Credit: Paul Martino, Bullpen Capital

Does raising institutional money at the seed stage help or hurt?

In 2009-2010, during the peak of the eCommerce bubble in India, there were very few seed stage options for raising funds for startups. You could either get money from angel investor or look to raise money from large VC’s, hoping they would put money at the seed stage so they can be part of the later round.

During that period, larger firms in India, such as Sequoia Capital and few others did many (over 15-20) deals in a year. The typical check sizes were about $500K in India (about 2 CR that that time).

The main reason why entrepreneurs were looking to raise money from institutional investors,  besides needing the cash and finding not many other options was the belief that “if they were in early, they would be an automatic in the next round”.

Of the over 40 deals  that were done by institutional investors in 2008-2010 in the early stage (largely in eCommerce), only 4 are still around. Of the companies that took money from institutional investments in their seed round, only 5 secured investment from the VC in their post seed round.

This weekend I had a chance to read the ET survey on Why startups are raising seed stage capital from VC firms.

The average % of the company that entrepreneurs gave up is about 15% and the amount they raised from VC investors at the seed stage is about $500K.

There are many good reasons to raise money from traditional Venture investors, but assuming they will definitely invest in the later round, is quite possibly wrong based on previous history.

If you are looking to raise money and you have an interested later-stage VC investor willing to put money in your company, by all means you should take it.

Assuming they will invest later is a big leap of faith.

There are, like most things in the startup world pros and cons to this approach.

The pros include the “name brand” value of the VC firm on your cap table early on, the ability to tap into the expertise of the VC investors and also access to their network and connections.

The downsides are the signalling effect if they refuse to invest in the follow on round, the likelihood of them investing in other competing startups in the same space in later round (since they understand the market) and finally the smaller pool of investors available for you (since many VC’s wont invest if a lead VC investor passes on the follow on) in the next round.

While I dont think there are many options in India for entrepreneurs, the best bet I would still recommend is to get the right investors at the right stage of your company. At the early stage, angel and seed stage firms make sense, and later on using their help to get VC’s is a good approach.

Credit: Paul Martino, Bullpen Capital

Credit: Paul Martino, Bullpen Capital

Paul Martino of Bullpen capital puts this week in the chart above.

Given that seed is now a perpetual and continuous process until your series A, I would recommend you raise constantly and raise often.

Startup Survival

How to survive a “funding round that fell through”?

Once a week, I get a panicked email from a founder who wants me to take a look at their startup and invest since they were looking to close a round, but a key investor or two decided to not participate.

Most investors (buyers) don’t like to be rushed. Whether that’s you trying to make a big purchase, or even waiting in line at the McDonald’s trying to decide what to eat for lunch. So, it is not surprising that I have not invested in a single opportunity where the need was to invest within a day or two.

I did get a chance later to talk to a few of the entrepreneurs and of the 5 I have spoken with, 4 shutdown their company because they were unable to raise their round. Most of them decided to move on and join another startup.

Even if you have good traction (growing 10% MoM) and a sense of product market fit, fund raising is very hard. In fact it is likely the hardest thing you will face as an entrepreneur. Some people claim building a product is harder, or getting customers is, but I think fundraising is tougher than either of those two tasks.

The main reason is that there is asymmetry and inefficiency in the market for information and opportunity.

In most cases investors do not know if a startup will make them money and founders do not know if an investor is ready to participate.

The best way to survive the “round did not close” issue is really to keep your burn rate really low or generate enough other income to survive longer. That’s easier said than done.

Keeping your burn rate low is the easier of the two things to do. Don’t hire would be my suggestion to most entrepreneurs. That’s usually the biggest cost in any startup. Payroll. So, if you and your co founder can make by without making the investments in people (or in inventory if you are an eCommerce company) then do it by all means. You might experience pain and longer working hours, but it tends to be worth it. Primarily because the chances of your company doing well after you experience a “almost funded, but did not” is low.

Startup Closed

Startup Closed

Generating enough income to survive is hard as well, but usually if you have specialized talent or skill, then consulting tends to be a necessary but good enough option. If you can get work in the area of your startup and get paid reasonable rates, then you can keep your dream going for that much longer.

If you will want to ensure your funding gets closed, then the first thing I’d advice you to do is to setup enough options with alternate investors (hope to have 10 interested and likely 3-5 might close) or have a way to keep things on simmer until your investors are ready. Since it will be a chicken and egg to get more investors until you get more traction, I’d recommend you focus on selling and getting more customers by focusing all your efforts on sales, instead of adding any more features.

IAmAnEngineer

Sometimes all you need is someone to give you an opportunity @DaveMcClure #IamAnEngineer #MyDaughter

We are a pretty nerdy family and sometimes to a fault. In fact some days we will be at home with the kids and we are texting each other, since we are in different rooms. My older kids do code. Thrisha (13) does mostly front-end – Javascript and HTML/CSS and Rishab (11) does decent SQL. My youngest girls are 9, so I am hoping they will start to code, soon, as well.

I was in San Francisco a few weeks ago talking to Dave McClure during the #preMoney conference, about my daughter, who has been coding for a while, and he suggested she should come and do an internship at 500 Startups. I am was not sure, but I mentioned it to my wife, who was a little worried about where she’d stay, how she’d commute etc.

IAmAnEngineer

IAmAnEngineer

We have a ton of family and friends in the bay area, so one of our good friends, Sachin, offered to host her for the 1 and 1/2 months of the internship. Thrisha was keen to do an internship, and 2 of the startups at our Seattle accelerator offered to have her over during the summer in LA and NYC.

She was constantly talking to these 2 companies and was pushing us to send her to those cities. I was not too keen about LA, because we dont have folks we know there, and so both staying there and commuting were going to be a problem. And she is only 13, so I was a little concerned about she being out on her own.

Over the last 5 weeks, thanks to Dave and #500Strong, my daughter has been in Mountain View, coding and working on a project that they use to monitor their investments. She has been very happy and is learning a ton.

The first day I went to drop her at work, she got on a call with the lead – Santiago, who has been very helpful and supportive. During that call, I was suggesting to Thrisha that she should spend more time brushing up on her Javascript and take 1-2 weeks to do that.

Santigo jumped in and said, “No, just go to github, download the repo and get started”. I was not too sure about Thrisha going in and checking code into production, but I let my fears stay in my own mind.

Turns out Santiago was right. Thrisha got the repo, and picked up the language and the requirements completely by just looking at the code and learning.

I am still amazed that a 13 year old (let me brag for a little bit) is able to understand and work on code that gets used, but that’s I guess the scary part as well. If, a 13 year old, who is heading to 9th grade can do it, what stops my 11 year old or 9 year old?

At what age should we support programming with our kids? Should we just expose them to technology and programming and let them pick up stuff on the go?

Another question is about women in technology. I dont think this problem is going to go away anytime soon and it does require a concentrated effort for a long period of time, but you have to hand it to folks like Dave and others at 500 Startups.

Sometimes, all you need is someone to give a 13 year old, an opportunity. I know Thrisha’s very happy and thankful to the #500Strong team for the chance to work at the fund.

My daughter’s 13. She can code. She is an engineer. #IcantBeMoreHappy #IamAnEngineer

Startup Ecosystem Ranking 2015

Global Startup Ecosystem Ranking, 2015 #Seattle and #Bangalore

The global startup ecosystem rankings at out. Since we had a chance to partner with the team putting together this research I had a chance to learn the methodology a lot more this time. There are three observations I have regarding he overall report and a follow up to an early comparison of the 2 startup ecosystems I have the most experience with – Seattle and Bangalore.

First, the two ecosystems are not that different in many aspects – the criteria used by compass were:

1. Performance (exits, valuations, etc).

2. Funding access

3. Market reach

4. Talent

5. Startup experience

and finally Growth index.

1. Growth: Bangalore is growing dramatically, at 2.5 times Tel Aviv’s growth and more than 3 times Seattle. It will be a matter of time before the total number of startups from Bangalore will be more than that of Tel Aviv or Seattle combined. Likely in 2018.

2. Spread: Seattle’s ecosystem of startups is more broad based – a few eCommerce (Zulilly, Expedia and Amazon), some cloud and a few SaaS companies. Bangalore’s ecosystem of startups is fairly shallow – eCommerce rules, followed by a few in Ad tech and B2B.

3. China: I am shocked that Beijing and China were out of the top 10, much less not even on this report. My first hand knowledge of Seattle and Bangalore and secondary knowledge of China, indicates that they will be #2 even higher than where LA is.

I would agree that market access / reach and startup experience,  expertise will put Bangalore slightly behind Seattle, but that’s more than made up for with Bangalore’s better funding availability and overall acquisition track record.

Here is my unofficial top ecosystems ranking, which I believe will reflect a more accurate ranking of the top ecosystems for startups.

1. Silicon Valley (Separate the valley and SF and you will have the #1 and #2 positions)

2. Beijing

3. New York

4. Los Angeles

5. Boston

6. Tel Aviv

7. Seoul

8. Chicago

9. Seattle

10. Bangalore

11. London

12. Austin

13 Sydney

14. Moscow

15. Toronto

The rest of the ecosystems dont matter. Either market access, funding or performance in terms of acquisitions.

The other parts of the ecosystem that should be measured include news and media involvement, hackathons, events, training and education – early indicators of where the ecosystem is headed and I think those will show a few other cities – Tokyo and a few middle eastern countries as well.

Startup Ecosystem Ranking 2015

Startup Ecosystem Ranking 2015

Being Capital Efficient

How your investor “Story” differs from your customer “story?

I dont subscribe to the meme that says you have only one “story” as a startup. I think you need different stories based on your audience. I want to talk about one particular case based on a real world example and share how the stories might differ, the messages might change, and the positioning might be different as well.

I had a friend who is building a hardware company. Or, so he thought. The hardware unit would sit in a car and monitor driving behavior. Since it was focused on a niche (but large) use case, he was able to confidently show a large market (over $1 B) in a bottoms up market research study.

He had also done some initial customer development and spoken to over 50 of his target customers who were all willing to buy and pay for the solution, talked to 5 potential distributors who were willing to stock and sell the product and also had talked to manufacturers who could build at scale. Armed with this information, he felt he could raise a $500K round, since he had a strong team of 3 folks with him.

Being Capital Efficient

Being Capital Efficient

To build the hardware he estimated 3 resources for 6 months, so he felt $500K would give him enough cushion to tide a few mistakes.

After 3 months of trying to raise money and talking to over 12 potential targeted investors in his list, he found out that the appetite for  hardware was just not there.

Well, there was appetite for a hardware company, but only at “scale”. Not in the initial phases, meaning the target investors,  who were “early, seed and angel investors” wanted to see upwards of 500 to in one case, over 5000 units, before they were willing to to give the angel terms – $500K at $2M valuation. My friend felt he was being low-balled, but he had no other options.

Most investors he approached were unwilling to fund his hardware company.

This is not about hardware though, the same “investors unwilling to fund” anything outside known or proven models exist in other areas as well. Markets get in and out of favor. The flavors of the month are big data, anything marketplace (consumer) and most all things SaaS, etc. and cloud (B2B).

So, when he reached out to me, my initial reaction was the same as other investors. Having burned my hand in hardware companies, I was unwilling to fund anything close to hardware. Over the last 9 months we have funded 10 hardware companies and 30+ software. Except for one hardware company, the rest still have not shipped product (nearly 3-12 months after they promised to do so) and most have been unable to raise a follow on round of funding.

On the other hand, 50% the software companies have been able to secure follow on funding. I understand funding is no measure of success, but it is a key milestone.

Instead I asked him to position his product as a “Insurance and driver data as a service” – DIDDaaS (forgive me) platform and get the version 1 out with software alone, instead of hardware. Turns out that worked. After 3 weeks of meeting the same investors he did before, with a software only, asset light play he was able to get $250K committed to start.

Trends point to the fact that even software companies are forgoing being capital efficient, but if your story depends on raising a lot of capital to be competitive, I’d say change the story to appeal to the capital efficient investor, EVEN if you end up raising a lot of capital.

Angel List Database of Investors

What percent of active angel investors are on #AngelList?

Every week, I get about 2-3 emails from entrepreneurs asking me to introduce them to angel investors who might be interested in a startup.

Besides this, I get about 3-5 introduction requests to specific investors.

Looking at my reports from Conspire, I end up helping more than 70% of the specific requests and only introduce 25% of the folks from the generic requests to “connect” to investors.

I’d love to help a lot more, but I unfortunately dont have the time. For the entrepreneurs who want connections, I end up saying – Can you please check on #angelList. Which is what I would do if I were in their position.

I usually get a note from the entrepreneur who say most of the investors on Angel List are “fake”. I think they are confusing getting “lead investors”, who are on Angel List versus, getting the entire round done, with investors who are not on Angel List.

Somehow, many of them come back telling me that there are a host of “other investors” who are actively investing, but are not on angel List.

That lead me to the topic of this blog post.

“What percent of active angel investors are on #AngelList?”

Angel List Database of Investors

Angel List Database of Investors

Most entrepreneurs believe that like the iceberg featured above there are a lot more actual investors than the # on any database. Or that there is opacity in the identification of angel investors.

I am not sure of the data, but I wanted to do some quick and dirty data checking.

Here are the assumptions I am making about the startup.

1. I assumed that I was looking to raise money in Bangalore, India or Mountain View, California.

2. I am starting a company in the SaaS (Software as a Service) space.

3. I am looking to raise $500K from angel investors

4. I have early product and some customers (none of them are paying, or a few are paying too little).

5. I dont have a large network of investors and I am not from Facebook, Google, LinkedIn or a “hot company” on my resume.

I then looked at Angel List with these assumptions and got about 35 “individual investors” in India and 512 investors in Silicon Valley. There are actually a lot more, but I weeded out the ones who have done only 1 investment over 2 years ago and those that are not SaaS specialists.

I also then looked at the recent 9 SaaS investments (last 2 years) in India, and 14 SaaS investments in SaaS in the Bay area. I got this list from Owler and Crunchbase and also looked at data from 5 accelerators – YC, 500, Alchemist, Angel Pad and StartX. I wanted to check who are the investors in these startups.

The data on some of the investors is available but most of the startups that recently got funded have 3-5 investors who are public and rest (similar number) who are “behind the scenes”.

The quick and dirty research suggests that close to 40%-50% of angel investors are not on Angel List.

The reason I was able to determine that only 20%-50% of the investors were publicly identifiable was by speaking to 7 of the Indian startups and 9 of the US ones.

The most common 3 reasons why not all investors were listed on the company’s Angel List page were:

1. The angel investor was not on Angel List.

2. The other angel investors did not want to be identified or preferred to keep a low profile.

3. The angel investors were part of the syndicate, which was led by one of the well identified investors already on Angel List.

I spoke to 5 of the “lead investors” and 3 of the “not on Angel List” as well.

There are 3 takeaways for entrepreneurs from my research.

1. To get an angel round done, you need a lead angel investor who is very likely on Angel List and is pretty active (you need a lead for other rounds as well, BTW, so no surprises here).

2. If an “angel investor” is not on Angel List, it is highly unlikely they will lead the round or help you close the round.

3. Most of the “other investors”, not on Angel List purely work on recommendations from their trusted “Angel investors” NOT from other entrepreneurs. This is different from professional investors (such as Micro VC’s or VC’s) who get most of their recommendations from other entrepreneurs.

So, my recommendation is start on Angel List, get your lead investor and then use other sources (LinkedIn is the better source than Angel List for this) to find investors who are connected to your lead on that platform, but are not on Angel List. Also use recommendations from your lead investor to help you get to other investors who invest with your lead.

5 strategic items to consider before you get acqui-hired #napkinStage

In the last 3 years at Microsoft Ventures, 7 teams have been “acqui-hired”. 2 were from India, 5 in the US. I had a chance to be up close and see the action, the challenges, the frustration, the joy and the sigh of relief that the entrepreneurs face with these deals.

Acqui-hires fall into 2 buckets – those that save face and those that are incrementally progressive.

While many of the acqui-hires seem like a face-saving opportunity for the founders, they are pretty traumatic for the employees and almost always a poor deal for the angel investors, with exceptions.

The incrementally-progressive ones land the early employees great jobs in the new entity, provide a small return for the investors and allow the founders to get a small win under their belt.

I think about acqui-hires with the focus on the 3 main constituents – the early employees, the advisers and investors and finally the founders.

 

Acquihire Model and Strategy

Acquihire Model and Strategy

You could debate who comes first and who should be considered later, so this is only one model for thinking about this.

1. Return on Risk (ROR) for early employees. Most of your employees (if you hired great folks who were already in other great companies) have taken some form of risk to come and join your startup. Assuming that many left opportunities that were considered less risky than yours, I suspect they would expect a sufficient return on the risk taken. Most good employees, will get an offer from your acquirer, which, I think is the main reason why they are acquiring your company in the first place. The best way to give them a return on risk is to help them “true up” on their salaries they forwent.

2. Return on Time (ROT) for the first few hires. In most acqui-hires, I have seen that the acquiring company does not value the product / service that has been built, but instead likes the team. Building a new team who work well together takes time and energy, which is why they chose to acquire a team instead. A good way to help your early employees a return on their time spent (and you as well to hire, recruit and build the team) is typically via a “sign on bonus” for the entire team.

3. Return on Investment (ROI) for your early investors: If you take money, it should your responsibility to return it if you make some money. While many founders feel that angel investors fully know the risk they undertake when they invest in startups, the responsibility to return money does not go away when things dont work out. What I have found is that most founders will end up going back to being founders again and if you leave a trail of destruction or burn bridges when you do your first startup, it will get much harder to raise money for the next one. If you can help investors get as much money back or return their invested capital, then you will go a long way in terms of building credibility for your next venture.

4. Return on Equity (ROE) for advisers. Early advisers dont invest money, but typically their time. While you might feel less responsible towards them since “they did not lose money”, they did give you time, some connections, advice and mentorship, I think you should try and get some for of return for their Sweat Equity. I have seen one or two founders, taking a portion of their “earn out” to buy out the adviser shares that have been vested. You dont have to do this, but it does help.

5. Return on Opportunity (ROO) for founders. While most founders are relieved just with any exit (given that many acqui-hires were to save certain closure) I do think that founder return is important. If you do get an opportunity to get a good package of stock options and sign on bonus from your acquiring company, I’d highly recommend you negotiate for that.

I have found that in 4 of the 7 deals that happened, the acquiring company would have gladly paid an extra $100K – $250K just so the various parties involved would be “made whole”. In many cases the founders just did not ask since they were desperate to get the deal done.

My only suggestion to you as a founder is to ask if you can. If there is a good alignment with the acquiring company and they wish to keep all the employees for a longer time, they would gladly negotiate some more money to help make the deal more attractive to all parties.

The reason for the $100K to $250K number is simple. If your team is 3-5 people, the cost of hiring a team alone will be covered at those numbers. So, in most cases, it will be a win-win for the company.