On this episode of Thrifty Titans., we discuss the intricacies of an angel investment with Padmaja Ruparel, the co-founder of Indian Angel Network, the country's first and now possibly one of the world's largest group of angel investors with all 500 investors across 10 countries.
Padmaja explains the angel investing process, from evaluating the entrepreneur's deck to issuing shares to investors. She also share valuable insights for aspiring founders, including the importance of managing cash flow and being truthful and open with investors.
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Saikat Pyne: is a known name within Indian startup circles. She's the
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Saikat Pyne: co-founder of Indian Angel Network, or I N, which is
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Saikat Pyne: the country's first and now possibly one of the world's
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Saikat Pyne: largest group of angel investors, with over 500 investors across
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Saikat Pyne: 10 countries
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Saikat Pyne: and a portfolio of over 200 companies in seven countries.
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Saikat Pyne: On this week's episode, I sat down with Pat Maja
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Saikat Pyne: to discuss the intricacies of an angel investment. If you
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Saikat Pyne: are an aspiring founder or happen to know one, don't
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Saikat Pyne: let them miss even a minute of this episode.
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Saikat Pyne: Hello, Hello, Welcome to the U Incorporated podcast with me,
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Saikat Pyne: your friendly neighbourhood part-time creator and full time media nude.
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Saikat Pyne: On this show, I catch up with some of the
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Saikat Pyne: most bad ass founders, media, Mavericks and indie hackers in
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Saikat Pyne: the whole wide world. And we have some truly insightful
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Saikat Pyne: chats on startups, media and influence, the stuff that gets
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Saikat Pyne: left out of the media headlines.
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Saikat Pyne: Whether you're in a corporate a startup, you own a
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Saikat Pyne: legacy brand, a scrappy side hustle or you're only a student.
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Saikat Pyne: If you are keen to build your brand your voice
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Saikat Pyne: your way, you're in the right place. Here we come
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Saikat Pyne: Hey, welcome to the show. Padmaja.
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Padmaja Ruparel: Hi, Fake. How are you? Long
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Saikat Pyne: time. Long time a day. Let's dig right in path.
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Saikat Pyne: Could you break down for our listeners? The difference between
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Saikat Pyne: an angel round and a venture round?
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Padmaja Ruparel: Very interesting question. I have been very appropriate at this time. Actually,
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Padmaja Ruparel: what is very important to understand is first what is
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Padmaja Ruparel: similar between the two rounds.
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Padmaja Ruparel: OK, right. In both cases, their model of investing remains
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Padmaja Ruparel: the same.
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Padmaja Ruparel: The model of investing is they will buy shares in
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Padmaja Ruparel: your company
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Padmaja Ruparel: for a certain sum of money.
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Padmaja Ruparel: They are really investing so that the company grows so
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Padmaja Ruparel: the share price at which they bought will be very
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Padmaja Ruparel: different to the share price at which they sell. And
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Padmaja Ruparel: the difference between those two share prices is how they
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Padmaja Ruparel: make their return.
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Padmaja Ruparel: An engine is really predecessor to V C money, so
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Padmaja Ruparel: it's basically when a business is at its very early stage,
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Padmaja Ruparel: free revenue or maybe very small revenue. Typically, V CS
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Padmaja Ruparel: are coming in for angel, right? Ancient money is to
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Padmaja Ruparel: really get the entrepreneurs started.
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Padmaja Ruparel: V. C Money is really to start building start building
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Padmaja Ruparel: the foundation for growth that when the V C come
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Padmaja Ruparel: in to help the company grow. When
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Saikat Pyne: a founder is considering going to an angel network like yours,
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Saikat Pyne: how does he or she really remind the appropriate amount
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Saikat Pyne: of funding that he or she could ask for in
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Saikat Pyne: the
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Padmaja Ruparel: angel? So let me first give you a broad amount.
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Padmaja Ruparel: If you're looking at an angel group like ours,
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Padmaja Ruparel: typically at 67, Karole or a million dollars, is what
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Padmaja Ruparel: is the appetite.
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Padmaja Ruparel: The average Aite falls between five and six Cos for
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Padmaja Ruparel: an ancient.
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Padmaja Ruparel: The reason is an angel deal is an earlier stage deal.
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Padmaja Ruparel: As I I explained earlier that rates are much higher.
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Padmaja Ruparel: The valuation, therefore, will be lower because the traction is
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Padmaja Ruparel: just about starting. Therefore the valuation will be lower. And
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Padmaja Ruparel: if you raise much money at a low low valuation,
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Padmaja Ruparel: you will mess up your cap table. You just give
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Padmaja Ruparel: away a lot of your company, which I don't think
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Padmaja Ruparel: entrepreneurs should.
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Padmaja Ruparel: OK, entrepreneurs really need to think through their cash flows,
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Padmaja Ruparel: literally week on week,
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Padmaja Ruparel: OK, to say OK, this is gonna be my expense
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Padmaja Ruparel: this month. Let me divide it. I'm going to be spending,
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Padmaja Ruparel: let's say, 10 Macs this week I'm going to spend
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Padmaja Ruparel: 10 Macs. Next week I'm gonna spend 20 lacs. Week three.
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Padmaja Ruparel: I'm going to spend 10 lacs in Week four. What's
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Padmaja Ruparel: my revenue coming on a conservative basis? This is going
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Padmaja Ruparel: to be my revenue week on week. The difference between
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Padmaja Ruparel: the revenue and the expense,
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Padmaja Ruparel: which will be a loss on a week on week
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Padmaja Ruparel: basis that is called the burn. OK, so over a
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Padmaja Ruparel: twelve-month period, my bone is likely to come to about
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Padmaja Ruparel: three girls.
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Padmaja Ruparel: If that be the case, my advice to entrepreneurs has been,
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Padmaja Ruparel: Please don't raise more than 110% off your bond that
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Padmaja Ruparel: you've calculated in a really robust way. You say check
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Padmaja Ruparel: it out from all all all five. That is my
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Padmaja Ruparel: 10 expense. Or is it actually seven LA
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Padmaja Ruparel: and that three or 3.3 K then becomes the old
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Padmaja Ruparel: investment race
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Saikat Pyne: when you got it? And how much equity should a
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Saikat Pyne: founder be willing to part with during the round? What's
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Saikat Pyne: like the sweet spot?
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Padmaja Ruparel: So could Angel investors like that never take more than
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Padmaja Ruparel: a significant minor, but they never take more than a
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Padmaja Ruparel: minority stake. OK, they are never minority. If there's anybody
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Padmaja Ruparel: with a majority stake asking for a majority stake, he's
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Padmaja Ruparel: not an angel. He's just taking over your company,
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Padmaja Ruparel: right? That's a number one baseline message I'd like to
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Padmaja Ruparel: do now. Sector to sector. It does differ, I must say.
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Padmaja Ruparel: But typically I've seen Angel round average between 10 and 22%
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Padmaja Ruparel: somewhere there. OK, each stage of company, non revenue, stage
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Padmaja Ruparel: of product. All of those may do, but I think
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Padmaja Ruparel: I've seen
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Padmaja Ruparel: between 10 and 22%.
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Padmaja Ruparel: Got it? Can
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Saikat Pyne: you walk us through a angel investment process like right
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Saikat Pyne: from start to finish with, Let's say, a group like yours.
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Padmaja Ruparel: Entrepreneurs can. Today Google is very active. Online is very active.
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Padmaja Ruparel: All of us are online. Accepting us is not a
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Padmaja Ruparel: great problem. It's a very
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Padmaja Ruparel: but I would really tell entrepreneurs to go to LinkedIn
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Padmaja Ruparel: or try and find connects to any investor. I am
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Padmaja Ruparel: not
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Padmaja Ruparel: a warm connect. Recommendation is a great idea. OK, so
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Padmaja Ruparel: you can approach us in any way. But I would
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Padmaja Ruparel: suggest do this. Then what happens is as soon as
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Padmaja Ruparel: your deck comes in, there's a team that bet it,
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Padmaja Ruparel: and we all have turnaround times at every level in
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Padmaja Ruparel: our investment process.
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Padmaja Ruparel: Team. Quickly, Veteran gets on to a call with an entrepreneur, right,
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Padmaja Ruparel: and says, Here is what we think about this. Tell us,
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Padmaja Ruparel: Have we missed anything? And from there they will give
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Padmaja Ruparel: examples to say, This is why we think it's competitive
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Padmaja Ruparel: or your market size doesn't look right. You want to
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Padmaja Ruparel: go back. You can keep coming back as many times
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Padmaja Ruparel: as you want.
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Padmaja Ruparel: Assuming it's a good conversation, it moves to what we
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Padmaja Ruparel: call a deep dive with you present to investors. A
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Padmaja Ruparel: group of investors. We have pitch sessions every Saturday online,
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Padmaja Ruparel: sometimes investors. Also, it's a hybrid, depending on what's happening
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Padmaja Ruparel: and you present in a 45 minute session.
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Padmaja Ruparel: Investor at typically even say, Hey, this is a great
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Padmaja Ruparel: deal or this is something I'd like to do a
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Padmaja Ruparel: deep dive. We actually work with the investors. The I
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Padmaja Ruparel: N team does most of the work now. Many companies,
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Padmaja Ruparel: many investments that we've done, are not necessarily led by investors.
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Padmaja Ruparel: Number one
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Padmaja Ruparel: and there are a whole lot of investors that the
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Padmaja Ruparel: I N team reaches out to to get them interested
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Padmaja Ruparel: or to because the main expert they understand the sector well,
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Padmaja Ruparel: and they put up their hands so they may not
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Padmaja Ruparel: even be on the pitch. So I think entrepreneurs should
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Padmaja Ruparel: not get depressed because the i n is working at
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Padmaja Ruparel: the
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Padmaja Ruparel: OK, got it, then The diligence happens on the business
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Padmaja Ruparel: side to understand the strategy. How is your product working?
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Padmaja Ruparel: What is the patent, if any? What's your cash flow?
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Padmaja Ruparel: What's the team? Who are you thinking of bringing on?
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Padmaja Ruparel: Who are your customers?
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Padmaja Ruparel: Walk us through your A particular sales. Walk us through
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Padmaja Ruparel: a particular delivery. What were the issues? If it's a product,
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Padmaja Ruparel: how is an A MC going to work? Which is
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Padmaja Ruparel: annual maintenance contract? Is it required? How is your pricing
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Padmaja Ruparel: going to happen? All of those deep business side issues
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Padmaja Ruparel: are discussed,
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Padmaja Ruparel: and investors are brought in wherever required because that investor
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Padmaja Ruparel: understanding becomes very important. They come up with some very
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Padmaja Ruparel: innovative ideas,
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Padmaja Ruparel: as if that's all done. We've moved to a term
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Padmaja Ruparel: sheet so the term sheet is shared with them. Before
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Padmaja Ruparel: that valuation, amount of money to be raised is discussed
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Padmaja Ruparel: and agreed that is in the term sheet. The team
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Padmaja Ruparel: walks the entrepreneur through the term sheet to make sure
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Padmaja Ruparel: they are sustained. Why? Those clauses are there. What are
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Padmaja Ruparel: these clauses? What do they mean? And why are they
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Padmaja Ruparel: in the document? Once the term sheet is done, we
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Padmaja Ruparel: do an investment note.
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Padmaja Ruparel: Just share with all the 5 600 Indian investors we
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Padmaja Ruparel: have OK, and then two days later, at seven PM,
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Padmaja Ruparel: an investor call is set up
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Padmaja Ruparel: Right now, out of this 5, 600 investor, whoever everybody
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Padmaja Ruparel: got a chance had a chance to reach with. Whoever
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Padmaja Ruparel: is interested joins the court. We've had calls where 500
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Padmaja Ruparel: 150 people on the court. The entrepreneur just does a
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Padmaja Ruparel: walkthrough present his business, this pitch and the investor ask
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Padmaja Ruparel: him any questions or sometimes even suggests very good idea.
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Padmaja Ruparel: What investors cannot pay is they cannot renegotiate the commercial,
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Padmaja Ruparel: which is the evaluation and the amount to be raised.
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Padmaja Ruparel: They don't like it, they don't invest, but they don't renegotiate.
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Padmaja Ruparel: We don't want the entrepreneur to go through any kind
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Padmaja Ruparel: of duplication or renegotiate.
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Padmaja Ruparel: We then internally open it up after the call to investors.
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Padmaja Ruparel: We have a mobile app cycle and people just commit
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Padmaja Ruparel: their money on the APP right? It's one hit.
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Padmaja Ruparel: Once we see the money is raised or committed, we
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Padmaja Ruparel: go back to the entrepreneur to say Now we'll do
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Padmaja Ruparel: the legal and financial diligence, which is when we go
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Padmaja Ruparel: into the inside of the company in the early intelligence cycle.
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Padmaja Ruparel: Most of it is we rely on what the entrepreneurs
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Padmaja Ruparel: telling us if they're saying that we have 10 lacks
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Padmaja Ruparel: of revenue, we have 10 lacks of revenue. We'll go
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Padmaja Ruparel: with that, OK, But when the legal and financial religion,
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Padmaja Ruparel: which is usually third party, they now will ask for
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Padmaja Ruparel: those 10 LAC revenue.
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Padmaja Ruparel: Now, if it's let's say it's about nine lacs or 9.5,
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Padmaja Ruparel: it's not the end of the world. If it's 11 lacs,
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Padmaja Ruparel: it's not the so you're almost there in 10 Lacs.
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Padmaja Ruparel: But if it's a set 10 and it's four, that's
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Padmaja Ruparel: the problem, right, because that's questions everything.
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Padmaja Ruparel: Once the legal and financial diligence is done, we do
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Padmaja Ruparel: a shareholders agreement again. The team works with the entrepreneur,
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Padmaja Ruparel: explains the various clauses. There may be some changes that
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Padmaja Ruparel: they've requested. If we can adjust 100 and 10% we do,
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Padmaja Ruparel: and once that FA is done and signed. We tell
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Padmaja Ruparel: the investors that the money gets remitted to the company
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Padmaja Ruparel: and then the company needs to issue the shares and
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Padmaja Ruparel: send it over so that the investors get their shares.
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Padmaja Ruparel: So that's the investment process. Typically, it takes two months
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Padmaja Ruparel: to get from door to door. If I may say,
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Padmaja Ruparel: sometimes we find an entrepreneur in the early stage, start up.
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Padmaja Ruparel: They don't understand. Sometimes they don't have all the data
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Padmaja Ruparel: in one place. So it takes some time to put
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Padmaja Ruparel: everything together and it slips in for a little bit
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Padmaja Ruparel: more time. But broadly, this is what happens.
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Padmaja Ruparel: Got it.
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Saikat Pyne: The last question I had for you in all of
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Saikat Pyne: your years of investing, what are some of the most
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Saikat Pyne: common avoidable mistakes that you've seen founders make?
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Padmaja Ruparel: So I think the most important thing is
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Padmaja Ruparel: for founders to be
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Padmaja Ruparel: to be very transparent when pitching. OK, Yes, you're doing
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Padmaja Ruparel: a pitch. And yes, it has to be a sales pitch.
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Padmaja Ruparel: But be truthful. If you don't know something, say you
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Padmaja Ruparel: don't know,
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Padmaja Ruparel: right? If you have decided you're going on a certain
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Padmaja Ruparel: strategy and somebody asks you, why are you not doing
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Padmaja Ruparel: this right, either. You have a good reason you're not.
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Padmaja Ruparel: You decided not to do that strategy and do the
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Padmaja Ruparel: one that you are suggesting
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Padmaja Ruparel: or you not thought about it or you think that
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Padmaja Ruparel: you know, there is a different reason. Share it. Actually,
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Padmaja Ruparel: we did, Just thinking This is what we thought was
00:14:01
Padmaja Ruparel: a problem, but and therefore we adopted. So I what founder?
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Padmaja Ruparel: That's the first thing. The second thing, which I think
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Padmaja Ruparel: is that founders need to be confident and very self confident, right?
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Padmaja Ruparel: They have to back above their level. That's necessary.
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Padmaja Ruparel: But when you're doing that, don't be ramrod straight. Right?
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Padmaja Ruparel: Be open to mentoring and suggestions
00:14:29
Padmaja Ruparel: doesn't mean you survive, but you are open minded, OK?
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Padmaja Ruparel: Both of these allow you to have a clinical professional
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Padmaja Ruparel: and an unemotional conversation with investors, because if you are,
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Padmaja Ruparel: if you don't do that, what you're projecting if you're
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Padmaja Ruparel: a very un, you're a very emotional person or an
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Padmaja Ruparel: arrogant person. And like marriages, which I shared with you
00:14:56
Padmaja Ruparel: in the beginning,
00:14:58
Padmaja Ruparel: the investor said. I just uh he's great, everything's right,
00:15:02
Padmaja Ruparel: but I know that I can work with him or
00:15:03
Padmaja Ruparel: her
00:15:04
Padmaja Ruparel: and therefore, then step back.
00:15:07
Padmaja Ruparel: Right? Remember, you're bringing in a co-founder. He or she
00:15:11
Padmaja Ruparel: has to feel comfortable working with you,
00:15:14
Padmaja Ruparel: right? So it doesn't mean you fall all over the place.
00:15:17
Padmaja Ruparel: But you have a proper clinical professional conversation that you
00:15:22
Padmaja Ruparel: can and transparent. That's the second piece, right? Third piece,
00:15:28
Padmaja Ruparel: which I keep telling everybody.
00:15:31
Padmaja Ruparel: It's great to think and have ideas and be innovative.
00:15:36
Padmaja Ruparel: Ideas are a diameter.
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Padmaja Ruparel: It is execution that matters. So unless you're able to
00:15:43
Padmaja Ruparel: bring that across in your pitch, that not only have
00:15:48
Padmaja Ruparel: you built it so far by doing things yourself of
00:15:53
Padmaja Ruparel: getting it done yourself and that you are willing to
00:15:57
Padmaja Ruparel: take this forward on by executing it right, you are
00:16:03
Padmaja Ruparel: gonna be the CEO chief executive officer
00:16:07
Padmaja Ruparel: unless you then do that. Forget about investment
00:16:12
Padmaja Ruparel: because nobody want to invest in idea. Nobody is going
00:16:17
Padmaja Ruparel: to invest in Consultant. OK, nobody want to invest in.
00:16:23
Padmaja Ruparel: You have to go through a journey to reach there.
00:16:26
Padmaja Ruparel: So
00:16:28
Padmaja Ruparel: I think the key is to say they are willing
00:16:32
Padmaja Ruparel: to go and pitch to customers, ensure that the technology
00:16:36
Padmaja Ruparel: or the product is well embedded and they are able
00:16:39
Padmaja Ruparel: to go through all the technical details of it, and
00:16:43
Padmaja Ruparel: they are willing to lift boxes and
00:16:45
Padmaja Ruparel: and sweep the floor if require. That's
00:16:48
Saikat Pyne: to that. And on that insightful note, guys, it's a wrap.
00:16:51
Saikat Pyne: Thank you so much for being on the show, but much.
00:16:53
Saikat Pyne: I really appreciated catching up with you after all these years.
00:16:56
Padmaja Ruparel: Thank you very much. It was very nice talking to you.
00:17:05
Saikat Pyne: Thank you for tuning into the U Incorporated podcast with me. Second,
00:17:09
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Saikat Pyne: you on the next episode.