out of money. As the start-up culture matures, entrepreneurs need to be capital efficient and not just efficient in terms of idea and execution. And for capital efficiency, the confidence and the trust of the investor makes all the difference. I find that entrepreneurs, especially in technology startups, will speak, focus & build products, but very little business. They assume that customers will come once they have their product ready. Their idea of startup success is to build world-class products with the help of hiring a world-class team by raising capital. Capital efficient startups should understand the value of timing, when to conserve and when to spend the money. A word of caution to entrepreneurs: it's marathon run, not a dash to the finish line.
Why are new start-ups shutting down like fly-by-night markets?
The power of money is limited, but it is overestimated by both entrepreneurs as well as investors. Entrepreneurs assumed funding as the end-goal or solution to all their business problems. Funding should have been used to accelerate growth but not turn entrepreneurs into superheroes for media purposes. Once funded, I often find that the entrepreneur is mistaken that spending more is equivalent to more business or more traction. They spend more time on how to spend money (advertising & infrastructure) and less on building the business. In reality, it takes years to build a sustainable business.
It's time to be real. Chasing growth, rapid scaling of business, achieving leadership position by ignoring profits have been among the biggest mistakes by entrepreneurs. On financial statements a company can be in loss due to initial capital investment but unit-level profitability is a must. Startups seem to have missed out on tracking profits which is a valuable metric.
How can a founder extract the best from his VC or angel investors?
All funded companies have an investor representation with the board of directors. It is a formal construct for governance purposes. It's the board which approves of all the business plans, compensation, next rounds of funding, etc. It is important to understand that investors do not react pleasantly to surprises, so communication is foremost in retaining the trust of the investor. Formally, an investor audits business performance but informally the investor also helps coach the founder. For this reason investors trust transparency, especially if the founders ensure that the investors are made part of the decision-making process.
The investor board is a very useful collection of influential people to be leveraged by founders. Adopting an attitude of gratitude is a lifestyle habit that helps entrepreneurs accelerate their business. In an entrepreneur’s lifetime there will be investors whose contribution will matter. At every funding round, entrepreneurs need to unleash the power of appreciation by making all stakeholders feel that their contributions have been meaningful and crucial to the business. For growth: try thankfulness with investors, it works every time.
What could be some other possible commandments for entrepreneurial success? Please put in your comments