The perils of taking seed money from VC funds – By Deepak Srinath

I met three interesting startup’s last week. All of them were founded by entrepreneurs in their late twenties or early thirties, who had been part of product teams in other startup’s or global tech firms. The startup’s were pre-revenue or had just signed up a few customers. Typically, in the Indian VC context, these firms would be considered too early by ‘early stage’ VC funds to do a Series A. They would be asked to come back in 6 months time when they had signed up more customers and had discernible revenue traction. However, to my surprise, all of them claimed to have termsheets or were in serious conversations with VC funds – not seed stage focused funds, but regular VC funds.  What’s even more surprising was that the quantum of funding they were offering ranged from $200K to $500K, not the usual $2 million plus that these funds like to invest.

A few top tier VC funds have started making investments in the realm of angels/seed stage funds. When a VC fund makes a seed type investment, they are essentially purchasing a low cost option to participate in a full round if the startup shapes up well. Unlike an angel investor or a seed fund, a VC fund’s economics don’t work on a  $200 K investment; their economics work on making much larger investments in each of their portfolio firms. So how does this matter to a startup as long as they get the money, right? Maybe not, let me explain.

In most cases when a VC fund makes a seed investment, they contractually tie in an option to lead the next round, which is typically in the $2 to $5 mil range. If the fund exercises this option, the startup loses out on talking to other funds and discovering the best possible valuation and terms. If the fund does not to exercise the option, other funds will be very wary to investing in the startup. Their view will be that if the fund who did the seed round and has an inside view of the startup does not want invest, surely there must be something amiss.

A few VC funds who make seed investments mention that they do not tie in an option on the next round for precisely this reason. Nevertheless, with or without a specific option to invest, if the fund does not participate for whatever reason, other VC’s will wonder what’s going on.

On the other hand when a startup takes money from an angel or seed stage fund, there is no expectation that they will participate in a follow on round. Their model is based on investing a small amount really early and guiding the startup through to a stage where they are ready for a VC fund to come in.

For long we’ve bemoaned the lack of adequate seed stage funding in India. This is clearly changing now with the more angel investors and seed stage funds springing up everyday. From an entrepreneur’s perspective, funding at every stage is critical. However, if entrepreneurs have alternatives, they must think carefully before taking seed money from a VC fund.

Testing the waters: Our experiences as customers of start-ups – By Uday Disley

Being in the start-up ecosystem has its advantages, for one gets a firsthand view of new products and services which are at either a concept stage or at a beta stage. Now that the people in this ecosystem are most likely to evaluate start-ups from a business viability point of view, we at Viedea more often than not try out these products/ services as consumers. So has the experience been good? Well it’s been interesting to say the least, let’s see what we have here:

Enterprise Software company: Building an enterprise product is the holy grail for most in the IT products space, and there are plenty of them out there, trying permutations and combinations of various ‘features’, which unfortunately end up remaining just that, a bundle of features and not a wholesome product. We have used a software product of a start-up in the past, which had obvious issues of not understanding its users and their workflow well, and to top it had really bad UI. Whilst you may have the intention of building a great product, but one needs to understand that a hundred features, may not solve the core problem, which the product was to built to address in the first place. Verdict: Use this logic – Simple product = address core need = great user experience = happy customer

Printing services company: If somebody needs to build a great service platform, here is a case study. This printing services company came up about the same time we started off and we have been loyal customers since then (though not a volumes customer). What we like about the place is its clean approach to addressing a customer need and delivering the same with reasonably high service standards. Well let’s see what works for them – they have demystified printing for the consumer with a fairly interactive and easy to approach delivery mechanism, in other words the first time user is as comfortable as a regular user. Verdict: Consistency in service = happy returning customer

Consumer electronics company: Ok we have not been early adapters when it comes to consumer electronics, but that is set to change, as we took a big leap of faith and pre-ordered a tablet pc from one of the most talked about start-ups in the tech space. Well we have been tracking this company for the last six-eight months and if not anything else this is a superb study of how a product can be built, evangelized, supported and maybe even funded, by a community. For the community of supporters it has been an interesting and frustrating journey, for it has stood by this company through its development stage to product delivery stage, going through the teething problems of a start-up. Anyway the company has delivered the product in its first round of pre-order, where most of the users have been very happy, meanwhile the second set of pre-orders though much delayed, is eagerly awaited. Verdict: Hype and good response needs to be followed up with good customer support.

Apart from the ones mentioned above, we have tried various start-up food services, salons, online stores, bought bus tickets, books, with varying degrees of ‘customer’ satisfaction (or dissatisfaction). It’s a classic dilemma for somebody who follows the start-up ecosystem, while you want to support it to the hilt by buying and endorsing the product/ services, at the same time you as a consumer can’t stop yourself from criticizing a mediocre product/ service. Instinctly you feel for the start-up team and are able to relate to the teething issues that they might be facing, but at the same time you want them to succeed by pushing their limits. The start-up ecosystem needs supporters and critics to be consumers as well and in all fairness guess it just completes the loop.

%d bloggers like this: