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Anonymous

Former Global Head of Pricing and Strategic Initiatives at Uber 

Founders: Choosing the Right Investors

UberX and UberEats: Setting the Take Rate

Startup CFO's - Managing VC Expectations

Can we talk about your experience in raising capital and being Head of Finance in growth equity businesses. What do you think is the biggest challenge for founders or growth equity CFOs, in the fund-raising process today?

I think it’s more about meeting the expectations of the venture capitalist. They are taking high risks, but they also want very high returns and they have a certain set of expectations. They are looking to invest in the companies who can be 100x where they are. The late stage investors are a little bit more realistic. For example, they are looking for certain IRR, which tends to be a 15% or 20% IRR. If companies can deliver that, they are much more open to fund. But for the VC business, out of 100 companies, one or two will be successful and most of them will fail. For the one or two which are successful, they are looking for very high returns.

Their expectations are to invest in the businesses that can grow, exponentially, for a long period of time. With that expectation, the founders also need to provide that picture to the venture capitalists and to grow, especially in the consumer business. The marginal cost of growing the business is very high, but you still need to show the funded growth, and a different set of beliefs, because the expectations of the VCs are very different. I found that a little disconnected, many times, between what the right way of running the business could be and what the thought process of a VC is. That disconnect could be a bit tough. You need to show a plan which is very aggressive; you get the funding from the VC, for that particular plan and then executing on that plan becomes hard. Even if you execute on that plan, you have to invest a lot of capital, which may not be the right way to think about running your business. That becomes one of the issues in the business.

The other thing is, right now, there is a lot of liquidity in the market; interest rates are so low. You have so much capital floating around and VCs need to put that capital to use. Different players can raise a lot of capital and if your other competitors have raised the capital, you also need to raise capital, to compete with other subsidies and benefits on other platforms. It becomes a rat race, from that perspective.

How do you balance between raising too much versus too little? For such a fast-growing business, how do you project the business and then understand how much to raise?

One thing I have realized is that most of the businesses fail because they don’t have enough capital. Although, yes, raising too much capital will dilute yourself and your other shareholders. But, ultimately, it’s better to have enough capital as opposed to running out of capital. The way to think about it is, yes, you want to have enough capital to run your business for at least the next 12 to 18 months, when you have the path to profitability.

You need to run different scenarios. One is your more optimistic scenario, then a realistic scenario and, finally, a conservative scenario. You want to raise capital in such a way that, in your conservative scenario, with your growth, with higher expenses and higher losses, you still have enough runway to run your business, in the time you turn to profitability. I’m talking more about in the late stage, that is how you would think about it. You need to have enough runway for at least 12 to 18 months, to turn to profitability, in your conservative scenario.

I think that should be the first thing in your mind, for any other CFOs. Yes, you want to have financial discipline, but you also want to have enough capital. If they have enough capital, then they can, potentially, focus much more on executing the business strategy, rather than being worried about running out of cash.

You mentioned the difficulty in engaging with VCs and becoming aligned, in terms of their business model return and projections. What are the most difficult engagements or interactions that you’ve had with VCs and how do you navigate that difficulty in alignment?

There are a couple of areas. VCs have a certain set of expectations, depending on the other businesses that they have seen. They have a certain set of metrics which is how they evaluate most of the businesses. Your business, let’s say, is a new business, and you have a different way to look at new business and you have a new set of metrics. I think the biggest gap between aligning on the way you think about your business and how it could, potentially, be different from the other set of metrics, for other businesses that they have evaluated. The way to do that is, yes, you build those relationships over a long period of time. You provide the set of metrics that you think are more in line with how you think about your business. You show the implementation of those metrics and you show continuous projections, with the goals and the profitability, based on the performance of those metrics. Then, I think, investors will become a little bit more comfortable, over time that, yes, those could be the right metrics, for this particular set of businesses.

That becomes much more challenging, to align on the right set of metrics, how you measure the performance of the business and what could the right growth path be, for that business. So you are not burning a lot of money, but you are showing enough growth and you are showing a constant path to profitability, as well.

How do you, as a company, and you, as a CFO, do due diligence on the investors, on the VCs? If so, how do you go about that?

Yes; I think it’s always about supply and demand. Ultimately, it’s all a marketplace. You need to have, not only a good business, but it’s also very important to have the right investors for your business. Investors can also make or break your business, depending on how they provide the guidance, how they run the board and what their expectations are. As I mentioned, there is also supply and demand. If you are a strong business or if you are in a strong position, then yes, you would definitely like to choose an investor which, rather than the evaluation at that point in time, I would rather go with a VC who you are much more comfortable with, who has a strong belief in your business, who you believe could be a long-term partner, to your business.

That would be the best way to think about it. Often, what happens is, yes, you raise money in the first round, with your investor. In the following round, it’s always better for that particular investor to invest again in the business. You can only do that if that particular investor is thinking more of the long term and you have built up a good relationship with that particular board member.

Also, there are often a lot of ups and downs in the business and you don’t want to be bothered by the investors who are much more of a short-term thinker and disrupt your thought processes in running your business. It’s very important not to go just for the valuation when you are raising capital. Obviously, if you only have one VC who believes in you and you definitely need capital, then that’s it. But it’s better to wait, and get the good investors on the board, who understand the business, who you could consider the thought partner and who is a long-term believer and investor in the business.

Lastly, what advice or specific tricks of the trade do you have, for founders, going through the process of raising capital, in terms of preparation, processes or any materials that you think makes the process as professional as possible?

One is, raise the capital when you need it the least. Rather than waiting until the last minute, when you are running out of cash or balance sheet becomes weak, it’s always important to start the process earlier, when you are in a situation of strength. Even if you don’t need capital, I think it’s always good to have an extra amount of capital, when your business is strong.

Then second thing is, it’s always helpful to get help from any of the advisors, whether those are consultants, painting the story to tell to the investors or bankers, helping you to find the right investor set. I think, although it takes some capital, it will help the process run much more smoothly and it will help you find the right capital, from the right investors. It’s very time consuming, so having the right partner with you, to run that process, is very important. As a CEO, when you are fund-raising, you also need to run your business. Having the right set of partners, who are 100% focused on raising the capital, is very important.

That will help you with the preparation of pulling the right data, creating a much more advanced story. Yes, you want to continue to build a relationship, but having the right story, having the right data set, which is consistent communication or consistent story, is important. Those are a few things that I would suggest, for any of the founders.

Lessons from Raising $90m in Venture Capital

How to manage the relationship with a VC investor

The importance of understanding the incentives and expectations of VCs

Balancing between raising too much versus too little

What to look for in a VC investor as a founder