I have had the chance to observe startup founders both in the Bay Area and in India over the past 2.5 years. While it’s a small duration, it does seem to me that founders in India are relatively less aware about how startup investing actually works. By this I mean an understanding of the VC math, acceptable investment terms, exit paths, cap tables and other nuts and bolts that have nothing to do with technology stacks, target markets or business models.
If you were to ask an average Joe (or Jai!) founder in India, who’s yet to close a round, anything regarding investment terms beyond pre-money valuation and dilution, there’s high chance that you’d draw a blank. I’ve found this true even with founders who’ve earlier worked at other startups. In contrast, a founder in the Valley is much more likely to have an informed opinion on terms like liquidation preferences, anti-dilution, vesting, tag-drag along rights, or even how valuation cap & discounts work upon conversion. Being in the dark on these topics can be highly inefficient, and at worst, suicidal. If you’ve signed up for say 3x liquidation preference in the seed round, you might as well stop working on your startup right now.
Why are Indian founders not as aware?
I believe this difference can be attributed primarily to the lack of availability of information and standardized documents in India compared to the US, especially from highly credible sources. In the US, experienced and celebrated investors regularly write not just about their investment thesis, market predictions and pitch tips, but also advice on termsheets, fair terms, bad investor behaviour and their learnings from exits/ failures. In India, while there are occasional articles from investors about market dynamics, sectoral thesis or commentary on the ecosystem, advice on the nuts and bolts hardly comes by.
Why is this transparency and knowledge sharing absent in India? There aren’t any blogs or web sources on one’s fingertips which are considered bibles for Indian entrepreneurs. There could be multiple reasons for this. One, the ecosystem is small & nascent so the demand might not have been felt yet by investors in India. Two, before blogging became the norm among investors in the US, it was used by a few to differentiate themselves from others – that need might not have arisen for investors in India yet. Three, investors might feel there’s no incremental benefit as much of it is similar to global knowledge out there. Lastly, a cynical view is that investors benefit from this information asymmetry. It surely is a combination of the above and founders are worse off for it.
A few global resources to bridge the gap:
In the meantime, here are a few sources from the US that might help Indian founders understand the nuts and bolts of how startup investing works:
- The VC math: How VCs really make money (Power Law) and what it means for founders – Mark Suster’s Deck (focus slides 24-34).
- Standard termsheet: The ideal first round equity funding terms – Chris Dixon’s post (dated but terms mentioned still relevant, except maybe board structure).
- Understanding investment terms: Nothing more comprehensive than Brad Feld’s seminal Term Sheet Series. Additionally refer to Venture Hacks and Brad’s book – Venture Deals.
- Knowing your fate: While not strictly related to how investing works, Paul Graham’s ‘Default Alive or Default Dead‘ essay is really a starting point for all founders, especially in light of what’s transpired in last year or so.
- Standardized funding documents: A list of standardized fundraising documents from the legendary Fred Wilson. In addition, there are the YC Safe documents, but implementing them in India may not be possible.
- Founder shareholding & dilution: Neat infographic by Mark Suster explaining how founders’ shareholding gets diluted over time in a startup.
In general, it’s great to follow the blogs of Fred Wilson, Brad Feld, Mark Suster, Chris Dixon and read Paul Graham’s Essays – these investors have been writing quite transparently about startups & investing for years.
As a closing comment, it would be great if some Indian investors blog on these topics as well. There are multiple things that will be clearer in the local context. For example, assuming that exits in India are taking longer and cost of capital is higher, is the VC math even more skewed given fund sizes are big enough now? Or do convertible instruments work as well as they do in the US? And the like.
Open and frequent discussions on these topics would be a welcome step forward for India.
Know any Indian startup investors that write regularly, especially on the above?
[Originally posted on LinkedIn]
Image credit: JD Hancock via Foter.com / CC BY