S01E06

Raising early-stage capital? Here’s how this VC picks startups

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What should I put in my pitch deck? How should I approach an investor? Who’s the right investor for my startup? We cover these questions and more with investor Gopi Rangan.

Fundraising can be a stressful activity for most founders. It takes anywhere from a few weeks to months to find the right investor and convince them to invest in your idea. In this episode, early stage investor Gopi Rangan tells us how he looks at companies and shares some effective strategies to raise capital. 

“The best time to raise money is when there’s an inflection point in the business. When you can show some traction, the traction could be as simple as building the right team or showing some early progress with the product and in the market,” says  Gopi, the founder and general partner at Sure Ventures, a seed-stage venture capital firm based in Silicon Valley. 

Edited Excerpts.

Q.  Let’s start with your journey, you have a bachelor’s in Engineering and masters from  Indian Institute of Technology and Arizona State University, respectively. Then you were a venture capitalist for almost a decade before you started Sure ventures. Can you walk us through your journey and what has influenced your worldview? 

A.  I’m shamefully overeducated. I also have an MBA from INSEAD which helped me transition from the engineering world to the business world and that’s how I got into venture capital. A pivotal event in my life was this car crash I was in that opened my eyes to many different things. 

Years ago, when I was a new immigrant in the US I had just graduated with a Master’s degree at Arizona State University. I got recruited on campus. I got a dream job in Silicon Valley and moved to California. I bought a new car and a couple of months into that I had a really bad car accident on the freeway driving at 70 miles per hour. It was a hit and run.Thanks to German engineering, nothing happened. I was safe but the car was completely totalled. That event shook me. It made me think about risk in general. It also made me think about money because it was a brand new car and I had no business buying a brand new car at that stage in life 

The incident made me wonder if I didn’t have insurance, that safety net to protect me financially, what would have happened? That was the moment I realized that there are two activities that we all pursue. One activity is to accumulate assets.

The asset could be knowledge or physical assets like buying a home, a car, or other types of things. That’s what we work towards. The second activity is  to protect that asset, make it not go away when bad things happen.

I focus on the second aspect because that is what levels the playing field and makes the world a fair place. It’s unfair if one person has to take huge risks to get the same reward as the other person.

Having access to products like insurance and other solutions like it, is a great way to build a fair and equitable world and allows us to take risks. That led the thesis for why I started Sure Ventures. I wanted to think about what I want to do for the next 20, 30 years? And that mission to enable peace of mind was front and centre of that.

Q. What are you excited about in the insurance space in the near future?

A. In developed economies like North America and Europe insurance is well established. Some companies have been around for more than a hundred years. But unfortunately the products and the services, are all stuck in the stone-age, even with the infrastructure of all these companies. That’s one aspect of it.

In emerging economies like India and parts of Asia the percentage of penetration of insurance products is so abysmally low. That is something that we need to change. Huge opportunities are coming up in the future in the next 10, 20 years where new products will be designed and new infrastructure will be put in place to access new customers.

Nothing has happened in the past 50 years in terms of how products are designed and how business models are innovated. It’s just a total greenfield. 

You can build whole new products without having the legacy of old school thinking, stopping you from creating new ideas. That’s why I’m excited about this sector. 

Q. Tell us a little bit about Sure Ventures and what you focus on

A. At Sure Ventures, we focus on the earliest stages. I’m the General Partner in the fund. It’s a solo GP fund and I have a partner who works with me very closely.

The two of us brainstorm on every important decision that we make. Our investments are usually at the pre-seed or seed stage. Sometimes maybe a little later, but usually after the company raises a large Series-C or a Series-D we’re out. We don’t play a role in that area.

We invest early. The earlier the better. Scary early is perfectly fine for us. That’s the way we look at opportunities. We typically invest in startups that raise the first institutional round of capital, the first $1 mn – $2 mn  of capital that they raised. Our investment is usually about $100,000 to start with. These startups may have raised angel investments before they raised the round of funding.

Sometimes they may have gone through an accelerator, but it’s not necessary. Sometimes they go through the accelerator after raising funding from us. So there’s a phase where the company is ready for institutional capital. They want to bring in professional venture capital investors into the mix.

I see companies at pre-revenue all the time. I definitely see pre-profit. They don’t need to be cash-flow positive at all. Sometimes they have early customers that have some revenue. Sometimes they don’t have a product and they are still fishing for the minimum viable product (MVP). 

Sometimes maybe there might just be a prototype or they have a concept for it and it’s a pre-slide deck. In fact, most of the companies I invested inhave typos in their slide deck.

Q. So you look past the typos on the slide deck?

A. I love the typos. The typos are real. The whole startup game has been so professionalized, the pitch decks and the demo days and the elevators pitches, all of those things are perfected. And I feel like entrepreneurs spend too much time perfecting the art of pitching.

I would rather spend time with them to figure out what kind of business they want to build and focus the effort on that. I want to save them time on perfecting the pitch. Sometimes it makes me wonder because when there’s a perfect pitch, I have to put the effort into finding out the real story behind it. And that takes a couple of extra meetings. I would rather have them come to me the way they are.

Q.  As a founder, what do you need to include in your pitch deck when approaching an investor? 

A. The pitch deck educates me. It tunes my mind for the conversation that I’m about to have with an entrepreneur. It helps me understand. What is the area of focus? The background of the entrepreneurs and it gives me a teaser on the concept and their vision, i.e. why they’re doing what they’re doing.

But a big portion of the substance comes from the real meeting, not from the pitch deck. As a founder, you want investors who are waiting to listen to your story and are informed and have done their homework. 

Before every meeting, I try to research and understand a little more. The reason is that in the end, I know where I stand. I’m reasonably smart, but the entrepreneur is exceptionally brilliant. If they are not, I shouldn’t be investing in them.

If the deck is structured in a way that shows what the problem is, who has the problem, how many of those people exist in the world today, what might happen in the future, what are the different ways to build a solution in that space? Who are the others in that space? It’s great to have some competition. It shows that there’s validation in the market. Or is this a business, that’s building a whole new category? 

Outlining the risks is also very helpful. What are some challenges that you are anticipating? Where do you need to find resources to overcome those challenges? 

That’s the purpose of the pitch deck. I don’t look for beauty and design in the pitch deck. I look for insights that I can get out of the pitch deck, which will prepare me for the meeting. 

Q. What is your approach when it comes to VC, would you say it’s more of an art or a science? 

A. I want to say it’s more art than science. The caveat is it’s not just all intuition, that’s not how it works. There is a significant subjective component, and it’s very difficult to turn it into a formula. 

I’m a big believer in data-driven decisions. There’s a significant lack of diversity in venture capital. Mainly because people invest in people who they know and who are often very similar to them. And that breeds a lot of bias within the system. Entrepreneurs who don’t have that  privilege are significantly disadvantaged. 

For us to change that, on one side, it’s the right thing to do, but also from an investor point of view, it’s an opportunity. If people aren’t investing in great entrepreneurs, just because they have biases, it’s my opportunity to take those shots.

I don’t look for a formula, and it changes case by case. Sometimes it makes sense to look at the market, sometimes it doesn’t make sense to look at the market because the market itself is not there yet and we’re expecting the market to show up three to five years from now.

So at that stage, how can we do market sizing? We can do all kinds of analysis and we can do all kinds of hypotheses, but it’s all theoretical. Everything will change in the next six months when we realize that the product needs to be slightly different and we’re now chasing a different beast.

I don’t focus a lot on analysis paralysis. The number one thing that is important to me is a long term commitment to a mission. I look for the combination of entrepreneurs with great skills and unique insights combined with the right idea that they can pursue. 

Q. When should a startup founder look to raise capital, whether it’s pre-seed or seed capital, is there a certain point at which I should go out and look to raise from an institutional investor versus an angel investor what’s that point at which I make this call?

A. The nomenclature of pre-seed, seed, Series-A, Series-B keeps changing and I’m struggling to figure out what they all mean. In the early days, Series-A companies raised $2-3 million, that used to be Series-A. But now some startups raise a $40 million Series-A and I have no idea what these mean anymore.

What is more important is where is the company? What stage is it? What do they need money for? How much do they need and what kind of investors do they want to bring onboard?

The best time to raise money is when there’s an inflection point in the business. When you can show some traction, the traction could be as simple as building the right team or showing some early progress with the product and in the market. When you have that conviction that, okay, this is really going to unlock potential and we can leap to the next stage if we raise some capital and pour more into what we’re already doing and it’s working very well, that could be the time that is often the best time to raise money. 

At the time of raising money, it’s important to think about it from a perspective of how long will this money last, how much do you want to raise so that you can focus on business without having to focus on fundraising for a while, what is that period? Often the period is about 18 months or so. One could argue that in today’s environment when things are so volatile and there’s so much unpredictability in the macro market, you may want to push that a little more. In the upmarket when things are fantastic, you could shrink that 18 months to 12 months, or maybe even less than that.

At the earliest stages, it’s more important to bring the right people on the bus. It doesn’t matter what brand they have and it doesn’t matter how much money they have, those things are secondary. The most important thing is to bring the right person on board. 

As an entrepreneur, you want to think about, is this person a great signal to bring follow on investors, in the next round of funding, is this investor a great signal to hire new candidates?

Can you go up to a candidate and say, this is the investor that is backing us, and therefore you should join the business. Can you go to a customer and say that this is our investor that’s on board with our business?

Q. A lot of entrepreneurs have cautioned you shouldn’t be ideally raising money from really big funds because it’s a huge signaling risk if they don’t do a follow on investment for whatever reasons.

A. You pick any large fund, it has a billion dollars and if they’re investing at pre-seed or seed stage, you begin to question, will you get the top partner at the fund? No. You are going to get a different partner that’s junior or new to the fund, and they’re still exploring the relationship.

If you get an investor like that, what if a year or two later that investor says, you know, I liked the team and everything, but you know, this is not for me, I’m going to do something else. Now, what happens to the investment? It’s stuck with the firm and you get a different partner that’s going to inherit the transaction. That is tough. This happens very often with corporate venture capital groups and when the characters change that changes the entire dynamics and now you are stuck with that investor on the cap table who may or may not add value and often will be detrimental.

That’s why it’s very important to bring someone who is aligned with where you are with the business.

Q. Tell us a little bit about building those early teams, the first few employees? and later employees? 

A. Let’s start with the different phases here. The founding team is usually a collection of people who may or may not have worked together and it’s good to have some chemistry, but if you wait for everything to come together to start a company, you’re never going to start a company. So sometimes founding teams come together without having worked together for long periods.

The strong pattern I see with successful founders is that they are slightly above average on the confidence level. They are not super overconfident that they dismiss everybody else, but they are not under-confident also.

The first set of employees are usually experts in certain areas. It could be a technology expert that understands specific things like machine learning or artificial intelligence. It’s also important to bring employees on board who can round out the team. Founders usually have a set of skills and a view for how they want to build a business, but it’s nice to add a few people that will help create a full team. 

Maybe the founders don’t have a lot of business development skills so they bring someone on board who can help with the business side. That’s the role of an early employee, more than the skill they bring. It is important to have alignment with the founders on how they think regarding their vision, their values, their leadership style, their management style that is going to bring the best out of their skill more than just the hardcore skills itself. 

There’s a beautiful Harvard Business Review article that came out many years ago. It was a two by two matrix that talked about what people bring on board and it talks about competent jerks and lovable fools. If you do a two by two matrix on one axis, you have the skills and the other axis is how easy it is to work with them. You want the top right card quadrant where people are fantastic and they also have great skills. You always want to avoid people who don’t have the skill and are difficult to work with. But between the other two choices- people who may not have a lot of skill, but they are great to work with, and the other choice where they have exceptional skills, but they’re difficult to work with. The early employees will fit under the lovable fools category.

They don’t have certain specific skills, but they’re much easier to work with. They will wear different hats and be willing to learn. As you go further and further in the business, it’s okay to work with competent jerks because you’re looking for performance. At the founding stages of the business, amongst the early employees, I like the lovable fools. It’s perfectly fine to bring someone on board who doesn’t have a lot of experience but is super interested in an area and they are willing to contribute. 

Q. If you were to advise somebody who is starting their career in general, what would your advice be to that person?

A. That spark of entrepreneurship is present in everyone. Sometimes that spark dies out along the way for various reasons, especially with middle-class people. We get into the rut of salary and once you go into that and you stay with it for a while, you get used to that predictable salary coming in, which by the way, is not always going to be predictable. Things will change abruptly without your control, and you have to get used to it. Keep that spirit of entrepreneurship alive, it’s not about age, it’s just a question of mindset. When it is the right time, you will have that slightly above-average level of confidence, to go and say I’m going to build this and keep this alive and that will allow you to build something on your own. 

If you can keep that spark alive for as long as it takes for you to say, ‘I’m going to start my own thing’. I think the world will benefit. We need more brilliant entrepreneurs who can build innovative solutions and change the way we live for the better.

Q. Thanks so much, Gopi, do let our listeners know how they can get in touch with you?

A. I have a podcast called The Sure Shot Entrepreneur. I interview venture capital investors and ask them questions about how they make decisions. My goal is to show insights on the process of an investor so entrepreneurs can learn more about this black box of venture capital. That’s how I hope to be able to promote the spirit of entrepreneurship, light the spark and keep it alive for a long time.

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