2014 is the year when India became #3 worldwide in tech #startup funding

I am finally going through all the reports from PwC MoneyTree, E&Y reports and Venturesource data to determine how the tech startup ecosystem did in terms of funding and growth of VC investments. Here is a snapshot from 2013, the report is available for download.

Worldwide Venture Capital Investments 2013

Worldwide Venture Capital Investments 2013

If you look at 2013, US dominated with ~3500 funded startups by VC’s and that represented ~70% of all tech startups funded. There were a total of 5700 companies that got funded by VC’s alone, worldwide.

In 2014, the number (have to get permission to post since it is behind a paid wall) of VC funded startups rose to ~6500. Depending on which number you seek some say it is 7200.

The US was number 1 with 65% of startups, Europe (primarily UK, Germany and France) #2 with 1500, China #3 with 451 and India #4 with 312.

If you treat UK, Germany and France as separate countries (which they really are and I am not sure why E&Y and PwC group them together as Europe for the purposes of the report), then none of them made it to the top 5.

Looking at countries alone: 1) US, 2) China, 3) India, 4) Canada, 5) Israel, then UK, Germany and finally France.

In terms of invested dollars as well, the numbers are the same:

1. US $38 B – $45 B

2. China $4.5 B – $5.2 B

3. India $2.4B – $2.9B

4. Canada $1.7 B – $1.8 B

5. Israel $1.65B – $1.75B

Book review: “Average is over”; about the future of successful people

I tend to read about 1-2 books a month. Largely on my kindle and sometimes audio books. I was referred to Tyler Cowen’s book “Average is over” by a friend who reads more extensively than I do. She wishes that I dont give her unnecessary attention.

It is about $10 on Amazon Kindle. If you want to be the 0.01% of innovators, creators and influencers, then you should read this book.

I have believed in the theory that “normal”, “average” and “balanced” are the worst words in the entrepreneur’s dictionary. Things like “best practices” suck. If something is a best practice you are getting no value from it at all, since someone who found out about it in the first place got the most value from it.

The basic premise of this book is that the next generation of technologies, innovations and breakthroughs in the next decade will not result in economic gains for the “average” folks.

Instead the folks who are extremely driven, intelligent and motivated are the only ones who will make it big.

The rest will see their quality of life improve marginally, but will have to find other means to feel “good” about the contributions they make.

I would recommend you read this book (or skim it) if you have an interest in economic activity and the history of innovation.

Individually proficient, Collectively efficient; why your first hire matters

The first employee outside your founding team is like a founder, but not quite. Many times you luck out and get a great person who steps up to be a founder emeritus, but you will most likely get a very good employee.

From my observation of the 72+ companies I have personally observed at Microsoft Ventures Accelerator over the last 3 years, if you hire your first employee outside your known “network”, it is very likely you will not succeed as a company.

There is a direct correlation between the first hire and the caliber of people your startup attracts.

Let me say that again differently. The first person that joins your startup as an employee, sets the tone for the entire set of next 5-10 people and then the next 11-50 and finally the rest of the people.

I developed a system to figure this out, which I use as a benchmark to evaluate companies who get accepted to our accelerator program – I usually ask to speak to the first hire in most cases, rather than the founders alone.

Many times, founders dont have a first hire. I ask them to name the first person they’d hire if they were to hire in a week and I ask to speak to them.

Why does the first hire matter the most?

Simply because they will be the manifestation of the “company culture”. It is a test, of whether the founders have given enough thought to what kind of company they want to build.

Based on my interview with the first founders over the years, I have developed a pithy – Individually proficient, collectively efficient.

In most large companies, the “team” looks really good because 1 or maybe 2 people carry most of the load and the rest are “bit players”, who come in for cameo roles, but are largely coasting. A large company has the ability to scale since there are so many people, so even in an organization of 1000 people, 10 people’s (1%) collective work is a lot of momentum.

To compete as a startup, you will need to build that momentum, but with fewer than 10 people. Which means, your 10 people are competing against the larger company’s 100’s. In most cases you really are competing with the larger company’s 10 people, but lets say for the sake of argument, you have to compete with a larger team at a large company.

The 10 people you have to go to battle with have to be wedded to your vision and view of the world. The only way that happens is via constant communication and reinforcement.

Which comes back to the first employee. The first employee is the reinforcement of your culture and you need to not only make sure that your first employee is competent and a superstar contributor but also makes your team collectively rise up the scale.

Why is it so difficult to raise money for tech startups outside the valley? And how to fix it

I was in Chicago on Friday for a startup event at 1871. The accelerator and co-working space is the most happening place in that city. Over 100,000 sq. ft. of awesome startup space. Imagine 350+ early stage tech companies, a few investors, small teams from larger F1000 companies, a developer coding academy and great event space all rolled into one.

That’s the future for all cities, which I see increasingly – Denver has Galvanize, Provo, UT has Boom startups and Austin has Capital Factory.

These hubs concentrate the tech startup activity and provide a critical mass of community, local engagement and evangelism for startups. I was super impressed with 1871 and left very excited after the session at Boom startup and Capital Factory as well.

The one consistent theme I have heard from most of the founders is how hard it is for them to raise money in all those locations. Outside of the valley, funding in New York, Utah, Austin, Chicago and Seattle takes twice as long and you dilute twice as much.

On average Silicon valley companies raise about $491K (Angel list data with cross-reference from Crunch base) for their seed round, which takes about 3 months to close. Since most of them raise a convertible note, it is fairly hard to understand seed stage dilution in the Silicon Valley.

Outside of the valley, which was reinforced with entrepreneurs from Chicago and Austin, there’s a real push from angel investors to have “sustainable revenue” and “proven product”. The average company outside the valley (in the US alone, in the top 7 cities – Chicago, Austin, New York, Boston, Seattle, Los Angeles and DC – raised about $230K for the seed round and took about 5 months to close.

From the 11 entrepreneurs who I spoke with in Chicago alone, the average dilution at the seed stage alone was about 15%. In the valley it would be closer to 8-10% would be my guess.

That roughly equates to twice as long and 1/2 as much money and I would bet that it would be that they diluted twice as much as well.

Comparatively, Bangalore companies would take even longer from my experience – 7-8 months, and raise the same amount of money as the average in the US, and dilute in the range of 20% at the seed stage.

Outside the valley, everyone is in the same slow boat, to raise funds, as an entrepreneur.

The angel investors are slow moving, have little motivation to invest at the early stage and have a very high bar for “funding”. It is not unusual to expect to have serious, sustainable revenue from startups before angel investors fund the company.

It is no wonder that most entrepreneurs outside the valley think they are the ones with bad luck.

This is the same in other cities such as Philadelphia as well.

Funding, one of the critical parts of the ecosystem is underdeveloped and very difficult for early stage startups, outside the valley.

Just to be clear, it is hard to get funded, in the valley as well.

If you are from one of the “it” companies, like Google or Facebook and have built a network of colleagues who you have worked with, who again, because they are in those companies, have done well, financially, and are willing to fund your seed round, then things are relatively smooth.

Else it is a pain.

On the flip-side, I hear from my angel investors that the ideas are “poorly formed” and have a lot more risk than other “safer” investments they have in place. Also, in many cases the local seed investors prefer to fund “known” businesses and not take a risk with unproven models.

So what’s the solution in other cities?

I suspect there’s no easy answer until you get some “winners” – both startups and investors who make it big and decide to “give back” by investing. Or forward thinkers who decide to “pay it forward”.

Until then, here are a few things that you can do:

1. Build relationships with investors way before you need their help. I would advice future entrepreneurs to build deep relationships with potential investors 2-3 years before you start if you can. Meet them at events, volunteer for their projects and show / prove to them that you can deliver.

2. Start with a kickstarter campaign. This may not be a perfect option for many types of projects, but you will be surprised with the diversity of crowd-funding models and types of companies that get funded.

3. Help organize local “angel list syndicates”. Get a bunch of folks who invest in the stock market to help them diversify into startups – this is a role that angel groups tend to do but they do a largely poor job of it.

4. Organize entrepreneur-driven funding showcases and invite (beg, cajole and excite) investors from Silicon Valley, who have possibly connections to your city to come.

5. Get local large companies (the F1000 in your city) to kickstart a pooled fund model, with some initial funds annually. The budget for this could come from their innovation funds. Find a way to help solve that companies problems with local startups.

How #investors judge #entrepreneurs. Yes it happens all the time.

Over the last 2 weeks I had the chance to do what I like best. Meet and learn from entrepreneurs at the earliest of early stages. Hear about their ideas, learn about their problems and find interesting new ways they are tackling problems of funding, building products, hiring and managing teams and getting users and customers.

Similar to the Mazlov’s hierarchy of needs I have formed a mental model of entrepreneurs and their categories or types based on what they think they “need” from me. Most of them have an ask – connections, funding, advice or referrals. Which is expected, after all I am asking the question with an intent to help.

The hierarchy of needs are fairly similar to most entrepreneurs but the most self assured ones behave differently and ask different questions. They seeks perspectives on the problems they are facing and guidance on their choices.

The rest seek funding.

If your answer to the question “How can I help?” is ” all I need is money”, then you have lost the plot. I think most investors wIll judge you right there and drop you down 2 or 3 notches on their scale. That’s tough to hear but that’s the truth.

If your answer to that question is “I need to get connected to x customer, or y potential employee or a person for a partnership”, you will be viewed as a tactician. Nothing wrong with that, but hey just like entrepreneurs judge  investors, they do the same.

If your answer is “We are facing these challenges  and would love your take on how you’d solve the problem, you will be viewed as a smart, talented and open-minded entrepreneur.

If you answer the question with “I want to start a company but I don’t have a good idea yet”, then you will be judged as a wannabe. Someone that always fantasizes about entrepreneurship but never does anything about it.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

How to be a better manager – providing feedback to your direct reports and employees

There are 3 types of behaviors when it comes to managers giving feedback to the people that work for them.

1. I’ll give you no feedback - little praise, no criticism until the year-end when I have to do reviews.

2. I’ll give you unvarnished feedback immediately when I hear something from others you work with or from my own interactions. As it happens, often and early.

3. I’ll watch the interactions, notice behaviors and patterns and give you feedback every so often - weekly, monthly, quarterly and avoid “the last thing I heard syndrome”.

It is obvious that #3 is the best way you can be a manager. Feedback is very important to employees. They want to know what they are doing well and what they need to improve. As a manager you are at one of the best positions to tell them that. After all most people spend more interaction time with their managers and peers than their spouse (which is unfortunate, but true).

The rule of thumb to follow to give feedback as a manager is to watch for “lines not dots“. I love that phrase from Mark Suster.

Ideally you have the chance to talk to, watch and get feedback about an employee over a good period of time (ideally a month, but I have seen folks do it over a week or even over a quarter) and then make sense of the patterns.

The first kind of manager is absolutely useless, but tragically more folks like those exist in the corporate and startup world that we’d like to admit. This kind of manager is obsessed with “results” alone to provide no developmental feedback to their employees. If numbers are good, they will let employees get away with murder (figuratively) but if they are bad, then everything is suspect.

The second kind is sightly better, but not by much. They give raw, unvarnished, ball-by-ball, running commentary on the employee’s actions – from others, from their own interactions and from random folks as well. The reason it is useless is because they dont help detect patterns – they only remember the “last” thing someone said and repeat that. So, if there was something about an employee not responding to one email, that one person said, on time, this type of manager would rake your coals over that, even if that’s not the usual pattern of that employee.

The third type of manager is the evolved one. They listen, keep notes and keep both anecdotes and feedback for the employee in a file or in email so when the monthly or quarterly review period comes, they can provide both data and concrete examples.

These types of managers will be the most appreciated in your startup. They “invest in the lines and not the dots”. They look for patterns and observe behavior over a period of time, instead of giving conflicting feedback over even a small period, and unwilling to understand the behavior of the employee.

It takes a lot of effort to be that type of manager. They are very valued because they invest in their employees.

The trick I use to keep track is send myself emails with the Subject line having the name of my direct report. I have filters setup for the name as well. Every so often (I do it monthly) I will go and review all the emails I sent to myself about that employee and look to summarize the feedback. Then I also keep not of the anecdotes so I can help them recall behavior and suggest some corrective action if it needs to happen or kudos if that’s in the order.

What is the hack you use to help provide feedback to your employees?