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Early-stage startups should be wary of fund-raising pitfalls

BENGALURU: Entrepreneurs nurturing young companies are liable to strike poor bargains with investors in their quest to raise money, according to startup industry practitioners, highlighting the need for caution about an event that is widely regarded as rite of passage in the life of company founders.

“In a market where investors are autorickshaw drivers, and startups are passengers, the rickshaw is still overcharging them,” said Sharad Sharma, the cofounder of software product think tank iSpirt, on Friday. Sharma was speaking at an ET Roundtable on the subject, ‘Are Investors Taking Too Much for Too Little?’ Niketh Sabbineni, cofounder of Bookpad, maker of a document handling tool that was acquired by Yahoo last September, and Rutvik Doshi, director at Inventus Capital Partners, were the other speakers.

The fund-raising successes of companies such as Flipkart, Snapdeal and Olacabs for valuations in the thousands of crores have created a widespread impression that copious amounts of money are waiting to flow to back Indian entrepreneurs. Overall, entrepreneurs are giving up less of their company for more money, but it is still not ideal, the panelists said.

Sabbineni said that while some companies may get a lot of attention and funding, others, especially those looking to gain a foothold, are in danger of under-selling themselves. “Early-stage companies are still taken for ride,” said the former CEO of Bookpad that was acquired by Yahoo last September. The Bengalurubased company had raised an angel round through convertible debt a month before it was bought over. “We also struggled in the initial stages. It’s a big problem, if you are given a free wireless credit card machine but take a royalty for life, you should ask questions.” said Sabbineni.

Sabbineni, who has become an angel investor after the acquisition, said he chose the convertible debt route for his investments as one could secure funds without settling on a valuation on a company. This is a type of bond that the holder can convert into a specified number of shares or cash of equal value in the next round of funding. Doshi of Inventus Capital Partners said that the relationship between the investor and the startup founder is guided, in large part, by demand and supply. While the amount of money available has increased, so has entrepreneurship multiplied manifold. An important development, he said, would be a big increase in the amount of money Indians are willing to allocate to back startups. “If there are more Indian investors putting in rupee capital, the demand-supply gap would correct itself,” he said.

Inventus has invested in companies such as online bus ticketing firm, and car rental company

Sharma, a former head of R&D at Yahoo in India, said entrepreneurs must discriminate between ‘quacks’ and ‘investors’. Too many people with too little knowledge of investing are responsible for the imbalance, he pointed out. As for startups, “Entrepreneurs should trust their gut, have emotional certainty but at the same time have intellectual uncertainty.”

Sabbineni of BookPad added a company’s financial health would give it leverage at the time of raising funds. “Work towards becoming cash-flow positive before every round of funding. That puts you in a better position,” he said. An alumnus of IIT-Guwahati who has been an angel investor since he sold his company, Sabbineni said he has been on both sides of the bargain and, therefore, makes it his business to use fairness as a guiding light.

All three were of the opinion that it is vital to encourage greater dialogue and knowledge-sharing between entrepreneurs who can learn from each other. “We need a founders’ union,” said Sharma

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