HOW TO CONVINCE A VC | METASTARTUP #25

sir we're a newly launched startup sir and we're looking for funding tell me more we have an Innovative idea that solves the problems of real does it have ai sir we don't have ai does it have blockchain sir I don't think it's a fit for us see sir sir invested in a startup sir which startup man yes sir they're selling milk sir milk oh my god when I started off with YouTube I was giving you guys purely advice I was just like hey you know this is how you do things but then over time with feedback I realized I have to give you more pragmatic advice which basically means here are my personal learnings and this is an anecdote from my past that kind of puts this point that I'm telling you guys about in action what I've realized is that Millennials today are junk food Seekers which means that it's not just the kind of food we eat that's unhealthy but also the kind of content we consume we want junk food quick fast entertaining interesting because our attention span is super low so what I have to do is create content in a very entertaining way it's like one of those dirty greasy burgers and then seal my valuable information and how to actually run a startup in between that so I have to sandwich um you know really good content in between junk food so that's the reason I did the skit in the beginning of this video I don't mean to offend any venture capitalist with that skit but the entire reason I did that skit was I want you guys to learn so make sure you subscribe to my YouTube and follow me on Instagram because who knows how I'll evolve as a content creator in the future not only do you get to absorb awesome startup content you might also get to see me change as a content creator because hey I'm doing this for the first time just like some of you guys in the future now let's get back to the topic I have been on both sides of the table both as an entrepreneur who's gone out to raise funding and as a investor who's looked at several different you know entrepreneurs pitches and decks and so on and so forth and one of the biggest dilemas that I faced you know when I got a deck for the first time was there was this one company they were in the grocery space you know they had a lot of data they were doing $1 million annual recurring Revenue but I just didn't know if they were a good investment right I was just like okay I have the deck they seem their numbers seem to be good but I needed some validation is there any other investor investing um you know I really I couldn't tell whether the startup was good bad or ugly while Avalon's Venture arm makes smaller Investments than a traditional VC we usually invest about $100,000 per company we enter sometimes we invest a little more than that um but the mechanics are similar before I did this video I had a lot of candid conversations with many different Venture capitalists across India and you know I asked them what are the intricate challenges of your job right how do you actually judge a particular entrepreneur

how do you judge an investment especially if it comes in cold and you have you know a very short amount of time to make a decision you see what I realized was that most investors as well as myself we're genuinely confused about whether we like a startup or not and even if we're genuinely confused about why we like that startup one thing that's common between Avalons investment wing and other investors is that we all want to bet on winning ideas we want to engage with high performing entrepreneurs in large Market spaces who are going after big problems um the only thing is it's such a high-risk space and there are so many variables that determine whether startup succeeds or not simply because there are so many variables involved an investor must actually use thumb rules right and by thumb rules it means maybe there are a million variables involved in a startup success an investor has to say look I'm only looking for these one two three things that I think are thumb rules that can kind of tell me or give me some assurance that hey maybe these entrepreneurs or these Founders are able to tackle the bigger subset of variables that are out to get them some of these thumb rules can be as simple as is the founder a very driven person who's a visionary is the market big enough what I've kind of realized is that most investors will decide internally whether an entrepreneur is a winner or a loser in the first 10 seconds of a conversation and Avalon is no exception to this rule we get sold within the first 5 to 10 seconds of our conversation with an entrepreneur not even 5 to 10 minutes it's that first hello and the first you know that's the entry slide of the slide deck that kind of decides am I really interested in this or should I just you know kind of switch off for the next 15 20 minutes that's how I think you know I want to be respectful to every entrepreneur that pitches to Avalon so does Shashank my co-founder but sometimes you just know there's no way in hell we would invest in a company but as a respectful investor who's also sat on the other side of the table we give the entrepreneur his 15 or 20 minutes his or her to kind of display what they have even if we know in the first 10 seconds we will not invest in a company the big problem is that once our mind is set on whether somebody's a winner or a loser and the same thing with most Venture capitalists once a VC has set in his head whether a startup is a winner or a loser it is very difficult to change their mind so you have a very short window to convince a venture capitalist that you are a good fit in the skit I did I showed you an example of how an investor invests just because somebody else is investing you know that validation from other investors you might think that hey you know what these Venture capitalists are not so smart after all if they you know if they claim they do their own thing but look for validation from other investors but the problem is at Avalon we do the same thing too and if you somehow landed up with a lot of money or you were managing other people's money you would do the same thing it's a very human process to look for validation especially when you're betting so much money remember I told you investors are looking for certain thumb rules one of the strongest thumb rules or signals is another investor investing which is why I always mention to most of the entrepreneurs that I work with go get your first investor get your lead investor who will lead the round and then the rest of the investors will follow suit it's not that hard once you get one person to bite also one of the difference between Avalon and most other Venture capitalists is that apart from the fact that we invest less of money um this is also not our primary job right we don't manage other people's money whereas in the traditional Venture Capital World these VCS are actually fund managers they manage other people's money so they have maybe 10 or 15 different limited partners who are people who put money in the VC and say Hey you can go out and do a good job finding these companies and when you're managing your own money or in Avalon's case when I make an investment decision it's pretty much me and Shashank and you know a couple of other people on our board who were just like okay should we do this should we not do this and that's it right that's how we make our decision whereas with traditional VCS it's other people's money right so they have to show and prove to those other people that look we're making the right Investments at Avalon we've written off Investments sometimes Investments don't work out it's okay you know we swallow our own pride and we say hey we became better investors but with Venture capitalists they have people to answer to right and typically those are lots of people so a traditional VC's job and his own credibility as a venture capitalist is on the line whereas for us our primary business is the services business and the products that we own and the investing arm is something we do on the side because we're like hey you know maybe it makes sense to invest in a couple of companies that show promise and Mak sense in the Avalon Network now I know there are a few VC friends of mine who watch the first 10 20 seconds of the skit and are going oh you know that's not us well obviously the skit was over dramatized um and I am yet to meet a VC uh in all my interactions who has a fake accent um so obviously you know take it with a grain of salt most people watching this please do remember it is wired in our brain to seek validation I do it when you get rich you will do it too but in general most Venture capitalists I met are smart people right you can't manage millions of dollars of other people's money if you're not smart but at the same time they are susceptible to the same biases that all of us are as an entrepreneur I've been doing this for more than a decade right and that experience kind of allows me to enter Uncharted Territory I take a lot of risks that other entrepreneurs would be like oh that's probably a little risky for us as an entrepreneur I can pretty much confidently say that I don't care about what anybody else thinks especially when I enter a market if I believe something will work I will go ahead and do it without seeking validation but as an investor I'm still very much a newb I've only been doing this for a year and a half so I'm learning a lot along the way hopefully and my goal for myself is that over the next 5 to 10 years I become good enough to be able to take risks that nobody else can take right I'm talking about massive Financial risks in other entrepreneurs um but that day is Yet to Come and hopefully we'll learn this together just like my Evolution as a content creator maybe my Evolution as an investor is worth watching out for as well either I'll end up making really outrageous bets over the next decade or I might just end up making a fool of myself either way this time it's going to be televised in this video I'm going to go through three things that every venture capitalist looks for and what's the best way you can pitch these three things while being cognizant of them the first thing that an investor looks for is the

target market the biggest question on any Investor's mind including our minds is how big is the market so generally what happens is after a year or two years into a startup's life cycle a startup will generally stumble upon something called a cost of acquisition of customer then the startup will go to venture capital and say look we've kind of nailed our CAC and the CAC is say 2,000 rupes per customer and we're making 5,000 rupees of each of these customers that we acquire so now the startup knows that its profit margin is 3,000 rupees then it's very easy for a startup to make a case for the VC and say look you know we make 3,000 rupes per customer this is how we acquire them then the only math left to do for the investor is how many such customers can you tap reach so as long as the difference between the revenue per customer and the cost of acquisition per customer is a positive one then Venture capitalists know that as long as they keep pumping in money the company will continue to make more money right then just you know after your series a which is your first formal round of funding it's just about throwing more money at the problem acquiring more customers and scaling everything right um and Venture capitalists know this but what generally happens is that there is a ceiling in every Market the difference between total addressable market and just the total Market is addressable means you can actually reach out to these customers whether it's through ads whether it's through you know a billboard going out there right in front of them it doesn't matter the addressable Market is what part of the total Market can you actually tap and reach out to there is not a single serious VC in the world who will invest in a target market or a total addressable Market that is less than a few billion dollars in size the bigger the market the better remember these folks want to put in big money and reap even bigger returns I learned this the hard way in early 2016 I made an investment in a company uh called Alpha armor which you know it was run by a pretty smart entrepreneur who made gym apparel and the way I was thinking was that look you know I would buy gym apparel because you know I go to the gym once in a while and you know I'm pretty sure there a lot of other people who would want to buy this you know these tank tops and these gym shoes and this sipper and so on and so forth so I put money in that company not a lot of money that was more like a personal investment now the entrepreneur spent a year doing this and then came back to me with a simple conclusion there are a very small number of people who are actually into Elite Fitness and bodybuilding in India even if we tapped and sold to every single one of them we would still not make any reasonable amount of money as a company they had hit the ceiling of the market very quickly within a year and they just realized there's no more room to grow that just even if they put more money into acquisition and reached out through new channels the people who were into serious bodybuilding was still this was still a very small number and I learned the hard way that if I don't look for a market that's really big this business hits a ceiling and you will only end up making a few lakhs per year the total addressable Market or the revenue potential in the market can be easily calculated through a simple formula the formula goes like this the average revenue per user multiplied by the total number of users that are directly reachable or addressable through any form of marketing the bigger the target addressable Market the more interest you'll get from both Venture Capital investors as well as smaller funds like Avalon we love investing in massive markets especially massive markets that you can reach digitally instead of you know going in front of them one of the advantages we have over smaller Angel Investors or you know Venture funds is that we actually understand marketing very well so we just open Google Trends or Facebook audience insights and see when an investment comes in when a potential deal comes in whether the target market is actually big enough so that you can reach these people on Facebook the second thumb rule that a VC

looks for is evidence so fundamentally there are two ways to present your evidence a through a story and B through actual data what I've learned is that data is King if you have solid evidence that your startup makes sense that those three numbers that I spoke about make sense The Tam um the cost of acquisition per customer and the revenue per customer those numbers make sense nothing like it but if you're say startup chance are you don't have those three things nailed down perfectly but maybe you have one or two customers that are already using your product that are already paying you for that product two or three customer success stories that forms a good story you say look I've had two people I don't know these numbers yet and I'm trying to figure out these numbers that's why I'm raising Capital right but during this kind of graph I've helped this customer and this is a real need and I'm also telling you that the market is big and how you think there are millions of billions preferably of people across the world that you can help with the exact same solution that you've built when I meet a lot of budding entrepreneurs they come to me and they say look we have this product it has feature one feature 2 feature 3 feature 4 guys and girls you need to face this Venture capitalists don't particularly care about your features because they know that the customers don't care about the features either the benefits are basically what your product accomplishes I mean you can just pull out an iPod and say hey this allows you to carry thousands of songs along with you right whereas when you're pitching features what it sounds like is hey this thing has 4GB of digital music storage which Venture capitalists don't really care about it's the benefit that matters more whether you want to build a deck from a storytelling perspective or the data perspective I have you covered in the next video so don't forget to subscribe and follow me on Instagram because I always keep putting out small bits of information that are useful that I might not cover in my videos imagine you come to me or any other venture capitalist and you say look I want millions of dollar and here's my deck think about if you had a lot of money say million dollars with do and you had to invest this million dollars and hundreds of entrepreneurs came to you on the first week and they said you know we want your money chances are if you managing a million dollars of another person's money you would not make that decision instantly you would think about it and you say okay maybe I should invest in this entrepreneur oh but maybe this guy's good as well I only have a limited amount of money so what you would do is

you would build a relationship right it takes some amount of time until you get familiar with the entrepreneur because it is possible that an entrepreneur comes takes the 1 million and then never shows up again right so you want credibility you want someone who's been there for a while so you build a relationship a pitch deck is the way to build a relationship with a venture capitalist now if I was on the market raising Capital what I'd do is I'd first send a pitch deck or get an introduction and then send a pitch deck and then tell the venture capitalist look I'm not looking for money right now but I want to build a relationship is it okay if I send you a bi-weekly report on everything that's going on in X company right and that's the right way to do things you build a relationship and you find a way to send them an update every 2 or 3 weeks now I want to talk about the third and the most important point in any venture capitalist book right this is the biggest and the most important thumb rule um I remember a quote from Vijay Shar Sharma where he was like I don't invest in the bus or where it's headed I driver one of the things that we look for and every top tier VC will look for is grit right grit or you know Paul Graham causes formidability uh it basically means is this guy or girl capable of getting anything he wants to or she wants to despite all the obstacles in their way is this person a winner or is this person going to quit

Venture capitalists do not invest in quitters there are a lot of startups that fail and who've raised millions of dollars who failed but chances are their Founders have gone through many many obstacles before they finally said I quit right startups are so hard and it is so easy to quit but vure capitalists are looking for people who will not quit and who always get their way a lot of you who want to start startups and I've said this many times before it is so hard and it's not very hard when you have one or two people but once you have a team of 40 50 people if you miss one payment you are basically screwed and you're screwing the lives of 40 other people right at the same time that you're doing cold calls you might have to clean the office and this is something these are all things that I've done right so it's just it's a very tough situation to be in and that's why venture capitalist look for people who have the grit another thing about good Founders is that they understand their domain very well which means that if it's a Founder who's talking about medical technology the founder needs to know that space very well because in one or two questions you can tell whether the founder is good at it or not a personal experience is that before I started job Spire I knew nothing about recruitment in fact I didn't know what a notice period was until 6 months into my journey into job spire and most Venture capitalists that I met until then could tell right could just be like hey you've never had a job before you've not been exposed to this industry and what I did was I went and I spoke to hundreds maybe thousands of people were both recruiting as well as looking for jobs or have had jobs and bad scenarios of jobs before just to absorb all that information I became a domain expert without actually having to experience this but that took me a lot of time I believe that if I was out of college and I had to do all of that research I just wouldn't have managed I would have wasted months right so Venture capitalists are expecting to do your homework and know your industry inside out now finally I want to end this video with a little bit of

advice many times a VC will come to you or you will go to a VC and the VC will say no to you this is classic rejection right this is a rejection game every 10 VCS you go to nine of them are going to say no can you imagine that there were companies like Facebook and Google that venture capitalist have rejected these went on to become huge companies what I've started noticing is that there is a general trend for most VCS to be quite old and I'm talking about 35 Plus which is not too old but it's still old enough and what generally happens is these guys are pretty much disconnected from most of what's happening in the millennial World Imagine Snapchat Snapchat's target audience was kids right people like you and me and Millennials and you know people under the age of 28 at maximum um but mostly for to 16 and 17 year olds most VCS did not touch Snapchat with the poll they were like disappearing pictures that doesn't even make sense we're going to stay away from it so what I've realized is that especially in India most Venture capitalists don't understand businesses that are directly focused towards Millennials unless the VCS themselves become younger so if an old VC says no to you I think that you shouldn't worry about it too much if you understand your Market well and you are young that's why I have so much hope in young people right because when we're young you are also the target audience so you can see things that other people can't right I don't understand how the typical 15-year-old things it's very difficult for me to know what is it that influences their daily lives today maybe 10 years ago when I was 15 I knew exactly how it worked but I do not understand how the 15y olds today think so while I'm not the best person to make a product for a 15-year-old I am somebody between the ages of 20 to 30 because I understand that Target Market very well and I employ people in that age range too so as a team we understand that TG very well but a VC who's a little bit older might say no to your idea without fully understanding your Market which is why I believe if you're a Founder with grit that is working in a large target market that you think you understand better than any older person you know if you're the target audience too um you should go ahead with your idea right you should go and give that idea Your Best Shot possible and maybe a few years later you'll thank me for it although one really weird Trend that I'm noticing is that a lot of VCS are getting younger right a lot of Partners and deal flow guys are starting to get younger because it seems like these guys understand the world the best and are most connected with the biggest driver of change the internet all right guys that's it for this video in the next video I'm going to teach you how to make a pitch deck whether it's actual storytelling or whether it's actual data storytelling um I'm going to help you make a pitch deck that runs you through the entire process don't forget to subscribe to me on YouTube and follow me on Instagram