Category Archives: Angel investing

The step function of #changes that are happening in the #Indian #startup scene

Most everyone believes that startup growth happens in step functions. You work for ages on something and it seems like there is little progress, but as an entrepreneur you are plugging away at it and suddenly one day, the growth is dramatic. Then it plateaus for a while and grows again. That’s the same for startup ecosystems is my opinion (not researched).

Step Function Growth

Step Function Growth

I am starting to see the next step function of growth in the Indian technology startup scene. There are a lot of people (entrepreneurs, investors, etc.) contributing to this growth and its hard to point to why it happened except in hindsight.

First, what metrics should we track so we can really know if there’s a step function or no progress?

Here are a few that we track at the Accelerator.

1. # of startups: How many startups are getting formed, where are they getting started, etc.

2. # of funded startups: Time taken to fund startups, amount of investment into startups, stage the companies are in at the point of angel investment etc.

3. Pace of growth: How quickly are they signing customers, how quickly are they getting VC investment, how quickly is their revenue growing, etc.

The NASSCOM 10K startups initiative is one such forcing function contributing to the growth.

Yesterday in partnership with NextBigWhat they organized the first of several #startuproots event.

A big part of that event was the #sharktank, which had 4 companies out of 200 that applied, that were going to pitch to investors and they had to make a decision on the spot.

For those of you who are not familiar with the sharktank format, the startups get 5-10 minutes to pitch, the investors get 5-10 min to ask questions and 2-5 min to make an offer. The entrepreneurs can then take some time to make their decision and then make a counter offer.

All offers are binding, save for legal and financial due diligence. Which means if and investor gets cold feet later, they cannot back out.

Yesterday, 4 companies presented. I had heard about 2 of those companies before (but did not know they were chosen) and the other two companies were fresh and new.

There were 8 investors who were part of the sharktank, but only 6 were serious. The other 2 seemed more there to critique and provide theoretical knowledge about startups.

Pankaj Jain from 500 startups, Ravi Gururaj from HBS, Ranjan Anandan from Google, Anirudh Suri from India Internet Fund and RK Shah from HBS were on the investors side.

Tookitaki (ad-tech space), Moojic (retail music hardware), Credii (Mid-market IT decision support) and Lumos (solar panels for backpacks to charge your phone), were the presenting companies.

All four got funded at the end of the event. I personally thought 2 of them would definitely get funded, but all 4 getting offers was truly a step function change.

I was personally pleased that Lumos got funded. They are doing something new and innovative that most Indian entrepreneurs wont do – Working on a non-software, difficult to scale hardware business, because of their passion.

I have to call out a special mention to RK Shah. RK is not a technology entrepreneur, (he runs a textile unit) neither is he a professional institutional investor. He wrote 2 checks himself yesterday. We need more RK Shah’s in India.

Finally big kudos to Jaivir, Brijesh and the rest of the NASSCOM 10K startup team. In less than 1 week, they got 850 signups for the event, and 500+ people attending.

Why do investors use boilerplate emails instead of telling you the plain truth?

Most every day I get 2-3 requests to review companies for investment in the seed stage as an individual investor. Since I keep a fairly open network on both LinkedIn and Twitter, I get many folks sending me an email to review their plans. While I do read all of their emails, and send them a response, only 1 in 10 get me to open their plans.

It tends to be fairly easy to decided not to pursue based on their description of the problem or their background. Although I have put my criteria for investment on my blog, rarely do people read it.

I dont think entrepreneurs have internalized the changed landscape for funding of all types.

I do send a quick email to everyone of the people who I dont intend to invest in with a short 1-2 sentence reason. Either its because I dont like the market, the idea or dont believe it will work.

I used to be brutually honest initially (a few years ago) and have mellowed down over the last year. These days if I say I dont have time, it really is the truth. Its not because I dont like the plan or the entrepreneur or the idea. Its just because I dont have the time to evaluate the company.

The main reason I mellowed down was the feedback I heard from many entrepreneurs who had not developed a thick skin that my response was really disheartening and counter productive.

I read today, Paul Graham’s piece on VC boilerplate that Harj Taggar wrote and was amused initially, but the reality is most entrepreneurs prefer to read emails from investors that have some boiler plate stuff rather than the honest truth. I mention most, not all.

Its hard to find know which entrepreneurs prefer the straight up honest truth versus the ones that prefer to get a pat on the back with some encouragement to keep going.

Practically speaking the email from Harj, has 25 sentences too many. If all the email said was “it’s currently a little early for us to step in here.”, that would suffice. If there was more detail, i.e. the number of users, or too few customers, etc. it might help, but really it rarely does.

Why?

Primarily because you get into a shouting match about why the entrepreneur thinks you should be investing at this stage and why you are not an “angel investor” if you wait longer or that you (as an investor) are very risk averse. See comments on my post earlier on what you should have ready before you approach me to get a sense for that.

I invest in very few deals every year (most likely 2) and so do most VC’s. Like most of us we are all pressed for time. Short email responses with quick no should help, but realistically most entrepreneurs dont like that.

A field guide to being a technology angel investor

I am going to work in a series of posts over the next few months on angel investing. This guide will be based on my conversations with about 100+ US angel investors and over 50 in India. The goal is to encourage more high net worth individuals to fund new technology companies.

I have one request of you: If you are an entrepreneur, please promote this guide (it will be free, before you ask that question) among potential angel investors and those that are on the fence. I will try and make it into a downloadable single file in 2-3 months when I finish the guide. Here’s an excerpt.

From 2008 to 2013 there has been a 713% increase in angel investors1 who have funded technology startups the world over. Dramatically lower costs of starting companies, thanks to cloud computing and well formed distribution channels such as app stores has created a boom in entrepreneurs forming new digital ventures. This boom in supply coincided with significantly lower returns from several other asset classes worldwide including a steep drop in public markets, debt returns and also lower housing and real estate prices, which enabled these investors to seek better returns, offered by technology angel investing.

There are multiple reasons we are seeing an increase in angel investors including the anticipation of higher returns, the desire for fostering entrepreneurship among the youth, the need to give back in a more meaningful way to the community and the joy of mentoring. Many angel investors are also seeking a way to leverage their expertise, experience and connections built over the years into a meaningful venture. Whatever the reasons, the net result is that we now have a large set of experienced individuals interested in helping fund and grow innovative companies.

This guide is for potential and new investors, ones on the fence and those who are experienced at the art and math of investing at the early stages. The audience for this guide includes high net worth individuals and experienced entrepreneurs who are keen to help the next generation of entrepreneurs. This guide can help those who, after years of experience working at a large company are now looking to branch out and learn about new markets, new companies and technologies by nurturing and investing in game changing entrepreneurs and their ideas.

How to get to 1000 startups in India ever year

I will be on a panel with several others at the IAMAI conference next week for the India Digital Summit and the discussion is about how to make 1000 digital startups happen annually in India.

I thought I’d put some thoughts together and get some opinions before I present at the panel.

Currently there are less than half that number of product companies being started each year.

There are various issues across the funnel, but I’ll focus on the #1 issue, which I believe is at the top of the funnel.

Great product entrepreneurs starting great companies.

I wanted to pick a specific example from our accelerator: two of the most amazing hackers and geeks I have worked with – Melchi and Aditya co-founded Cloud Infra after 6 years at Google here in India, building high quality products.

I would fund them just given their background and the quality of hackers they are. Regardless of what they are developing.

Anyplace else (Valley) they would have been funded first and then they would have been asked questions. I worked with them for 4 months.They are amazing.

India needs more of them to increase the number of startups from 500 to 1000.

Unfortunately that’s not happening and is not going to happen.

I may get a lot of brickbats for this statement, but:

I believe the best product entrepreneurs should have built & shipped a world-class product before they start a company.

If you have worked in a services company it does not count. Period.

There are very few software product companies in India – in fact fewer than 20 are really good. Of those 20, many, including Google, are cutting back on hiring and investing in India.

That’s just awful.

Yahoo, Zoho & InMobi in particular have contributed a LOT to the product startup ecosystem in India, given how many good developers they have helped groom.

If you worked at any of these product software companies a few years ago, then you are a candidate for a high quality product startup in India.

Granted, a small number of these folks are actually starting companies, but that can be fixed.

The trouble is there are not too many of them in the first place.

And the bigger issue is that the Google’s and Facebook’s of the world are preferring to hire more folks in the valley.

In fact many of the top IIT graduates who get jobs at Google and Facebook are moving to the valley. 2 years ago they’d be working here in India.

To get 1000+ digital startups each year in India, we have to work on making sure world-class digital software companies hire more of our top people here in India.

I dont think tax breaks will provide them any more incentive to hire here.

I also believe there are enough quality folks here in India they can hire.

I’d love some ideas on what will make them hire more people of high caliber in India and keep them here. I’d love to see them not cut back on hiring in India.

What are your ideas on how we can get these companies to hire great engineering talent in India?

Announcing the angel investor office hours in Bangalore (soon in Mumbai and Delhi as well)

How to hack your seed round in India, got 63 emails, comments and twitter messages asking me to take the post to its next logical step.

The 3 biggest issues entrepreneurs raised were:

1. They dont have the email addresses of these angel investors. Even if they did send them an email, responses were slow or went into a “black hole”.

2. The angel networks in particular have a fairly arduous process to filter, select and decide on new companies.

3. Many angel investors were not proactive in telling them what areas (sectors) they were interested in funding, so entrepreneurs could tailor their pitch to be more specific and target the right person.

I am extremely pleased to announce that in Bangalore (soon in Mumbai and Delhi as well), we will have a few of the top angel investors from IAN (working on Mumbai Angels and others as well, stay tuned) who are committing to office hours each week to meet entrepreneurs and provide them quick feedback on their funding options.

From January 2013, five of the most prolific IAN investors, Venkat Raju, Manav Garg, Nagaraj Prakasam, Sharad Sharma and Sundi Natrajan will hold monthly office hours in 2 locations – the Microsoft office at Lavelle Road and Eka Software offices in Outer Ring Road.

Update: Anil Joshi of Mumbai Angels has also agreed to host office hours in both Bangalore and Mumbai once a month.

Each session will be for 30 minutes per entrepreneur and a max of 4 entrepreneurs will be given time on a first-come-first-serve basis every month. Only one session per entrepreneur per year will be allowed.

Second, after each investment led by these investors they will write a quick note to tell us more about why they decided to invest. This will tell us more about what their thesis was, the trends they were betting on and other relevant details.

Finally each of these investors will share their investment thesis for 2013 and the sectors or areas they have expertise in or are passionate about. For example, Sharad’s an expert in Internet and advertising, whereas Sundi is passionate about education.

I am very excited that they are committing to these office hours. As entrepreneurs we will get a chance to interact with them and get their initial feedback so we can fine tune our plans and strategies to maximize our funding chances.

I do have one request: We’d like a volunteer to help program manage this effort. You should be willing to commit about 1-2 hours per week. If you are interested, please send an email to: mukund at thrisha dot com.

If you are a seed investor and you’d love to join this program, do send me an email as well.

P.S. A few folks have been asking me about other cities, such as Chennai, Hyderabad, Pune, etc. I wont be able to commit to these investors coming to those cities, but will try and get a few more local investors from those cities to hold office hours.

Getting funded by US investors vs. Indian investors – a perspective

This is another post to force the debate. I have heard many Indian entrepreneurs say that they would rather be funded by a US investor than and Indian investor. In fact most would prefer specific Silicon Valley investors.

There are many pros and cons to both Indian and Silicon Valley investors.

Lets do the valley first.

Pros:

1. Investors move quickly. They make no decisions fast and yes decisions faster. Some companies (Cucumber town for instance) have been known to take a few days or upto a month to raise a seed round of $300K.

2. Investors are willing to invest in breakthrough ideas, instead of me-toos. In fact they have deep liking for disruptive ideas.

3. Willing to lead a round, and help you syndicate other investors.

Cons:

1. There’s tremendous deal flow. Competition to get funded by a valley investor is huge. Lots of companies that have 3 to 10 times the traction as their Indian counterparts for the same stage of company.

2. Valley investors dont like funding anything outside the valley. In fact an investor told me “I dont like to drive to the other side of the bridge (I am sure he mean Dumbarton bridge, given how close it is to Menlo Park) to fund a company”.

3. You have to move to the US (Maybe this is a pro for most Indian founders). The biggest hassle is immigration. H1B visas (working permits) are much harder now than 5 years ago.

Now lets look at India.

Pros:

1. Competition is a lot less. There are far fewer product companies in India than US. Some might even say there’s too much money in India chasing too few deals. Entrepreneur’s dont necessarily agree with that, though.

2. There are many funds raised just to invest in Indian product companies. They are willing to provide the same amount of money, as their US counterparts from as low as a few hundred thousand dollars to many millions.

3. Traction requirements are a lot less. A lot less in India. For a sapling round (assuming you raised a first seed from an accelerator or from friends and family) many companies are getting funded with far fewer customers or users than in the US.

Cons:

1. Indian investors (angel and seed) move very slowly. Slower than molasses in fat. We have a company with a 2 month old signed term sheet, that’s waiting for the money, and expects it will take 6-8 more weeks.

2. Their terms are lot more onerous and they require a higher percentage of the company during the seed round.

3. They rarely add any value after putting money into the company at the seed round, usually only asking for “3 year financial projections” when the product is in beta.

If I were an entrepreneur and I have the ability to go to the US and have some (small or otherwise) network in the valley I’d go and raise money there in a heart-beat. If my customers are primarily in the US, then I’d also consider moving there.

If I have never set foot in the US and want to stay in India or have my market here (for any number of reasons), then I’d be better off raising money in India.

What do you guys think? Did I miss any obvious pros and cons?

Why it is a LOT easier to raise seed money for your startup in India than silicon valley right now

If you are an Indian entrepreneur who is looking to raise seed funding for your startup do it now. There’s been no better time to raise money for technology product startups than this year and possibly part of next year.

I understand the issues entrepreneurs face with Indian investors in the seed & early stage. They take too much time to make a decision, they ask for too much of your company and wont fund anything pre-revenue.

There are 3 major trends that are making it easier to raise capital now than any other time.

1. The number of accelerators has grown tremendously over the last year. There are 30+ privately funded (6+ in Bangalore alone), for profit entities, who are all keen to add bigger batch sizes to their portfolio.

2. Many Venture capitalists, stung by criticism that they are not taking enough risk and are not early adopters are eager to engage with startups earlier in their evolution, and are tweaking their investment thesis to add a few more pre-revenue and pre-product stage companies to their mix.

3. Angel networks, seeing over 15+ VC’s raising over $100+ million funds to focus on India, are signing up new angel investors in droves, and expanding their footprint. 2 years ago only 3 large angel networks existed in India. Today there are 15, and each of them has over 25 angel investors and some have over 150.

Seed stage of the Indian startup ecosystem has never had so many things working for it in confluence.

The demand side of the equation is fairly consistent. Our database indicates that after the eCommerce boom of 2010 and 2011, this year has seen a modest fall in new product startups being formed, from over 700 to little over 600, which means fewer companies chasing more investment options.

Now, lets look at the valley.

1. There has been a boom in new product startups, and the competition is fierce. The number of new startups has increased from over 1700 per year in the valley alone to over 3000. As I mentioned in an earlier post, VC’s are seeing nearly 150+ companies in the SaaS market, each of whom are doing more than $1 Million in revenue. There are 2 times as many companies fighting in the valley for the same quantum of funds.

2. Venture investors, seeing the boom in the seed stage and seeing also far fewer exits are adopting a wait and see approach to series A.

3. The VC freeze on series A in the valley has led to many sapling round investments from seed and micro VC’s and super angels, who are increasingly picking and choosing the companies they put seed money in for an extension round or “sapling round”.

If you are an entrepreneur, raise your seed round NOW. Things will get more “sane” by June next year and there will be many who start to take a more cautious approach to seed stage investments.

The equation on series B in India, is not as rosy though.

Funding for eCommerce companies, many of whom raised series A at HUGE valuations last year has pretty much dried up. Most companies are doing inside series B rounds (from their existing investors) and 3 of the  CEO’s I spoke with claimed down-rounds (where valuation of this round is lower than the previous round).