Category Archives: Venture Capital

Why forced mergers in the eCommerce space is a good thing

Right now there are many distraught entrepreneurs and industry watchers who are either a) saying “I told you so” or b) saying “this is bad for startups”, when they read the latest “forced merger” between several eCommerce companies. While many felt it started with Flipkart and Letsbuy, the most recent BabyOye and Hoopos has more commentary on the negative side.

While we in India, have been witness to these mergers only in the last few years, this has been happening in the valley for eons  The new age name given to some of these funded startup exits is acqui-hire. Somehow acqui-hire in the valley is great and forced mergers in India is not.

There are and were many naysayers when there was a raft of funding in the eCommerce space a few years ago. Many folks were right about unsustainable business models, rampant discounting, unsustainable customer acquisition costs, etc. To them I say:

From Alfred Lord Tennyson’s poem In Memoriam : 27, 1850

“‘Tis better to have loved and lost
Than never to have loved at all.”

The eCommerce bubble in India has created a new set of entrepreneurs. They did it with other people’s money. No one really lost except for the LP’s who I am sure are now once bitten, twice shy about returns from Indian startups.

Honestly though, I have talked to 5 Limited partners at large organizations who are disappointed with returns from Indian Venture capital, but also realize they dont really have much of a choice but to stay invested.

There are some that claim that other deserving entrepreneurs, who were working on non eCommerce startups, were ignored during the eCommerce bubble. That’s absolutely nonsense.

In India over the last 3-5 years, if you were a good entrepreneur with a good business, great team and chasing a large market, you were able to raise money. The ones that did not get funding, either were chasing smaller markets, were going to grow slowly or were not sufficiently good teams.

Now what do I claim that mergers are good for Indian startups?

1. They help companies and their employees consolidate to create one large player in a mid-sized to big market, instead of 10 players chasing the same market and being extremely competitive.

2. They provide a means of employment for the many employees at those companies who were not the founders or the investors.

3. They give hope to the many entrepreneurs in the making that you can have a “failure” and still be considered for another opportunity in a startup.

4. It provides the investors an opportunity to consolidate their portfolio and hence double down on their winners, without spreading themselves too thin. That way the remaining portfolio companies win.

5. It frees up time from several investors having to spend time on middle-of-the-road companies, and gives them more time to spend chasing new opportunities.

6. It is easier to merge a company in India than it is to shutdown. The process to shutdown a company is also a lot more expensive.

Anything I missed on the other goodness from the eCommerce forced mergers?

What should you expect from an accelerator?

I have written previously about how to evaluate accelerators and choosing the right accelerator since there are so many of them these days and also about what the goal of an accelerator is.

I wanted to share somethings that entrepreneurs should expect from an accelerator from a perspective of a startup founder. I think the best thing that has happened is that so many accelerators have opened in the last few years. Similar to eCommerce companies in 2010-11, I expect many to close or shut down within the next 2-3 years.

There are 3 top things an entrepreneur needs according to me:

1. Access to customers: Whether it is beta customers for feedback, early adopters for providing traction (paying customers) or larger customer for growth, startups thrive on customers. Depending on the stage of your company, if an accelerator does not help you get customers, they are not doing their job. That’s the first lens I would adopt to judge accelerators. If you have access to customers, you can practically write your own destiny. If all the accelerator does is provide advice on getting customers but does not provide introductions to customers, or have customers be ready to adopt and review your platform, you are not going to get much traction or be “accelerated”.

2. Access to talent: In India, for startups, good development talent is hard to get , marketing & sales talent is harder and design talent is extremely challenging to get on board. If your accelerator does not help you with talent sourcing or provide talent in house to help you tide these critical areas when you need them most, you should run away. I have heard the notion that the graduates of the accelerator will help you, but entrepreneurs helping other entrepreneurs by providing time  is not very sustainable. Most of the very successful startups and their executives are extremely busy. While a sense of pay-it-forward does exist, its just not sustainable is what I have found. There’s no substitute for dedicated people to help you with development issues, help you with User experience and design (mockups, wireframes, HTML/CSS development and information architecture) or marketing talent to roll up their sleeves and run campaigns.

3. Access to capital for growth: While I am personally not a big fan of funding as a metric for accelerators to gauge their success, capital is nonetheless needed to grow and thrive, especially in India, where most founders are not serial, successful entrepreneurs or those that come from a “rich family”. So look for an accelerator that provides you an extensive and wide set of investors from seed to early stage and from venture to growth. If all the accelerator does is “showcase you in front of several investors” but does not actively nudge investors to help take a closer look at your company, I dont think they are doing their job.

There are several other things that matter which include a support system of the existing entrepreneur network from their previous batches, access to meetings internationally that possibly help get some global exposure, and a great space to work from, besides other things. However if you dont have access to customers, talent and capital, there’s no value in joining an accelerator.

What I learned from attending 5 Venture capital outreach events

Blume Ventures, Accel, Matrix partners, Nexus partners and Bessemer Venture partners all had their CEO meetings and invited between 100 and 200 portfolio company CEO’s, angel investors, entrepreneurs and other venture investors to the meeting. Most of these meetings were held in Bangalore, (Blume did others in Mumbai and Delhi, and BVP in Mumbai). The format of the meetings was fairly similar – cocktails, an introduction to the fund, a few select portfolio company CEO’s either in a panel or individually on stage talking about their company or industry trends, and finally dinner and networking.

Of the 200+ people in each event, about 120 are the usual suspects ( these numbers are my own guesstimate, not very accurate, but in the ballpark). They include some up-and-coming entrepreneurs, media folks, wallflowers and other luminaries.

These events are both a way for folks to catch up and network, and also for the fund to showcase potential CEO’s to later stage investors for follow on rounds.

The most interesting are the 50-60 folks who are “new entrants” – they are wannabe entrepreneurs, “friends of the venture firm” – typically large company executives who they are trying to either get on the advisory list of their invested companies, or keep the close so they can be the first source of funding when the executives decide to “start something”.

Meet these folks and you quickly get a sense for the firms “proprietary dealflow”. While most of them may not like to acknowledge it, regardless of their “sector neutral” stance, their biases show very clearly.

Although most of the VC’s claim to dig “wide and far” to source deals, and spend a lot of time on planes, they rarely go outside their comfort zone. That’s on an individual basis. I dont think its because they dont have the intent. They also dont have the time to make and maintain new relationships.

Why does this matter for you the entrepreneur?

Say you are an entrepreneur looking for the next round of investment after your initial seed round. The first thing you have to realize is most of these firms prefer being “the first institutional check” into the company.

So remember what I mentioned earlier – Dig your well before you are thirsty.

If you are looking for a round of funding in 6 months, its ideal to start creating a top 5 list of individuals in each firm (not VC firms, but individuals within the firm) who will be on your target list. Then meet and network with their executive list – those 50+ folks I mentioned before. They are the most likely to perform the due diligence on your company before the VC invests.

Each VC firm has their top 50 folks, so technically in India, there are not more than 500 of these folks (after accounting for the fact that some of them overlap VC firms). If you take into account your specific sector and area, I suspect there are not more than 10 people you will have to meet.

These are the taste makers. They are not entrepreneurs, but the ones who will have a strong “No” on deals. Their yes may not translate into an investment, but their no will surely kill it.

Have you attended any of these? What other observations did you derive from these events?

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?

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?

What is Venture Rate of Return?

Entrepreneurs usually ask me why VC’s take so much of their company when they are only providing money and the entrepreneurs themselves are doing all the work.

Its very simple actually. VC’s and other professional investors raise money from other people (usually funds and high net worth individuals) who are expecting a return on their investment.

Right now in India, fixed deposit rates hover around 10%. That means each year you are getting 10% return on your money as a “safe investor”. Real estate investing over the last 20 years has returned in India (not all but many) close to 15%. Granted both these are fairly “not very liquid” investment classes.

Venture investing though is less liquid. Until the companies “exit” they dont return any money to the investors.

So if you as an investor are willing to take a risk, you expect a higher rate of return. Some other asset classes return higher than real estate, but they would be more risky.

The term Venture rate of return is the % of money the investment will yield annually over a period of time in a venture fund. Used to be that period of time was 7 years, now it is close to 10 years.

Lets say for sake of discussion the rate of return you expect as an investor in a fund is 25%. It seems reasonable given the risk.

That means, the VC has to return 25% each year on money raised.

Lets say that the VC raises a $10 million fund. In year one that fund has to be “worth” $12.5 Million, $15.65 Million in year two and so on until in Year 7 when it has to be worth $47 Million and in Year 10 it has to be worth (and return) $93 Million.

So the $10 Million raised has to return 9.3 times its value over 10 years.

VC’s have operating costs as well so they take 2% of the fund every year as a management fee for say 4 years. That means they have $9.2 Million to invest and $93 Million to return over 10 years.

Ten Times the Money raised.

Now this money should not be in paper alone. It has to be funds returned to the investor. Which brings us to the “exit”.

If startups dont “exit” – go public or get bought, then the funds dont get their money back and everyone is unhappy.

Unhappy since VC’s wont make the return they have to for their investors and the investors in turn will stop putting money in VC funds, which means fewer startups will get funded.

What does this have to do with % ownership for VC’s? They have to own a significant % of your company so when the company exists, they can provide that return to their investors.

If you are a VC and you are investing the $10 Million in 10 companies (its not as simple as put $1 Million in each company BTW), you need to have at least 2-3 companies “exit” because 7-9 will close and die. Startups have a very slim chance of success. Success in this case is providing an exit.

Success, however for an entrepreneur is a growing, thriving business. That’s the dichotomy and a discussion for a later post.

Here is a spreadsheet for a review.

Fund Raised  $  10,000,000
Management Fees 2%
Year 1 Mgmt fee  $        200,000
Year 2 Mgmt fee  $        200,000
Year 3 Mgmt fee  $        200,000
year 4 Mgmt fee  $        200,000
Total Management fee  $        800,000
Total available to invest  $    9,200,000
Expected Annual return 25%
Fund Value Fund Return
Year 1  $  12,500,000
Year 2  $  15,625,000
Year 3  $  19,531,250
Year 4  $  24,414,063
Year 5  $  30,517,578 3.05
Year 6  $  38,146,973 3.81
Year 7  $  47,683,716 4.77
Year 8  $  59,604,645 5.96
Year 9  $  74,505,806 7.45
Year 10  $  93,132,257 9.31

Commitment delivery percentage – an indicator of future success of startups?

Here’s an interesting new term for entrepreneurs to be aware of – Commitment delivery percentage. I dont know for sure but I think in a year from now, most startups will start to follow this metric more seriously than others. Some investors are already claiming this metric to be the #1 indicator of future success of startups.

At the Microsoft Accelerator in Bangalore, there are 11 companies in our current batch (Sep to Dec). Every week I send our reports to all our mentors with the weekly commitments that startups have signed up for and how many of them have met their commitments.

Since startup discipline is something I am very passionate about, it goes without saying that I track everything at the accelerator.

Commitments fall into 2 buckets – product and customer. Overall we focus on 3 areas in the accelerator – Product development, Customer development and Revenue development, but initially revenue development is largely ignored since most folks are building MVP and getting early adopters.

Each of these 2 buckets of commitments is not something the startup comes up with alone in a vacuum.  I typically discuss the commitments at our weekly all hands and it is a fairly public affair. While some teams try to lower the bar for their commitments, most are aggressive with what they commit to.

Product commitments are delivery of new set of features, versions or changes per a customer / early adopters requirement. Since many companies have mobile or web applications, most startups at the accelerator become customers of other startups so the feedback loop is quick and immediate.

Customer commitments are a combination of # downloads (if mobile app), or active users, engaged users or user feedback. Since I fundamentally believe that nothing’s possible without customer’s (who have a problem) at a startup, most companies have customer commitments from the first week. During the early days it was mostly meeting customers to get feedback and showing mockups, wireframes, etc.

The weekly report I send out to all mentors (currently over 70 folks) are to people who are committed to helping these startups and are engaged with them every week, either making introductions or reviewing progress and trying their product.

As with most reports, I can tell quickly who has read the report and who has not. On average 30 mentors (less than 50%) read the reports each week. They dont take more than 5 min to read and review.

Most of the investor mentors were reading the reports (of the 13 investor mentors, 8 were diligent and even asking questions every week to clarify certain points).

Over breakfast and a few lunch meetings I had a chance to get & give some feedback to some of our mentors. One question most people asked me was:

What % of commitments were being met and which companies were best at meeting commitments?

The answer is a surprising 70% of commitments were being met consistently and 63% of companies were consistently (with 1-2 exceptions per company max) exceeding their commitments on both product and customer traction.

Most seed-stage investors in India have a revenue requirement (not all, but most) so I was surprised they were the most aggressive in asking me questions about commitments. Seems to me, thanks to the early visibility, investors, were willing to make earlier bets, but needed some sense of the team’s performance.

What better way to judge performance than see the team making commitments weekly and delivering on them?

Investors have mentioned to me the in their experience the #1 indicator of a venture funded startups’ success is crisp execution and if they are going after a large market, then fantastic execution makes a good team great.

So how can we help more companies get on this instead of just Microsoft Accelerator companies?

We plan to release a version of our startup connection system (internally called The Borg) to all Indian companies by mid January 2013. With this solution all companies (who opt to do so) can make their commitments and report them to over 250 seed and early stage investors, mentors and advisers. And yes, its free to all startups.

The next experiment is to see in June of 2013 if the improved visibility into a startup’s execution increases the chances of funding for entrepreneurs. We are currently tracking that as well, and will be able to report in an automated fashion.