Category Archives: Angel investing

Dealflow management is now harder than fundraising for #microVC in India

In 2008 (before Angel List) there were roughly 1000 technology startups in India starting each year. of these about 50+ got funded by VC each year according to Thomson Reuters.

The percentage of services (consulting, IT enabled services, BPO, outsourcing) companies was about 29% – those that started and 33% of those that got funded.

The number of eCommerce companies was about 3% of the total.

Services and eCommerce Companies India

Services and eCommerce Companies India

Fast forward to 2014 and those number of companies starting at 22% of the total for services and 5% of the total for eCommerce.

The structural changes of the services companies have changed as well. We have gone from 8% of the companies in IT Services to 5% from 2008 to 2014.

Service Category Startup in India

Service Category Startup in India

While Thomson Reuters does not break out the data, anecdotal evidence suggest that there are a lot more digital marketing & design outsourcing companies now than before.

The number of eCommerce companies has been steadily increasing as a % of companies started, but has increased significantly as a % of funded companies and a % of total funding.

The only other category, which has grown (for which I dont have a breakout again) is software as a service (SaaS).

Over the last 7 years, the number of Micro Venture Capital firms has also grown. We have gone from none in 2008 to 5 in 2014, and I think we will end up at about 10 Micro Venture Capital firms (those that have less than $25 Million in capital to invest) in 2015. These include Angel Prime, Oris, India Innovation Fund, Blume Ventures, and others.

I have talked to about 5-10 angel investors and industry veterans who are all looking to start their own Micro VC, seed fund and combination accelerator or incubator in India over the last 3-4 months.

In 2008, the average amount of time it took to raise a fund (regardless of size) was about 9 – 12 months. That number is lower for Micro VC funds, obviously, but we have no way to know how long it would have taken.

In 2011 of the 3 funds that raised, the average was about 7 months.

This year, I am hearing funds that are < $25 Million close their raise in less than 4 months.

That means the time taken to raise their fund has dropped. It is easier for fund managers to raise their capital, they can do it in shorter periods of time and they can raise more than they initially desired.

The challenge for the fund managers seems to be no longer raising capital, but efficiently deploying it.

The gold standard for VC investing has been proprietary deal flow (startups that come to the investor for funding exclusively and go to no other investors). That’s becoming harder for all VC’s now.

If the number of companies starting up has grown significantly (as from the graph above) and the % of non services companies have grown as well, then there is a real democratization of founding startups.

So the problem has now moved to sourcing, building a brand for your Micro VC firm and convincing entrepreneurs that you are the “smartest” capital available.

The best entrepreneurs have multiple sources of funding, and they have many investors of different type chasing them.

The challenge for Micro Venture firms with no brand visibility or “magnet” founders is that their deal flow is largely limited.

From our own data, I can confidently tell you the “best” deals are usually referrals, but 3 in every 5 companies we get into our program are non referralsSpeaking to Accel and Helion last week, I confirmed that 25% of their funded opportunities were cold (unsolicited).

So while the Micro VC fund manager may have a decent network, their biggest challenge is going to be that they will not be able to attract at least a quarter of deals which come because of having a good brand in the startup ecosystem.

The problem for a lot of the Micro VC’s is going to be that they have poor quality deal flow or deal flow that’s not proprietary.

While they will still go to many events, and review Angel List startups, I suspect they will have a tougher time getting good quality companies to apply.

The bottom line is that now it is as hard for the investors to get good companies as it is for the entrepreneurs to get good investors.

Which is why I love this quote

“Every morning in Africa, a gazelle wakes up, it knows it must outrun the fastest lion or it will be killed. Every morning in Africa, a lion wakes up. It knows it must run faster than the slowest gazelle, or it will starve. It doesn’t matter whether you’re the lion or a gazelle-when the sun comes up, you’d better be running.”

― Christopher McDougall, Born to Run: A Hidden Tribe, Superathletes, and the Greatest Race the World Has Never Seen

The most important skill #entrepreneurs will need is to manage investors and navigate #funding landscape

There are many skills we ask of entrepreneurs – sales, hiring, marketing, product management etc. Of them fund raising is probably the most detested among technology entrepreneurs and the most desired among investors. If there are 3 things most seasoned entrepreneurs will tell you that you need to focus on as the CEO is to set the vision and product direction, hire great people and make sure there’s enough money in the bank.

The fund raising landscape, though has dramatically changed over the last 7-10 years for technology startups.

Used to be that most startups went from bootstrapped (for 6 months or less) to friends and family round (for the next 6 months) to an angel round (lasting 12 months) and then, if successful to a institutional venture capitalist (lasting 18-24 months).

It is not unusual to hear of 7 or more funding rounds BEFORE the institutional venture funding round these days for the 80% of the startups that dont have “unicorn type” growth. This crushes previous investors and makes the entrepreneurs more vulnerable to the situation when there is an exit at the company and the entrepreneurs make literally no money at all.

What are the sources of capital now available to entrepreneurs and when should you chose them?

That’s largely a “it depends” type of question, but here are your options.

1. Most entrepreneurs start with a bootstrapped model. It used to be that you had to keep 6 months of capital for yourself to sustain before you started, and now that has remained 6 months or become closer to 12-18 months. If you show quick traction, expect external investment soon, else expect to be in for the long haul.

2. Friends and family are typically still a good option, but increasingly I am noticing ex colleagues who have worked at startups or large companies who trust you and have experience in the market or customer problem you are trying to solve are a good option.

3. Crowd funding sites like Kickstarter, Indegogo, Fundable and Funding Circle are a relatively recent option for hardware startups, but are increasingly becoming a good option for “validating” true customer need and initial funding for many startups as well.

4. Angel investors are still a viable option, but increasingly angel groups are becoming a better source of the next stage of capital. They provide not only the ability to get money quicker than venture investors but also provide valuable expertise, advice and connections to help rookie entrepreneurs along the process.

5. Accelerators are relatively new source of funding, advice, network and mentorship as well. From fewer than 10 that existed 7 years ago, there are over 500 of them across the world, with many focused on specific verticals and industries that have domain expertise to help you further than a generic seed fund.

6. Micro Venture Capitalists (Micro VC) or Super Angels or Seed Funds are a relatively new phenomenon as well. From fewer than 10 Micro VC’s 7 years ago, there are over 250 of these small check-size, quicker to move investment options.

7. Angel List Syndicates are the latest option available to entrepreneurs now in the US and India (via Lets Venture). These syndicates allow any investor who has expertise in an area to help syndicate their “deal” with other interested High net worth individuals. They are usually led by an experienced and very well regarded entrepreneur and the value to this individual (besides the carry, a small portion of the investment in ownership or future exit option) is the reputation it builds for that individual.

Most of these new options come with their own pros and cons, but they are relatively recent phenomenon. If you are an entrepreneur I’d highly recommend you spend time reading up on all these options before you embark on your funding path. The best sources are usually blogs written by experienced entrepreneurs who have recently gone through the process and have the knowledge and desire to share.

Are accelerators failing startups or the curious case of “zombie startups” jumping from one accelerator to another

On Wednesday I had a chance to interact with 31 entrepreneurs in the IoT space at Plug and play technology coworking space in Sunnyvale. There were 10 companies in the Healthcare IoT area, 11 in the connected car and 10 in the home automation (IoT) space. Plug and play has 3 sponsors for their programs including Bosch, Johnson and Johnson and StateFarm, so the companies chosen were deemed a good fit for those sponsors to help them with innovation and startup scouting.

The interesting part that was very obvious to me when I looked at the list and later spoke with many entrepreneurs was that 19 of the 31 had gone to another accelerator program before this one. Of the 10 companies in the connected home space, 3 were from the Microsoft Accelerator itself. Of the 31 companies, 28 were outside the Silicon Valley, which makes sense (that they would want to move to the valley). Two that applied were from YCombinator as well, so, there were not just companies from tier 2 accelerators.

I asked the entrepreneurs why they felt the need to go through another 3-4 month program after they had been to one before.

The not so surprising conclusion is that for many (not all) companies, the 4 month accelerator model is largely insufficient. I did learn that most entrepreneurs did value the support, mentorship and advice provided by the accelerator program they were with before, but many had insufficient “traction” to justify a series A after their “acceleration”.

Of the over 3500 companies funded by venture capitalists in technology last year, less than 150 went through accelerator programs. Of them, nearly 50% were from YCombinator.

At the same time, over 1200 companies went through accelerator programs in the US alone last year. Of the over 1200 companies, 68% have gotten some form of funding (or about 800 companies) is the claim from the accelerators.

Which means about 650 (800 minus the 150 who secured VC funding) companies that “got funded” after an accelerator program, have not secured Institutional funding from a VC, but either from angels or from other accelerators.

If you look at the angel data from the US, of the over 4000 deals funded by angel investors in technology, < 5% or about 200 companies have been through accelerators before.

The result is that 450 companies that were claimed as “funded” after an accelerator program actually went to another accelerator.

Going back to the numbers above, if out of the 1200 companies funded by accelerators, about 450 (or 30%) went to another accelerator and 20% of them (on average) shut down, fail or close, then really about 50% of the startups from the accelerator programs or about 600 companies should be technically “funded” institutionally, but that number is 150. So, there are 450 “zombie” companies.

So the question is – what has happened to the “zombie” companies?

There are only 3 possible answers:

1. More companies have shut down that the numbers reported by accelerators.

2. Many companies end up becoming “cash flow positive” or “break even”, so they chose to not raise funding, but instead grow with “customer financing”.

3. More companies are “zombies” or walking dead – trying to raise funding, not succeeding, but not growing fast enough to justify institutional Venture funding.

I have my hypothesis, that it is #3 that makes up most of the “zombie” companies, but I’d love your thoughts.

If the measure of value that an accelerator provides (as measured by entrepreneurs) is funding, alone we are failing big time.

The cofounder dilemma – or when the biggest reason for success is also the biggest for failure

Over the last 2.5 years I have had the chance to closely observe over 70 startup teams for more than 6 months each (some a lot more) to find out which of them succeed (by their own definition) and which of them fail.

The thing that struck me 2 nights ago at the TIE dinner was a question that was asked by one of the solo founders – why do investors insist on having co founders if one of the biggest reasons for companies closing is “founder issues”?

If you look at the data from multiple sources about the biggest reason for failure in technology startups, I am struck by how high “co founder issues” comes up in the reasons for a startup folding.

After “no market need” and “ran out of cash” – which by the way is another way of saying there was no market need, the biggest reason was team and co founder issues.

Initially that struck me as odd. I mean, as investors, we keep telling entrepreneurs that we don’t fund solo entrepreneurs. Or that we invest in teams. Or that we like a well rounded hacker, hustler and hipster teams. Most investors have a bias against solo founders. We are prone to say – if you can get one person to join you as a co founder, why should an investor join you?

I have one theory around why we do what we do and say what we say. I am going to say it is a theory for now since I have not validated this and certainly can’t speak for all investors.

The reason is that the biggest reasons for failure (poor co founding teams) is also the biggest indicator of success.

Historically, great technology companies have 2 co founders.

Most investors pattern-match.

So, they tend to talk to 20 folks and form an “informed opinion”. If you look at startups in the technology space historically, the 2 co founders insight has borne out more often than not – Microsoft, Apple, Yahoo, Google, etc.

So, as investors we assume that data (that 2 cofounders is better) trump judgement (that sometimes a solo founder can be just as good – DELL, Amazon, eBay, etc.

So, the question is – why we do insist on having a 2 founder (or more) team than a solo founder?

The answer is fairly simple – investors, like entrepreneurs have biases, or a deviation in our judgement.

If you are a pattern-matching investor, with not much operating experience, then you will go by “best practices”. Then you find other ways to rationalize those decisions. For example – you will quote how startups are very hard and during the hard times you need someone (your co founder to keep your spirits up), or that you need folks with complementary skills to form a company, etc.

Those are largely true and maybe not rationalizations at all, based on the experience of many investors, but I have found that early stage (angel investors) tend to have these biases formed and opinions they have been “handed down” from seasoned investors, who have their own biases.

So, what does this mean if you are a solo founder and still need a “cofounder” since your investors are telling you they invest in teams.

Ideally, you should look for people you want to work with and have worked with before. Note, I did not say “you know well” – that’s necessary, but insufficient. If you worked with them that’s the ticket.

If you don’t have that person and keep getting feedback from investors you are trying to get on board that they don’t fund solo founder companies, what they are really telling you is that there’s other problems that make them not want to invest.

The problem might be that dont know the market, dont understand your product, or any number of other reasons.

That’s the real problem to solve as a solo founder, before you solve “let me get a cofounder” problem.

How to get on an venture investors “radar, then their “shortlist” and finally on the “spotlight”

If you are looking to raise your post seed round or series A, I would highly recommend you find a way for venture investors to seek you than you seek them. The process is much quicker and you get better terms. How do you do that?

First you have to understand how the venture process works – like most other processes, they go through stages. For the purposes of our discussion, I am going to define the process into 3 steps.

Venture investors have associates or principals, who are smart young folks whose job it is to do due diligence, source new deals and keep their eyes and ears on the ground to new opportunities. Many folks malign them, but they are good folks mostly and have their heart in the right place for most parts.

Many of them are from a Ivy league B school and most likely have been at a management consulting firm after that like Bain or McKinsey. They tend to think very much top down, but I have know a few folks to hustle and pound the pavement as well.

I spoke with 5 associates and principals over the last week to understand their role and the new changes so I thought I’d share some of their thinking to help you.

Venture principals have “categories” of companies on their radar or “spaces”. Given their background in management consulting, that’s to be expected. They think top down – what are the meg-trends, which are the big industries ripe for disruption and which sectors are ready for startups to innovate in. This is important to know. They may have a few companies, but many a sector is likely in their radar.

The associates then spend about 2-6 weeks doing a “deep-dive” on that sector – meeting entrepreneurs, talking to companies, reading research reports (not necessarily in that order) and forming an opinion. Most of them will pick a theme or category based on their experience and some level of “comfort”.

Then, they would present their findings to the “partnership” meetings on Monday. If all looks good, (and I am grossly simplifying), they get a “yellow” light to go ahead and source / look at companies. Not a “green light”, mind you, that’s only given if they have already a list of 3-5 companies identified on their “shortlist”.

After the partnership meeting, they will be assigned a “executive sponsor” partner – someone who can make decisions to write a check on behalf of the firm. The associate has to provide a weekly status update to the partner, who in turn will brief the rest of the folks if they find something “hot” to invest in.

With the yellow light, the associates then tap into their “network” to get proprietary deal flow – usually folks they went to college with, or folks they met at some conference or others they read about on blogs like Geekwire, TechCrunch, etc. In the last 2 years, many folks are also sourcing from angelList or other platforms.

That’s the opportunity for you. Meet with the associates and principals, because not many folks take them seriously. They cant write checks, so most folks ignore them. They are the most crucial part of the equation to get on the “shortlist of companies” within the radar. Typically 7-10 of the 30-50 companies the associates meet will make the “shortlist”.

The best way to make the shortlist is to get you other startup friends and CEO’s to recommend what you are doing to the investors.

The next step is the “spotlight” – the executive champion and your associate will usually meet the 7-10 companies for 2-3 meetings and finally pick 1-2 to bring to the entire partnership.

The process I explained above works “most of the time”. It may happen that the entire process is completed in days as well. I had a chance to speak to 3 partners at venture firms as well, and they attributed about 40% of the deals to this part of the process. The rest were the partner’s networks and recommendations from invested company CEO’s legal partners, etc.

To raise funds for your startup use a fishing pole not a fishing net: A #contrarian view

Most early stage find raising advice around fund raising is about casting a net as wide as possible to speak to 100’s of potential funding sources to land one investor.

Actually that’s pretty bad advice according to the data I gathered from Pitch Book.

New Investor Additions Each Year- CRM, SaaS and   Home Automation

New Investor Additions Each Year- CRM, SaaS and Home Automation

Within your category or market there are far fewer relevant and willing investors than you can imagine. So casting a wide net is a big waste of time for most entrepreneurs.

Of course the larger the market (e.g. SaaS or Consumer internet) the more are the number of investors in each stage but it is still a small, finite number.

Most venture investors will share broad themes of their investment thesis so they don’t “miss” out on deals, but that does more disservice than good. So, when an investor says we invest in “consumer internet” – that purposely broad so they don’t “miss out” on any hot deals. As an entrepreneur, you need to ask more pointed questions about the sub categories within that theme.

Investors should follow the same advice they give entrepreneurs. Be niche, narrow and focused. Here’s the thing though. They are following that advice but only they don’t message or position it that way.

So the best indicator of if an investor will fund your startup is to look at what they do not what they say. Talk is really cheap I guess.

To prove this I looked at 3 segments. One older theme, one middle aged and one relatively new theme. They were CRM, SaaS and home automation. These are themes I know better than others. For CRM I looked at data from 1996 to 2002, SaaS from 2006 in home automation from 2008. Data does not exist for home automation for 8 years obviously.

I looked at total dollars invested over time  and the number of investors over time as well. Then I plotted the graph over time to look at year over year growth as opposed to cumulative growth.

Here is what the data says. There are a about of 130+ unique investors in CRM over the 8 years, 47 in SaaS and about 15 in home automation. That’s is on the venture side.

So if you have talked to one or more of these and they said no, you will be better of rethinking your business or do without going to other investors. Going to other investors who have not invested in a theme will very likely result in you wasting time. Note that the rate of addition of new investors to a theme is slow. Even in a large market such as CRM.

This also explains two other memes. One that there’s a herd mentality among us and second that venture investing also follows the Geoffrey Moore tech adoption curve.

Once one or two “innovative” VC’s finds a new space then the herd follows but slowly. This explains the fact that new VC additions to a theme rarely exceed 10% YoY even on “hot” themes.

After the innovators, the early adopters and then finally the majority follow.

I suspect, but don’t have the data yet, but a VC innovator in one theme rarely is an innovator in many other. They like to stick to their knitting. Unless they hire a new partner with expertise in a new theme. Which is rare.

So, bottom line for you as an entrepreneur is this.

There is a very short list of VC’s who will invest in your area.

Going after hundreds of potential investors is a big waste of time.

Setup a google alert for funding keyword within your category for 4-6 months before you are looking to raise money and also for “new fund” in your category. Those are your best bets.

If you have exhausted the list of potentials then you are highly unlikely to raise investment. Go back to your positioning and business model and see if you can change something to try again in 6 months with the same set of investors.

Of course there are exceptions to this rule of thumb but they are rare.

A comparison of early stage private company startup databases

If you are an early stage investor (Venture Capitalist, Angel investor or other Seed fund), there are now a host of databases which claim to have the information required to scout, identify and track startups. There are 2 open data sources – Crunchbase and AngelList and 5 known new age companies – Datafox, CB Insights, Mattermark, Tracxn, Rocket Companies and Owler.

Crunchbase and AngelList have proprietary data (which they have open sourced) that’s entered by the startup founders and “followers” of the company.

The rest of the systems have either used public API’s or crawling to build their database of startups from sources such as Crunchbase, AngelList and LinkedIn etc.

All of these systems have almost identical pricing ($399) for a single seat per month. Owler claims to have a free tier and CBInsights has priced themselves even more than these solutions.

All except Datafox have given me some form of limited access to their data for evaluation purposes.

All these solutions are looking to replace the expensive Venture Intelligence reports or Reuters data or other private databases from yesteryear’s or become the “Bloomberg” terminal for private companies similar to what’s being used by traders and investors for publicly listed companies.

The mega trend that’s important for the story: The benchmark for a good stock to buy was a “ten bagger”. A company that if you invested $1 would return $10 in relatively short period of time (2-5 years) as initially quoted by Peter Lynch.

What’s happening in the private markets is that due to the onerous regulations, Sarbanes Oxley law and other paperwork associated with being public, tech companies are staying private longer. So they are becoming multi-ten baggers before they go public. Companies like Facebook, Twitter, Uber and AirBnB, may do well as a public company, will no longer be a 10 bagger post IPO (or highly unlikely) but are obtaining large valuations from seed rounds to Series D or E.

So, many investors are looking to invest earlier into these companies. Data from companies listed above will be very useful for these investors, to make decisions on investing.

All these systems have a fairly similar UI and have almost identical data. for the 3 sectors I wanted to track – Internet of Things, Consumer Internet companies and B2B Enterprise software companies. I am sure you will have better value for the arcane categories. There is not much of a difference in their data since they all seem to obtain data from the same sources. Except Tracxn, I dont think the others use manually curation to track or manage their database.

There are 3 top things I looked for when evaluating these systems:

1. Comprehensive nature of their data: Most are fairly similar and you may get a 10% variation in companies from one system versus another.

2. Capability to export and do analysis manually: There’s not much of a difference here as well.

3. Their analysis, reporting and intelligence platform:All of them are in version 1 of their analysis modules, so right now there is a tremendous lack of sophistication on their data analysis.

Most peers in other companies and a few Venture firms I know, use more than 1 system and pull that data into their own CRM system.

I wont be able to really recommend one system over the other. They all do the job for a beta / version 1 system pretty well and right now, Datafox has a good visualization engine as does CB Insights. CB Insights has the most robust system, but in all 3 cases had the least # of companies of the other 4. Tracxn claims to have analysts that are curating their data, but I dont see the impact of that on their database.