Tag Archives: funding

It is not that I dont think you are great, but I am not confident about my ability to pick winners consistently

I had a very interesting conversation with an entrepreneur yesterday who I was keen to invest in. He had soft circled $250K of his $750K seed round. I have been a big champion of him and really respect his determination, thoughtfulness and diligence.

I committed to $50K and was going through the details of the investment with him, but letting him know that even if it took him a while to raise the remainder of the funds, I would ear-mark the $50K for his venture.

He then asked me “You know and influence a lot of other investors as well, can you please convince them to join the round”. I said that I can introduce him to investors who have invested in the past with me, but they will have to make their own decision.

I was not going to lean in on them to invest.

He mentioned that I “leaned in” on another VC to invest in a portfolio company, which is what he heard from the other entrepreneur, who I had worked with.

He was correct. I did lean in. So, the signal I sent him (although that was not my intent) was that I was not as committed to his venture as I was to other the one where I leaned in.

First, I dont have as much influence as entrepreneurs give me credit for. That’s just the truth. They may attribute the fact that I am at Microsoft Ventures as a signal that the corporation thinks this is a good investment, which is absolutely untrue.

Second, I believe there’s a HUGE difference between an angel investor (who I dont like to lean in on) versus a institutional investor (who I will lean in from time to time).

Most angel investors invest by reputation, connections and referrals. VC’s will judge an entrepreneur and their opportunity on its own merit, do their required due diligence and will likely pass EVEN if there was a strong referral from a person they trust.

Referral’s get you in the door with an institutional investors, whereas with an angel investor it will usually get you a deal.

Most angels I know have “day jobs” or “other interests” with angel investing being their side project, activity or means of giving back. That does not mean they don’t want a return on their investment, it just means they don’t do as much diligence as an angel group or an institutional investor would.

Knowing that, I believe the biggest challenge is the confidence in my ability to pick winners all the time. I am investing as an individual investor because I believe in the entrepreneur. I don’t know if that entrepreneur, problem set, idea or market is right for the other angel investors I know and invest with.

Well, I do know that to a certain extent, but with angel investors, the relationship I have would be personal as well as professional. With VC’s it is rarely (exceptions exist) personal.

So, when I meet the other angel investors over dinner, with their family, I don’t like having uncomfortable conversations about “the investment that went south”. Many of them are great folks, but not mature enough as an investor to realize many of these angel deals (in fact 70-80% of them) will return in loss of their investment.

Many of the angel investors I invest with are not in the “early seed market” for the long haul and have not seen ups, downs, sideways deals, etc. So, end up investing in 1 or 2 companies, solely because of referrals and recommendations.

I don’t think I have confidence in every deal I do to end up returning my money or generate a great return.

That does not still mean I dont believe in the entrepreneur when I invest in them.

This is truly one of those cases, when its not you, its me.

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.

My thoughts on the Flipkart fund raising

I got 4-5 calls from journalists and reporters wanting my feedback on the Flipkart funding news yesterday. I am biased, and I like the folks in the company a lot.

That said the main questions I got were: (NB: these were actual verbatim questions from reporters).

1. Does this mean game over for other “ecommerce players”?

2. Does this news mean that the “keep inventory model” will work? Is the snapdeal model better? Which one will “win”?

3. Why does this business need so much money?

4. Will eCommerce ever be profitable? Will flipkart ever be profitable?

5. If Amazon decides to come to India, will Flipkart’s first mover advantage still remain?

Rather than answer the questions one by one, I think I will set some context first and address the questions as I see the macro picture emerge.

Indian retail market is a ~$500 Billion market. It is large. Most of this ($350 Billion) is grocery. Unorganized retail (Kirana stores, small shops, etc.) make up 92%-95% of this market.

Besides grocery, the largest number of stores are called “fancy stores” – selling everything from pencils and books to tupperware and brooms. Jewelry stores are next (in terms of revenue they might be larger than fancy stores).

Of the organized offline retailers (totaling about 1500) , fewer than 5 (changed to 5% based on IBG data) are turning profit. Everyone else loses money. Why? High real estate costs and high payroll costs, compared to unorganized retail.

When Amazon started in the US (circa 1994), they were going after a 90% organized retail market. Fewer than 5% of US retail companies were unprofitable.

Amazon was going after big box organized retail in America.

Organized retail in India is a small part of the puzzle.

Flipkart is going after the 90+%, which we know as unorganized retail.

3 major trends that drive retail in India, for the next 10 years will be increasing urbanization, worsening traffic and higher commercial and retail real estate rentals. The fourth (if it ever passes, will be FDI). I am not holding my breath for that one.

The flipkart model will do well is my perspective, given their dense logistics coverage in urban areas and minimal rentals thanks to warehousing.

Amazon surprisingly will do well as well if and when they go direct in India. The market is very large.

I dont think its game over for other eCommerce players, just like many years after Amazon, came Etsy, Zaapos and others. In India, though those markets are currently small and will grow over time, so in a few years or a decade, things will change again.

The inventory model that is flipkart’s strategy seems to be working for them. That’s the reason to raise $200 Million.

The no inventory model for snapdeal seems to be working for them as well. Snapdeal will try to help many of the unorganized retail players compete with the organized players and flipkart.

I am not sure about whether the online players will actually get profitable over the next 5 years since the offline retailers have still not gotten there in 10+ years, but the online players have a better shot at becoming profitable.

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

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

Step Function Growth
Step Function Growth

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

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

Here are a few that we track at the Accelerator.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Why?

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

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