View the image in a new window for better readability.
1. This post is written keeping the market conditions of India in mind and may not apply to other geographies.
2. The table shows somewhat ideal scenarios just for understanding, in real world there are many more variations.
3. Don’t mistake table as set of fixed rules, these are just some possible combinations to enable you to create your own scenarios
4. Most of the times these things are function of the main investors subjective opinion, competition for the deal
5. This is not description of what my firm The Morpheus follows. Methods followed by The Morpheus could be different depending on the exact scenario
Update: (answers to the questions that have come on the post)
What percent of equity that will be diluted to the investors at each step?
This can be calculated fairly easily
- Equity given to the investors = Total money invested / Post-money valuation of the company
- Post money valuation = Pre-money valuation + Total money invested
- Pre-money valution = Valution of your company before taking the investment
- Pre-money valuation = 1 Cr
- Money being invested = 15 L
- Post-money valuation = 1Cr + 15 L = 1.15 Cr
- Equity given to the investors = 15 L / 1.15 Cr = 13.04 %
How did you come up with the pre-money calculations?
- Startup valuations are essentially an art, end of the day valuation of a company on which both the startup and the investor agree on
- I have based these numbers on my observations and understanding of the preferences of Indian startups and Indian investors operating at different stages
- I have been directly / indirectly involved in a good number of funding deals / discussions
- Also there are deals in which I was not involved but i have the information about them
- I have a personal bias towards revenue generating / cash flow positive startups
Most founders start companies to achieve things like : financial freedom, creative freedom, change the world, make a difference, do something different, be the master of their own fate, be known for their work, be respected by friends & family, lead people, create jobs and the list goes on.
A surprisingly a large number of folks who start companies expect these glamorous things to start happening automatically the day they leave their job and become entrepreneurs. And since the reality is very different, very soon they start complaining and eventually quit. Here is a little secret you should know:
“Things don’t happen automatically, u have to make them happen. You have to endure and enjoy the pain. Successful entrepreneurs know it instinctively & that’s what makes them tick.”
First 2 years (or more) of a startup are extremely demanding on you as the founder of the startup. You have to endure a lot of pain before you can even get a glimpse of some of these nice things. And there is always a high probability of not making it. Its kind of being pregnant for 2 years while knowing that probability of giving birth to a healthy child at the end of it is a mere 10-15%. People who go through this period of pregnancy and deliver successfully are the ones who enjoy the journey and the pain more than the outcomes; ones who are prepared to do what ever it takes. You should ask the same question of yourself – are you ready to endure the pain? Or are you better off in your job?
Here is the list of some the things that you should be prepared to go through at a personal/ emotional level during your entrepreneurial journey.
- Unless you plan to live with your parents, be prepared to move out of your comfortable flat in Versova with rent of 20k a month and move to Dahisar to maintain the size of the flat but reduce the rental bill to 10k a month.
- Flights won’t be the default mode of travel between cities (surely not kingfisher). Every time you’ll travel you will evaluate train vs flight, usually the trains win and mostly sleeper class fare.
- Cabs are no more allowed for travel within the cities. You gotta be using auto rickshaws, ride buses / trains / metros or even hop on the shared cabs (yeah I have done that)
- No staying in hotels, not even budget hotels. Make a list of friends / relatives in all cities and starting piling on. Or checkout www.couchsurfing.org
- Can not eat in any fancy restaurant – get a list of affordable but clean food joints – McD is a great option. Cooking at home is even better.
- No more drinking out in pubs. If you wanna drink bring it home.
- No movies in multiplexes. In fact no time to watch TV.
- No phone upgrades / No laptop upgrades. Manage with what ever you have.
- No bank will give you loan. Not even a credit card.
- When we were doing our first venture madhouse – did not buy new clothes for 3 years. Only bought when an investor asked me come to the next meeting in formals.
- There is nothing called a work-life balance in first 2 years of a startup. It’s only work, work and more work. So get used to it and tell your family also.
- You are doing to work (or should I say slog) 18-20 hrs a day everyday for the whole 2 years. And in your 4-6 hrs sleep you will keep dreaming about work anyways
- And a lot of your work time will be spent doing small things, which are not exactly intellectually stimulating – kinda stuff you always took for granted – cleaning the loo, mopping the floor, making tea, opening your office, buying food, going to banks, dealing with govt officials, starting the generator
- You won’t have much time with family or friends. You will regularly face – angry parents, angry wife, angry kids and angry girlfriends/ boy friends.
- No going to family functions or weddings. Even if they drag you to the function – you will be sitting a corner on your laptop or iPhone and that would leave your relatives angry with you.
- No holidays. No weekends. And if you really want a vacation – Use Google earth to enjoy your imaginary vacations. Feel happy when google earth has higher resolution imagery for your vacation spots. They have recently added high imagery for Kashmir region, especially gulmarg and Amarnath.
- No time to take care of your health. Running, exercises, gyms – all go for a toss
- Don’t expect any recognition for your efforts from friends and relatives – they wont get it – for them you are still a moron – who quit his fancy job with a big company and fat paycheck to do some thing as mundane as SELLING DVDS
- Be prepared to a lot negative talk – all most all people around you will keeping tell you how big a looser you are and many more things.
- Totally get used to failing. Infact failing is not bad – that’s the way to make progress. If you are building anything from scratch – you have to fail 20-50-100 times before you get it right. That’s how evolution works. That’s what happens when you try to solve hard problems.
- Be ready, most people will reject you : customers, investors, employees you try to hire, organizers of startup showcases. You have to keep looking for the ones who will accept you.
- Employee retention will be a pain. You will spend a lot of time finding and training freshers to find they have been poached by biggies with just 1.5x or 2x the salary as soon as training is completed.
- Your girlfriend’s / boyfriend’s parents may tell you that they are not too keen to marry their son/ daughter to an entrepreneur
- And if you plan to close an arrange marriage deal you can forget about it. Entrepreneurs are a total flop in arranged marriage scenarios
- Your co-founder will chicken out and will create a bitter scene. People who seem super committed and ready to give their life for the cause would suddenly find out reality and bail on you.
- Be ready to max your cards / pledge your Personal Assets/Share certificates to give fuel to your Business.
Lot of startups fail / shutdown, just because founders were expecting too much too soon and were not prepared for some of the hard things. I believe being aware of what is in store; can help you prepare for it. If you are prepared for the pain, it will not come as a surprise and I promise at the end of it – all the nice things that you started out for are eagerly awaiting you.
Thanks to Ashutosh Upadhyay , Ankit Maheshwari, Robin Moses, Indus Khaitan, Pankaj Guglani, Sahil Parikh and Nandini Hirianniah for reviewing the draft of the article.
We have started a twitter account called “Friends of Morpheus (@fom_morpheus). This is a community of folks who are either working with us formally or have a good informal friendship with Morpheus or are just interested in startups. The idea is to share / discuss / publish – news, articles, wisdom and thoughts about startups, more engagement activities will be added overtime. Sometimes we will also share updates from Morpheus and from portfolio companies 🙂
If you have something to share please tweet it with @fom_morpheus and we can further share it with all the fom_morpheus followers.
Click here to follow Friends of Morpheus – http://twitter.com/fom_morpheus
Don’t forget to spread the word and feel free to send us suggestions on what more can be done or should be changed.