Where do investors scout their prospective investments? What do they find important when negotiating a deal with a start-up? Why do they think about an exit strategy early in the game? For aspiring entrepreneur Vinodkumar Bhovi the course Entrepreneurial Finance: Venture Capital Financing was the ideal way to find answers to these kinds of questions. He shares some of the eye-opening insights he learned at the Amsterdam Institute of Finance in this program taught by Cyril Demaria.
Bhovi is on a journey from senior software engineer at Rabobank to entrepreneur with a mission to combat climate change. He founded earthemission.com to create cloud carbon management software. By offering solutions for carbon emission measurement and reporting across various industries and company sizes this addresses a critical need in the fight against climate change.
Starting earthemission as a side gig demonstrates Bhovi’s commitment to his vision while also acknowledging the practicalities of transitioning towards entrepreneurship. Through the course at the AIF he gained insights into investor expectations and sought to understand what they seek in an entrepreneur, preparing Bhovi for the growth and scaling phases of his venture. “To understand what they’re looking for in an entrepreneur, I wanted to put myself in the shoes of an investor”, he says.
Deal sourcing
The road from search to exit that investors follow is a long one, Bhovi learned. It starts with deal sourcing, a big challenge for investors. “Before, I thought that it was entrepreneurs that would reach out to investors. However, this is something both parties do. Entrepreneurs are looking for capital, but at the same time you have investors looking for entrepreneurs in whom they can invest their money. Somehow the two parties need to connect. There are platforms for this. That could be LinkedIn, it could be events, it could be startup acceleration programs, or in-house programs.”
Deal structuring
Next in the deal flow comes the deal structuring. In the eyes of Professor Demaria this is the most critical part of the process. “A handshake is good, but if in the future you had a conflict, that wouldn’t stand. So the term sheet plays a really important role here. Cyril brought a few examples of situations where not everything was properly worked out”, Bhovi says.
When it comes to agreeing on the terms, he learned this can be a very lengthy process. “The term sheet is a document which goes back and forth between the two parties for negotiation. You go through a conversation. Usually this entire cycle can take up to six to eight months. This is something I didn’t realize.”
Investors invest with other people’s money
Something also unbeknownst to the average entrepreneur is that the people they see as the investor, oftentimes are not working with their own money. “On the contrary, investors mainly invest with other people’s money. It means they have two different responsibilities. They are getting money from someone and giving that to someone else. So basically they have a responsibility towards both parties. They also have to take into account that if they somehow mismanaged the funds it could give them a black dot on their career.”
In practice it means a lot of effort is put into due diligence. “I used to think, maybe a bit naively, that it would go like in the show Shark Tank. Investors ask a few questions and then they write a check. But in reality, there will always be due diligence in the background. No investor would invest even a single penny without.”
Typically this will be done by an outside party, another thing entrepreneurs are not aware of. “So those other guys will come in on behalf of the investors. They get the financial statements of the company and then provide their feedback. So that was another eye-opener for me.”
Exit strategy
One final big difference between the investor’s perspective and that of the entrepreneur, is that the first will always want to know what the exit strategy looks like. “Usually investors will have a time frame of three to four years within which they want to see returns. So it’s important that you have an exit strategy from day one. Is it going to be an IPO on the stock exchange, is your company going to be sold to a bigger peer? It means it’s important for you as the entrepreneur to think about where you see your company heading in five years’ time. As an entrepreneur, I wouldn’t be thinking about that. I would just be thinking about the next month or the next year and how you want to build this baby.”
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