Category Archives: Entrepreneurship

Are there too few seed/angel investors in India or is too much money chasing too few great companies?

This is a debate that I keep having with entrepreneurs and investors alike. When you talk to entrepreneurs they correctly point out the # of angel and seed deals done in India are very few. If you remove accelerators, the number of angel funded tech companies in India is about 60 (2013) and the number of Venture deals, which are about 50. Add the accelerators, which add another 60 companies and we have about 150 startups getting funded each year.

Given the number of entities that get started is about 1000 (2013), that seems like a small number. Entrepreneurs also point out the very investor friendly terms (drag along, liquidation preferences) that are given by angels in India and the fact that most angel funded companies give between 20 and 30% of their equity at the seed / angel round, which are common among technology startups.

On the other side, Venture and angel investors point out the relatively few exits (fewer than 10 in the technology sector) and the amount of time it takes to grow companies in India (over 10 years). They believe there is enough money for the right opportunities. I can point to 2 examples of companies we are trying to fund which have 3 competing term sheets at the angel investment stage to confirm that it happens, but is rare.

Which brings me to accelerators such as ours. There are about 30+ accelerators in India, but I am going to focus on the top 5. In discussions with other accelerators, the constant theme I get from most folks is the intense focus on the part of entrepreneurs to “get funded”. First the angel round, then the sapling round and then the series A. I know in our own case that is true.

So let me talk about our case in particular, although I have mentioned it before. We dont want to focus on funding. If that’s the biggest need of entrepreneurs then they should go elsewhere.

Unlike other accelerators which are not a corporate program, the key value to Microsoft from our program is startup engagement. We take pride in engaging with the startups and are extremely happy if they are successful, but the financial return from our investment is going to be largely negligible to us. Even if 1 of the 11 startups “makes it big” and we owned 6-10% of the company when it went IPO or got acquired, it would not be a significant dent to Microsoft by any means.

We had a chance to review about 800+ applicants this batch 4 for our accelerator. There were many great entrepreneurs and companies, but we could only support 10 – 15. If we were running a fund, similar to a venture investor, we would only select 2 or maybe 3. That’s consistent with our previous batches.

That we believe is a great disservice to the entrepreneur ecosystem. Many more companies could be small, non angel / VC funded businesses, and still do well. I do not like the term “lifestyle” businesses, but these companies do not warrant the money required by rapid growth, quick to scale companies.

So we do not put a lot of emphasis on our companies getting funded. We do help them get connected with angel investors and venture capitalists, but that’s it. In many cases we have worked behind the scenes to push investors we know to get deals done faster and at better terms, but that’s largely behind the scene. Our emphasis is to open doors and opportunities that help them get in front of other entrepreneurs, potential customers and partners and help them understand the discipline that it takes to be a great entrepreneur.

A few of our previous company entrepreneurs dont like that, and we don’t have a problem with that. Our goal is to help the ecosystem grow and allow more entrepreneurs to experience the journey. If they only wish to focus on funding, they are better off going elsewhere.

So, back to the question: Are is there too little risk capital in technology or too much money chasing too few deals?

Unfortunately the answer is clear only from the perspective that you are coming from. Neither entrepreneurs nor investors will be able to see the challenges the other side faces very easily so it is a question that quite possibly has no clear answer.

The best is to keep at the problem and have different parts of the puzzle try and fit themselves as they progress instead of force fitting more funding into companies or the other way around.

The other part of the question comes from the seed fund that we have as part of Microsoft Ventures. We have not invested in any company, in India, so far, but we have 2 in the pipeline. We get questions on why we dont fund all the companies from the accelerator.

The answer is fairly straightforward but very hard for entrepreneurs to swallow in India.

Microsoft Ventures fund is global. Which means we look at opportunities in the US, Israel, China and other locations. We have some fairly standard criteria for our funding – including, but not limited to the following:

1. We only have the authority to put money in a US or UK entity.

2. We can only use a convertible note instrument.

3. We need to have the company’s product’s well aligned with internal Microsoft teams / products and goals.

The accelerator, however, does not have the strict guidelines associated with these 3 criteria.

Finally since we fund all companies globally, the investment committee looks at all companies across multiple geographies and “looks” for traction, differentiation and other metrics and our companies are just not as strong as those in Israel or the US. They seem to need a lot more time, same amount of money, with potentially smaller exits. While that’s the nature of the maturity of our startups in India, that’s not a bad thing overall. We will get there eventually is my perspective.

Until then we have to fight battles on why we should fund a company from India, when the comparable company in the US is much further along.

The argument for China is simple – a US company just does not do as well in China as a Chinese company.

The arguments for a Israeli company are great as well – most of their companies are Delaware entities, have extremely strong technology (which is aided by government) and they have at least 100% more traction (customers, revenue) than comparable Indian companies.

What do you think? I’d love your perspective on what I am missing.

The toughest choice for an entrepreneur – Slow and committed vs. Fast and apathetic

Another day, another debate. This time it was Ravi Gururaj, Raj Chinai and Rajan Anandan vs. yours truly.

Lets have a twitter debate copying @rajananandan and @ravigururaj as well on your thoughts.

The debate is about the type of investors that entrepreneurs need now. I believe in the last 18 months, the Indian entrepreneur has changed dramatically. They now prefer a slow, but committed investor as opposed to a fast but apathetic investor. If they could have the best of both worlds, they’d like a fast and committed investor, but that’s as rare as a blue moon. Ravi is of the opinion that speed is the need of the hour.

Here’s the background:

Startups that are getting funded by accelerators are largely (there are exceptions) getting a better shot at getting funded that those that are not. Coming out of an accelerator, most startups get a few angel investor to put anywhere between 50L (or $100K) to 2 CR (or about $400K). This is their seed round. In the US, nearly 27% of companies raise the series A after this angel round of funding. That ends up being a $2 Million to $5 Million round. In India for 2013 that is < 5%

In India, because customer acquisition is slow and laborious, the next round after a seed round, is actually a sapling round (or bridge round) during which the entrepreneur raises anywhere from $500K to $1.5 Million. After this round is when most startups raise their series A in India.

So compared to the US startup, Indian startups have given up 7% on average to the accelerator, 25% to seed investors and another 30% to sapling round investors. In the US most startups go from 7% for the accelerator and 20% for seed investors before their series A.

The “sapling round” is very critical. The reason is that VC’s look for market, team, traction, space and competition before they invest in the series A. Most companies (over 90%) in India are clearly not ready after their seed round, with a complete management team, enough traction (aka revenue) and sufficient product differentiation to support a $2 Million round at a valuation of $4-$5 Million.

Say you are an entrepreneur and you want to raise a seed round and are given 2 choices:

1. An investor willing to move quickly and give you 50L in less than 6 weeks, but not commit to helping you fund the next round, either because they assume you will have enough to raise a series A, or because their investment thesis only allows them to put 50L per company and not more.

2. An investor wanting to take 2-3 months to make a decision (to get to know you, or because they are busy, or because of any number of useless reasons) but committing to give you 50L now and earmarking another 1 Cr to 2 Cr for 20% of the companies they invest in for a future sapling round.

Which one would you prefer?

Most entrepreneurs 18 months ago believed that a fast investor was better than a slow one. But I believe that’s changed now.

Why?

The time to raise a round is increasing, not decreasing. Most entrepreneurs are hearing stories of how some Venture investors are taking over 6 months before making a decision since they have enough good quality deals to pursue. They are also seeing their peers raise a bridge round of financing 12 months after their seed funding raise and realizing that a committed investor is better than one that is apathetic to a 50L investment.

I wish there were fast and committed investors, but that is just not possible.

Why?

The time taken to make an investment increases with the amount of capital involved. It is that simple.

For a Venture investor, $250K investments are quick, but $5 Million take more time. Similarly for an angel investor, $100K investments are quick, but $500K take more time, because you better be sure.

The reason for the $500K is that they will put $100K first, then commit to putting another $200K to $400K as needed in 12-18 months. They are committed to seeing you through a series A if they believe in your company.

Angel investors in India are realizing as well, that most (over 90%) of their investments need more money than they put in at the seed stage before they are ready for a series A. Given that 30-50% of their portfolios will fail, close or shut-down, due to any number of reasons, it is important to let the winners “win”. So they need to support their “winners” with more cash.

I’d love your opinion on this topic. Please let us a comment or lets debate on twitter. I am @mukund. Copy @ravigururaj and @rajananandan as well.

Yahoo’s Marissa Mayer is redefining the future of tech careers: #startups #entrepreneurs

I think of careers as a set of 3 phases of 12-15 years each. From 21 to 36 you are in the rapid learning phase, from 36 to 51 you are directing and from 51 to 66 you are guiding. These are broad brushstrokes. I am going to focus on the first “trimester” of your career in this post.

Why 12-15 years? Generally speaking, it takes most people 2 years to get a handle on anything meaningful (build a network, understand how things work), then two years to master it, and a year to start being in “the zone”. Boredom hits usually at the end of the “zone” when the juices just dont flow doing the same thing for 5 years. I am going to call this 5 year period as “doing a (one) job”.

Then most people tweak their role or go for a dramatic change in their “job” after 5 years. During the younger years most people I know are eager to learn, discover and grow their knowledge. So, they go through 3 sets of 5 year periods or “jobs”.

For most people the age of 35 (or in other cases 40) typically becomes a “mid-life crisis” point. 15 years of working can do this to anyone. That’s when a “career” change is explored.

I get about 5-7 emails and requests for calls / discussions with mid-career executives each week who want to brainstorm and get my thoughts on their career.

After the obligatory, landscape review, many realize there are few options for those who have achieved a lot by 35 – they are VP’s, Directors, Managing directors and suddenly they realize it is going to be one long haul after this.

Most folks fall into 3 buckets at this point.

1. Some decide they like “mentoring” younger people and continue to find a challenge to help others within their company grow and thrive. These folks have made enough money but not enough to leave the luxuries that their position offers.

2. Others decide they need a hobby (or want to follow their “true passion”) that will keep them occupied because work tends to be on cruise control. Many take up teaching as a side profession since they believe they have learned enough to share.

3. Still others want to venture out on their own. Having heard about entrepreneurship and always having a “bug” to startup, they usually come to seek my help on the choices and get some advice on their idea.

This is when the fun part starts.

When I present the stark reality of entrepreneurship (it is very hard, they will likely fail, though they will enjoy the ride and to build something awesome will take them over 5 years), there are 2 reactions.

The first person had not thought about it in this context and ends up understanding that they are not ready to take the risk and goes back to one of the two previous options before. They will usually say “I always wanted to start, but I kept pushing it out, since I was getting promotions, got married, had kids, school, mortgage, etc. Now it looks like it is too late”.

The second person realizes this, and understands that it is “now or never”.  The overwhelming dissatisfaction with their job pushes them to leave their high-paying, easy job to the unpredictable world of entrepreneurship. They end up taking a LOT more risk later in their career, which they can ill afford it, than when they are younger.

If you are an Indian or have many Indian friends, you will know a term that parents use (typically after they graduate) – “Settle down”.

I absolutely loathe that term.

“Settle down”.

What does that even mean? Actually I know what that means, but I guess I detest it so much, that when folks mention it, I get upset and “forget” the meaning.

Settling down is for ground coffee. You ask hyperactive kids, who have had a candy binge to, “settle down”.

Settle down to a 21-30 year old strikes me as the worst advice you can give.

[Side note: To my american friends, settle down means, get a steady job, buy a house, get married, have kids immediately, buy a car and go for Art of Living classes – all within the span of 10 years].

Why would anyone wish that on their children?

Here is what I think will happen in the next few decades.

Thanks to rapid “softwareization of work”, most people wont get a simple “middle class job” which pays well enough to “get married, buy a house and a car and have kids” all within 10 years.

Instead I think parents will have to start telling their college grads to take risks early. Jump into entrepreneurship right after college.

Why?

Simple.  Most roles at large companies will start to resemble small entrepreneurial team roles. We are already starting to see that in larger software companies and I think the pioneer of that model is -

Yahoo!

Yes, Yahoo!

That’s the future of careers and hiring. Check out their buying binge since Ms, Mayer has been the CEO.

I am positive that the impact Marissa Mayer will have is more on careers, hiring and the future of entrepreneurship than on advertising technology which is Yahoo’s business,

To all the CEO’s sitting on piles of cash and need to hire awesome teams – here is the playbook.

[Ed. That they have not produced any meaningful new products at Yahoo is not lost on me. Give them time. Innovation is never linear.]

So what does this have to do with careers?

Most parents for the next 10 years are better off telling their kids to start a company, be an entrepreneur and get acquired by someone like Yahoo. Here’s why:

Option 1: Be awesome at school, take on a $30K -$50K student loan when you graduate, then get a job – at Yahoo! – to get paid $60K / year as a starting salary.

Option 2: Start a company. If you succeed, sell it to a Yahoo-like company for $ Millions. If you fail, get acqui-hired by someone like Yahoo for $hundreds of thousands. If you fail miserably, get hired for at least 25% more than your peers who took option 1 straight out of school. Voila! You are ahead anyway.

Either way, option 2 is worth the risk.

Tell your kids to be an entrepreneur.

Settling down is for old geezers. By that time – the risk is clearly not worth it.

The never ending debate about quality vs. quantity among #startups

Yesterday we had a debate at the Microsoft Ventures Accelerator Demo day about whether the ecosystem needed to provide more support for existing startups or get more new entrepreneurs into the fold.

On one hand there was Sharad Sharma of iSpirt who made a very cogent analysis of where engineering education is in India currently (vs. 5 years ago). His point was in 5 years we have increased the # of engineering graduates by 10-fold and that has resulted in many disillusioned parents and students, who have paid lots of money to engineering colleges to get a degree, but find that there are not as many jobs as they thought there would be. This has resulted in social unrest in a couple of states. There is even a state considering a student loan waiver (similar to farm loan waivers in India).

His analogy was: if we get too many early stage entrepreneurs and not enough capital to help them or policy related changes to support them, there will be too many failures and a backlash against entrepreneurship.

His suggestion is to help support our existing entrepreneurs with the intent to make them successful.

Ravi Gururaj and I, on the other side, were of the opinion that we should focus on quantity given the maturity of our ecosystem. India is a largely nascent technology startup community and what works in Israel, China or US does not work here given where we are.

That does not mean we dont support our existing entrepreneurs, but a call to focus only on existing entrepreneurs does not help our cause. The best is we can do both, but if we had to prioritize one, I’d advocate quantity right now over quality. When the ecosystem gets large enough (we will know when it is too large based on lagging indicators, not leading), then the focus on quality alone *might* help.

I am going to outline my case for why this is the better approach based on data that I currently have. I’d love to have you debate this with us. I dont speak for Ravi, so please review the below as my opinion alone.

To set context, there are over 60K (30K product) tech companies that get started in the US annually. The comparable number in Israel is about 400 and India is about 500 (Over a 1000 ideas and entities get started every year in India, but a large number end up not becoming companies).

Of these in the US over 30K (About 3K get VS funding) get some form of funding, about 50% of starts in Israel and 25% starts in India get some money (friends and family, angels, VC’s, etc.)

The bottom line is that we are a very nascent ecosystem. There is largely insufficient data to make meaningful predictions on our successful startups yet.

The second set of data points (read the larger Kauffman foundation report later) are on shutdowns and “failures”.  If you classify success as an exit (which is bizarre, but humor me for a bit) then 97% of startups fail. If you broaden success to those companies that are profitable / operating then 75% of tech startups fail and if you further broaden the definition to those that have not “shutdown” then that means over 61% of startups fail.

Note that these are all US numbers and we dont have significant, meaningful or valuable information for India, but we can largely assume that the failure rates are similar if not worse.

So we are a very nascent startup nation and we have lots of failures.

That would lead many to advocate that you should focus on creating winners. Like there’s a formula for that.

Here’s the thing – there’s NO formula for a startups “success”, except great founders, solving a large problem, which has large market and of course – LUCK.

I dont understand why people dont give a great importance to luck as a significant aspect of any startup’s success. Maybe it is in our psyche to discount the intangible. Anyway, that’s a whole another discussion.

Anyone that claims we can “engineer startups to win” has not realized that it is impossible to pick the winners. Even the best “pickers” average 30% or less “winners”.

So the best you can do is really to get more people to believe in the “religion” and thus turn into more converts.

As a nation we still have many folks who are not entrepreneurs directly who influence our entrepreneurs. We need them to believers as well.

The “get a safe job” instead of a risky startup parent of an engineering grad needs to be converted.

The “I wont let you marry my son /daughter” because you dont really have a “job” father-in-law needs to be converted.

The “I need to maintain our lifestyle so lets buy a imported car instead of your Alto, so dont give up your (ed: dead-end boring) job to start a company” husband needs to be converted. P.S. This is a true story of a women entrepreneur whose husband said these exact words. Sad really.

The argument that they will see many failures and hence will be disillusioned is going to be invalid, since there are few other options.

Let me segue to Sharad’s argument and the comparison to engineering education for a bit.

To those parents who, after asking their kids to get an engineering degree, are now finding them without a job, I ask “What was your option”? Arts? Law? Commerce? Medicine?

While they are all equally good options, none of them are guaranteeing your children a “job” either. And the jobs they deliver are likely going to pay a lot less.

In fact going through an engineering education at a “not-top-tier” college is probably as good for children as going through a top arts college in India.

Why?

Simple. Even the arts are being “scienced”.

Back to our regular programming.

So the 3 main arguments I make for continuing to focus on quantity are:

1. Our ecosystem is too nascent and we have too few data points to focus on quality alone.

Why? Do a lot of experiments, figure out which ones work, rinse, repeat, hope for the best. We cant be Steve Jobs and assume we know a winner when we see one. We are better at being a Jeff Bezos and trying a lot of things, willing to be misunderstood for long periods of time and finally making a few dents.

2. You cannot guarantee quality.

Why? We dont know how to pick winners. We dont know which startups will succeed and which will fail. So, it is best to support all, and the winners will rise to the top.

3. We need more converts to the religion and the failure rate should not be a deterrent.

Why? The options are not many. If you are graduating now and expect to get a “job” at a large tech company, the chances are getting slimmer and the likelihood of you liking your job in a few years are slim.

That’s my argument. Your turn.

The pretender and the contender wear the same clothes

In the last year I have talked to over 800 entrepreneurs. About 200+ were discussions over 15 minutes. That roughly equates to about 1/2 my work time. This time was split between listening and learning from them and the rest was spent sharing some “gyaan“. For what it was worth, most of them were very nice to me and politely nodded when I dispensed my 2 minutes of “framework advice”.

What I have learned is that it is very hard to give an answer that’s cogent, well thought out and precise. In an era where there are enough advisors, mentors and other folks giving lots of advice, there’s a cottage industry sprung up around trying to “help” entrepreneurs and “grow” the ecosystem.

Here’s the challenge for us as entrepreneurs. The pretender and the contender both wear the same clothes, speak the same language and likely use the same words. We have to discern who’s who.

So what’s the framework to use to determine who you should listen to and who you should ignore?

There are enough folks suggesting that peer learning is the way to go. After all, what better than someone “like you” who has just been through the same path before. The pros of peer learning are usually – practical advice, “here’s what I did and it worked for me” and knowledge dished out without airs and graces. The cons are lack of context, the inability to give you a framework to think and providing answers to questions that you might never encounter.

There are other folks suggesting that “successful entrepreneurs” should provide you with the right advice. Meaning, folks who have seen relative measure of success and would be likely able to share more refined nuances of their journey. The pros are well thought out arguments, balanced perspective on what works and does not. The cons are that success comes over a long period of time. The things that worked a few years ago are rarely going to work as effectively.

Still others say the best advice is from “failed” entrepreneurs. They can possibly tell you everything you should not do, but not all the things you most likely should do. The pros are that you get to really understand that the rose colored glasses that are worn tend to be tinted anyway. The cons? – What should you do? Opposite of all the things the failed entrepreneur did?

At the end of the day it will become obvious that to have some modicum of success, you will have to blaze your own trail. Else someone who has done the “exact” same thing that you did, will likely “clean up” before him, leaving nothing but crumbs for others to “feast” on.

The only way to know who the pretender is and who the player is to watch them in action.

Which is why I highly recommend that you work with the advisor and mentor for a few weeks or a month before you actually bring them on board. For the first month, if they truly believe in what you are doing, they would offer their time for free, then you can overcompensate them for their work post that effort.

Are Indian entrepreneurs “thin skinned” or misunderstood?

There are so many great tech entrepreneurs of Indian origin in the valley who have been successful over the last 2 decades. A last count indicated over 40% of all startups in Silicon valley were either started by or had an Indian cofounder.

This has led to several of them (entrepreneurs from the valley) and a few “industry observers” commenting and comparing the startup ecosystem in India to that in the valley. Most are not encouraging. From the outside looking in it is relatively easy to say “There are too many clueless people running incubators” – actual quote from a self-proclaimed Silicon Valley expert, or “Focus on local opportunities, not on global ones” – actual quote from a Tech Crunch article.

In both cases, many entrepreneurs in some closed Facebook groups that I am a part of, were all up in arms about these broad generalizations. The articles themselves were focused on many aspects of entrepreneurship as well in India, and the quote alone, taken out of context would be construed as a “passing mention”. Nonetheless many entrepreneurs took umbrage and the conversations denigrated into an abyss.

Back to my question about Indian entrepreneurs. Are we just thin skinned or misunderstood?

First, our startup ecosystem is fairly nascent. Comparing it to the valley is not doing either location any good. Both investors and entrepreneurs complain about each other constantly in both locations, though. Many investors claim entrepreneurs lack the depth, knowledge of the markets and understanding of what it takes to build a great business. Many entrepreneurs claim investors are risk-averse, predatory and bean counters without the expertise to build a business.

They are both are right, but both are wrong as well.

Market dynamics and conditions in India force both of them to play hands they are dealt with and I think so far we have done well. Comparing a teenager (Indian startup ecosystem) to a mature adult (Silicon Valley) does not make any sense though.

Second, I do believe that we can be more appreciative of each others positions and show a lot more empathy for our investors and founders. I am not suggesting a group therapy session, but knowledge and understanding of the constrained markets India has and the small exits that we generate does not help investors is important. Neither does expectation of Silicon valley type exits or “traction” help entrepreneurs.

Can we all get a little more thick skinned as well? – possibly. For most parts if you read a “self-professed expert”, such as myself or others, claiming to understand the nuances of the ecosystem, which you believe are incorrect, be direct and point it out, with a cogent argument explaining your point of view, instead of vitriolic comment spewing or worse – name calling without context.

How to encourage more amazing people to join #startups – for #investors & #entrepreneurs

In the last 2 weeks I have had to catch up on several shareholder’s agreements that startup founders have sent my way to review.

It is very disappointing to see that most of the Indian founders keep 10% or less towards Employee Stock Option Plans.

There’s no better way to say this. This is silly, very backward in its thinking and has no justification.

I dont buy the argument that employees dont value stock options. They dont understand them and hence they tend to ignore them.

As an investor and startup founder it is your duty to make sure employees understand the value of stock options.

All successful startups will agree that the startups with the best people usually wins. Not always the best product or best technology but the one with the best people.

The best people dont come cheap. They have multiple options – Working at a large company, working for themselves or striking it on their own to build their own startup.

If you want to encourage the best people to consider startups, you not only have to pay well, but also give them enough incentives and “upside” to ensure their success.

I am also very disappointed that investors are not asking this of startup founders. The long term viability of the ecosystem depends on the best folks making good money so they can become entrepreneurs or investors again.

The wealth needs to go around. 2-3 folks in any company making a lot of money while the rest slave away for paltry sums is a recipe for a host of B and C players being early startup employees. None of us want that.

I dont think this is very sustainable.

If you are a startup founder, one of the most important things you need to do is to ensure your employees make a lot of money as well if there is a big upside.

I want to be a big force of this change for the good.

Starting today (as part of Microsoft Ventures and my own personal investments) I pledge I will ensure that every startup (starting in India) has at least 15 if not 20% of the shares kept aside for early employees. I also want to make sure that the shares do get granted to employees. Finally I also will make sure that our portfolio will share the wealth with the employees as well. I understand that means we might have to take a haircut on valuations or even reduce our ownership. So be it.

If any of our co-investors do not agree to our model for equitable employee contribution, we will not do the deal.

Be the change.