All posts by Mukund Mohan

My discipline will beat your intellect
Angel investing, Entrepreneurship, India

Accelerators have supported twice the number of entrepreneurs to the Indian startup ecosystem

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I have been researching the data from Thomson Reuters to understand the optics of the accelerator business in India. There are 37 accelerators we track, who give a little seed money and take a percentage of the company in return.

Based 2012 data, accelerators have funded 89 companies with their first check, compared to less than half that done by angels and VC’s in India.

Most accelerator funded companies take 6-8% of the company in exchange for 5-10 L ($10K to $25K) in India. That 6% dilutes to ~4% at series A (assuming 20% for angels and 30% for VC’s).

The first scenario for you, the entrepreneur, is to get funded directly by a VC. The chances of that happening in India are low – 1.4%. The other challenge is that those companies got relatively poor valuations (average about $1.4 Million pre money). Only 19 out of 1300 entities got funded last year to raise their series A through a VC directly. In this case you will possibly dilute 30-40% and still own >60% of the company. I have used 30% dilution in the chart below.

The second scenario is to get angel funding and then in 18 months get VC funding. The chances are better that you might go through this scenario (2X more – 43 companies got angel funded last year), and then venture funding. You will end up owning 56% of your company (by giving about 20% to the angel investors). The valuation challenge persists with angel investors as well, with the average valuation being less than $1 Million.

The third scenario is to get into an accelerator. The chances are twice as much (nearly 9%), but give up 6%, then get angel funding and finally a venture investment. You will end up owning 52% of the company now compared to 56% in the previous scenario. The 4% should get you a better valuation and it does for last year’s data (Average valuation was $2.3), nearly 60% higher.

See the chart below for the data.

Accelerator Metrics
Accelerator Data

The numbers on top of the boxes are the # of companies that got funded last year. The number in the parenthesis is the % of companies of the previous box.

The numbers at the bottom in percentage are the % of your company you will give up to that entity.

The circles at the far right are the % ownership of the company you will have post that path.

I’d love for you to let me know if there are any mistakes in this analysis.

This data will change as accelerators get older and have been around for some time, since most of the VC deal flow is still not through Accelerators or Angels. I suspect as companies from accelerators get more mature and the accelerators get better at running their programs, we will start to see a better benefit for entrepreneurs in India.

Thanks to Anand of Accel, Rahul of Canaan and Abhijeet of Bessemer Venture Partners for reading drafts and reviewing the information. Amaresh & Hanaan at Microsoft brainstormed this model.

All the data above is for Series A valuations and numbers from Thomson Reuters. Overall, there were  143 – 155 companies that reported receiving funding last year in India, and many of them were follow on financing (series B or later).

India, Learning, Marketing

A/B testing your email messages

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I have about 30,000 friends who follow my blog on email, and the open rate is about 8% (which according to Mailchimp is very low) on each blog post. Besides this I have another 9,500 friends and acquaintances that I send an email update to once a month on key blog posts I have written during that month. That has an open rate of 17%. Roughly about 5000 of my friends read a blog post, which gives me a fairly good sample size to do some serious A/B testing on my blog post titles.

My email friends are about 61% from India, and 25% from the US (largely the valley). This was inverse just 5 years ago in terms of %, but the number was about 3200. So a nearly 10 times growth in 5 years. 

Since wordpress does not allow me to segment the email by friends, everyone gets the same blog post and title as soon as it is published. But the email acquaintances is where I have a lot fun.

Here’s what I found last week in 3 sets of 2000+ subscribers.

I had the same body of the message but changed the Subject of the email.

First subject (Sent on a Thursday at 10:30 IST): Where is analytics headed in 2020? An insight gathered from 25 top #startups – 14% open rate

Second subject (Send on a Friday at 10:30 IST): The future of analytics is in offerings based on derived insights – 11% open rate

Third subject (Sent on a Saturdaya at 10:30 IST): How analytics companies are making 92% margins compared to software companies – 21% open rate

I am shocked that the Saturday message had best open rates, since weekends have been consistently low on my open rates.

The message though was one of margin – which I think appeals to Indian entrepreneurs a lot.

What do you think is the reason that the first subject got a better open rate than the second? Is it more specific?

Entrepreneurship, India

How the risk appetite of entrepreneurs affects their exits in Silicon Valley, India and Africa

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I run this fun experiment each time at most events I speak at. I ran is again yesterday at the CII event yesterday in Bangalore. The experiment is to gauge the risk appetite among entrepreneurs. It is not scientific nor is it structured. It has though, given me a sense for the risk appetite among the entrepreneurial class.

I have run this experiment now over 30 times and have had fairly consistent results. If there are over 100 people in the audience, I ask folks three questions and request a show of hands.

Q1. If I gave you a 10% chance of making $2 Million from your startup, how many of you will take that outcome? I get a show of hands at this point.

Q2. If I gave you a 1% chance of making $20 Million from your startup, how many of you will take that outcome? Show of hands again.

Q3. If I gave you a 0.001% of making $1 Billion from your startup, how many of you will take that outcome? Final show of hands.

Over the last 3 months, I have spoken at 2 conferences in the US, 1 in Zurich, 1 in Africa, Singapore and over 5 in India.

The results give me a quick sense for the hypothetical risk appetite for entrepreneurs in that community.

In the US at both the conferences, the distribution was 30%, 10% and 60%. In Zurich it was 60%, 30% and 10%. Africa was very close to the US surprisingly, at 35%, 15% and 50%. It is almost as if Africans have nothing to lose and Americans don’t care for small outcomes, but both end up at the same place.

In all the conferences in India, it has been 70%, 25% and 5% (and that’s being generous in 2 conferences including yesterday, where 2 out of 150 people opted for the 3rd choice).

Rather than draw quick conclusions about the risk appetite, I thought I’d think about it more and understand why Indians are happy with smaller outcomes.

Given that the effort over several years to create a $10 Million outcome at your startup is the same as one that has a $1 Billion outcome, why dont we focus on the large opportunities?

  • Is it fear of failure?
  • Is it that we are “happy” and content with even the small things?
  • Is it that $2 million is such a large change in our lives that the $1 Billion does not seem worth it?
  • Is it that we really don’t aim big? Notice I did not say think big, I said aim big? Nuance, but a big difference
  • Is it lack of exposure to large markets?
  • Is it that we are not hungry enough?
  • Or is it something else?

I don’t quite have an answer. When I mentioned that I dont have an answer to the moderator Mohan Reddy yesterday, he expressed dismay. He was looking for an answer – was it our cultural background, our education system, our values, our government – someone or something had to be blamed.

I dont know the answer, but have a deep desire to find out.

Why?

As we start to invest in the early stage startup ecosystem in India, it is important to calibrate the possible returns and allocate funds associated with the returns. If most entrepreneurs in India are okay with smaller returns, it makes sense for us to allocate fewer fund here than China, Israel or Africa.

From our experience at the accelerator, where, over the last year we have “invested” our time, resources and energy in 23 startups, we know that the risk appetite is much lower among startup founders in India, compared to those in Israel for example.

We have already had 2 small “exits” and 3 closures in India. Israeli companies are still out there, fighting for their series A and beyond, while 1 company had pivoted dramatically in Israel, only to start again.

Is the reason something completely different? Is it that we are realists and don’t think the billion dollar outcome is even possible?

As Henry Ford said:

“If you think you can do a thing or think you can’t do a thing, you’re right.”
Research, SaaS

Where is analytics headed in 2020? An insight gathered from 25 top #startups

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The most amazing part of my job is that I get to learn from the smartest entrepreneurs in the world. I cant think of too many people who get a chance to talk to 3 entrepreneurs via video conference in California at 8 am, 2 startup founders from Singapore at 1030, have lunch with 4 amazing big data analytics company promoters in Bangalore and then wrap up the night with a conference call at 830 pm featuring a recently funded analytics company in Boston.

Most VC’s get a local perspective, Silicon Valley, Tel Aviv, Bangalore, or Beijing. I get pitched from all over the world. Most investors in the valley will tell you the best and brightest come to the valley, but I believe there’s a big shift happening. More on that later.

I wanted to share one very insightful thing I learned after 25+ detailed (over 1-2 hour) briefings with entrepreneurs who are all innovating in the analytics space.

The future of analytics is in offerings based on derived insights.

I just gathered this insight, so let me explain.

Historically the analytics space was filled with services companies. In fact  consultants would take loads of data and gather insights to help their clients with their business objectives. The best known analytics companies that dont call themselves analytics companies are Mckinsey, Bain and other management consultants. Then companies like MuSigma and others decided to “offshore” this insights service. The problem with this type of offshore services business is obvious – low margins (net of 20% and since they are people intensive, they dont scale as fast).

The purveyors of the software model of analytics are those that provided a SaaS product – names such as Cognos, Business Objects etc. Companies like Kaggle crowdsourced your analytics and there are hundreds of companies providing SaaS analytics, such as GoodData, Insights Squared, etc. The problem with this type of business is that most of these software products are “generic” hyper cubes and data warehouse / data mart models. Their margins are better than services, but still nowhere near the 80% gross margins that some industries command.

Since we all know that software is eating the world, many companies in industries such insurance, banking, finance, manufacturing are all facing a threat from new age software companies, who are re-imaging the businesses.

The next generation of analytics companies are those that take the insights gathered and create an offering in that specific area so they can benefit from the insights, instead of providing those insights to others in the industry who make more money from it.

Let me take a simple example. Global Analytics just raised $30 Million. They are an analytics company. They used to provide their insights to financial institutions by way of giving them “leads”. These leads were those customers who were worth extending credit to. An average lead in this case cost their client $30 – $100 (depending on quality).

While that in itself was a big and large market, the larger market is to extend the banking facility themselves, which means with their analytics and insights can directly offer short term cash loans to those that their analytics deems are the best. The average customer in this case will make them $500 – $5000 (depending on the size of the loan). They did this via their own offering Zebit.

Now, most founders with a background in software will say “Wait a second. what business are we in? Software or Financial Services”? That’s a good valid question.

But when you get into the “Financial Services” business there’s loads of things you can re-imagine and redo the right way with a “software frame of mind” as opposed to being a “financial services insider”.

Huge difference in revenue and margins.

That’s the future of analytics.

Using the insight gathered from the analytics to offer a product / service direct to customers and not selling the insight or analysis to existing players.

Let me give you some more examples.

Lets say you are foursquare. You have analytics and insights into where people check in, where they go, what their patterns are with respect to travel.

Would you rather sell this treasure trove of data to marketers (and face a bunch of privacy issues) or would you create an offering based on those insights yourself?

The value to a museum of information that a potential customer is near their location is possibly $2.5  (that’s quite high I imagine if the tickets are $25).

Instead if foursquare offered a virtual museum tour or a personal crowdsourced guide to the museum, then they could sell that for $10 and have 40% margin on that offering.

Imagine if you had driving habits data about car owners – how they drove, what time, how fast, how safe, etc.

Instead of selling the “best driver” data as a lead to the insurance companies, who might pay you $100 – $200 per lead, you could create your own insurance offering based on miles traveled, safety of the drive etc., changing the long standing model of one-size-fits-all car insurance.

There are lots of examples that entrepreneurs are dreaming up these days and the most audacious ones I am talking to want to upend large established industries. It is both exciting and scary at the same time.

That’s exciting. Software will truly eat the world.

Entrepreneurship, Funding, India

Which universities produce the most #startups in #India?

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It is not uncommon to see most startups have founders from IIT and other top schools in India. I wanted to only take a look at the funded startups (Yes, that funding is not a guarantee of success is not lost on me). While Crunchbase only has about 103 startups from India in their database, most of them are not funded.

I expanded the list of early adopter VC’s in India to take a look at their portfolio list from their websites (yes I know that many dont list all their investments on their website, but we have to start somewhere). That produced a list of 219 companies in total.

Thomson Reuters gives us about 316 companies funded both by angel investors and VC’s since 2010 in technology. This is possibly the most comprehensive source of funded startups.

This produced a total of 478 founders and co-founders. Of those, 228, 47% came from the IIT’s and IIM. That’s a lot. Even for funded companies that is a lot.

I only took the top 9 colleges (since there were 3 colleges that all were #10). All this data is from Linkedin (where available). I also realize that most people do not put all their educational qualifications on Linkedin, so this data may be slightly off. I do know that 60% of the LinkedIn profiles associated with the founders were complete.

There were 11% of these (52) that had both an IIT degree and IIM degree. Here is a list of those colleges and the # of founders.

Tech founder universities in India
Which universities do tech founders graduate from

Keep in mind these are funded companies alone, not all companies. I was not surprised that IIM A and IIM C were near the bottom of the list, but what surprised me was that IIT Kanpur was lower than IIT Mumbai. Why? Most of the folks I know in the US (entrepreneurs and others) are from IIT K. The image has IIT Bangalore, which does not exist, and it should say IIM Bangalore.

This does raise a few questions that I would like your opinions on. Lets just dwell on one question first.

Why is it that nearly 50% of funded companies have founders from top colleges? Is it a selection bias – given that over 60% of investors (VC’s) are from IIT and IIM?

P.S. I know all the data heads and junkies want access to the “raw data”, but Thomson Reuters, which is a paid service, will not let us share this.

P.P.S If you compare this analysis to top universities in the US for funded startups, they make up a far less % of funded statups.

Learning, Management

The most admirable part of Amazon’s culture that #startups can benefit from

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I am a big fan of Amazon. I read Jeff Bezos first “letter to investors” back in 1998 (a year after they went IPO) and was super impressed by his focus on customers above all else. I paraphrase, but he said, we are a one trick pony – our trick is to keep customers happy.

The most amazing part of their culture is the way it permeates and allows each and every employee to be a part of the experience. I dont know how they do it.

There’s another part of the culture that amazes me. How can a company that’s 100,000 people able to get all its employees to sing off the same hymn book? I know companies that are 10+ people that struggle with this. At 100,000 employees (not including contractors), Amazon is humongous.

Let me give you an example. There are many people in the Bangalore office in India, who are part of Amazon’s foray into eCommerce who I know well. Most, if not over 90% of them are not related to AWS in any way at all. Well, they may be users of it for their applications, but not evangelists by role or title.

The previous weekend we had 2 events, which I happened to be at. One was at our accelerator and another at a location in a local college.

I know the key evangelists from AWS fairly well and expected to see them at these events in full force. Except I saw more than 2 people and none of them from the AWS team.

I walked up and talked to them before the events and was surprised to hear that they were “all hands on deck” to support startups on AWS. Many of the folks in the Bangalore (and other offices as well) volunteered to be at these events to help startup developers understand AWS and be evangelists for it. And this was not part of their MBO or their job description. They were doing it because they liked it.

Try getting that from any other large company. Most large companies operate in “silos”, with each team focused on their own turf.

Startups as well for most parts have people “responsible” for certain roles. Getting a developer to support customers can be a challenge but that’s what you should as a startup founder aim to build as a culture. Similarly getting your marketing folks to help with testing should be par for the course.

This is possible to do when the company is 10 folks or so and even possible at 50 people. Beyond that is very rare.

At 100,000 that’s near impossible.

If Amazon’s done that, then it is something to learn from, admire and find a way to emulate that.

Entrepreneurship

The reason why #startups fail in India is different from why they fail in #silicon valley

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I read the interview with Steve Hogan yesterday about the reason for failed startups. Take a look at the #1 reason why startups fail according to him.

Hogan says, is that they’re sole founders without a partner. “That is the single biggest indicator of why they got in trouble,” he says, adding that it’s especially common for sole first-time founders to fail.

Sole founders.

#2 was lack of customer validation and #3 was “company ran out of time” – or money.

From our India data, I can tell you that among technology startups, solo founders make up less than 35% of the companies. We track now in our database about 15,000+ entities.

If you look at the reported closure rate, they are not significantly different from entities with multiple founders.

In fact in my own personal experience with 33 startups that I have closely observed in the last 12 months at the accelerator, the #1 reason for startups to close in India has been mis-alignment of founders.

Let me give you some examples that I am not sure are uniquely Indian, but occur in India a lot more than in the valley.

First was a team of founders working on a B2B marketplace.

Two founders we interviewed and accepted were related, but chose not to let us know about it. In the first 2 weeks at the accelerator, in multiple meetings they would often contradict each other’s views of their target customer’s pain point. One founder was a self-appointed “domain expert” and another was the “technical founder”.

The domain expert was an expert primarily because of the fact that she was not technical. She did not really have a background in the field, and neither was she all that experienced dealing with the potential customers. They had both stumbled into the problem while they were working in their previous jobs that were not related to their startup. After the first few weeks of multiple disagreements on the direction of the product, they chose to “keep their relationship intact” than to work on their startup.

Second is a team of strong technical founders.

Both these founders were among the smartest hackers I have met in India. Pound for pound they would be among the best developer teams you have ever worked with. They had worked with each other for over 5 years at a large MNC and came highly recommended. Their pedigree was excellent as well.

The problem they were addressing was real and fairly technical, and you were compelled to go with the team just given their background and the problem they were solving. The trouble was their answer to every customer problem was build more code. They were loathe to talk to real customers and after multiple fits and starts decided to split a few months ago. They still remain friends, but chose not to work on their startup.

Third was a strong team of founders, who had worked together for a year at another project.

They were also folks with excellent backgrounds, great Ivy league college degrees and were solving a real problem that many consumers had in India.

After a year of working together, building what I considered a good team of 5-10 folks and an alpha, then beta product, they chose to go separate ways. In discussions with both founders after the split, each blamed the other for not “delivering”. One person was the designated CTO and the other was CEO and chief sales guy. They did close a round of funding, but the product went through multiple fits and starts. The problem they were solving was real and even I was an early user of the product.

In all three cases, I found that having the co-founder was the big part of the problem.

Lack of communication, inability to stick through tough times and different visions for the company / product were the biggest causes for failure.

I’d like to understand from you what about our culture, our maturity as a startup republic and our progress with technology makes these problems more prominent in India.

 

Other

Top 8 Things That Make #Entrepreneurs Cringe – @lilibalfour, #startups

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Lili, I took the liberty of taking your piece and turning it on its head, but from an entrepreneur’s perspective. In good humor, of course.

Have you ever left a pitch and wondered what entrepreneurs really thought about you? I decided to roll up my sleeves and conduct a planet-wide, sector and stage agnostic survey of entrepreneurs. I ensured that I included entrepreneurs that represented all stages, sectors and continents.

Naah, I just made this sh*t up, because I have been an entrepreneur before and feel the pain.

The survey includes input from entrepreneurs in San Jose, Big data entrepreneurs in Singapore, clean teach entrepreneurs in Mumbai, enterprise software entrepreneurs in Berlin, and entrepreneurs who focus on mobile gaming startups.

Without further ado, I offer you the top eight things that make entrepreneurs cringe:

#8: Liars. Hey, who knew? Investors lie as well. Actually a lot more than entrepreneurs do. “We are really interested in big data”, when all their investments have been in retail. “Our partners really like your company”, when they have never even visited our website.

Tip: Honesty is the best policy. It is best to brag about the fact that you can invest, only if you truly can, else pass. If you are a associate or principal, its okay to say you are not the decision maker.

#7. Monkey time: 100% of entrepreneurs said that they hated investors who were late to their meetings. Really Lili, I don’t need to do any survey to get this result. Why do investors think their time is  more important than an entrepreneurs? Making us wait at your reception area for 15 minutes past the time to meet is not cool.

Tip: Be on time. If you are running late, come by and let us know. Provide something of value for the 15 minutes (or more normal 30 minutes)  of our time you wasted. And no, a coke does not cut it.

#6 Drama Queens: 100% of entrepreneurs are turned off by investors who came across as “higher than thou”. Dont give us the “I have 3 back to back board meetings, 3 deals to close and I have not eaten lunch in 10 days spiel”. You chose to do that, its your job.

Tip: Check the drama at the partner meeting in the morning, and keep it real.

#5: Know-it-alls: 150% of entrepreneurs (this % includes those that are not entrepreneurs and not also from Ivy league schools) stated that investors who claim to know every industry, every segment and market just because they went to Harvard or Yale were lame.

Tip: Listen with an open mind, be willing to learn.

#4. Ramblers: 99.9% of entrepreneurs I surveyed stated that investors who went on and on about the one company they had invested in, which made the returns on their previous fund, turned them off.

Tip: Stop. Listen. Think. Question. Pay attention.

#3: Clueless: 100% of the entrepreneurs I spoke to were p*ssed off that the investors did not bother to visit their website or try the product before their meeting. That’s why you have associates and principals. Make them do some work for the ridiculous amounts you pay them.

Tip: If you expect us to do homework, do yours as well. Spend a few minutes looking at our website, product and offer us a tip or two on what you saw, what you liked and what you did not.

#2: Distracted: 50% of entrepreneurs I surveyed, responded that they hated investors who constantly checked their phones, emails, responded to twitter messages and facebook pokes, when we were pitching. The remaining 50% of entrepreneurs will never talk to investors again.

Tip: We came there because we want to work with you. If you’d rather check your email, do it after we leave.

#1: Unethical: 90% of entrepreneurs felt it was unethical to share our pitch with competitors or your portfolio companies. Really, guys it is not ethical, lacks judgment and really gets us bothered. The remaining 10% of entrepreneurs did not know that some of you did this.

Tip: Respect the confidentiality of our information and the intellectual property we have created.

Did I miss anything? Leave a comment and let me know what makes you cringe.

Humor, Personal

Off topic: Totally useless observation on Angelo Mathews

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For those folks that dont follow cricket, this wont matter at all.

Angelo Mathews the captain of the Sri Lankan cricket team seems to have a case of “What he said”.

In the last 3 matches he has lost as captain, his post-match comments, have been a “replay” of what the previous captains said after matches they lost a day or two before. Bizarre. Its almost as if he prepares for the post match press interview by reading the newspaper in the morning of what the loser from the previous match said and repeats that.

After losing the semi-final match against India in the Champions trophy preliminary game he said Sri Lanka “Choked” – identical to what Gary Kirsten and South African captain said of their semi final loss to England a day before.

After losing the earlier match against New Zealand he said it was “a bad toss to lose“, an identical statement to what Misbah ul Haq, captain of Pakistan said after that team’s loss to West Indies a mere 2 days earlier.

Again at the Celkon trophy final, his team lost to India. He chose to focus on the fact that his team “showed character“, which were the exact same words said by Virat Kohli the stand-in captain for India a mere 2 days ago.

Now, I dont know Angelo too well, but seems to me he’s got a case of photocopy-itis for post match conferences.

eCommerce, India

My thoughts on the Flipkart fund raising

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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.