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A penny for your thoughts, pretty woman, or the myth about raising capital

“What follows may be considered as rated material in some parts of the world. If you are juvenile masquerading as an adult this is about the right time for you to move on to the other unrated posts.”

There is no easy way to say what I am going to say. Please forgive me.
It is not directed at you, and certainly not at every one who has helped us out in the last decade or two. If it causes offense, it wasn’t meant. Shock on the other hand is an entirely different story.

Part I – The way it will never work for you

Here goes.

I never thought I would end up prostituting grand plans for world domination for a few thousand dollars and change.

Sometimes with shame, sometimes without.

I have done it a handful of times now, as recently as yesterday, as early as ten years ago. The normal answer was always no. Sometime a kindred soul would turn around and say yes and drop a cheque.

But these yes’s, as rare as they were, had a lot more to do with “you need the money, take it; change the world, if you want; we don’t care, we just want you to be happy”.

There were times when I couldn’t do without capital. I admit it and by intent, design or environment we always raised only what we needed. Enough to make a difference, not a dollar more. Without this much needed injection of funds, whether it was Avicena or Alchemy, we wouldn’t be where we are.

The people that we raised capital from didn’t do it to make money on the transaction. They didn’t care about valuations and exits. Nice fringe benefit to have, but their primary motivation was always helping us out. We could put the money to better use than just letting it sit in the bank. They trusted us to be fair.

But then about a year ago things changed. We did the MIT workshop, started thinking about moving beyond a rinky dinky, itsy bitsy, little Pakistani company.

Step one was moving away from a single product operator to a multi product platform. If you thought building one product was hard in four years, how do you plan on scaling to four products on a single platform in the next 12 months? We needed help across the board; people, talent and tools.

Surprisingly enough for a first round, we didn’t have to go look for capital. A client (three year old relationship) wanted to invest, we sat down and chatted. Four conversations and a brief excel spread sheet later, we shook hands. We spent 10 minutes on valuation another five on the Share Purchase Agreement (SPA) and that was that.

Three weeks later money was in the bank. Two months later we finalized the SPA and signed.

I wish I could say all fund raising happens like this. It doesn’t. I don’t know who was praying for us or what led the planets to their alignment but this is certainly not how fund raising will work for you or even for us. If it does, take the money and run.

There is no Pretty woman in real life. That was just a movie.

Part II – A primer to pimping yourself

Back to pimping! What is involved in raising capital?

For an investor, the criterion to invest is simple. Can you make money for me? How quickly?

We are not talking about grace, elegance, vision or contribution to society. How long would it take for you to execute on a simple plan to increase the valuation of this company by 10 times and exit. Notice the focus on the three key words. How long and Simple. That is all there is to it.

A simple plan is easy to execute and even easier to explain. A simple plan makes a great story. Investor like great stories that originate from simple plans. Investors don’t like complexity because it raises the bar. It adds more unknowns. Complexity turns execution into a question mark.

As Guy Kawasaki puts it – your input costs 2 dollars, your output sells for five dollars, you make a dollar on every transaction; the market will buy everything you can produce. That is a simple plan, and it works every time.

Length is the second variable. A company with a ready product and a track record of customers and execution is easier to flip. The product is ready, the customers are raving, the business case and possibly the model are proven. All you need to do is add scale, run up revenues and flip. A year, two years, three, before you know they are in and out and every body’s a winner. Investors love short tailed winners. Complexity lengthens the tail.

Good. That sounds simple. What is the catch?

Simplicity, execution, length and delivery on a short tailed great story flip are all linked to one key word. Credibility. Track record. History. Which unfortunately you don’t have! What is your profile again? Semi hungry, broke, startup kid with stars in his eyes. When was the last time you pulled a stunt like this? Sure you say you can do it, but why should I risk my money on you, when there are far more safe bets around? Give me one good reason? Prove it

Prove what? That this is Pretty woman, not your imagination, but real life…

Show me a bunch of raving customers who have paid good money to work with you. Show me a pipeline of more who are dying to get in the line. Show me the money you have made and what you have done with it. Show me the truckloads you will make and share with me. Show me how good a pimp you can be, if I open my checkbook and sign.

Can you. If yes, then let’s sit down and chat. If not, you can quote whoever you want, dream whatever you need, rant whatever you wish, your dream will remain a dream. Shut up and stop wasting my time and yours.

Part III – Hope?

Does that mean you should go back to your dreary grey cubicle and face another day of mediocrity, abuse and arrogance? No it doesn’t. All it means is that your chances for getting funded get dramatically higher if you can do the following

  1. Get customers
  2. Get them to pay full service
  3. Make money on the ones you serve
  4. Have a growing list of new customers who are going to join the queue

That is all there is to it. Get this right and you won’t care about capital. Get this extra-ordinary right and you will have to switch to an unlisted number because capital will be chasing you all over the world.

And how do you go about making (a) – (d) happen.

You already know the answer. Two word. Focus and execution. You have to start small. You have to make it work first for the little guys before you can make it work for the big guys. An unresolved problem that just went global is not a problem that you want on your plate. Once you get it right for one market, you can extend your reach. But you need to get it right for that one market for anyone to take you seriously.

Without that one market, you are just another pretty woman.

 

(Don’t take my word for it; hear what Guy and the initial group of investors who put money down in Google have to say about it.)