Dr Apoorva Ranjan Sharma is a seasoned veteran in the startup sector and a serial investor. He is a seasoned veteran in the startup sector and a serial Investor. Dr Apoorva is a globally acclaimed angel Investor, speaker and previously been a speaker at RISE Conference Hong Kong, Web Summit Lisbon, TiE Global SF and many more. He is also co-founder & President of Venture Catalysts – Asia’ first integrated incubator and No. 1 Early Stage Investor in 2017, 2018 & 2019, and globally 7th largest as rated by Crunchbase. He is one of the most iconic figures in India to foster the development of startup ecosystems across Tier 2 and 3 cities in India as featured by Forbes magazine.
As the coronavirus pandemic continues to disrupt the business environment, it is a difficult time for entrepreneurs seeking financing. The economic slump triggered by the COVID-19 pandemic has created a severe funding crisis in the startup ecosystem. Most startup investors are apprehensive about making new deals and are focusing on their existing portfolio of companies for the time being. Even if some startups manage to secure funding, they are not getting valuations as per their expectations. Given this scenario, startup founders must know how to negotiate with VC firms to avoid finding themselves on the losing end of a disadvantageous contract.
A VC deal can bring a lot more than just money to the table. This includes but not limited to mentoring, strategic advice, access to network resources, and external support. It is, therefore, important to take into account these factors while proceeding with business negotiations with VCs.
Self-assurance: Take advantage of your leverage
How much leverage does your startup have? Understanding the business leverage of your company will allow you to be more firm in your approach to VCs. One of the key variables in any negotiation is the attractiveness of your alternatives to the deal. When it comes to a VC deal, the more VC funds are interested in your startup, the more leverage you have. Use this leverage to put yourself in the best position when you are negotiating with your potential investor. If investors can see your conviction, they are more likely to have confidence in your startup.
Determination: Aim for higher valuations
While financial markets are not in great shape right now, your startup can still achieve the planned growth. When VCs invest in a startup, they expect to be onboard anywhere between 3-7 years before they make an exit. It is crucial to make them understand that even if your startup is not profitable at present, you can turn that around. Of course, negotiating with a group of seasoned investors can be quite intimidating for first-time entrepreneurs. However, if you can prove the investors how determined you are about reaching the financial targets, you have better chances at getting a high valuation, especially at a seed stage. Moreover, VCs become sceptical when you lower the valuations of your business as they expect startup founders to ask for better terms.
Adaptability: Be flexible in your approach
As mentioned earlier, there are multiple parameters to weigh in during the negotiation period. Focus on monetary valuations, but also consider what other benefits you can gain from a potential investor. Be it access to networking or mentors, think about the value a VC might add to your startup. If a VC is offering higher valuations but no other benefits, it may not be the right option for you. Startup founders often care too much about the valuations, and they forget about how much autonomy they are going to lose in return. This is why being flexible in your approach can help you in the long-term.
Receiving capital from VCs for the first time is a milestone in a startup founder’s journey. As long as you are careful while negotiating, VC funding can give you the stepping stone to take your business to new heights. Spend time analyzing the term sheet, hire an external advisor if required, and understand the legal obligations of entering into a VC contract. More importantly, remember that the devil is in the details. So, look at the fine print and make sure there is no scope for legal ambiguity. This way you can achieve both short-term gains and long-term growth without compromising on your control.