INVESTINTECH

 The Cute Story of MyCute Office

Abhishek Barari was having a cup of coffee with a few friends in a

neighbourhood café in Mumbai. It was 2014, and his friends were

running start-ups of their own. And they were all complaining about

rents in the city.

'It's impossible to get a place to work in, one of them said. 'I only want a one-room office, but that's just not available in the area that I want! Those that are available are either too far away or too expensive. And I've got to furnish it, maintain it, organize tea and coffee for my guys-it's just too much. I want to run my business, not be an office administrator!" one of them said, and glared at his coffee. (Note for the reader: This was during the time that co-working spaces had not become popular and were rarely available.)

The conversation turned to the Indian cricket team's tour

of Australia, but somewhere at the back of Abhishek's mind, the

problem stayed. Even when his childhood hero M.S. Dhoni was

being discussed, he had a thoughtful look on his face, and wasn't

Taken from the authors personal interviews with Abhishek Barari berween 2015 and 2020.

really listening. While on his way home, the thought persisted and he kept wondering what to do about it. That night, Abhishek was unable to sleep peacefully. He dreams

that he was on his knees in front of three landlords, all of whom refused to give him their miserable, stupid office space, for as ridiculous a reason as rent. He told them repeatedly that his business would grow rapidly and he would soon be able to increase the rest he was paying, but the idiots simply refused to listen. He woke up feeling dejected, and decided to go and meet another friend who ran his own business nearby.

While sitting with him, Abhishek looked around casually and noticed an empty room in the office.

Don't you need this space?" he asked. 'Not for the next few years,' his friend replied.

'And you own this office, don't you?' Abhishek asked, bur he wasn't really listening. Suddenly he had found the answer to Mumbai's office-space problem. Why not rent out partial office spaces? If someone had an office where a room, or even part of a room, was free, why not rent it out to someone who wanted only one room, or maybe just a couple of desks?

And Abhishek jumped up! Why couldn't he, Abhishek Barari. be the person who brought the landlord and the tenant together?

Landlords would love to get the additional rent for their vacant space, and tenants would be equally delighted to get a partial office rather than set up a full office of their own. And he could charge a commission on each such transaction! With a smile on his face, and dreaming of the Jaguar he would be able to buy in just a few years. Abhishek left his friend's office and almost ran home!

Over the next few days, he spoke to a close friend, Rahul Shelke, and found him equally enthusiastic about his business idea. And together they started planning this new venture. Fixed deposits were broken, movies and entertainment were cut back on, girlfriends were politely told they were busy and, finally, the two young friends were able to scrape together a few lakhs to fund the venture.

The first step was to give the company a name, and they settled on the interesting-sounding 'MyCuteOffice'. People sniggered at this. No one will take you seriously, they said, but Abhishek was adamant. People will remember this brand it's so unique! And so the company got its cute name.

Next, they had to create a website and an app where people could log in and either put up their office spaces for rent or hire these spaces as tenants. Essentially, MyCuteOffice became an online aggregator or broker-for shared office spaces. Even the concept of commission was picked up from the property broker market, which charged one month's rent per transaction. However, they decided to charge only the space owner and not the tenant, since most renants were expected to be start-ups and might not be able to pay.

Now our founders were smart and realized two things. First of all, many of the tenants were likely to take on office spaces for short periods after all, at least some of them were likely to be start-ups and would outgrow these spaces over time. Secondly, this was a new concept. The founders were confident they could make it work, but would the office owners agree? So Abhishek and Rahul decided to take their brokerage in monthly instalments. In other words, they would charge 8 per cent of the monthly rent every month, instead of taking the entire amount up front. Of course, if someone stayed on for more than a year, that was great, because the company would keep getting its 8 per cent every month.

The next step was marketing. To get prospective tenants, the founders decided to advertise online. People searching for office space would hopefully see their ads and at least try to find out more about the concept (remember, co-working spaces were not in vogue at that time). For space owners, however, the approach was more basic. MyCute Office employed a salesperson who would go around to all commercial complexes in Mumbai and knock on doors. Unfortunately, this was a new concept, and most of the time this person was turned away. However, the founders did manage to get some spaces.

And so the journey began. Two young entrepreneurs with a idea, a few lakhs in the bank and loads of passion. Initially, as with an all start-ups, the going was tough. The first problem, of course, was that most people had not even heard of this concept. Office owner were, quite frankly, sceptical. You mean I have to let a complete outsider sit in my office?

about security? And all the confidential documents we have? No way! Even potential tenants were not convinced. You mean we have to stick to the rules, regulations and timings of that office? What if we need to work late? And what if the landlord decides he has had enough and chucks me out after a month? Where do I go? What

Incidentally, even the founders had anticipated such objections at least initially. Fortunately, there were a few brave souls (the founder could probably count them on their fingers) who took the plunge and Abhishek and Rahul were able to conclude the first thirty-odd transactions. And then something very inter happened. One of their first tenants was a young man named Neelay Jain. Neelay came in as a tenant but liked the concept so much that-hold your breath he joined the two young friends as a co-founder. So now there were three young men to run the business!

But then, of course, the inevitable happened. In spite of watching every penny that they spent, their frugal funds ran out, and they needed funding. For marketing, for operations, for salaries, for the rent of their own office. In simple words, they had reached a stage where they could not survive without funding. And that's where they approached an angel network.

The Pitch

The presentation to the angel network took place in Mumbai in the winter of 2014. Present in the room were around twenty veterall members of the network, or angels. Angels they might have been, but they were all ready to grill Abhishek and pounce on remotely negative. anything

However, right from the beginning, the angels around the table realized that they might be on to something big. All of them were from Mumbai, and they were well aware of the high rents in the city. It was true that many small companies were not able to get rented space at reasonable rates. Conversely, it was also true that several owners of office space had spare capacity and would benefit from the rent for this extra space. Even in the other metros, while rents were not as exorbitant as in Mumbai, they were still high-and, therefore, there was an opportunity. In other words, both for the landlords and the potential tenants, this was a problem waiting to be solved. Further, given the large number of spaces in these cities, and the equally large number of people wanting office space, it was a huge opportunity which no organized player had tapped so far.

There were other issues, of course. What's your entry barrier?' asked one of the angels. 'What if someone else comes up with the same concept, raises a bigger round of funding than you and kills your business?' And having said this, he looked around proudly, as if to say, 'So there!"

Actually, at this stage, we do not have any significant entry barrier, responded Abhishek in all honesty. But over time, as we get more spaces listed on our website, our entry barrier will increase. Since we are a space aggregator, the more options we have for the potential tenant, the more likely he is to come to us. Anyone else starting something similar will take a lot of time to build up the number of spaces we have, and that's the competitive advantage we will have. Of course, we'll need to grow rapidly, which we should be able to, once we get funding."

That made sense, and the angels nodded. But there was another issue. 'We need scalability, one of the angels said. You need to grow rapidly to much higher levels. And I see an issue here. Like any other property broker, you would need to take the potential tenant to several offices before he can make a decision, whether positive or negative. Either way, it requires manpower-someone who can take

him around. And any business that is so dependent e naturally less scalable. How do you plan to take care of this?" Abhishek realized this was an issue. 'Yes, that's correct, but we are hoping to use technology for this. Lots of videos and photograph that the potential tenant can see. But I agree-there is a certain amount of manpower dependence in this business. We'll need to look at this problem as we go along. on manpower

There were a few more questions, but at the end of the session, the angels were satisfied. This seemed to be a good opportunity-a niche in the office-space rental business that had not yet been tapped. And a lane niche it was. The founders were all well qualified-Abhishek him was a chartered accountant, with an additional degree in law. The were obviously several other steps to go through but, in principle, me investors were willing to invest in the company. And at the end of it a MyCute Office was the proud recipient of funding worth Rs 70 lakh At this stage, let's hear Abhishek himself on what happened is

the pitch session:

More than the presentation, I realized what the investors were looking for was clarity of the concept. What was the problem we were trying to solve, and what was the value proposition to the customer? And my investors clearly liked the concept of being a platform for unutilized office space.

I think the other thing that went in our favour was honesty. There were several questions to which we didn't have answers. Rather than guess or lie, we decided to be up front and say we didn't know. Investors realise that you will not have all the answers especially in the early stages of the business and are willing to live with it. But they definitely don't want to be fooled

After the Funding

Now you can imagine the reaction of the founders once the fundin was approved. That's right they were over the moon! They find. had money in the bank! They could now put into practice all those terrific plans they had made. And that night, for the first time in months, they celebrated with beer and high-quality pao bhaji!

But even after getting the funding, progress was slow. As the investors had guessed, to conclude each deal, someone from the team had to accompany each prospective tenant to shortlisted offices, just as a regular broker would. And it took several such visits before a deal could be concluded. Several office spaces were not great and had to be knocked out of their database. And then there was the paperwork-an agreement had to be signed between the space owner and the tenant. In fact, the amount of manual effort required was huge.

It was also taking a lot of time to get both landlords and tenants to accept the concept. In fact, for the first two years, it was slow-going. After all, it was a fairly revolutionary concept and people wanted someone else to take the risk before they did. Abhishek, however, still believed that he could get business to pick up. But for that, he needed marketing spend-lots of it. And that meant money. But the company had almost run out of money and the numbers had not yet picked up sufficiently to approach VCs. And so it became a vicious cycle-no money, therefore no significant marketing, therefore no increase in business, and therefore no money!

This is what Abhishek had to say about these tough times:

After the angel round, we got several proposals for funding, but didn't follow up on them. Perhaps we should have. We realized later on that it's important to have some funds in reserve. Ideally 50%. You never know what's going to happen, particularly in a new business, and you must have some funds to fall back on. Otherwise you run out of money and then get into a mode where you are desperately chasing money, rather than focusing on your business.

The founders had heard about this happening to many start-ups, but it was scary to have it happen to them. After all the effort they had put in! Enthusiasm began to flag. What had seemed like a great idea did not seem so great any more. Even the regular pao bhaji dinnen the founders used to have became tasteless affairs-so what if beer was part of the menu?

However, Abhishek was not the kind to give up easily. He decided to move the company into survival mode. Cut costs wherever possible including the salaries of the founders. Reduce employees and replace them with interns. Reduce salaries wherever possible and increase commissions. In other words, move away from fixed costs to variable costs-costs that would be incurred only when a transaction took place and therefore revenue came in.

Now they say that once you've reached the bottom, there is nowhere to go but up. And lo and behold, this actually began to happen. Some two years into the business, the concept started gaining acceptance. Landlords who had rented out their office spaces found it a good way to get additional income, and most of them realized it was not really a hassle. Even security was not an issue Consequently, many of them spoke to their friends, and these friends also decided to try out the same experiment. Referrals became the name of the game. In other words, what Abhishek could not force through marketing and advertising started happening through word of mouth. Yes, it took time, but then any new concept does take time, doesn't it? Gradually, MyCuteOffice became more and more of a known name in office-property circles, and the founders realized the value of the interesting-sounding brand name. Something that people remembered.

There was something else that started happening. Now that the company had been around for more than two years, the founders had seen thousands of office spaces. In the process-and this is important, so please put down your cup of coffee and pay attention-poor-quality spaces were weeded out and only the good ones remained. Plus, the founders did something else they asked the tenants to rate the properties they had occupied. This rating was done on the company's website or app, and tenants were happy to do so. Naturally, the poor-quality spaces were further filtered out. As a result, Abhishek realized that, in many cases, they actually did not need to accompany the potential tenant when he or she visited an office space, because most spaces that remained after the filtering were good anyway. And, in any case, by now MyCuteOffice had built something of a positive reputation for quality spaces, so tenants were willing to take out the time and visit these office spaces on their own.

And this had huge implications for the company. Suddenly, the manual intervention needed to close a deal reduced. Which meant less manpower or, conversely, more business with the same manpower. In other words, salaries and conveyance took up a lesser percentage of the revenue. The business became more scalable which was one of the concerns that the angels had. Quite naturally, there was more money left to spend on marketing and expanding the business. You can imagine the rest. Numbers grew, as did the brand.

By the way, we almost forgot. There was another interesting risk to the business that we hadn't mentioned earlier. Remember, the commission to the company was being paid on a monthly basis. Now after the first month, what if the landlord were to turn around and say, 'Thank you, Abhishek. I don't need you any more. I'll take the monthly rent directly from the tenant, so I don't need to pay you." You see the risk, don't you?

However, that did not happen. By this time, landlords had realized that they needed MyCute Office as much as MyCute Office needed them. Since their tenants typically stayed on for only a few months, they would need to get another tenant once the earlier one left. And where would they get this new tenant? MyCute Office, of course! In other words, it became a long-term partnership between landlords and Abhishek's company, and very few landlords bypassed them.

Now, in 2017, something really, really important happened. As you are aware, by this time, co-working spaces had become relatively common, and the bright young Abhishek sensed another opportunity  for growing the business. Rather than looking at just unoccupied parts of existing offices, he started identifying fully vacant office spaces. He would then meet the owner and propose a partneri in which the entire space would be converted into a co-working space, jointly branded between the owner and MyCuteOffice. The investments in the office space would come from the owner, and Abhishek and his team would manage and market it. In other word MyCute Office had moved from being a pure aggregator of shared o spaces to co-branding and managing co-working spaces.

In fact, he went a step further. He realized that most existing co-working spaces, such as WeWork, 91springboard and Awfis, we expensive. Many small companies and start-ups would not be able afford the rent they charged. And so he put on his thinking cap agit Could co-working spaces be made more affordable? For instance, di they really need huge, lavish reception areas? Did they need larg free spaces for occupants to move around and possibly chat in? Mos importantly, were tenants willing to pay significantly higher rents for these 'perks? Or was there a sizeable population that wanted well located, clean, comfortable but functional areas which took care of their needs-sufficient but not excessive free space, enough storag tea and coffee percolators, a refrigerator, a microwave oven, etc.

Smart guy that he was, Abhishek brought in an architect who helped optimize each potential co-working space-maximize and, at the time, ensure comfort. Effectively, Abhishek had created a new paradigm in co-working spaces-namely affordable co-working spaces. Interestingly, the rental charged per seat was least 40 per cent lower than that charged by the large, expensi co-working spaces in the same localities. Our friend Abhishek had effectively created a kind of OYO Rooms for office space looking at the phenomenal growth OYO Rooms has seen, you ca imagine the potential growth of MyCute Office. And

Obviously, this would not have worked three years earlier, when co-working was a nascent concept. But now landlords with emp spaces lapped it up and at the time of writing, Abhishek had already signed up and launched five such co-working spaces in Mumbai, in addition to the shared spaces that he already had. Importantly, the company remains profitable. And with the profitability challenges faced by some of the larger players in the business, who knows? In the long run, perhaps it'll be Abhishek's model that the others would adopt.

And now a note for you, dear reader. If you happen to live in Mumbai and go to Kandivali, and by a strange coincidence if you happen to land up at Abhishek's office, you will see a very, very basy but happy young man. And if you were to stay long enough to see him take a well-deserved break, you may see him gazing into the distance, thinking of Bengaluru, Hyderabad, even Dubai and

Singapore, where he could spread his wings... So let's leave Abhishek with his dreams.

Analysis

So that was the cute story of MyCuteOffice. But, in life, it's not just enough to read stories. You also need to learn something from them. Let's now analyse what happened, what the angel investors were thinking and why they decided to invest in the company. Remember the PERSISTENT approach we had talked about in the Introduction? As we had mentioned, successful businesses follow the PERSISTENT approach. And therefore investors look for such start-ups to fund.

So what is the PERSISTENT approach that Abhishek followed? Good question.

First of all, there was a clear PROBLEM that Abhishek was solving that of providing low-cost, shared office spaces to companies. Even landlords got a bonus-rents that they never expected. Equally important, they were willing to pay for it. And that's the 'P' in PERSISTENT.

Next, we have the first 'S' in PERSISTENT, namely SIZE OF THE MARKET. Why is this important? Obvious, isn't it? The whole purpose of creating a start-up is to ultimately create a giant. Sute, you may be an exception and are desperate to create a small, stagnant start-up, but then you'd be in a ridiculously small minority, wouldn't you? And how can you create a giant if the market itself is small? And therefore SIZE OF THE MARKET becomes critical. Fortunately for MyCuteOffice, office rental was a huge marker, even if they were to stick to Mumbai alone. Of course, if they were to expand to other cities, it would be far larger. And that made it an even more attractive business.

When you get investors on board, SIZE OF THE MARKET becomes even more critical. Look at it this way. You are looking a your venture as your baby-hopefully for life. But the investor who has put in money wants returns, and that, too, reasonably fast. Now he can get returns only when some other investor buys out his share at a higher valuation. That investor, too, expects a third investor to buy out his shares, and so on. And all this can only happen if the SIZE OF THE MARKET is truly large. Otherwise very soon this cycle will stop, because fresh investors do not see significant growth any more. Get the idea?

Now we're sure you have a question. And you're right, it's a very relevant question. What's the point of a huge market if your business does not SCALE up rapidly within this market? Let's also take a look at the investor's point of view. Risks in a start-up are clearly high. It's an unproven company, and it may or may not survive. And when an investor buys shares in the company, he cannot sell them in the stock market simply because they are not listed. He can only sell them when someone else-usually another investor is willing to invest in the company, and therefore buys his shares. So the risks are far higher, and the shares are illiquid. Quite naturally, therefore, an investor putting money into a start-up wants much higher returns than he would get in the stock market, and that, too, consistently over several years. Which means the business needs to grow rapidly to a very large size. For this to happen, we have already seen that SIZE OF THE MARKETaddition, the business needs to be able to SCALE up rapidly within this market for investors to be interested. So that's the second 'S' in PERSISTENT, namely SCALABILITY.

Now here's what happened to SCALABILITY in Abhishek's case. In the beginning, he had to have one of his people accompanying the tenant when he visited possible spaces. In other words, some employee would have to make multiple visits before a deal was signed and in some cases, no deal was signed. A lot of manual involvement. Importantly, any business that has too much manual involvement is tough to scale. Because then, for any growth in your business, you will need to add a proportionate number of people. Over time, however, as the poor-quality spaces got filtered out, the need for an employee to accompany the tenant came down. So the business became more and more SCALABLE. Voila!

Let's summarize. Any business needs to solve a PROBLEM. where the MARKET SIZE is large and the business model is SCALABLE. That much is clear. But can they do so profitably? Are the EARNINGS positive? Or at least, is there a possibility of the EARNINGS becoming positive in future? If the business is inherently loss-making, it will always be dependent on funding, even for survival. And that simply won't do! So let's look at the EARNINGS MODEL the first 'E' in our PERSISTENT approach. There are obviously two components to EARNINGS. One is revenue and the other is costs. Abhishek was getting revenue from commissions and later from processing charges as well, so the revenue part of the model was fine. But what about costs?

Now here we need to introduce an interesting term, namely unit economics. Which simply means earnings or profitability at the level of each unit. What is a unit, you might ask? Actually that's not a very easy question to answer, so let's simply define it for the original shared office model of MyCuteOffice. In simple terms, a unit in MyCuteOffice could be one transaction-in other words, one rental contract between a tenant and a space owner. The revenue earned from this transaction minus the direct cost of executing the transaction gives you the earnings at the un level. In this case, the revenue was clear-it was the commission earned. The costs could include the running around to complete the transaction, the paperwork, the legal fees, if any, etc. It would not include overheads such as marketing and salaries. Clearly, the cost of executing a transaction was not significant, and therefore this business was profitable at the unit level. In other words the unit economics was positive.

And this is key-at the very least, any business needs to have positive EARNINGS at the level of the unit. If not, the mon transactions you have, the more you lose. And when overhead are added to that, the business can never make a profit. It can never be viable. However, if the unit economics of a business is positive there is a chance that EARNINGS will be positive at the level of the company. At least somewhere in the future, when the volume are large enough and the sum of the EARNINGS from each unit is greater than the overheads of the business.

If that is clear, let's take a look at the investor's viewpoint. At an early stage in any business, volumes are low and, therefore, the overall business is unlikely to be profitable. Moreover, it is virtually impossible to predict the kind of marketing spend required to make the business profitable as a whole. And, therefore, angels would not use this as a decision point. But-and this is an extremely important 'but'--the unit economics of the business needs to be positive Of course, you may start by selling at a discount, so as to rapidly grow your customer base. In this case, the unit economics may negative, to start with. But at some stage, it will need to become positive for the business to be viable, and therefore for the investor to become interested. In the case of MyCute Office, it was clearly

positive, which was fine for the angels around the table. Now you are probably thinking that this is a ridiculousy simple concept, and you've mastered it by now. However, life and business can never be so simple. Let's ask you a Is this the only way we can define a unit for MyCuteOffice Suppose, instead, that we move towards their current model, where they manage branded co-working spaces. And we consider one full co-working space to be one unit. We would now need to look at the average revenue we can get from this space per month, which means we bring in issues of occupancy. So we now have a new definition of unit economics, and therefore a new level of profitability. But our earlier comment still stands. Irrespective of how you define your unit, it must be profitable otherwise it cannot be viable once you add overheads.

Now for the extremely important 'R' in PERSISTENT, namely RISKS to the business. What were the RISKS faced by Abhishek and gang? Well, there was the obvious RISK of the market not accepting their offering. So landlords might have been unwilling to have unknown people on their premises for security reasons. Conversely, mants might not have wanted to comply with any restrictions that landlords might impose. For instance, tenants might have wanted to work late but landlords would perhaps not be willing. There was the added risk of landlords and tenants doing a side deal after a month and bypassing the company, thereby knocking out the commission that MyCute Office would have earned. You see? Founders as well as investors need to be aware of the RISKS the company faces, and how they plan to mitigate them. Fortunately, in the case of our young friend Abhishek, both the RISKS mentioned above came down with time and, in fact, vanished once he moved into the co-working model. Incidentally, most founders tend to overlook RISKS, assuming that things will go well. It's always a good idea to discuss the business with friends and get them to poke holes in your model in other words, to try and come up with potential RISKS that can kill the business. After all, it's better to be prepared in advance, isn't it?

By the way, one standard RISK faced by every company-whether start-up or behemoth is competition. Could MyCuteOffice remain ahead of competitors? And what if a new competitor-perhaps with deeper pockets were to enter the market? We are all aware that office rental is an extremely crowded space-with brokers lurking in every corner of Mumbai. And investors are smart. They definitel do not want to invest in a crowded space with lots of competiton So what do they look for? A NICHE within this crowded space quite naturally. More specifically, a large enough NICHE, which therefore, permits the business to scale up. In this case, MyCuteOffice had discovered a large, untapped NICHE, because shared office space was a new concept and brokers were not yet into this business. And that's the 'N' in PERSISTENT. Incidentally, using shared space was also a highly INNOVATIVE solution which gives us the l'a PERSISTENT.

In general, to overcome the threat of current as well as future competition, every business needs what we call an ENTRY BARRIER-the second 'E' in PERSISTENT. Sometimes also called 'competitive advantage'. As you might have guessed, a ENTRY BARRIER makes it difficult for a competitor to enter your business. In the case of MyCuteOffice, initially there wa no such barrier. But over time, Abhishek built up a large database of office spaces, which gave him a significant advantage over any new competitor. Any potential tenant would rather come to broker who had a large number of options than to someone who had just a few. So that would make it tougher for a competitur to enter. In fact, as MyCuteOffice expanded in the future, the database would only grow larger, making the ENTRY BARRIER even stronger.

While on the subject of RISKS, we need to mention onc RISK that all start-ups face. A RISK that is the basis for this book Namely, the possibility of funding not coming in when required And for this, it is always desirable to have a back-up business plan. In case things work out well and you get your funding, go ahead and use your regular high-growth plan. Which will probably inclus hiring people, large marketing spends and so on. implement this plan, you will grow rapidly. But in case the funding doesn't materialize, you would need to cut your costs and prepare for the long haul. And that's where you would need to move to your back-up plan also called a survival plan. Cut your costs and try and move fixed costs to variable ones. For instance, reduce salaries and increase commissions, replace employees with interns, use referral policies instead of marketing spend. Remain at break-even so that you can survive for a few months, by which time you'll hopefully get your funding, or your business picks up. And as you would have noticed, that's exactly what MyCute Office did.

And then, of course, there is the first 'T' in PERSISTENT the TEAM, starting with the founders. Perhaps the most important thing that any investor looks for. In fact, in early-stage start-ups, many investors look more at the founders than at the business. Why? Simply because at such an early stage, no one has any idea what direction the business will ultimately take. But if they have the right founders, these founders will pivot as required and make the business a success which did happen in this case, when Abhishek and gang moved to co-working spaces. In addition, Abhishek and his partners exuded both conviction and passion. Most importantly, they were honest. Where they did not know the answer, they said so quite truthfully. And the angels were convinced.

All this is great, but isn't there something we have missed? The investor would look at market size, entry barriers, scalability and all the other terms we have discussed, but at the end of the day, isn't there something else he would look at too?

Of course there is. Investors do not invest in bright ideas alone. They want proof. They want to see if all the above good things have actually led to customers coming in. And more and more of them coming in over time. Ideally bringing in revenue although some ventures do not have revenue, at least initially. And that, ladies and gentlemen, is what we call TRACTION the last T in PERSISTENT. The culmination of all that's good about the business, which the investor wants to see before he puts his hard-earned money into the venture. In the case of Abhishek, at the time of asking for funding, there were a few spaces he had lined up and a few transactions completed. So there wasn't much TRACTION. However, the investors believed in the story and were therefore willing to put their money into the company.

In general, however, you must remember that most investon look for proof that the idea is actually working on the ground. And the only way they can check for this is TRACTION, isn't it? So 2 good time to go in for funding is when you have been able to show sufficient TRACTION.

And that, my friend, is the PERSISTENT model that both

start-ups as well as investors look at.

The Impact of the Coronavirus-or Any Other Crisis

What do you do when such an unprecedented crisis hits you? It could be the COVID-19 crisis, or the global financial crisis of 2008 or, for that matter, any crisis that may appear in the future. Well, as you can imagine, money becomes more scarce in these conditions and investors become very, very choosy. They look for even more PERSISTENT start-ups to invest in. And that is what your start-up needs to be.

But there's something more. Remember, Abhishek faced exactly the same problem some time back, where he wasn't getting funding. And what did he do? Simple. He cut costs drastically and went into survival mode. Thereby he was able to last through the tough period. And that's exactly what you need to do. Cut unnecessary costs especially fixed costs. Reduce salaries where possible, and move to variable compensation. Reduce marketing expenses. Give up unnecessary office spaces if you can. Keep your company ticking and move from growth mode to survival mode. During such times, many others will fall by the wayside. And if you've survived, well. once funding comes back into the market, you're in business!

Finally, here is a table that captures the essence of the approach, as applied to MyCute Office: One last word. Apart from the acronym PERSISTENT, what is extremely, extremely important is the English word 'persistent. When you have a start-up, things will go wrong, many assumptions that you made will be invalid, funds will dry up and competition will heat up-along with your stress levels and blood pressure, of course. These are just a few of the things that can go wrong. But, dear founder, you need to persevere. And after that, you need to persevere some more. And more. Patience is the name of the game. That's what Abhishek and his team did-and they succeeded. And that's the crux of starting and running a business, isn't it?

THE BASICS OF FUNDING #startup 

All set? Okay, let's look at some of the headlines that have been hitting the media over the past couple of years:

'Tiger Global invests $200 million in BYJU's; valuation jumps

to $8 billion" 'Walmart completes deal to buy Flipkart for $16 billion"

'India Startup Oyo Raises $1.5 Billion at $10 Billion Valuation"

Nandita Mathur and Salman SH, Tiger Global invests $200 million in BYJU's; valuation jumps to $8 billion', Livemint, 10 January 2020, https:// www.livemint.com/companies/start-ups/tiger-global-invests-200-million-in byju-s-11578570528442.html

Anirban Sen, 'Walmart completes deal to buy Flipkart for $16 billion'. Livemint, 18 August 2018, https://www.livemint.com/Companies/ qOBduC30BVpKTv9CpCYayH/Walmart-completes-16billion-buyout-of Flipkart.html

Saritha Rai, 'India Startup Oyo Raises $1.5 Billion at $10 Billion Valuation', Bloomberg, 7 October 2019, https://www.bloomberg.com/ news/articles/2019-10-07/india-startup-oyo-raises-1-5-billion-at-10-billion

'Warren Buffett's Berkshire Hathaway closes $300-million investment in Paytm"*

'Chinese investors are suddenly in love with Indian startups't

Sounds mouth-watering, doesn't it? Now here are some more:

India emerges 3rd largest ecosystems for successful startups # 'Indian startups raised about $14.5 Bn equity funding in 2019"

Yes sir, this is boom time in India's start-up world. And everyone seems to be getting massive rounds of funding. From angel investors, from VCs, from the US, China, Japan and, of course, India. Everyone is getting funding. And, therefore, so can you.

However, you must remember that the companies we have just spoken about raised this kind of funding after years and years of growth. And your own start-up is perhaps still in its early stages. You may get there, but you need to start small. So let's take it one step at a time, and examine how you will start raising money. Beginning with the first step-namely the family and friends' round.

Alnoor Peermohamed, Warren Buffett's Berkshire Hathaway closes $300-million investment in Paytm', Business Standard, 28 September 2018, https://www.business-standard.com/article/companies/warren paytm-118092700876_1.html

1T.E. Narasimhan, 'Chinese investors are suddenly in love with Indian startups, Rediff.com, 2 January 2020, https://www.rediff.com/business/report/tech chinese-investors-are-in-love-with-indian-startups/20200102.htm

* PTI, 'India emerges 3rd largest ecosystems for successful startups'. The Economic Times, 17 October 2019, https://economictimes.indiatimes.com/ small-biz/startups/newsbuzz/india-emerges-3rd-largest-ecosystems-for successful-startups/articleshow/71636451.cms?from=mdr

Jitendra Singh, "Indian startups raised about $14.5 Bn equity funding in 2019', Entrackr, 27 December 2019, https://entrackr.com/2019/12/startups raised-about-14-5-bn-equity-funding-in-2019/

The Family and Friends' Round

When you create a start-up, you obviously need money. For hiring people, for marketing your product or service, for developing and hosting your website, for operations such as managing inventory and deliveries, for the call centre that will handle calls to and from customers, and for just about anything else that your business requires. And the first place you'll check for money is your own savings. Hopefully, you still have some left after all the mandatory partying that life requires. Having done that, you'll probably go to your father, or your chacha or mama, and beg for money (begging is perhaps an exaggeration, but you get the idea). If you've maintained decent relations with your chacha or mama, there is a reasonable chance that you'll get something out of them. Even the reason is as simple as, 'Chal beti (or beta), zindagi mein kuchh toh kaam kar le (At least get something done in life).' And then, of course, there are your friends the ones who are not already neck-deep in debt because of their own start-ups. So that's the first round of funding the 'family and friends' round.

Now there are a couple of important issues that you must note here. First of all, all these people know you-or, at least, they think they do. You are not an unknown outsider who cannot be trusted (we will ignore the distinct possibility that you are a known person and therefore cannot be trusted). And, therefore, they might be willing to take a risk with you. Something that an external investor will not do. Maybe, just maybe, they also see some promise in you. Yes, they will probably look at your business, but they may not want to see the balance sheet of your company. In fact, they might even be willing to fund your idea even before it has taken off, because they know you. On the flip side, however, the amount they put in is likely to be small. To summarize, at this early stage you may be able to raise small amounts from your friends and family, without too many questions being asked. And then, of course, you start your venture-and soon discover

that

you

need far more funding. By now, of course, your chacha ormama say no, and, most likely, so do your friends. But you do need the money, so where do you go?

To angel investors, of course!

Angel Investors

Angel investors are the first external investors in your business. Those who do not know you. Why are they willing to invest in your business? Very simply because they want to make money. They have tried fixed deposits and debt funds, and have learnt that they don't make more than 7 per cent or so-and, of course, they pay tax on this interest. Some of them have tried out the stock market and made money, but they have realized that stock markets can at best give you around 15 per cent returns over the long term. That's it. Real estate is a good option, but the amounts involved are very large and the investments are illiquid. And anyway, real estate seems to be stagnating, at least in the foreseeable future...

And therefore, investors are constantly on the lookout for new avenues of investment. Something that can potentially get them much higher returns than these traditional investment options. Where they can park a small part of their investments, even if the risks are substantially higher. And what better place for this than start-ups?

Look at it this way. What are our unicorns such as Flipkart, Oyo Rooms and Ola Cabs valued at? Over a billion dollars each, isn't it? And in some cases, several billion dollars-Flipkart, for instance, was valued at $21 billion when Walmart bought it. Now, can you buy shares in any of these companies at this valuation? Unless you are a direct descendant of some royal family and have inherited pots of gold, certainly not. But-and this is a very important but could you have bought shares in these companies when they were toddlers and just about starting off? Aha! Sure you could have. And that, ladies and gentlemen, is the concept of the angel investor. QED.

Angel investors sometimes simply called angels are people who are either rich or at least comfortably off, and are looking at investing in companies at an early stage. In the hope that they will become the next Flipkartor Naukri.com. And since they have invested an early stage, they own a large chunk of the company's shares. whose value could increase dramatically when these companies grow ever so rapidly. So the word 'angel' is probably a bit of a misnomer they are very, very keen to make money. But they are also willing to ke a risk. They are, therefore, willing to help you out with funding when your business has not really stabilized and no one else is willing to fund you. And that is how they came to be called 'angel' investors. After all, angels are those who help you when you're in trouble, isn't it? However, to get back to earth, we know that all start-ups will not become unicorns. Many will simply die out. Some will plod along. But there will be those few success stories that will either become unicorns, or will be bought out by those that do. And that is what angels hope for. To invest in several companies in the hope that at least one of them grows rapidly and becomes a unicorn. Or is bought out by someone, who in turn is bought out by someone... till one of these 'someones becomes a unicorn. The other start-up investments may be worthless, but that doesn't matter-the angel is looking for those one or two start-ups that will make so much money for him that they take care of the losses of all the others put together. Now can you see the lure of angel-investing?

Most angels operate in groups, rather like a pack of wolves although, hopefully, the similarity ends there. We call these groups. angel networks. Each of these networks have several angels as members, and organize regular meetings-typically monthly or quarterly ones. If you are looking for funding, you would need to apply to one or more of these networks. Subsequently, the network goes through a process of shortlisting, based on which a few the start-ups are selected. These shortlisted start-ups are then asked to come to the next angel meeting and make a presentation which we also called a 'pitch session'. Here, the

For the moment, however, we'd just like to emphasize a couple of points. First, while angels operate in groups, their investment decisions are taken individually. The network might help its members in evaluating businesses and doing the necessary due diligence, but investing in each start-up is solely the decision of the individual angel. Secondly, the kind of money raised at this stage is typically between Rs 50 lakh and Rs 2 crore, with each angel putting in anything from Rs 5 lakh upwards. Indian Angel Network, Lead Angels Network and Mumbai Angels are a few of the well-known angel networks in operation when we were writing this book. By the way, many cities have their own networks, such as Chennai Angels, Hyderabad Angels, Jaipur Angels, Chandigarh Angels, etc. Interestingly, given the small amounts that each angel needs to invest, namely Rs 5 lakh, many of these angels are what we call 'aam aadmi angels'-those who are not super rich but still invest in start-ups. And then, of course. we have the real heavyweights-the super angels, such as the Infosys founders, Ratan Tata, Azim Premji, Sachin and Binny Bansal and Vijay Shekhar Sharma. Unlike aam aadmi angels, these super angels do not need networks. Once they decide on a start-up, they often decide to invest the entire amount in the start-up themselves.

Now let's assume you have raised your angel round. And hopefully you grow. And grow. And at some stage you need more money for more growth. Probably more money and at a higher valuation. Perhaps a million dollars, or the equivalent in rupees. Now that is typically beyond the reach of most angels. But you still need the money, so who do you go to?

Venture capitalists, of course!

Venture Capitalists

As you are aware, a venture capitalist, or a VC, manages a fund that takes in investments from either HNIs-high networth individuals or even organizations. These funds then invest the money in start ups, but usually at a later stage compared to angels. Now what we are about to say is extremely important, so please pay attention. No drowsing or nodding off. Angels invest their own money, whereas VCs typically invest other

people's money. How does that make a difference? Simple. If you are an angel investor and you happen to like a great but risky idea, you might be willing to put in a bit of your money. But if you are a VC, would you take the same level of risk with someone else's money? Clearly not (of course, if you do, you can never become a VC. Or, more likely, you will not remain a VC!). Which is one of the reasons why angels make early-stage investments and VCs make later-stage investments. Because at an early stage, the business is not proven and, therefore, risky. At a later stage, the business has stabilized, at least to some extent, the dud companies have been weeded out and, hopefully, investments carry lower risks. And that, ladies and gentlemen, is why VCs invest at a later stage, when a start-up has proved itself.

The other difference is that VCs invest larger amounts, which ties in very well with the fact that at later stages, start-ups do need much more funding. Typically around Rs 5-7 crore and above. Or if you find dollars more exciting, a million dollars and above. The flip side, of course, is, with the business having stabilized to some extent, valuations are also higher.

Don't get us wrong. Nowhere are we saying that VC investments are guaranteed to succeed. Of course not. But the business is more proven and, therefore, the risks are lower. And so, today we have lots of VCs around, looking for those juicy investments, Sequoia Capital, SAIF Partners, Bessemer Venture Partners, Tiger Global Management, SoftBank and Lightspeed Venture Partners are just some of them. And then there are the so-called micro VCs such as Blume Ventures, India Quotient and YourNest Venture Capital. These VCs typically get in at earlier stages and invest amounts that are somewhere between angels and conventional VCs.

And now for some yummy terms. Every industry has its own fancy terms, which people in that industry love to bandy around. So the computer guys talk about blockchain, Hadoop, augmented reality and so on. The bankers talk about bond yields, spreads, NIMS (net interest margins), etc. The auto industry brags about electric vehicles, hybrids and Bharat Stage VI. So what about our VC industry? Shouldn't it have its own unique terms that VCs can throw around at parties? Sure they do. And their terms are Series A, Series B, Series C... all through the letters of the alphabet. And sometimes, just to confuse you, there is also a Pre-Series A...

Sounds like fun? You bet it is. These are simply stages of investment. So a Series A investment typically raises $1-3 million. a Series B raises $3-5 million, a Series C raises $5-10 million, and so on. You get the idea, don't you? Series A is typically the first investment by a VC fund, Series B is the next one, and so on. And each stage gets a larger quantum of funding than the previous one. Of course, you must remember that these are only ballpark figures. So you could have a Series A investment that raises less than $1 million. or more than $3 million. There is no law against it. Just remember that Series A precedes Series B, which, in turn, precedes Series C and so on. And that also tells you what a Pre-Series A investment is. Something that is significantly less than a million dollars, but comes only after an angel round.

Dear reader, do you realize how important this section is? Because you are now armed with just the right set of terms with which to impress people at your next party. And if you drop these terms somewhat nonchalantly, as though you deal with such boring things every day, we can assure you that the effect on your listeners will be quite powerful.

IPO

If you have just about launched your start-up, you don't need to worry about IPOs, or initial public offerings simply because it's likely to be very, very far into the future. If at all. Essentially, you have to worry about it when getting your shares listed on the stock exchange, through an IPO. Now why would you raise an IPO? Well, there are many reasons. First of all, it gives all the investors including the employees who may have got ESOPs (Employee Stock Option Plans) an easy exit through the stock market. Valuations become clearly defined. And, of course, the special powers of the VC that the shareholder agreement provides (see Chapter 20) are gone. By the way, most start-ups never reach this stage. Biggies such as Ola Cabs, Paytm, Flipkart and Oyo Rooms never had an IPO. They simply kept raising larger and larger rounds of funding from VC's. On the other hand, you have Info Edge (the owners of Naukri.com) and IndiaMART, which have both floated IPOs,

Why Raise External Funding?

Good question. The first reason is obvious and we've mentioned it earlier-friends and family can only help up to a point, and whe you need larger amounts of money to scale up rapidly, you need to go to outsiders. That much is clear.

But that's not the only reason. Remember investors-whether angels or VCs-are typically highly experienced. And therefore they can add tremendous value to your start-up through mentorship. Because they now own part of your company and are therefore interested in seeing it grow and succeed. Also, they bring solid contacts, which your start-up can use. For instance, if you have a B2B start-up, just imagine the senior-level contacts and therefore potential clients your investors could ger you. And then, of course, the company gets credibility-so if a biggie such as Sequoia Capital or SoftBank were to invest in you, well, your customers would start respecting you, wouldn't they? To summarize, money, experience, contacts and credibility are all key reasons to look at investors for funding.

But hang on. Does every start-up need funding? Let's just step

back for a moment. Look at successful businesses around you. Look

at that highly popular photo studio in your neighbourhood. Is that business? Yes. Is that a successful business? Of course it is. Did they raise any rounds of funding? Most likely not-except perhaps from their family. And what about the highly rated nursing home just two streets away? Once again, highly successful, but which probably never raised any funding, except maybe a bank loan. In fact, you will see successful businesses all around you that are doing great work and perhaps minting money-just look at the Jaguars parked outside their homes. But most of them would never have raised external funding. In fact, we are fairly certain that only a small percentage of ventures actually take funding from outside.

So why has funding become so essential? The answer is media. parties and peers! 'I just raised a Series A round,' brags a founder at a get-together with friends. Of course, he forgets to mention that his venture is loss-making and is likely to remain so for a long, long time. But that's irrelevant. He's raised a Series A round-that's what matters. And the poor guy listening to him, who is actually running a profitable business without needing funding, feels left out. Maybe I'm wrong. Maybe I do need money,' he thinks. Or take the media. Every channel and its uncle blares out, XYZ company raises a Series B round. Or, 'PQR valued at over 100 million dollars. And the poor chap watching feels left out once again. You see? The environment is abuzz with valuations-Series A, B, C, bridge rounds, VCs and the like. And whether you like it or not, peer pressure forces you to act. Tune abbi tak Series A raise nahin kara? Koi problem hai kya? (You mean you haven't raised a Series A yet? Is there a problem?)' And so on.

Does that mean you do not require funding? Of course not! If you are building a solid product, you would most likely need money to build it. If you are in a business where rapid growth is the only way to stay ahead of competition, yes, you would definitely need funding perhaps lots of it. If you are trying to build a consumer brand, you have no choice you must raise money. But please remember, funding is not something you raise because it is fashionable. It is not something you do when your girlfriend (or boyfriend) starts, drifting towards Mr (or Ms) Series B. It is something to be raised if and when you need it. Remember, funding is not an end in itself-funding is a means to an end. and that end ix to run a successful, profitable business. Yes, if you do need it, there is no option and you must raise it.

Also, even if you do need to raise money, funding and valuations should not be your focus. Focus on building your business. If you can do that, the funding will come. Don't chase funding. Build a successful business, and let funding chase you.

The Impact of the Coronavirus or Any Other Crisis

Dear founder, that's a huge question. And at least part of the answer is obvious: Businesses have slowed down, even if temporarily, People have lost money. Most of them are not willing to take risks at the moment and are happy to park their money in a fixed deposit with their friendly neighbourhood bank. So what happens to angels? They are also people, aren't they? Quite naturally, they have also become risk-averse. That doesn't mean they will not invest, but they will perhaps be far more choosy. And that brings us back to our favourite theme-ensure that your start-up is PERSISTENT, and you stand at better chance of getting angel funds. By the way, this is true for any crisis, and not just COVID-19.

When funds are in short supply, PERSISTENT is the way to go. But what about VCs! Well, that's a slightly different story. Remember that angels have a choice they can park their money in bank fixed deposits. But the VC cannot. VCs have raised funds for a limited period, and they need to give returns to their investors. And so they will go ahead and invest. What's the message for you, dear founder? Well, if your start-up is at a later stage and you need VC money, you will probably find it a bit easier. But, of course, you still need to be PERSISTENT.

And with that, we come to the end of this chapter, We have looked at different kinds of investors, and we have also looked different stages of investment. We've seen why you need to raise funding. And why you don't. And now, assuming you do, wouldn't you like to look at the real thing? Wouldn't you like to meet start. ups that have actually gone through these stages? Including those that managed to raise funding? And even more important, those that could not and fell by the wayside? Wouldn't you like to understand the PERSISTENT approach? We're sure you would. And for that, there is one simple thing you need to do.  

All You Need To About Saving Tax

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