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Funding advice from an I-banker | Shauraya Bhutani @ Capital Connect Advisors
185 Plays1 year ago
Shauraya Bhutani brings to the table an exceptional combination of being both young and a veteran of the PE space, and he is the co-founder of the boutique investment bank - Capital Connect Advisors. He spills the beans on how to get your startup funded across different levels, and how to be more strategic about engaging with an investment bank to raise funds.
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Read more about Capital Connect Advisors:-
1.Investment banker Shauraya Bhutani makes it to Forbes Asia’s 30 Under 30
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Transcript
Introduction and Episode Overview
00:00:00
Speaker
I'm short of Bhutani, the co-founder and partner at Capital Connect Advisors or Boutique Investment Bank, headquartered in Singapore and New Delhi.
Challenges of Startup Funding and Strategic Fundraising
00:00:21
Speaker
This episode is a masterclass on all things funding. The start-up funding winter is upon us and in such a difficult environment, it is the need of the hour for founders to be smart and savvy about fundraising. Shorya Bhutani brings to the table an exceptional combination of being both young and a veteran of the PE space and he is the co-founder of the boutique investment bank CapConnect.
00:00:43
Speaker
In this freewheeling conversation with your host Akshay Dutt, Shaurus spills the beans on how to get your startup funded across different levels and how to be more strategic about engaging with an investment bank to raise funds.
Understanding Investment Banking Careers
00:00:55
Speaker
Stay tuned for some amazing nuggets about funding straight from the horse's mouth!
00:01:08
Speaker
So you're an investment banker. Let's start by understanding what is a career in investment banking entail, what attracted you towards it, you know, like a broad understanding of the space.
00:01:24
Speaker
Yeah, absolutely. So I'll answer what attracted me to it. And it's probably not the typical answer, right? So growing up in Delhi and always being exposed to, I guess, movies and such, I look very cool, you know, like investment bankers, wearing suits. What was a pretty woman and inspiration, Richard Girsh?
00:01:51
Speaker
It's pretty women's a bit ahead of or before my time. So Wall Street definitely, you know, in one of those and some of the recent ones were for Wall Street, et cetera. But, you know, as a kid, you're, of course, quite impressionable and you see this and you think, oh, wow, so cool, right? But that's what, you know, at that age. So how it what happened, I guess,
00:02:18
Speaker
Because of that, I chose to do a business major. One of the reasons I chose to do a business degree with a finance major and then one thing led to another and I started working in investment banking. So probably that was the spark, I would say. If I wasn't fascinated, I would probably not have taken the business degree in a finance major.
00:02:45
Speaker
It's in uni when I started learning more about the nuances, the expertise required. I went deeper into it. And then I did a couple of internships in Singapore, which exposed me to the working life. And as I did it, I just got more entrenched and I just loved it in terms of what goes behind the scenes. And it's, of course, way different to what you see in movies.
00:03:15
Speaker
Outside looking in, it's of course fascinating, etc. But when you're working inside, it's basically a night fight in mud. But you should enjoy doing that. It's not always pretty. It's ugly, but you should enjoy both sides. So as I started doing internships, I got my first job on the investment side, not investment banking.
00:03:41
Speaker
would work with some of the investment banks as our advisors, got to know how they work etc. So it just attracted
Types of Investment Banks and Their Operations
00:03:50
Speaker
me. Then I left the investment job and then joined the boutique investment bank and they say the rest is history.
00:04:00
Speaker
So the difference between investments and investment banks is in investments you are working with somebody who has money and helping them invest that money. In investment banking, your clients are people who are either seeking money or looking to invest money.
00:04:16
Speaker
That's right. So investments are typically like a private equity or a venture capital fund or hedge fund, which have the money, which they've raised, then they deploy it. So it's effectively the buy side.
00:04:31
Speaker
And in an investment bank, typically, especially on the corporate finance side, you're the advisor. Like you said, you're advising companies who are trying to raise money or sell themselves, or buyers who are looking to acquire smaller companies. So you're effectively, though, individually in the transaction and you're helping them. Yeah. And what are the different types of investment banks?
00:04:56
Speaker
Wow. I mean, these days, everyone, I mean, there's a lot of investment banks floating around, but I'll try to break it down. Right. So I'll start with the most known names and they fit in the budget bracket category. So, you know, Goldman Sachs, JP Morgan, Morgan Stanley, then you've got your mid market banks. So these Goldman Sachs and all would be like doing hundreds of millions of dollars of deals for large corporates.
00:05:22
Speaker
Yes so the difference between I mean I guess what bulge brackets do is they do larger deals absolutely but also they have more products to offer to their clients so they would do corporate finance which is effectively you know advising on M&A or advising on pretty capital markets today's capital but
00:05:41
Speaker
that a boutique bank would also do in a smaller scale. The additions, where the budget bracket kicks in and offers more products and more departments, they have a sales and trading desk, for example. When hedge funds, et cetera, buy a certain security, they go through them. So they have access to these assets and to facilitate the buy-in selling of these assets, whether it's equity or whether it's fixed income.
00:06:07
Speaker
So it's effectively corporate finance plus sales and trading and some of the larger banks would also then include corporate banking where they themselves have a balance sheet and then they're lending to their clients. Although it doesn't fit in investment banking but a lot of these firms have wealth management as well where they're managing larger family office money, high net worth individual money.
00:06:32
Speaker
So the typical advantage they have that all of these interact with each other. They have access to capital, they have access to the best companies, and that's where the bulge brackets sit.
Selecting Investment Banks for Startups
00:06:42
Speaker
At a smaller scale, also doing the same thing, some of the mid-market banks like Jefferies, HSBC to an extent.
00:06:50
Speaker
So, it's bulge brackets, mid-market banks, and then if you take out everything, if you strip off everything around sales and trading and wealth management, etc., then you have boutiques, which are offering corporate finance services. And even within the boutiques, there are some of the more established boutiques, which are competing with the bulge brackets on deals.
00:07:14
Speaker
uh you know their uh experience set uh and just because they're known like Lazard and uh probably Julian Lukey to an extent uh which are competing with the bulge brackets on a billion dollar plus deals um then you've got uh within the boutiques you've got regional or industry specific boutiques uh which you know specialize which is typically started by partners
00:07:37
Speaker
you know, ex-partners from bulge brackets or ex-partners from mid-market banks, we effectively wanted a larger share of the pie. They built their relationships, they have expertise, and they're like, we can go and do this ourselves, but we'll do it in a very niche and focused manner, but we're going to own more of the profits rather than giving it to...
00:07:56
Speaker
the shareholders of their previous companies. So these boutiques usually have very focused offerings that we have expertise in this sector, we have expertise in this region. So then they can niche it out and then start competing as well with some of the larger mid-market banks. Like for example, somebody helping tech startups in India to raise money. So that would be like a boutique investment.
00:08:25
Speaker
Yes and no. I mean a lot of the mid-market banks would also help take startups raise. I guess the difference would be that if you're a smaller startup then it's probably a boutique like a seed series A startup or you know raising say you know anything between a million dollars to fifteen million dollars then that'd be a boutique but if you're raising like a hundred two hundred three hundred million then the mid-market start kicking in to any extent right and by region the size differs as well so yeah.
00:08:51
Speaker
Who are the major investment banks in India? And from a startup perspective, like if a startup was to raise their ATSI round, who would they go to? At a series B, C, D round, who would they go to? Well, you should come to GAPLIC Connect Advisors. I've heard that's a good form to bank. But, you know, in case we're busy, in case we happen to be busy, no jokes, but I think this has done a great job, right? I mean, they were forced out of the key. For which stage?
00:09:20
Speaker
I think multi-staged, they started off about 20 years ago focused on advising technology companies and of course now have become this Bemruth who offers like a lot of products but when this still remains a very good option for Indian technology founders and they typically...
00:09:44
Speaker
No, not at all. I mean, they started off with doing smaller reasons. Yeah, they started off with doing a smaller reason. Now, of course, you know, at least it's just natural progression. Now they do bigger deals. But if you're a million dollar,
00:09:59
Speaker
If you're raising a million dollar as a tech founder in India, there's a lot of options, right? I mean, there's also a lot of one-man bands, which are experienced ex-bankers, etc., which can connect you up. But these days, because the Indian ecosystem is so advanced, if you're raising a million dollars, you typically would not need an advisor if you have a solid product, solid value proposition.
Role and Costs of Financial Advisors
00:10:28
Speaker
basically do without an advisor. What's the cost benefit analysis if as a founder you were to look at whether to go with an advisor or not? There would be obviously some cost to it. What would that look like? What would the advisor bring to the table? Yeah, absolutely. Absolutely. So as a founder,
00:10:52
Speaker
to hire an advisor. I guess, I mean, the most scarce resource for a founder is his own time, right? And they're doing so much, you know, hiring, building the strategy, working on the ops, doing BD, winning clients. So time becomes a very scarce resource. So an advisor should be hired if a founder has not
00:11:13
Speaker
previously raised any funding and does not have say a network into the VC or the early stage angels syndicate etc community. So a founder or advisor can come in and effectively play that role. Although founders are expected to do the pitching themselves, but all that goes behind in terms of preparing the deck and preparing data, financial model etc can be done by an advisor.
00:11:42
Speaker
but equally that can also be done by an experienced CFO. If you're using a smaller round. So this I'm talking about if you're using say less than five million dollars. So I mean then you should absolutely you know do a cost-benefit analysis of your time and then hire an advisor or hire an experienced CFO to run the process.
00:12:04
Speaker
And what does this advisor cost? It's a percentage of what you raise or is it a fixed fee? How does it work?
00:12:12
Speaker
Yeah, so typically what we've seen advisors in India for smaller raises, you know, they take a percentage of the amount raised and rarely, or at least in the early stage, they also charge already Dana, which is offsetable against the success fee. Dana is insurance skin in the game.
00:12:38
Speaker
Yeah, I mean, I think the retainer plays two things, right? I mean, especially as if you're a one man band smaller advisor, or it helps with the working capital, you know, because you're also committing your resources. And second, probably the more important part is that if I pay for something, I will value the services more and value their time more. So as an advisor and advisor, if you get a retainer from a founder, like founder's like, should I pay it for this? No, I've got to.
00:13:07
Speaker
Very commit. So, yes, Redino actually serves as a good tool for that as well. And what does it cost? Typically, a ballpark percentage of, like, single digit percentage of what you're in? Yeah, absolutely, absolutely. Anyone even
Shorya Bhutani's Journey and Firm Founding
00:13:22
Speaker
double digit, that's like, you should run away, right? So, it starts again, it varies so much. It varies so much.
00:13:33
Speaker
I think typically you would see anything as low as 2% to 5% is the you know in the middle somewhere in the middle but exceptional cases of course would vary. What we've seen interestingly some of the advisors do which I think aligns the founder and the advisor quite a bit as well is if you're an early stage founder raising money instead of giving cash to the advisor you do either a combination of cash and equity.
00:14:00
Speaker
Right. So you take your fees as an advisor and half in cash, half in equity. So that commits you also like, okay, we're here for the long term, right? We're not just here to like, take your cash and run away. And it helps founders because as an early stage company, you need to preserve cash, right? You need to use cash for the right things. So as much as you can save, give equity. Equity starts becoming very expensive once you start growing. So early stage, you're okay to give some equity.
00:14:31
Speaker
Okay, very interesting. Okay, so tell me about your own journey now in the world of investment banking. So you finished your master's in business that works. Yes, so I did my master's in business with a major in finance. I do Singapore, Singapore Management University.
00:14:49
Speaker
and the reason I guess just a bit of context to come to Singapore again was because it's the you know financial hub of Asia and of course you know you can also work in the Indian market while being based out of Singapore so it's very attractive and my journey has been I would say I mean everyone sees that journey has not been difficult but I would say it's you know
00:15:10
Speaker
I would also say mine's not been difficult, that's for everyone else to judge. I finished my unique joint in investment form, investing in renewable energy, so doing effectively investing in solar assets, wind farms in Southeast Asia, Singapore, Indonesia, Philippines, Thailand,
00:15:32
Speaker
interned with them for a year before I joined and effectively last year of uni all I was doing was interning. I was like uni is done now I need to get dual experience and yeah I think at the cost of a bit of cost in my education just to get dual education I was interning for a year through and through.
00:15:50
Speaker
So I worked with them for about a year and a half. Then after that, I joined a boutique investment bank in Singapore, which was focusing on Singapore and Australia, effectively helping technology companies raise funds, but also M&A, helping themselves. So the focus was pretty much Singapore, Southeast Asia, and Australia.
00:16:20
Speaker
I joined as the third employee with the form and, you know, worked with them for about five years. Also, it was a smaller organization. So, you know, you could, at least in Singapore, it was a smaller organization. So the upward mobility was quite high. The responsibility and ownership was quite high as well. But as long as you delivered on that, you could move quickly there.
00:16:39
Speaker
So I joined as an analyst there, then left, worked with them for five years, helped them build out the Singapore business, and then left. When I left, I was a director in the company, and me and my colleague worked for the same company, and thought, man, I think it's time for us to do our own thing, right? I mean, we can drive our own strategy, and we feel confident enough that we'll be able to deliver more value to our founders if we have our own setup.
00:17:07
Speaker
So me and my colleague from the previous forum went and set up our own boutique investment called Capital Connect Advisors. And why we felt confident upshare was I was 27 when I started that, right? And I felt confident, of course, to have my co-founder with a certain set of experience. But also, I think it's just up to my risk perspective. When you're early on, you can take certain risks.
00:17:35
Speaker
And I always had this thing in my mind, although I knew that I had to get the world experience, do a job, is to do my own thing. So it was a very easy decision for me. At least in my mind, it was quickly, right? Long story short, in 2021, we set up our own firm called Capital Connect Advisors, helping technology founders raise money and helping them sell their companies.
00:18:03
Speaker
effectively focused out of Singapore but a year ago and you know I am Indian but I am born and brought up in Delhi but I didn't work one day in India but just couldn't ignore the opportunity and there's so much buzz going around I was like I cannot sit in Singapore and be like yeah I'm only gonna do
00:18:24
Speaker
like Southeast Asian deals. So a year ago, we expanded Gapi Connect, set up a second office in Delhi, and effectively serve the Indian market, serve the Indian founders. So now we have, of course, recovering India and Southeast Asia, which is about 1.2 plus, 1.4 plus, 2.1 billion people.
00:18:45
Speaker
So that's a massive market for us, emerging market economy, et cetera.
Skills and Strategies in Investment Banking
00:18:50
Speaker
So yeah, now it's been two and a half years. I doubt to say it's been, you know, it's only been two and a half years, but I think about five, six years. It is a highly demanding job, but also a highly rewarding, especially when, you know, you're working for yourself.
00:19:11
Speaker
And you can see the results being forced to gesture the people with yourself as well. It gives you a lot of satisfaction when you achieve certain things. A couple of questions I want to zoom in on. So you spent about five years at Notch Ridge, I believe. That was the focus. What did you learn there?
00:19:35
Speaker
that was so much in five years right because I was early on um so I had I have to say in general here I've been lucky to now have had great people around me that are my bosses my mentors early on were very good and
00:19:53
Speaker
just absorbing how they operate has been you know or education in itself. Now what if I learned I guess you can break it down from you know technical to soft track from a technical perspective of course horned into you know how to
00:20:11
Speaker
On the financial side, how to model companies, how to understand the drivers of the companies, how founders think about their growth strategy, etc. and then making it, listening to them or getting their information and making it into something which is understandable by the investor side. It doesn't come instantly, it requires a lot of
00:20:32
Speaker
deals you've got to work on, a lot of type of different sectors you've got to work on. So just honing my technical skills, of course that's the obvious one. Second on the soft skill side, it's just how to interact with investors, how to manage founders, what gets them going, how do you position things. So that's more on the soft skill side and I would say
00:20:58
Speaker
You know, I think when you're engaged between, say, 20 to 25 in our industry, it's about honing your technical skills because, you know, that should never be compromised. Even if, you know, you're a senior banker, you have to have all the answers. Like my, I guess my framework or like my principles always don't, I would not ask anyone junior to me to do something which I can't do myself. So, honing your technical skills has become
00:21:27
Speaker
is very important from 20 to 25 but then really what kind of propels you forward is you know soft skills around people management or you know what drives people but also driving insights about your sector like what do you
00:21:45
Speaker
Can you call this first than any of the other general public? And if you can call it first, then you can action it first and you move faster. So it's a range of things. And of course, my time with Northridge, I learned a lot from a lot of great people across technicals, across soft skills.
00:22:09
Speaker
Also, how to build a form. Even that form was about 15-20 people. They were building it out. How to do institutional building in journalism. Technical skills means working on presentations, printing numbers, doing a DCF valuation of businesses. That's what we mean by that.
00:22:32
Speaker
Yeah, I mean we don't now I think it's come back actually in DCF valuation in general show, you know, modeling companies and accelerate the basic other grant work, building presentations, information memorandums,
00:22:53
Speaker
building out the data room for a company. Effectively, the data room is what investors look at when they're doing their due diligence. So all of those things. You spoke about taking a call about something which you think is going to happen before others reach that conclusion. Give me an example of what you mean by that. Yeah, sure.
00:23:22
Speaker
Maybe I give you an example from Keck and Nick's perspective and where we've seen and where we've been rewarded. So in Domesafe, just a little boutique investment banking business. It's quite crowded. There's a lot of people offering these services. But for us, it was
00:23:48
Speaker
even see the cold as a Singapore based investment bank, who's, you know, I think we're quite, we'd be quite good just, you know, doing business in Singapore, Indonesia, Vietnam, et cetera. But seeing that early on, the Southeast Asia market is very, very interesting. But
00:24:13
Speaker
If we want to expand larger deals, we have to go and expand our market to India. Now what we have, as my expertise said, is network is that we have investors based around the globe looking at their assets and they want to be investing in emerging markets. But taking that call around, we can offer them Southeast Asian assets, but the real actual scale comes from entering India
00:24:42
Speaker
And sure, it's not really a noble idea that, you know, like no one saw it then to India, right? We've been doing stuff. But I would say today, I can make that statement and be 95% sure about it. In terms of a critique in Western Bank focused on technology, the coverage we have is quite unrivaled, right? So no one in Singapore sitting and thinking, okay, you know, we should go out.
00:25:06
Speaker
to India as well. And why should we go out? The other thing, I guess, is just to switch to M&As. And I think we spoke about this before. The funding winter started hitting around in 2022. So I've come settling in.
00:25:23
Speaker
And it's still going on. When people are still focused on doing Japanese, when I say people, I mean advisors. But when we were speaking to investors, we saw there's going to be a pullback. So we started kind of engaging our ecosystem more on the M&A side.
Building Relationships in Business
00:25:43
Speaker
So what we realized is that there's going to be a slide to quality.
00:25:46
Speaker
in terms of where the gap is going right and apply to quality in terms of not everyone's going to get funded. The top guys are going to get funded or at least have enough cash that once the valuations go down, they're going to go after the M&A piece. Even the corporates are going to go after the M&A piece.
00:26:05
Speaker
We started building the M&A case I would think more early on than some of the other guys and that served us quite well. We're currently running a range of M&As which are going to be announced soon and we're very proud that we did that early on rather than jumping late on the bandwagon.
00:26:31
Speaker
So these small nuances, I'm sure I can think of, you know, other things. That's what happened. Got it. Yeah. Tell me about, uh,
00:26:41
Speaker
What it takes to build an investment bank? Does it start by building a relationship with founders or with investors? What comes first? Chicken and egg, kind of a question. Chicken and egg. I just want to define the investment bank here.
00:27:01
Speaker
I think what I'm referring to when I say investment bank is a boutique investment banking shop which specializes in corporate finance which is helping primarily offering two or three products which is helping on M&A effectively companies who want to sell or get acquired helping companies with private placements who want to raise capital to grow
00:27:26
Speaker
and three is strategic financial advice, which is of course embedded in the first two, but sometimes also is a standalone product. And this boutique investment bank, see ourselves, we're focusing on the mid market. So, you know, a good stage technology companies use BCT to now I'll answer your questions since I've defined it. I think it takes both and also you have to
00:27:53
Speaker
starting on I guess you have to convince one side that you'll be able to do the job and then take that side and then tell the other side that you have it so it starts it's like building blocks right so it's you build it slowly it's not you know day one behind you can just go and be like you know I'm advising um I think it's uh the quality I found to at least when you're starting on is
00:28:18
Speaker
to be more flexible than some of the established players will be. To be even more optimistic, take the chances and your chances will feel high.
00:28:33
Speaker
you can succeed then you know you've got this one basically break now and then you can lay another break and lay another break so it gets built over time especially as in early in your earlier career or if you joined like an already established
00:28:50
Speaker
investment bank then you're good, right? I mean if today even if someone joins us they wouldn't need to do what me and my co-founder had to do before because we you know build that up. So it's it really varies but if you're building from the ground up you need to be building a career. Forget like even investment if you're building a career in investment banking you shouldn't be doing all of this as an early as an early employee, right? You know making the connection etc leveraging your firm's connection so
00:29:19
Speaker
then your kind of your forms connections eventually become your connections because you know you've delivered value to them. You said that you have to take more risks when you're starting off. So risk here is because you get paid only if the fundraise happens.
00:29:41
Speaker
There might be a company where another advisor may say no because he thinks they'll not be able to raise, but you would still be a little more optimistic and work with them. Maybe some of those cases would work out, some of them would not work out. So that's what you mean by taking more risks.
00:30:00
Speaker
One of the elements, yes, but it's also, I think, just an opportunity cost, right? Some of the companies are fix-it-uppers in terms of, I mean, early on, right? This is in 2017 or 16 when we were starting out, fix-it-uppers in terms of there's a lot of work required, groundwork required before we can take them to market. Some of the established players are like, man, I don't have
00:30:22
Speaker
I don't have time to do this, or like, even if you do it, we don't. So that's like, I guess their extra work and the optimism has to kick in, right? And I can do the groundwork prep them and take them to market. So yeah, I mean, I think that's the main kind of risk, which is the opportunity cost and the closing risk.
00:30:43
Speaker
Give me an example of a fixer-upper. Maybe you don't have to take a name, but hypothetically, what it would look like and what you would do for them to make them ready for a fundraiser. Yeah, absolutely. So if it's here, and this is, I'm drawing from my experience very early on in my early days, right? So this is around 2016-17 and I'll keep you in Excel. So it's here, it's a company which has got decent customers on board.
00:31:13
Speaker
I don't have, I guess, a full team built out. So the customers are built out only on the founder's capabilities. Effectively, the founder is still the CEO, the CEO, the chief business development officer, everything. Now he needs to get, if he wants to scale from say a million dollars in revenue to five million dollars in revenue, he needs to get a team in place. But before he gets a team in place, he needs to raise money to get it there.
00:31:41
Speaker
But how's he gonna raise money if he's doing four jobs? So we come in I guess and we like it out of the four jobs You know, you keep continue doing you continue keep doing that. We'll at least take the CFO out Right, we go and fix your accounts will fix your metrics We do you know
00:32:01
Speaker
get into everything and clean up your books effectively so you can present it in a way which makes sense. Then we'll go out to investors, do that, you know, like work, market you, while you keep, because it's effectively, you have to keep afloat while you're doing the fundraising.
00:32:17
Speaker
So once we, you know, fix the, see, fix the, or, or, or make Shakespeare cards, put it in a nice presentation, or put a date at home, then we reach out to the investors, get him, you know, the money. But as a typical advisor, what would be, if, if you didn't have to do this, you'd go in, you'd have a CFO there, you'd have legacy over there. And the work for us required, the work required on our side would be much lesser, right? We'll just, we're like, you're the investors.
00:32:41
Speaker
We go and do all of these extra, extra jobs so the founder can be ready to raise money. And you know, it pays off actually. Whenever you've done this and show we haven't always been successful, but when we have been successful with these guys, you know, they're like our clients for life, our friends for life. So many times we've just been working for companies for like four or five years because we did that extra stuff earlier.
00:33:10
Speaker
Interesting. Okay. Do you also take a retainer in such cases? Because you told me at early stage, the retainer is part for the course. What about at the stage which you have?
00:33:27
Speaker
Actually, the early state is not wharf. Okay. In India, actually, no. Rarely would you get a retainer. I have to say this. Okay. Yes, I have to clarify that.
M&A Services and Economic Strategies
00:33:41
Speaker
Well, ourselves and our fee model, or actually, if you're raising money, I will send you an engagement letter. And that will define everything. But yes, I mean, we typically work on our, you know, our fee has multiple elements to it.
00:33:58
Speaker
Okay. So like there would be some part of it which would come in as fixed, which could be adjusted, what you were saying that adjusted against the success. Or if it doesn't come through, then that money still remains with you.
00:34:12
Speaker
Yes, I mean, that's the retainer model. We've been quite innovative on our theme models. I won't go into details. It's not like a secret source or anything, but our founders are always happy to be us in terms of once we've defined the value we can deliver.
00:34:34
Speaker
Okay. You spoke about providing strategic finance advice as a standalone piece in addition to fundraising M&A. Give me an example of that. Yeah, sure. It's for coffee season between fundraisers, right? Or say between a series B and CDC fundraisers. And they don't want to go full raise, they want to raise some debt. Or they want to raise some venture debt or any kind of debt.
00:35:02
Speaker
even debt against their inventory for working capital etc. So a lot of these guys are typically our long-standing clients so they'll come to us and be like we're doing a small round of debt and you make some connections and also can you advise us on how you would structure it. So that's where I guess the strategic financial advice kicks in. Also I guess on some of the
00:35:29
Speaker
It's not very difficult, but it happens when they're negotiating some customer contracts which have certain provisions which might affect a future transaction or change of control provisions, etc., which are affecting an M&A or planning to affect an M&A. All of these things read advise on as well. Anything sincerely related to transactions capital that's effectively what we consider a strategic financial advice.
00:35:58
Speaker
OK, got it. You spoke about building an M&A practice out once you realized that the funding winter was setting in. What does that mean? Does it mean that you tell founders that, OK, instead of a fundraiser, why don't you be open to M&A as well? Or do you also have to create some internal capabilities? Or what does that mean to build that out? Yeah. So I wouldn't say it.
00:36:25
Speaker
We let that out. I mean, we've always offered M&A services. I guess the switch was how much we focused on M&A versus Capri. So I would say before the winter, we were probably about 70-30 or focused on Capri's was 70 and now it's flip tracks. So it's about 70-30 on M&A and Capri's. There is entirely no specific
00:36:49
Speaker
capability to build out other than you know double down on your sectors in terms of where you've done deals and where your bio-network sits because it's
00:37:04
Speaker
M&Es are very highly strategic. I'll give you an example. Xcel, which is the revenue gap in formal fund, probably 10-plus sectors, 15-plus sub-sectors, right across the earth, the earth, the earth, the earth, almost. But if acquired oil, you wouldn't
00:37:25
Speaker
If you're running an M&A, your acquirer would probably fund two or three sectors basically. You know us with users, you have to be very specific. So I guess that you have to know where you have to know the sector you're focusing on and you have to know where the appetite lies for your acquirers in that sector.
00:37:45
Speaker
So see in same media sector, are they focusing on buying more agencies? Is it programmatic ads? What is that? So it's based on that you pick up a target or you pick up or a client specifically say okay we can confidently say that there'll be enough interest and you can't guarantee the execution since we're in Dutch.
00:38:08
Speaker
potential corporate acquirers in the space or larger debt companies in the space. We know there's an appetite for a certain business model, a certain revenue scale, a certain geography focus. So that's where you have to sharpen up if you're focusing or flipping on the M&A side.
00:38:26
Speaker
because what you don't want to do as a smaller form is take bets you want to be I mean of course there's always a risk of completion you try to reduce that risk by knowing what's happening in your sector and having those acquired cortex that's actually I guess that was the flip you know we started doing all of that all right that was which
00:38:49
Speaker
How much of your business is driven by the people who have money and how much is driven by people who are seeking money? Like seeking money could be either looking to raise or looking to sell. So sell side or buy side. So typically we do sell side. I would say it's 70, 30 as well as probably 60, 40. So we typically would do sell side.
00:39:18
Speaker
And this is typical across on boutique investment banks that sell side cabinets. Yes, I would think so. I mean, it's generalizing, but I can say that's true. Because they need advice more because they are in need of money. So they are more willing to pay for advice and pay for connections, pay for facilitation.
00:39:41
Speaker
Yeah, and also more volumes, right? Just more of these guys seeking money. And some of the bigger guys, the acquirers, either have their own setups, they have a fully built out M&AD. They do work with advisors a lot of times.
00:39:58
Speaker
with the nuance that they would typically have their own M&E, a corp dev team or inside. And if it's a large corporate, then they have long standing bank relationships, which some of the larger banks would serve, rather than the deep banks.
00:40:14
Speaker
Got it. So if you get a mandate from a business that wants to sell itself, this largely depends on the knowledge base inside the team over there. Or do you also have other ways to find who are good buyers and reach out to them? Is it a very human driven approach or other tools which kind of enable the process of discovery and outreach to potential buyers?
00:40:39
Speaker
Well, it's a combination of both. You can't possibly know everyone, you know, yourself. So we rely, you know, we have our proprietary network of, not proprietary, but you know, our own built out direct network of acquirers. Then we supplement that with our partner forms, which are based all around the world. We have partners in US, in Europe, in Japan,
00:41:06
Speaker
These would be other boutique investment firms. Typically, boutique banks or mid-market banks will be known for a while and we trust and have worked on deals before. So we would rely on them to augment our already existing network. Some of them, there is always some left which you have to build the first connection.
00:41:32
Speaker
So as long as to a founder, and this is what a founder selecting an advisor, right? Long as the advisor can demonstrate that they know 70, 80% of your invested universe from a first degree or a second degree type connection. I think that's, that should suffice. So I would also, I mean, just not advising founders perspective, right?
00:42:02
Speaker
If I'm selecting a mini advisor, they ask for an exclusive mandate.
Macroeconomic Factors Affecting Funding
00:42:09
Speaker
I give them subject to them, okay with some outside parties supplementing their network, whether it's advisors, whether it's the founder network, and they get paid a lower fee there. So this is just, you know, advice to founders negotiating management letters. What as a founder I've found, I've found this is fun.
00:42:29
Speaker
This is you should not do is have six bankers running around Six different banks running around and you're thinking, you know, I'm gonna play the diversification game and what use game whatever hits like it's effectively throwing mud at the world and whatever sticks But that actually count is very counterproductive
00:42:48
Speaker
Because there's no one driving a transaction strategy, no one is managing a coordinated process. I'm not sure if that was your question, but I think that's a very important point.
00:43:01
Speaker
No, that's interesting advice. Tell me something. Is there a macro reason for why there is a funding with Russia? Is it just that the Russia-Ukraine conflict and stuff like that? Or what are the macro reasons for Russia-Ukraine conflict? I think, of course, you always want to amplify it.
00:43:24
Speaker
Actually, I should probably know this because you've seen more cycles. There was just the craziness which was happening in 2020-21, especially during Covid, the over-promise of digitisation.
00:43:42
Speaker
are you could not that that that was that could not have lasted right and show in retrospect it was like yeah of course that would not have lasted but sure we live in retrospect so i mean one is this several reasons right so one is of course the COVID-19 boom which had uh which the technology sector piece like you know now uh everything is going to be digitized etc and like you know or
00:44:06
Speaker
in the hope of a post-COVID-19 world that technology adoption is just going to go into nature. So it did, of course, help that, but there was a bit of over-promise there. Second was, because of COVID, there was a
00:44:23
Speaker
It was a lot of subsidies, et cetera, which went out by the, and everything, a lot of things are driven by the U.S. to subsidize the guys, you know, loss of income, et cetera. And once COVID subsided, they're like, okay, we've, you know, we did all these subsidies, now who's going to pay for it, right? So they had to adjust the interest rates. And then the interest rates, interest rate is actually the main,
00:44:52
Speaker
thing, which makes the world go down from the source of capital and see the endowment funds in the governments, et cetera. Now they're like, okay, we want to hire return, right? And then they go to where they deploy money, the private equity forms, the venture capital forms, they're like, you know, we don't give you as much money now, we're expecting higher return, so money gets constrained. And that's, you know, that coupled with the Russia-Ukraine war,
00:45:21
Speaker
the crazy valuations which were going on, like super unsustainable, right? It had to come. And I think this is one of the best times, actually. Although I'm not like, I don't have a 20 year career, this 8, 9 year career, I feel like it's a very good time to operate. And I don't want to be insensitive because, you know, a lot of the companies are
00:45:43
Speaker
dying down, etc. But I think in general, it's what's needed. Not companies dying, but this, you know, this kind of rewriting of business, fundamental, so to speak, and everyone, you know, making sense by the need and making building from something which makes sense. So I actually quite enjoy this time.
00:46:07
Speaker
You're saying that anyone who survives this funding winter is sure to scale and grow big because you're forced to be more disciplined and so on. So not everyone who survives, you know, I think everyone will face different challenges. If it's all going to be funding winter, it's going to be something else. But you will be more battle-hardened than you have a higher chance to survive. Of course, you know, there's a survivalist bias, women survivors and survivors.
00:46:37
Speaker
But there will also be casualties which probably didn't dissolve. I think we have to be aware that not everything is black and white. There are companies who were relying on funding in 2023, early 2022 and they didn't know.
00:46:54
Speaker
or they didn't plan and it hit them suddenly. So those companies died out and those found them, must have been great companies, great founders, good products. And that's why I guess, just coming back, it's not just about, I guess,
00:47:10
Speaker
create founder, create product, but how you can navigate the time spreads. That would, you know, what we recommend a lot of the companies who come to us for fundraising. This was the one I didn't actually answer your previous question was that do you advise an M&A or? Absolutely. Like, you know, whatever it takes to see the next day or definitely consider it. Right. Could be, or could be actually a hidden opportunity.
Fundraising Strategies for Startups
00:47:41
Speaker
As a founder, how do you decide how much you should raise? Is it dependent on investor demand?
00:47:59
Speaker
Yeah, so it shouldn't be based on invested demand, I would say at least as a starting point. Because then you have to plan actually for your business right now towards demand. So I guess the main thing here is the run rate. You've got to see how much money you need to survive for, especially if an early stage startup burn in cash, right? This is not for growth state startups. You're looking for growth investments profitable. I'm talking about early state startups.
00:48:30
Speaker
If you survive, say, typically 18 months, 24 months, 24 months might be a larger amount and might force you to dilute a lot of your shareholding. So your 18 months is recommended in a good market. But in this market, if you're getting money for 24 months, just average it.
00:48:48
Speaker
But typically, you would see 18 months in runway. And as a thumb rule, again, that varies, but not more than 20% dilution in terms of between 15% to 25% is what's recommended. So you have to, of course, see your dilution as well. And then when you have a number and when applying this number one in factors, when you have a number in right, then you go out to market and say, we're raising this. Then that's when you see if there's demand or not.
00:49:18
Speaker
Let me give you an example. So let's say someone is building a SaaS business.
00:49:30
Speaker
Also build it with half a million dollars. They could also build it with two million dollars. Because with half a million dollars, you'll probably go slower. You'll probably try and figure out some way of revenue coming in sooner. You'll not invest so much in, let's say, hiring product managers and so on and so forth. But you'll focus more on a basic tech being in place. So I mean, you could go either way, right?
00:49:54
Speaker
especially at early stage, because it's not like your burn is etched in stone. You get to hire people to create your burn. So how do you decide in that stage that should you be ambitious and say, I want to raise 2 billion or should you be conservative and raise half a million and go through the MVP approach?
00:50:21
Speaker
Yeah, there are no easy answers here, right? And it's also so subjective to the sector you operate in. And maybe one way to think about it is, versus raising 2 million versus 4 million, right? Know that 4 million comes at the cost of dilution. And do you really need to go that fast? In some sectors, that's the answer, right? Because your competitors can close in and block you out.
00:50:49
Speaker
so I guess there's a lot of nuances in terms of you know go fast go slow no one can answer that for the founder because they know that business the best and also they know what probably we can't assume that they know but
00:51:03
Speaker
People around them know that this is the right bar 3, given that we have experience in the sector. So it's very hard to answer. I guess you go to Baddens & Notifactors, for the SaaS company as you said, right? It's very specific, you said SaaS Co.
00:51:21
Speaker
Then I mean, I guess you just got a big stock with the competitive landscape See, you know, is there a product out already there which is being adopted by your ideal? You know typically customers then you need to go fast and you know them out If you think it's you know a new product where you can win see a few marquee clients try it out and
00:51:43
Speaker
A lot of the SaaS companies have seen serving enterprises, especially, you know, the first customer actually serves as a testing ground for them. So you actually need, if you're an MVP stage, seed stage, pre-stage company, it is your million dollars to run your tech, your product, your ops, and then get that one customer first, right? Let them pay for, I mean, that's another thing, let them pay for your product development and both of that. So there's, again, so many new answers there.
00:52:12
Speaker
Right. I believe at that stage, whether you raise a million or two million, you will end up diluting similar amount, right? Like you still end up diluting 20% days. It's just that maybe you go to a different set of investors. If you want to raise half a million versus if you want to raise two million. Yeah. Then you will see, then you've got actually factored for Appetech, right?
00:52:38
Speaker
Some of these, some actually, you know, it solves you sometimes that you have no revenue in the company and you're doing like a pre-revenue raise, right? Because then it's all like you're convincing powers and how its sector you're in, if it's hot or if it's, you know, if there's invested demand, then actually you have to like qualify invested demand. Because you're right, like, if I'm raising, you know, if I'm a pre-seed company, pre-revenue company,
00:53:02
Speaker
raising the round. I can raise a million and raise 500K and make a case each way that this is the valuation of the company.
Conclusion and Listener Engagement
00:53:14
Speaker
So absolutely. In that case, then you have to see what the investor demand is if you have a good team.
00:53:20
Speaker
I guess the pitfall there, which I found is that sometimes, when you raise it a higher valuation early on, that valuation is like, you're stuck with that. In your future raises, you might not be able to. So I'll give you a very specific one. So I wouldn't name the company. I'll give you an example.
00:53:44
Speaker
say company A raises $5 million, raises $5 million at a 20 billion seed, uses that in 18 months, now it goes back to market. Raised 30. Now the market has changed because the multiples are different. But your VCs from the first round won't let you raise anything below 20, right?
00:54:05
Speaker
Oh, but at least not like it and you'll be, you know, poor stupid. Those multiples are not justifying it. So the investors who you want on both, they look at it and be like, there's no way I'm going to invest it. You know, that valuation, your metrics don't support it. You got, you know, funded your previous round 20 valuation actually does not mean anything to me because that was a different market, different valuation set. So adjusting back to, you know, reality becomes very tough for founders.
00:54:35
Speaker
Actually, sometimes you should protect your dilution but don't go crazy with your valuation because that's just a number at the end, right? Net-net is like when you've got to still grow, you've got to still raise more money and you've got to exit and get the cash. So I think you'd be very aware of these things.
00:54:56
Speaker
Oh, interesting. That's a good perspective. And that brings us to the end of this conversation. I want to ask you for a favor now. Did you like listening to the show? I'd love to hear your feedback about it. Do you have your own startup ideas? I'd love to hear them. Do you have questions for any of the guests that you heard about in the show? I'd love to get your questions and pass them on to the guests. Write to me at adatthepodium.in. That's adatthepodium.in.