A Primer on VC for first-time founders. How it works, what it means for them and how to raise VC

1. Arali Ventures 1
Venture Capital
what first-time founders need to know

2. Arali Ventures 2
 Understanding Venture Capital
 What is it
 How does it work
 Why it is important for founders to understand VC
 Raising Venture Capital – how to go about it
 Resources

3. Arali Ventures 3
Funding for Startups
Sources of funding has increased significantly, so has its diversity
Boot-strap, fund
thru revenues
3 F’s ( friends,
family and fools)
Angels,
networks,
syndicates,
Accelerators
Venture Funds (
seed funds,
Growth funds)
Growth funds/
Strategic
 Motivation, return expectations differ as we move along the chain
 Normally, Investor sophistication also tends to increase along the chain
As a founder, understanding these differences will be crucial in getting right fit investor

4. Arali Ventures 4
Decoding VC
VC’s raise money with the expectations of delivering outsize returns
100 Cr
400 Cr
Individuals,
HNI’s
Family Offices
Corporates
Sources @30% IRR over 5 yrs,
returns expected to be
4X of fund size
Fund size Return expectation

5. Arali Ventures 5
Decoding VC
The VC model is built on a few outsize returns
Scenario 1 (10 4X exits, 10 3X exits)
Exit value from 4X returns =200 Cr
Exit value from 3X returns = 150 Cr
Fund Portfolio strategy
Investments 20
Individual investment 5 Cr ( 3Cr + 2 Cr to retain pro-rata)
Equity 10%
Valuation 50 Cr
Scenario 2 (1 50X exit, 1 30X exit, 18 write-offs)
Exit value from 50 X return =250 Cr
Exit value from 30 X return =150 Cr
The POWER law applies. <20% of investments generate >80% of returns

6. Arali Ventures 6
What it means for founders
Expectations of outsize returns translate into these criteria
 Large addressable market
 Rapid Scaling ( achieving valuations of 2500Cr in 5 yrs, means hitting revenues of 250-
400 Cr – 500Cr in that period)
 Is the timing right? ( is the market ready??)
 Not easily replicable ( MOAT)
 Promoter(s) mindset & ambition
Understanding drivers of VC investments will help if it is right for you

7. Is VC right for you?
Key aspects to have clarity on before raising VC
Arali Ventures 7
 Overall Strategy, Vision for the business.
• Should you raise VC at all?
 Capital raise
• Is the opportunity cost of not raising going to be very high?
 Alignment of VC and Promoter/founder objectives
• Small funds might have a better fit sometimes for founders happy with smaller
outcomes.

8. Raising Venture Capital
how to go about it?
Arali Ventures 8
 Think of fund raising is an ongoing activity, esp if you are going to be raising multiple rounds
of capital. Budget for time and effort for the effort. ( typically, one founder takes on the mantle
and brings in others when needed
 Nothing beats a structured process, the benefits will last longer than the current raise
 Be open; truthful and honest to yourselves
Plan Research Organise Pitch
Negotiate,
Close

9. Planning
How much are you raising, to do what?
Arali Ventures 9
 Set milestones for the business
 Translate that into numbers, Keep it simple
 How much money needed to achieve what milestones
 Have a grasp on the numbers. It is your plan, not your
CA’s/banker’s.
 Be Frugal. ( We want to fund essential for the business, but not
your lost corporate salaries, atleast till the model is proven)
“Let me check with
finance/CA”
Unrealistic revenue
targets.
Inflated
costs
Higher than norm
promoter salaries
Exits to existing
investors
A well constructed plan speaks for itself

10. Research, Research, Research
And it is all not your market, product related
Arali Ventures 10
 List potential investors
 Shortlist based on track-record, intersection of thesis, stage, investments,
typical investments size, stage in the fund life cycle. Evolve a priority list
 Identify Partners, their history and track record
 Develop a hypothesis on what the right investor can bring to the table
Impress with your home-work

11. Structure
Winging it can only get you so far
Arali Ventures 11
 Start early, connect and build relationships with VC’s before formal fund-raise
process.
 VC’s invest in founding teams, as much as the idea.
 Set up and manage fund-raise as a sales process
 Leverage networks, actively seek help ( Corollary – you will get your pay-back
time as well)
 Focus on engagement; Design for getting feedback as a part of the process
 It is OK to hear “no”, better than no response at all
It is all about execution

12. Pitch
Converse, don’t pitch
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 It is about the business, not just the technology
 Business traction is worth a million slides & words
 Get your articulation right
 What is the problem you are solving / What is the value for customers?
 Why now is the right time? ( most successful startups weren’t the first in their markets!!)
 What is the competitive landscape?
 Underplaying competition is a warning sign
 De-mystify, de-jargonise. Don’t throw technology terms to impress
 It is selling alright, but doesn’t mean you have to speak all the time and cant listen.
 VC’s evaluate you on flexibility and ability to adapt
 Saying “I Don’t know, but I will figure it out” is OK
Keep it Simple, Listen

13. Negotiate and Close
Not the lawyers responsibility
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 Don’t be valuation-centric; be capital – centric
 In Early stages, valuation is just a derived number between funding ask and
VC’s equity holding criteria
 Understand and pay attention to T&C’s.
 Seek advice, guidance of ex-entrepreneurs who have raised capital before
 Don’t penny-pinch on legal advise. However, be wary of lawyers who will debate
every clause
 Pay attention to compliance. Again, don’t penny-pinch on good advisors
 Many a slip between the cup and the lip
 Deal is only done when the money hits the bank.
It is not – a – winner take all

14. arun@araliventures.in
Get in Touch