Vijay Anand | The Startup Guy.

Archive for the ‘Venture Funding’ Category

I love the weekends. Especially the ones where you pretty much meet people after people, and get to see the world through a different set of eyes and perspectives. Always loved that.

So there goes the past weekend, which has just about been the most amazing weekend ever – after a really really long time, and partly thanks to meeting some of the folks from the startup scene in bangalore.

So here’s a thought that’s been on my mind. How many kinds of entrepreneurs are there? Well, it seems there are two kinds. The Incremental ones and the Iterative ones.

The incremental one is that guy who wants to be an entrepreneur, is very calculative, and goes on and takes up a job in that large firm, and after years of carefully planning his networks, funds and contigencies makes a leap to build one product, putting together a company with his colleagues. You could almost say that Mindtree was one such firm. The firm immediately attracts investors, because the experience of the founders talks volumes, the contacts are well established and the product/idea is usually something that is closely related to the domain that they have been working in.

This is pretty much your typical VC fundable business.

But there is this other kind. The kind that starts off young, comes up with an idea and grows the idea. The idea is usually nothing significant, but an improvement none the less. The grow the idea, and make an exit – small, okay or in most cases nothing at all, move on to the next idea, and with each new ideation and execution grow exponentially in terms of thinking, visions and execution style. These are your radical mavericks.

But you know what? In most cases the incremental ones, as great as they are, will only become what they are, if they are not funded. If they learn lessons the hard way. If they learn to bootstrap, learn to live in the trenches, and they grow from there.

I strongly believe, and there are quite a few others who agree, that we are destroying these genre of entrepreneurs by either cushioning them with hopes of investments, in the name of incubation centres (totally taking away their risk appetite)and by simply not letting that first idea fail.

If statistics are true, then its usually the third venture of an incremental entrepreneur that will or should get funded. Anything before that is all premature, and just part of the process.

So I am trying to validate this theory and it kinda starts to make sense. They say that for any product to be built, it takes roughly about 2.4 iterations before it can hit the market and scale. With an iterative entrepreneur, I really believe that the entrepreneur himself is the product – really think about it. Every icon that you can imagine is one of those. Do you really think they made it in their first shot?

The first step really doesn’t have to be that big idea. And i’ll repeat that over and over again. With Michael dell it was the idea of buying stamps for cheap and selling them. He writes in his book that he learnt things in that first venture which helped him put together Dell. It’s also the reason that I strongly believe that they should start as early as possible – right in High school or college if possible. It could be just about anything from running a local canteen to trying your hand with home made jewellery. What you understand about working and interacting with people will go a long way.

Trust me, it wont be easy. And as a audience in OCC Bangalore noted during discussions, it is a terrible experience when your first idea bombs when asked for feedback from peers. But you know what… its all part of building you as the product. It’s an excercise to shed that extra weight that you have in you – that air of confidence and assumptions sometimes. Really, for an iterative entrepreneur, its all about falling nine times and getting up ten times. It really is.

So if you are one that falls into the first category, well You probably wont be reading this cause you’ll be busy trying to keep those investors and partners in bay. As for the iterative kind, unless you are in your third or fourth venture, dont waste your time trying to raise money and all. Be smart, save some money here and there, be frugal and stick it out. See how far you can build and take a product without having to raise money – its very much like holding your breathe to see how far you can control yourself from now having to depend on oxygen. But when you do attain that balance – or even control in it, thats when you know you are ready for the olympics to show the world what you really got.

Everybody, just about everybody seems to be having this problem. The teams that I oversee in IIT, all the way to a lone team in Simla, everybody is having a talent crunch. It is said that the most important aspect of a startup is the team. Have we grossly overlooked something? Or do things just have to be looked at differently? I think there is an alternative, and thats probably how the future will evolve.

So according to one entity’s claim, there are 800 startups in Bangalore. I know that as part of tracking startups, we see an average of about 500 – 600 new startups coming up every year, and these are just in the Technology space, and product focused.

Do we really think that we have the manpower to fuel all these dreams? I am really starting to doubt that. Loads of Opportunities, shortage of talent, and high density of clusters – which is going to be mean more and more people are going to leave startups to probably freelance and make use of this opportunity. I wouldn’t blame them. They are just tapping into the opportunity.

nGenera an entity founded by the guy who wrote the book on Wikinomics, which helps larger organizations optimize their task forces has this to say about Workforces: “…Enterprises have shed pyramid-style organization structures and instead view talent as a “marketplace” where workgroups with the right skills and experience can be quickly assembled, put on a given task and rewarded for the value they provide.” Does that sound Familiar? Will the same make sense for a Startup?

One of the primary reasons why a startup is pushed to go hunt for an Investor much before the focus, solution and customer has been identified, has been primarily because of this reason – the need to hire. if you want to hire, and someone none other than the best, he/she also comes with her own charade of questions as to how the startup is funded, and what are the options that the individual will benefit from. None of which makes sense, nor has a concrete founding unless there is a bank statement which shows some balance with lots of zeros following it – or atleast a term sheet.

So really, the eye of the hurricane is the issue with attracting talent. If that is solved in anyway, then a whole lot of issues along with it, including that of funding will slow down a bit. And time, even borrowed time is godsend for a startup.

Here is a gist of the issues:

  • Attracting talent for a startup is really hard.
  • Even if you manage to find a really talented individual whom you are dreaming and envisioning of as your future CTO, chances are that he wont take a fulltime responsibility.
  • If you go the usual route, hire freshers and want to train them, you realize that a year later they put your name on their resume and become part of the “hard to get” group, demanding hefty packages.
  • I’ll repeat, there is common theory that any investor will back a good team. Perhaps we need a slight change of thinking on that regard. It is not the team size, the numbers, nor the profiles that should matter. If there is an individual at the helm who could ideate, plan, execute and deliver then it should suffice right?

    I’ll get to what I am trying to say.

    I am thinking outsourcing. Did you know that Digg was mostly build over elance? The most touted Kevin rose, was not one of those developers who went nuts, locked himself inside his bedroom and coded away. Perhaps there is wisdom in outsourcing.

    Let’s put Mr. Friedman’s words to test if the world is really flat, shall we? I mean, if we could get talent from anywhere, then all of a sudden the perk of being in Bangalore, Chennai, Mumbai, or being in Gorakpur does not make a difference. And I think that itself is an incentive to try.

    The more I think about it, the more it makes sense. Think about it. Employee productivity is at around 4% right now. I could put some ruppee figures on it and say, if you invest 100 Rs on an employee, you get a product which is enhanced with a value of Rs 4. That’s ridiculously inefficient. And this output is for mammoth corporates. Can a startup really afford such inefficiencies and spend most of its time acting like training agents, than companies that are building dazzling products?

    Lets look at the benefits of getting more involved with communities like elance, Limexchange or Odesk for that matter. In order to make it work, you are going to have to;

    1. Break your product into modules and have vivid clarity on what you want. That will force the startups to get some clarity on what they are building, rather than playing by ear.

    2. You need to be able to do some project planning, which you should have been forced to do anyways.

    3. You only pay for what you build, which means much greater productivity

    4. You do not have to move to any specific location. You could be sitting in your own hometown, or wherever you can save costs on, and still get your work done. If Instablogs could be based out of Shimla and build such fabulous UI, traction and a community around their offering, it certainly is an example. Not that I have anything against Shimla, but its not your everyday IT Hub as commonly perceived to be more efficient to startup.

    5. And the best part of all. If you are having a cash crunch month, you can delay your next task allocation. You control time lines as to when the next task should begin, which means you don’t have to worry about having to shell out monthly salaries with or without productive work happening.

    Most teams that I am aware of, still would want to hire people fulltime. Well, you probably can, if you can justify it and if you can afford them. But in most cases, I am wondering if its a case where the founder just isn’t willing to accept the fact that the role that he chose to play is a lonely path. At the end of the day, he/she is the only visionary and the sole knight protecting and nurturing the idea child (perhaps along with his co-founder), but surrounding yourself with people who are at your call and beckon is just a temporary comfort and solace. I know it can get lonely, and having to see three people, the same three people, in your officespace everyday can be pretty tiring, and boring and even might feel as if you are stuck in a rut. (One of the reasons why Incubation centres make for some comfort factor, being around with other teams)

    But instead of focusing on surrounding yourself with frail souls, why not keep yourself surrounded by those key guys who share your vision (might be just you and your co-founder), and build the prototype, product and your initial traction with a product that is built by a team which is miles away, yet close by you – just a skype call away, and take it from there?

    You are most probably going to tell me that since your product is constantly evolving, you wont be able to get a specifications document beforehand. Odesk, and most of the freelancing sites do offer the capability to hire a person on hourly rates. And with the progress of agile project management methodologies, all you need is a good tool [like what Silverstripe software has], and you are good to go. Ofcourse, there is still the issue with your mentors and investors having to agree to it,but if anyone can make it happen, I know an entrepreneur can. Why not show them it works? Heck, When NASA and the defense contracts across the world are outsourced, why not that mashup you are building?

    I was initially a bit skeptical that outsourcing my development work will also mean that someone has access to my code. But I think the NASA model is going to rescue us there too. That’s why I mentioned that you need a core team. Ideate. Figure out the requirements, the initial one. Break it into pieces and send them all to four corners of the world. When it comes back, be ready to put it together. Oh yeah, you need to know how to work with code inorder to be able to do this, but if you or your co-founder cant, you were dead in the water even before you started.

    I am hoping to give this a whirl for my own startups. Has anyone tried this option? If so, what has your experience been?

    Disclaimer: I am not sure if this is a longterm solution. But most of the hard work and crux is essentially built in the beginning of a startups product lifecycle and thats when all the constraints are there. If the prototype is built, you have a few elite customers, and investors are standing on all sides wooing you, perhaps you can think about getting some folks onboard fulltime, and building a team to build from there.

    Some Discussions from Before:

  • The Startup Lunch Initiative
  • A Conversation I had with Vishal Gondal, where he was talking about this issue. Working with an Army, vs. Optimizing
  • Hiring Strategies for Startups, to attract those core members.
  • Do You really want to work for a startup? Think it through.
  • The truth of the situation is that there is way too much capital chasing too few good deals. So, If there was ever a time when you could be picky and be specific about wanting the best director and investor onboard, this would be it.

    In an attempt to ensure that you dont come off as arrogant beyond reason, but as one who is sane and more logical, here are a set of questions to ask an investor to ensure that he is a right fit for your board.

    1. How long have you been with this current firm that you are working with?

    2. Hmm. What was your previous engagement? Have you always been an investment banker or have you had the pleasure of bootstrapping an enterprise yourself?

    3. If You dont mind me asking, how many other company boards do you sit on?

    4. So what is your first impression about what we do, and the market that we are aiming for?

    5. How long have you been here in India? Do you have a lot of network and contacts here?

    6. I’ve been through your portfolio companies (and you better have), and there are some interesting companies there. Do you envisage any direct synergies with any of them?

    7. (If Yes to the above) Do you think you could put us both in touch so that we could probably do some preliminary discussions to see how far we could work together?

    8. Lets theoretically say for a moment that you were in my shoes, and that your firm was investing in this company. What would you say would it take to take this company to a successful exit?

    9. Are you in town quite often? We should certainly catch up again.

    There are a couple of underlying reasons why you might want to phrase a set of questions this way.

    Questions 1 and 2 help figure out if the investor has been with the firm for long, and if you are dealing with an entrepreneur or an overbloated MBA. If its the case of the latter, pick up the tab, pay for both of you and make a run for the door 🙂

    Question 3 about how many boards he sits on will give you an idea of what you could possibly expect out of him, and possibly could also use as a means to get some references out of those companies about what he and his firm bring to the table.

    Question 4: This is a nice way to see how far he can stretch his analytics skills and give you a different outlook from his perspective. This is an area that most venture capitalists will ace in. This is also the part where you want to shut up, make as less noise as possible and listen.

    Question 5: How many people does he know? How much time will it take before he picks up his phone and will make that call for you. All that matters.

    Question 6: This will pretty much tell you whether they are serious and have done their homework or are just messing with you.

    Question 7: If they were seriously looking at you, he’d leap at joy at you proactively asking for a meeting and opportunity to evaluate yourself. Oozes of self-confidence, and the ability to network and market yourself. You’ll get oodles of brownie points for this.

    Question 8: This will give you a picture of how big they are thinking. Just like question 4, pay close attention.

    Question 9: Make friends with such folks, if you’ve been able to bear with him for so long. They are worth keeping around. its not everyday you meet guys who understand what you do, what your market is, and also can think of an exit. You need to be in touch, and even become drinking buddies if possible 🙂

    Recommended Must Read: Befriend an Investor

    By now, most of you would have come across quite a few investors from the VC community,here and there. You might have been caught up with them over coffee, or run a deal through them.

    So here’s the question. If you had to do an evaluation and mention a venture capital firm that comes at the top of your mind, for their clarity in thought, attitude, business sense, and at the speed at which they went about doing things, who would it be?

    Leave a note in the comment.

    When should you go meet an investor, say hello and buy him a cup of coffee? Anytime, and hopefully at a time when you arent bootstrapping a company.

    An entrepreneur in residence today asked me how come most companies in the valley, and even a few companies here in India manage to raise millions of “dollars” in funding for their first round when I keep advocating on raising not more than what is required, raise valuation and then go for their second round.

    Well, that advocacy and advice depends on a lot of things, the vertical you are in, and the nature of the business (some require huge upfront investments, while others could be grown organically, while others need to be grown on steroids).

    Coming back to his question though, my answer was that, if you do a case study of all those entrepreneurs you will definitely find something in common with all of them. It is most probably a case that either they built a fabulous product (were the creators of Gmail or something on those likes), or were known to the investors much earlier than the time when they start knocking doors. There is also the case that being married to an investor works, but I suppose that would fall under the second category anyways!

    I am sure you are giving me the evil eye right now asking, “If I am not looking for funding, why would I go waste time with an investor?”. Well, all things said and done, if someone has access to all those Gartner, McKensie and all the trend analysis, and spent countless hours of debate and discussions with some very smart people, its the venture capital firms. And as much as its taken to their negative persona on their number crunching skills, if you sit with them without an agenda of asking them money, you would be quite impressed with the depth that they possess – ofcourse I am talking about the ideal VC here (there are too many fake ones also roaming around dressed as Venture capitalists).

    There is a very recent story floating around the web, that the founder of Disqus the weblog commenting system had known the investor for ages. He met him some very long time ago, and they shared a discussion about the investors blog and what all can be done to make somethings efficient. On signing off, they shared some urls, and had been in touch ever since. A few months ago, the founder bumped into the investor and gave him the link to disqus to try it out. When the investor came to know that they were trying to raise funds, he didnt spare much time to call them up and write a cheque. If the credibility is established towards deliverables and clarity, everything becomes much easier, and that is something that is only built over time.

    So My advice. If you are thinking about starting a company, just retiring, or want to go catch a movie and want company, call up a VC and see what he is upto. The relationship with the right investor is one that is built over a period of time. This is a long term investment you will not regret.

    Seems like we are not the only set of folks who are wanting to fix the problems we see around us and build a “sustainable” atmosphere around us. There is a post by Ryan who runs FOWA taking a stance against the Web Mission effort that is getting organized by the UK Government and quite a fair list of heavy weights, including Techcrunch. I think this post is important to observe for a couple of reasons.

    The striking similarities that we hear from folks around us in:

    1. Thinking that the Silicon valley for some reason offers more opportunities.

    2. Europe just like India, in most cases, seems to think that you only get funded if you hit the valley. Atleast we aren’t that bad. We have much more easier access to capital.

    3. There are folks like FOWA (Future of Web Apps) who are trying to build a vibrant community of users, developers and startups in Europe, very much like how we are working on the same – with arguments that they have “everything that they require right there”

    4. There are also people, most of them, who seem to think that the UK companies should be looking into the valley for users and potential exit strategies.

    I’ve been working on a post that shows a snapshot of interaction between startups, venture capitals and the markets from across the globe – the valley, Canada, Australia, Europe and India. You’d be surprised how similar most conversations are. Trust me, things are not so hard because we are in India, neither too easy because we are here. We are just facing the same harsh realities as anywhere else. Perhaps the world is flatterning. Huh! who thought I’d agree to that, so easily!

    I’ll leave you with this comment by Phil Bradley in that post, which just gets the message home without any explanations:

    “The equity gap between seed and series A that plagues the UK will not be resolved if we can’t demonstrate maturity and ability to build profitable businesses.”

    Paul Graham has written a recent article where he is wailing and moaning on the same topic. And I think he lives in the heart of where the action lies.

    To Quote Paul from his Article, “I used to think of VCs as piratical: bold but unscrupulous. On closer acquaintance they turn out to be more like bureaucrats. They’re more upstanding than I used to think (the good ones, at least), but less bold. Maybe the VC industry has changed. Maybe they used to be bolder. But I suspect it’s the startup world that has changed, not them. The low cost of starting a startup means the average good bet is a riskier one, but most existing VC firms still operate as if they were investing in hardware startups in 1985.”

    That just eerily sounds like the issue we face here.

    PS: I haven’t thought through this yet, but I believe this only applies to Internet/Media related startups.

    This was a conversation I was hearing from an entrepreneur who was joined by a few others who quickly chimed in the same tune. This is a recollection of those dialogues.

    Entrepreneur: I read the book “Search” a few days ago, and for six years google did not know how to make money.
    Entrepreneur #2: I agree, its all about creating traction and growing your user-base
    Entrepreneur: Yep. My question then is, why are these investors asking for business model every time we go talk to them? We need some “real investors” around here.

    My thoughts:

    I think there are some levels of evolutionary cycles that I must have missed. The first one is where supposedly there can be a business which doesn’t have to make money. I fail to understand how a business that doesn’t make money, nor has the intention of doing so even qualify for a business. Shouldn’t it be more of a NGO/non-profit initiative? I think people have totally gotten wrong the concept of using “Free” as a marketing tool, with Free as in Open Source. I am already having nightmares as to how Chris Anderson’s Next book on FREE is going to get twisted and run tales in board rooms and investment meetings.

    And the second most important decade that I must have missed is the bit where every family slaved their butts off for generations and gave it to the families of the VC firms so that we can demand that they give us money without having a business that makes money.

    Hmm. Let me now think if I have to smile, Laugh out Loud or go find a corner and cry about this state of affairs.

    Thankfully, I am not the only one talking about it. Here’s another perspective of the Same. Is your Great idea a Real Business?