In my career as a VC, investment banker and advisor, I have heard thousands of pitches from entrepreneurs, some good but most not so good. The key issue that keeps popping up (and it doesn't matter if this is a Silicon Valley entrepreneur or one here in India) is where the entrepreneur is constantly faced with the circular dilmma, most often referred to as the Catch-22 (I don't think Kurt Vonnegut knew how much that phrase was going to be used in the entrepreneurial lingo).

More specifically, this has to do with the fact that during the fundraising process, a startup often is expected to have achieved certain milestones (especially when the environment where VCs tend to become slightly more risk averse), but the entrepreneur needs capital in order to achieve those very milestones. What is an entrepreneur to do? Well, let me lay out some specific concerns and practical solutions:

--First and foremost, realise that you are asking a VC or an angel investor to part with either their own or their Limited Partners' (LP) money. And although the above request may seem unreasonable to you, it is one that is completely justifiable since the VC will have to answer to their LPs when asked "why in the world did you invest in a raw startup?"

--Also realise that you are competing with other startups for the VC's time and capital. Even though you may think your idea is superb, there may be another scrappy startup that has more traction, a clearer message and has a more believable trajectory to growth and profitability. So, believe it or not, timing may have something to do with how excited a VC gets about your business.

The level of excitement is a combination of both relative and absolute metrics. In absolute terms, a VC may get excited about the idea/vision but he/she has to also evaluate a startup relative to others on his/her desk at that given moment. Since the key resource that a VC has is time (i.e. bandwidth to manage the portfolio), he/she may choose for a potentially less risky smaller play rather than a very risky big play depending on the number and quality of ventures that he/she is evaluating at any given time.

What's worse from a startup's standpoint is that the risk profile for a particular VC continues to shift around over time. As an example, a fund may be more prone to doing early stage risky deals towards the beginning of its fund's investment cycle, and less risky later stage deals towards the end of the fund's lifetime.

With the above as backdrop, let's address the catch-22 scenario directly:

--Take comfort in the fact that this is not a dilemma unique to you alone. This is a fact of startup life that is faced by most, if not all, at some point as they launch their initial venture. But there are specific steps that you can take to address the risk (either perceived or real) that a VC may indicate. I call this series of steps, the "credibility continuum"(CC). 

The credibility continuum is a spectrum of risk reduction parameters. On one end,  there are high margin, high value paying customers (low risk) and on the other end is a raw core team of first time entrepreneurs with nothing but an idea and a small font 40 slide powerpoint presentation (high risk). The VCs would ideally like the startup to be on the "paying customer" end while reality is usually closer to the other side of the spectrum.

--There are key risk reducing techniques that don't cost a lot and also enable the entrepreneur to slide in the right direction on the CC scale. The key risk often hinges around two key areas – can the team execute on the potentially grand vision and will the "dogs eat the dogfood" (i.e. will the customers be willing to pay for a product or service).

A highly successful approach that a seed startup can deploy is "credibility through association". What that means simply is that since you as a raw startup don't have paying customers to truly validate the idea, you can gain credibility (and therefore reduce risk) by getting certain calibre of people associated with the startup, who bring a high level of brand equity and credibility with them.

Ideally, if you can get people to join as early employees or senior executives, it sends a very strong signal to the potential investor on two fronts – that you can sell your vision to get seasoned executives to come on board even though there may not be anything tangible in terms of a product or service currently available, and the fact that people are willing to give up their well-paying  jobs to join your startup means that the idea is potentially very interesting and valuable.

In some cases, the individuals may decide to invest in addition to joining a company. Rule of thumb – cash, by any legal means is usually a positive indication to a VC (cash from customers, from investors, from lenders).

--Further down the credibility continuum are Directors and Advisors. Again, getting seasoned people from the industry to lend their brand and time to the startups gives a level of comfort to investors. Recently I was looking at a seed stage startup where the single biggest plus in my mind was addition of a 35 year veteran from a specific industry as an Advisor, who indicated to me that over the decades she had been approached by many companies for advisory roles, but this one company's value proposition was the most compelling that she had come across in her years in the field, and that's the reason she came on board.

--Getting friendly companies to try the product or service for a fee as Beta customers or conduct a product or service pilot can help. Again, the preference should be to get some cash rather than give the product or service away for free. Obviously, if there is a marquee name, and the only way to get them to lend their logo to your slide 5 of "key customer engagements" is by giving away your product, then do it. Having Tata as a free pilot is better than not having Tata.

--I often tell entrepreneurs that VC money is the most expensive capital they can get. My fundraising ladder goes something like this – Revenues-grants-beg-borrow-steal-VC (some may choose to put stealing after VC). Do not take VC money unless you have to. And often at the earliest stage, small amount of angel investment might be a good starting point.

Angels are a big part of the overall entrepreneurial supply and demand chain that has made Silicon Valley buzz. The angel community is, along with so many other aspects of the startup ecosystem, in its formative stages in India. The Mumbai angels and the Indian Angel Network are a couple of groups that have gotten somewhat institutionalised.

Development of seed stage investing ecosystem will take time, but I am very encouraged by the progress by Angels and VC firms in doing their part to catalyse the process. It's not a question of "if" but a question of "when" the system will become self sustaining.

Bottom line: The catch-22 exists. And the entire life of an entrepreneur is filled with them. But complaining about it doesn't help. My advice is "to suck it up", or in other words, deal with it. Worry about things that you can control and forget about what you cannot control. Be creative, be passionate, be viral. That virus fuelled by passion, commitment, persistence and conviction will ultimately infect others somewhere along the Credibility Continuum and they will join as employees, advisors, directors, and investors.

The job of the entrepreneur is to be a prolific salesperson, since he/she will spend majority of the time convincing others of the "better, faster, cheaper mousetrap", whether it's investors, customers, potential employees, channel partners etc. etc. And quite honestly, that passion combined with a grand vision that is clearly articulated, can make an investor forget the risks and write a check on the spot to a couple of bright eyed, bushy tailed, first time techno-geek entrepreneurs.

(Mohanjit Jolly is Exceutive Director, Draper Fisher Jurvetson India)

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