July 05, 2007

Translating VC Speak - by Sanjay Anandaram

All too often hopeful entrepreneurs approach venture capitalists (VCs) and then keep approaching them with the same set of slides. After a while, disappointment sets in. ‘VCs in India are risk averse’, ‘They do not understand my business plan’, ‘None of them have operating backgrounds so they cannot appreciate the position’ are some of the common refrains. It is, therefore, worth understanding the language used by VCs during the meetings.

“Interesting but…..”

The word ‘interesting’ has many meanings but almost certainly never means that the VC is excited. The meaning of the word varies from ‘OK, nice’ to ‘intriguing’. It is also used as a place-holder or a punctuation mark. The ‘but’ that follows is dangerous. Means the VC is not positively inclined.

“Who else have you talked to?”

This is not a general innocent question. This is a way for the VC to know who else is looking at the deal and therefore, how he or she should pace the decision-making process. If a lot of VCs have been approached without much progress, the red flag goes up since VCs do compare notes about the deal among themselves.

Usually, VCs work in syndicates and want to know if the other VCs being approached are people they would like to work with on the deal in question. In some cases, it can mean that the deal is getting hot and therefore, they need to move fast.

“You are too early for us.”

This means please raise money from somewhere else, build out a team, acquire customers and revenues and then come back to us.

“How many customers have you spoken to?”

We do not think you’ve done adequate market and customer validation. Please do your home-work and come back.

“How much cash are you raising?”

This is an interesting question or rather a set of questions. VCs want to know whether you have thought through your financing plan and what the objectives of raising the cash are. They want to know what specifically will be achieved with the cash and over what time-period. Whether the company will be in a position to raise additional capital at the end of the time period based on expected achievements and at what valuation? Does it make sense therefore to have a co-investor participate in the current round of financing?

“Who’s the domain expert? Who’ll do sales and marketing’’

There are multiple variation to this. This means that the current team does not inspire confidence. Interest yes, but not confidence that it can pull it off. Additional members have to perhaps be brought in to strengthen the team.

“What’s the cap structure/current ownership of the company like?”

This question is used to find out how the shareholding is distributed and therefore, reflective of the mind-set of the promoter team. This in turn signals the kinds of issues likely to come up in the course of the investment cycle. Many a time, VCs insist on having an Esop plan either implemented or significantly enhanced before they invest. This implies that the pre-investment shareholders would get additionally diluted to the extent of the Esop plan.

Persistence is a valued trait to have. But there’s a thin line between persistence and obdurate obstinacy. Learning to read the signals and understanding the import of the questions being asked is a critical requirement. This should translate into the presentation or the pitch being modified appropriately with better preparation. Remember, VCs are trained to be skeptical and are quick to pick up signals. VCs rarely, if ever, say no to a deal. They engage with entrepreneurs and then disengage because they would have lost interest in the deal or some other deal has caught their fancy. The only thing then that spurs them to action is competition and or customer traction.

Sanjay Anandaram is a passionate advocate of entrepreneurship in India; He brings close to two decades of experience as an entrepreneur, corporate executive, venture investor, faculty member, advisor and mentor. He’s involved with Nasscom, TiE, IIM-Bangalore, and INSEAD business school in driving entrepreneurship. He can be reached at sanjay@jumpstartup.net. The views expressed here are his own.