Archive for May, 2009

Sharad Sharma joins Canaan as EIR

We are very pleased to bring Sharad Sharma as EIR (Entrepreneur in Residence) at Canaan. We have had a long standing relationship with Sharad, and share common interest in cloud computing as a disruptive area of growth. Over the next few months, Sharad with work with the Canaan team to identify an opportunity that he would like to build out over coming years.

EIR is really a structure that allows us to choose an entrepreneur ahead of the idea. Sharad’s prior track record, his passion for entrepreneurship, early knowledge of cloud computing, and interpersonal comfort made it compelling for us to take this route. We also felt equipped to contribute to his efforts given our global footprint and existing exposure to cloud computing through companies like Virsto and Soasta.

Sharad last led Yahoo! India R&D and was the India General Manager and VP of Product Operations with Symantec. He was also a co-founder and CEO of Teltier Technologies, a wireless infrastructure start-up that is now part of Cisco. He has also established AT&T’s and later Lucent’s R&D organization in India.

Welcome on board, Sharad!

Alternative Startup Financing Schemes

I’ve seen a number of posts lately discussing the ‘changing face of venture capital’. Paul Graham talks about the change in dynamics caused by the low capital requirements of technology startups. Fred Wilson discusses the need for a market for privately held common stock. There seems to be a general consensus about the growing role angels play in the startup ecosystem, and sadly there also seems to be a general consensus indicating that angels should basically write off their investments the moment they make them.

This last point rings true for me. Before coming to India I made a number of investments in tech companies. During my chapter in Los Angeles I also put money into a couple of independent films and a big event with uniformly poor results.

“family, friends, fools & freeman” – Joke by John Mullins at the Venture Capitalist development program at ISB.

While the returns on these investments were uniformly bad, the journey the ventures took was not. One tech company has seven figure annual revenues which support the two founders in adequate if not lavish lifestyles. The founders / promoters in each case saw money on the way. Little made it back to the investors.

In iAccelerator.org we’re fortunate to have a team as advanced as HashCube.com. They are profitable with a proven record of developing and deploying casual puzzle games for social networks and mobile devices. Recently MySpace opened up its platform to developers and HashCube has done well as an early provider of games for it. They see an opportunity to scale – more games, more platforms, more promotion, more revenues .. more investment required.

Even if HashCube can reliably replicate the success they’ve had with their initial games, the question of whether their success can translate into a meaningful exit for its equity investors remains uncertain. What if it is simply a profitable business heavily dependent on the founders? Far from being an aberration, this maybe the common case for technology companies. 37Signals.com promoter David H. Hansson argues that creating small (compared to Facebook) profitable companies which serve the needs of real customers is a far more reliable path to startup success, than the traditional Venture backed Big-Bang approach.

To address this scenario, I had the thought that HashCube could offer investors the right to invest in a pack of games taking a % of the revenue generated by those games until achieving a certain IRR. The goal being to produce an automated mechanism in which investors get paid as a normal part of the company operations rather than being dependent on an exit event. 

<p>Chetan Pungaliya spent some time here in Ahmedabad mentoring our companies, and had some interesting observations on this. He didn’t like the idea of selling the game pack as the founders needed the flexibility to apply both, the money and their time, where it would do the most good. This may be promoting the existing games rather than building new ones. For the same reason, he was resistant to carving revenues out for the investors early as he believed that HashCube could be ‘big’, and may need to reinvest all revenue back into the company to fully realize their potential. He suggested an alternative financing scheme as a compromise between the game pack based revenue share approach and the traditional equity model. His idea was to allow founders to reinvest all the revenue for the first few (say 3) years, but to cap founder compensation during this time. At the end of three years the rev share kicks in. This provides the founders with full flexibility to grow the business quickly during the initial period, and provides a clear path for investors to recoup their money if an exit isn’t apparent and the founders are taking the startup along a ‘lifestyle’ business route. Presumably, if the company raises a significant venture round angels at this stage would either be bought out, or would convert to shares on similar terms to those of the VC.

I’d be curious to hear from other potential angels about whether this kind of structure would make it more likely for them to invest in very early stage tech ventures.

MS Office Labs – Vision 2019

Interesting vision of ten years ahead from Microsoft Office Labs.
<a href="http://video.msn.com/?mkt=en-GB&#038;playlist=videoByUuids:uuids:a517b260-bb6b-48b9-87ac-8e2743a28ec5&#038;showPlaylist=true&#038;from=shared" onclick="javascript:_gaq.push(['_trackEvent','outbound-article','http://video.msn.com']);" target="_new" title="Future Vision Montage">Video: Future Vision Montage</a>

There is also a longer version here, and the Labs Blog here.

Proto.in Pune – Check out the Bootcamp!

Proto.in has just announced its Pune event on 25th July. Its a one day event, with the first part featuring prominent speakers such as the likes of Bharat Goenka of Tally and Pravin Gandhi of SeedFund. The second part has promised to be an “Oscar like event” showcasing 20 “mindblowing” technology startups.

What got me excited though is the 3 day bootcamp that Proto.in is putting together. Day one will focus on diving into the business plan you have for the company, and combing through all the fine details. Day two, they teach you and groom you on how best to deliver a pitch (some advertising guys coming in here to help.) Day three, is all about the stage — well known event management company “BuzzWorks” will teach you how to handle yourself in front of the camera, what to do and what not to do when in a public forum.

I do think the bootcamp kind of event can add significant value to startups, many of which often find it difficult to frame and articulate their plans. Its good to see the emphasis on presentation coming in. Best luck to organizers and participants!

Changing face of VC

Venturebeat has a great summary on whats happening in the venture capital world. While the specific conversation is focused around US, some of the aspects have relevance in other markets like India. From new deal structures, building profitability versus value (when there is a tradeoff), virtualization as a macro trend, kids as a market, evolution of angel investors, capital efficiency, globalization (including India), growing size of venture firms and more – what does come out clearly is the divergence in opinions of various VCs, and thats a good thing in my mind.

Read here.

Naval & Nivi – Simple tips for Angels

The Indian Education Market: Manipal K-12 (Company Profile)

The Indian educational market can prove interesting for private businesses, even in these times . India has a large population (more than 500 million) in the age group 0-24, the government spending on education is spent (nearly 97%) on meeting operational expenses and not for capital expenditure and for the average Indian, education for the kids, forms the second largest household expenditure item. Two equity research reports one by CLSA and the UDFC SSKI makes the case well. The CLSA report is very comprehensive and is the source of the often quoted assertion of the Indian education market to be USD 40bn.

Manipal K-12 profiled in my blog is a new player in this industry. It competes with Educomp, NIIT and Everonn among others. The key element of the business model is to offer specialized hardware and multimedia-based learning content to schools that would make teaching more effective in the classroom.

The scope of growth in this market is large over the next few years. As you will read in my post, the market penetration of all the players is a small fraction of the immediately addressable market (that is the private schools for the more privileged members of the society).

However, content for the K-12 educational market is likely to be an extremely competitive market. The United States for instance has several players in this business: Plato Learning, Renaissance Learning, Scientific Learning, and Discovery Education. Plato’s revenues has actually decreased from USD USD 142 million in 2004 to USD 68 million in 2008. The revenue of Renaissance has remained static in the USD 110 million range and that of Scientific Learning in the USD 40 million range over the last few years.

Why should be the Indian market be different? There are two reasons why it could be so. First, most Indian players have a subscription model which leads to recurring revenue. Second, the scope of expansion in the underserved public school rural market is immense. To take the advantage of this market, however, costs of content will have to come down sharply. Development using standards based learning objects and delivery using scalable Internet/satellite/television based delivery is probably the answer. Equally private players will need to partner with public organizations (state and local governments) and NGOs.

Manipal K-12 is also trying to develop its own brand of schools, like I suppose are all other players. Globally, this model has been a disaster. Edison Schools, went public at the beginning of the century, to set up a chain of private schools. Edison’s stock was publicly traded for four years and the company reported only one profitable quarter! I checked the website recently and it said the company was “growing and improving”.

Again, why should India be different? For the same reasons, corporate hospitals in India, have taken root: the Indian public sector has effectively vacated this space. Having said that, reaching scale building schools is a tricky, not least because Indian parents judge schools by how students perform at the Board level.

The Indian K-12 education market might provide far more opportunities for the private sector than the developed markets have. I do hope so for the sake of our country.

I would love to know your views on this market and find out if you are building any businesses in this space.

Read more at www.myopen-window.blogspot.com

Internet startup on a shoestring

Time has an interesting article highlighting that in the US, startups are being built for under $10,000. As several people compare the differences between the previous dotcom bust and this one, I think this is a key element – its much cheaper to do internet startups (of a certain kind), and this could be a great time for those to start businesses.

I have always been intrigued by the cost of starting up in US relative to India. It seems to me that the seed stage investment required in India is higher than in US, even though at a later stage, Indian startups may have better economics due to lower cost of marketing. With reference to this article, at the seedstage, an Indian startup may have the following disadvantages at being capital efficient:

  • Lack of Compact Skills – of people who can handle 2-3 distinct aspects of the business (such as building the site, UI, marketing) with high level of expertise.
  • Inability to attract top talent for equity in early stages of startup.
  • Low limits on credit cards – yes, thats a useful tool when you are starting out!
  • Lack of relatively cheap/free infrastructure like garages, attorneys, etc.

I think the key to success on such startups is personal passion (or “immersion”) and ability to pick narrow niches and market to them.

Are you seeing under-5-lakh startups taking roots here in India?