Archive for March, 2009

How much funding do startups Reeaaally need ?

In the last few months, I have had the chance to sit down with a few fellow entrepreneurs and discuss business plans, thanks to me wearing my HeadStart foundation hat. I noticed a few things that were common – entrepreneurs knew their product very well but not really their target customers, most of them had not spoken to more than a handful of prospects and when it came to fund raising, everyone first indicated they need a couple of million dollars. When we jointly ripped the business plans and re-worked them through, the fund requirement came to a few hundred thousand dollars (most of these companies were pre-revenue or have revenues of upto $300-400k per year, thanks to some related project work) except a couple of them.

Intrigued enough, I ran a survey trying to understand how much startups think they need to get to the next stage (pre-revenue->revenues->profits) and the survey results are very revealing (see here).

I asked a lot of entrepreneurs why they chose a ‘couple of million dollars’ as the figure to ask for and this is what some had to say

1. VCs in India expect a particular % share of a company, no matter what they invest, so better to raise more money than less. Funnily enough, some of them said a couple of VCs (do not want to take names publicly) indicated they will need 25-30% no matter what investment within the $1-2 million range.

2. Some entrepreneurs do not know what to ask for. In the absence of any sales plan and rickety financial models, they go by the million dollars story just because thats what everyone is raising.

I also looked at the E&Y VC Report of 2007 and 2008 and found that Indian startups raise, on an average, similar amounts of money (think it is around $5 million per startup on an avg) compared to Europe and the US; this when, we think India is relatively inexpensive to build products. Is it because VCs in India invest much later in the startup cycle or is that fresh US returned/US mandated VCs have not somehow grasped the Indian ‘value for money’ or is it something else ? Maybe, all of you can throw some light on it ??

Whatever it is, there is a huge hole in the pre-revenue/early stage ‘small deal’ (Rs 1-2 crore per startup) demand and supply for funding. And I hope this gap is filled very soon so that real innovation is not stifled.

Note: the survey results are taken from the Mint article where I put my thoughts on these numbers. 105 startups responded to the survey.

Its Black Magic Stupid!

Black Swan is the buzzword for economists and other street guys across the world. Black Swan is the name of the book written by Nicholas Taleb in which he says that Black Swan is an event which is beyond our thinking.
People across the world have started to call recent financial crisis as once in life time event. If you ask anyone they’d say its almost impossible to predict magnitude of event like this that would happen once in our lifetime or generation.
Would this economic crisis be called as Black Swan?

My answer is NO. Let’s speak about India.

Our crisis started from realty which started to bubble after unrealistic prices across the board in India. Every tom, dick and harry become Real estate tycoon and people got sucked in the name of owning a house.
10 Lacs worth of house was sold around a crore and people went on to buy despite beyond their reach. Their logic- Today’s 1 crore house would get a value of 4 crore within 5 years. People started to think an asset would always appreciate than thinking about the real value.

Banks started to give loans to real estate companies without assessing the real value. Their aim is to mint millions in interests. But these banks have forgotten to assess real value of realtors. Banks started to concentrate on variety of activities other than banking. They ventured in Forex, and derivatives which no one understands in the world.

Greed is reason for this crisis. Every product and service was priced artificially and companies have been started overnight and it looted money from public. “Overnight millionaire” was the motto for most of the entrepreneur.

Companies went on to stretch beyond their capabilities and core competencies. They took too much leverage. If you don’t think big, you’re dumb. Every company becomes dumb by over expanding in new businesses that are not their core competence. They employed thousands of people and borrowed through various innovative instruments which would be subscribed by a genius called private equity.

Whole India ran at leverage and domestic growth story. If pantaloon enters in retail business, why we should wait was the question asked by Birla group and they acquired some retail companies and started MORE which is now creating more problems for Birla group.

Stock broking is another business in which everyone from Kashmir to kanyakumari started to capture their share in India. Insurance is another. Likewise everyone started everything and they went on to demolish brands and made every service as a commodity.

Everything has been created based on DOMESTIC GROWTH STORY which has been misunderstood by corporate managers who work in air-conditioned room with their PowerPoint presentations. They went on to give amazing numbers to their bosses and as a result everyone went on to venture in a crowded business and made it unviable for everyone who has started it without knowing ground reality about the business.

Whole mess has been started by corporate managers who doesn’t know any ground reality about business but who play efficiently with numbers, statistics, case studies and PowerPoint presentations.

Now these folks are calling this crisis as Black Swan. Mess that has been created by managers without understanding of real condition. Mess that has been created in the name of expansion and diversification. Mess that has been created by leverage. Mess that has been created by greed. Mess that has been created by fictitious value creation.
Boys and girls – Don’t call this as Black Swan. Instead call this as “Black Magic” which has been created due to ill attempts by companies in the name of diversification, leverage and growth.

Starting Up in a Downturn

Downturn? I have only realized it much later after turning entrepreneur in December 2008. Nothing seems to have changed. March is busy as usual for clients when one rationalizes that business would start flowing in from April! Clients on the other hand are as difficult to make part with money beyond the idea honeymoon as before.

Nothing has changed. Would you agree?

One of the things that has changed perhaps is the time that entrepreneurs have on their hands. True in my case at least, it is a genuine pleasure to write again on VentureWoods after a long time. Many friends are now willing to share war stories, helping a new entrepreneur like me to tread warily on the path trodden well and hard before me by the faithful.

I was speaking with a close friend about how to hire, he is poised to raise a double digit million round for his business – yes, who said capital has dried out. You normally meet one set of people who are entrepreneurial and want to take the risk of working with you and then they want equity. Sadly, you quickly get into a position where you have options alone. In any case, if you are not a co founder does it make sense to join a startup still ready to offer equity? I would say not. A startup who still has equity to offer to a non founder has not got its act together yet. And the single digit equity that is then available is not really commensurate with the value the recruit is bringing in or from his point of view, doesn’t really cover his risk.

Anyway, we were talking about the second set of people who are not entrepreneurial and know exactly what they want, a function in an interesting new venture – consulting, marketing, sales – and we came to the conclusion that such perhaps are the best hires for a new startup who doesn’t have any more equity to hand around.

I am not taking his advice though. In my career over the last 10 years I did well with taking on fresh people out of college, asking them how much they wanted, adding a random premium on it and then combine that with a responsibility beyond their years. My experience – forget equity, ownership – young people treat this as their opportunity of a life time and what they lack in experience, just fast and quick, cover with their sheer hard work and enthusiasm.

Amar Bhide wrote an interesting history of McKinsey. I have read it again and again for just one thing, how a founder can vision what his company is going to look like years from the start and how to put into execution things, and balances that complement and support each other to achieve that vision. Recommended.

Ah yes, I started One Billion Minds – a powerful new prize led innovation platform connecting Corporations and Non Profits to students in top universities worldwide able to solve problems in Design, Engineering, Science, Computer Science, Business and Social Innovation.

It was indeed a lazy Saturday, downturn or not!

Brad Feld, On the Ecosystem.

Came across this blog post by Brad Feld, on his observations between VCs and Entrepreneurs and the so-called Ecosystem to speak of.  It’s kinda an interesting read.

Brad Feld on VCs, Entrepreneurs and the Ecosystem.
Some of the highlights:

I’ve long believed that the entrepreneurs are the motive force behind all entrepreneurial ecosystems – not the VCs, the other service providers, the government, or anyone else

I regularly hear people – including very smart and experienced ones – assert other things such as overstating the importance of the presence of VCs to the entrepreneurial ecosystem.

VC’s play a role in all of this, but it’s one that I regularly feel is dramatically overstated, misrepresented (including by many VCs) and misunderstood.  We provide different resources and value than lawyers, accountants, investment bankers, and PR and marketing firms, but we are still simply one of the inputs into the entrepreneur ecosystem.

Looking through the fog

Business standard invited us to do a guest column on the state of early stage technology investing in India today. Key perspectives:

- Slow, but still there. Odds aren’t very different from before.
- Watch your target market and customers – key markets continue to be vibrant.
- Valuation meltdown is more pronounced in later stage companies than in startups.
- These are times when VCs will get tested against claims we have made in past couple of years ;-)

Would love to get your perspectives on what you are seeing in the financing market?

iAccelerator – Supporting Early Stage Tech Ventures

Preparing to come to India I talked with a number of Silicon Valley VCs about the opportunities they saw here. Some were bullish, a partner at MDV told me he thought there was a 30% chance the next Google would come from here, but many were taking a ‘wait and see’ approach to investing.

In the four years I’ve been here I’ve seen VCs talk at a large number of startup events. Startup founders and VCs seem to like being in the same room together, but the VCs usually say ‘We are looking for profitable companies with proven management teams who need money to scale’. Founders tend to be young, energetic, first time entrepreneurs hungry to get started.

The net of this disconnect is the small amount of technology investing that happens. While complaints of a lack of innovation and leadership may be valid, they are excuses for inaction and represent a failure to identify and address the real power and potential of India.

The power and potential of India rests in it’s people and it’s youth specifically. 50% of India’s almost 1.2 billion people are under 25. The successes of Silicon Valley demonstrate that the digital economy is the domain of younger people who quickly adapt to and adopt new technologies. The ever decreasing costs of powerful computers, the advent of cloud computing and widespread free open source software frameworks has made the capital costs associated with starting a technology company cheaper than ever. At the same time, rapidly expanding mobile phone adoption and internet penetration has created a large addressable market for these companies that does not require massive spends in sales and marketing.

Large markets, low entry costs, all that is required is smart motivated people …. 600 million people under 25 … We should own this sector. To reach this potential though, the venture capital scene needs to service this part of the entrepreneurial sector by providing bootstrap capital, intensive guidance and connections catered to young first time entrepreneurs in India.

This is what we are doing with the iAccelerator a micro venture program I am conducting with the Center for Innovation Incubation and Entrepreneurship at IIMA We invest upto 5 Lakh INR in the companies we work with, and run them through a four month intensive startup bootcamp where they live and work in Ahmedabad. We help refine ideas, establish proper legal, financial, marketing and engineering processes, and connect teams with advisors, clients, partners and investors who can help take them further.

April 1 is the last day to apply for the summer program which runs from May 1 to September 1.

The Startup Chat. Every Saturday 10am – 5pm.

There is a lot of knowledge that resides among people, and not everybody is able to make it to real-life meets. In an increasingly connected world, it might make sense to make use of the technology that exists. There are also a lot of folks – aspiring entrepreneurs in tier II cities who do want to make it to the ranks, but do lack the know-how to move forward.

Here’s a means to solve that Problem.

Proto.in, along with VentureWoods and a host of other partners have started this online chat initiative called The Startup Chat. It will be live every Saturday between 10am – 5pm (IST) and people can connect to the site, login, and interact with people to get support in whatever they might be looking for.

It would be great to have the support of this community – as there are lots of mature and experienced entrepreneurs here. Do login and help out. And it would be great to catch up with all of you in real time as well. Look forward to seeing you there.

URL: http://chat.proto.in

Notes from GSMA

Eli Novershten from Canaan Israel office was at GSMA last month, and has shared his takeouts from the conference. I hope it is useful. Please use the fullscreen mode at bottom right of the widget for clarity.

It seems that cell phones are beginning to come across as a shock to mobile telecom companies! The manner in which non-telecom companies are able to stretch the envelope on an essentially telecom device has made them sit up and watch. Be it the iPhone, or other areasin entertainment, advertising, and so on (typically not within a telco competence set.) There is a catchup play here. Equally strong is the shift away from newer infrastructure, especially as many telcos, especially in Europe, have struggled to reap gains from their cutting edge infra investments over past few years.

Enjoy!

Barcamp Indore – 22nd Mar

We invite you to be a part of the first ever BarCamp Indore being hosted by IIM Indore. A BarCamp is an ad-hoc ‘un-conference’ born from the desire of people to share and learn in an open environment. It is an intense event with discussions, demos and interaction from attendees. Anyone with something to contribute or with the desire to learn is welcome and invited to join.

With a focus on Entrepreneurship and Emerging Technologies this event promises to be an exciting confluence of ideas and passions. To learn more about BarCamp Indore you can follow us on Twitter, visit our Wiki or catch us on Facebook.

For registration, please visit here

You can also drop us a mail or call us for any clarifications and queries.

Ways in which you can be a part of BarCamp Indore are:
• Sponsoring all or part of the event (T-shirt and banner sponsorships)
• Demoing your technology to fellow BarCampers
• Simply attending the event and blogging, flickring, or tweeting about it

BarCamp Indore
Date: 22nd March, 2009
Time: 11 A.M.
Venue : IIM Indore (getting there)

Contact Details
Kumar Gaurav Gupta | 9907-664-688 | p08gauravg@iimidr.ac.in
Aditya Jaiswal | 9907-664-788 | p08adityaj@iimidr.ac.in
A Joint Initiative by E-cell and Infiniti at IIM Indore