Ask HN: Is this normal ask from a VC?

4 points by intev 2 years ago | 6 comments

To set the right context, this is specifically in India. I know someone currently raising about 100k USD seed round. It's a D2C product that's doing well and just needs cash to expand. I thought he wound't have any issues raising but he keeps running into what I feel are predatory VCs.

A lot of them seem to want advisory shares *on top* of their investment. This makes no sense to me. Aren't the shares provided for the money given enough? To me it seems like they want to get a "discount" by being given more shares. They seem to love using this as a negotiating tactic.

There are also some "syndicate" leads that seem to want advisory shares for just helping raise. Is this normal?

I only have experience in the bay area, and I've never heard of any thing like this. i.e. trying to double dip into advisory shares, and asking for shares just to connect to people. Has the market changed? Is this the new norm?

GianFabien 2 years ago |

Whatever is the norm in one area of one country rarely translates cleanly to other areas, especially when underlying business practices and cultures are very different.

Having said that, in business negotiations there are no rules. Each party needs to skillfully position and ask for what is in their best interests. If your friend doesn't like the terms and conditions proposed by the VCs, then it is for him to come up with a strong counter-offer and so it goes on.

For any business one of the many choices is to grow organically and retain full ownership. The faster you want to grow, the more control you give away. That is simply the nature of investors maximizing for their own gain.

namanski 2 years ago |

I'm a tech founder who has raised money from VCs in India. For some reason, I feel like I know the 'syndicate' you're talking about. If you're okay sharing, are they Mumbai-based?

After running my co. for over half a decade, I wouldn't touch these investors with a 10-ft pole. "Helping you raise" does not justify the additional equity being sought.

If your friend isn't in dire need of money, I'd recommend avoiding being invested in by these investors and instead, only going after Tier-1 VC firms.

All in all, this is really bad for the ecosystem.

hilux 2 years ago |

You might get more useful responses with a more descriptive title that includes "India" and summarizes the problem.

barfbagginus 2 years ago |

Forgive that I'm giving advice without experience raising.

However, in situation where candidates are offering adversarial terms, the answer is often to strengthen the fundamental self-funded position away from the negotiating table.

When you offer something innovative, self evident, and set to grow regardless of investment, it becomes much easier to find favorable terms, or plain old loans.

For example, a friend was finding skeevy and overbearing offers when he was looking for investment in his CNC furniture shop when it was struggling to keep up with customer demand and ballooning lead times. For instance, one investor promised to help him run the business "on a tight ship, just like I run my Reposession business". It's questionable whether this person's leadership style would have solved the lead time issues, which were caused by weakness in material sourcing and production planning. These investors wanted not only a share of profit, but also control in a business they did not understand.

It turns out that after we analyzed his unit operations and lead times, developed standardized production flows, and got better vendors for our CNC parts, we were able to drop average lead times from two months to two weeks. This gave the company the ability to meet its customer demand without new equipment, raising revenue from 200k to 600k over the next 18 months. The organization was eventually able to secure a favorable CNC equipment loan directly from the CNC vendor, and continues its organic growth without having to take on an overbearing investor.

I'm sorry that I don't have more relevant examples, or examples of successful VC funding - in my experience the organic route of drilling down on technical fundamentals has been beneficial and led to healthy growth, when the offering was not appealing to honest investors. Realizing that the org is less desperate for investment than it seems let's us have peace of mind when we walk away from an unfavorable negotiation.

If your friend continues to struggle to find solid investors, I would encourage them to make peace with this rather than normalizing or accepting it, and commit to innovating and growing within the org's natural operating envelope, without taking on the risk of an adversarial stakeholder.

Good luck to your friend, and thank you for sharing your quandary with us.

AlDante2 2 years ago | |

The strategy you outline is classic BATNA. Your BATNA is your best alternative to negotiated agreement - your walk-away position. The stronger that is, the more leverage you have in negotiating. By improving lead times, your friend improved his BATNA, as you say, so much that he no longer needed the negotiation.

barfbagginus 2 years ago | | |

Yes exactly that! When he came to me with a string of dubious offers, we discussed the idea of strengthening the batna instead of panicking and taking on investor risk. What pain points do we need to tackle first if investment is simply not an option? This got us excited about really digging in to the production process, where we found a bunch of low hanging fruit to improve!