All posts by Mukund Mohan

My discipline will beat your intellect
Angel investing

A field guide to being a technology angel investor

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I am going to work in a series of posts over the next few months on angel investing. This guide will be based on my conversations with about 100+ US angel investors and over 50 in India. The goal is to encourage more high net worth individuals to fund new technology companies.

I have one request of you: If you are an entrepreneur, please promote this guide (it will be free, before you ask that question) among potential angel investors and those that are on the fence. I will try and make it into a downloadable single file in 2-3 months when I finish the guide. Here’s an excerpt.

From 2008 to 2013 there has been a 713% increase in angel investors1 who have funded technology startups the world over. Dramatically lower costs of starting companies, thanks to cloud computing and well formed distribution channels such as app stores has created a boom in entrepreneurs forming new digital ventures. This boom in supply coincided with significantly lower returns from several other asset classes worldwide including a steep drop in public markets, debt returns and also lower housing and real estate prices, which enabled these investors to seek better returns, offered by technology angel investing.

There are multiple reasons we are seeing an increase in angel investors including the anticipation of higher returns, the desire for fostering entrepreneurship among the youth, the need to give back in a more meaningful way to the community and the joy of mentoring. Many angel investors are also seeking a way to leverage their expertise, experience and connections built over the years into a meaningful venture. Whatever the reasons, the net result is that we now have a large set of experienced individuals interested in helping fund and grow innovative companies.

This guide is for potential and new investors, ones on the fence and those who are experienced at the art and math of investing at the early stages. The audience for this guide includes high net worth individuals and experienced entrepreneurs who are keen to help the next generation of entrepreneurs. This guide can help those who, after years of experience working at a large company are now looking to branch out and learn about new markets, new companies and technologies by nurturing and investing in game changing entrepreneurs and their ideas.

Funding

A new innovation: Angel investors seeking exits by getting a portion of startup’s revenue

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The last week we had over 25 folks who run accelerators, incubators and coworking spaces in India at the Microsoft accelerator. A few of them were individual angel investors as well.

Anyone who has invested in Indian technology startups knows that getting exits is hard. In fact in most of our discussions with entrepreneurs nearly 60% of them have the intention to never sell their company or “exit” but to build a standalone business which generates cash and employment. Given that number, it is not hard to imagine that most angel investors are vary of investing in startups given how many of them end up as “lifestyle businesses”.

Most angel investors, though need exits and returns on their investment. This is so they can redeploy the capital and the gains in other investments.

I have seen many creative ways that angel investors have tried to get exits from their investment in India. Unlike the US, nearly 40% of Indian angel investors (according to Rehan Yar Khan of IAN) usually exit at the series A or series B stage. At this stage either the new investors or the company buys their shares out.

I heard for the first time though, about a new technique adopted by an angel investor. This investor had a preset IRR (Internal rate of return) which they agreed to with the entrepreneur and required that the entrepreneur return the investment with the gain when they start to make a certain amount of revenue.

It seems more like a debt investment than an equity investment, but it seemed to work.

I have seen many investors who put money in non technology companies who put together deals like this one, but its rare for technology companies.

I wonder, how many entrepreneurs are okay with accepting these terms as part of their investment. I suspect that if entrepreneurs get more comfortable with convertible debt to equity instruments with some form of exit criteria tied to revenues, this will become a more viable vehicle for technology startups.

Other

3 trends that we noticed from over 500 Indian startups that we reviewed

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Over the last few weeks we reviewed over 500 startups and talked (phone, skype, etc.) with over 100 startup founders. This was our shortlisting process to get to 15 companies that will make it to our Spring 2013 batch at the Accelerator.

First, we reviewed a lot of travel startups. Especially the problem of helping travelers with trip planning. A list of things to do, places to see, restaurants to eat, etc. With all the data available from multiple sites including Yelp, Facebook friends recommendations, and other online sources there seems to be enough data to form a more informed trip plan. Unfortunately we picked none of them. Its too hard to see what will differentiate one company from another. Some claim it is their User experience, others their recommendation algorithm and still others their human-powered technology planning.

Second we reviewed many more gaming applications than we did in the previous batch. Zynga’s performance notwithstanding, many folks are jumping on the in-app purchases and social gaming concept. Most start with a web social game though, not mobile. That’s fair, since the number of mobile smartphone early adopters in India is still far and few between. Again, we passed on all of them since the teams did not seem complete and hiring design talent is amazingly hard in India.

Third we reviewed many SaaS applications in the help desk and customer support area. There were 3 teams with excellent experience & background in the space and all had some initial customer traction. Many were gunning for BMC Remedy, but my sense was although the market is fairly large, nothing set one team apart from another. They all pretty much had the same feature set as ZenDesk or FreshDesk.

Bonus trend – we saw many education “ERP” applications. School management, test preparation academy management, College alumni management etc.

Entrepreneurship, Funding

Crowdsourcing our application process; Feedback needed

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One of the things I am very disappointed with is that I know so little about so many markets and their opportunities.

As a selection team (we have 4 internal Microsoft and 6 external members – VC’s, angel investors and experts) we know more, but still our experiences are fairly limited compared to the entrepreneurs who apply.

We have so many applicants that are much more qualified than us, that it seems like we are under qualified to make these decisions on which companies to help and which ones to fund.

I have an idea for the next batch but I’d like some feedback.

Is it better to take a “wisdom of crowds” approach as well?

Should we take say 2-3 “slots” and provide the list of companies with an overview and plan and a selected list of say 100 people vote (with justification) on which ideas and companies should be funded?

Do you think it will work?

I dont want to give all the slots up for vote since there are some companies that are of strategic value to us.

One thing that it helps is avoid many more “Why did anyone fund this company” kinds of questions.

Please let me know your feedback.

Management, Tips

Differentiate with a personal touch and taking time

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Given the huge number of applications we had for the accelerator, one choice we had to make was how do we let people know they did not make the cut.

Having been on the receiving end of many “rejection” emails, I hated the generic “We reviewed your application and did not think it was a fit”.

So I decided to send personal hand crafted, no cut and paste, emails to every founder we could not accept – either because of their traction, the market they chose, the incomplete team they had or the fact that there were 2-3 other applicants in the same space that were further along and had more to show.

Over the last 4 days I have reviewed hundreds of youtube videos, demos and password protected mockups and wireframes.

Its hard and takes a lot of time, but that’s how we chose to differentiate ourselves – With a personal touch and taking the time to be human.

Again, to all those that applied, many thanks.

Since you have my email address (and phone number) feel free to connect with me in a few weeks so we can find ways to help you in any way possible.

Other

What’s the difference between Indian and US startups (Q4 2012)

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We finished collecting applications at the Microsoft Accelerator last week. Since I did not see the applicants from the previous batch I was extremely pleased with the high quality of applications overall. By most measures we exceeded the quality of applicants that we had internally hoped for.

Since there are 4 Microsoft accelerators worldwide – Israel, Beijing, Seattle and Bangalore we get to see trends across a fairly diverse set of companies.

I wanted to focus on 3 metrics that I noticed from our Seattle accelerator compared to the Indian one. I dont want to focus on the entrepreneurs or their background and quality but more on the ideas and markets themselves.

First where we got the applicants from was different. Our US accelerator got a lot more applicants from Australia and Europe than the Indian accelerator did. That’s to be expected since the US is a big draw, but even to an accelerator that’s not in the Valley was a surprise to me. That was not the “big aha”, though. The fact that we in India got quality applicants from Barcelona, Australia and London, besides a few from the US was a good sign. Many were not Indians who applied from those countries, but locals.
The biggest differences were in the sector / category of applicants. The US saw a lot more cloud infrastructure than we did. Nearly 25% more. The US also saw a lot more consumer Internet applications, specifically in web consumer, whereas mobile applications both in number and % were comparable.
The industries they were trying to disrupt were also a lot more diverse with some startups applying to the Seattle accelerator focusing on printing, automobile and even aerospace. Indian applicants were mostly focused on telecommunications, travel (a lot of companies this batch were travel 2.0 apps) and social networking.
The other metric that I was very surprised with was the % of bootstrapped companies was comparable. So those folks that suggest that companies outside India raise money quicker or faster now have a counter point.
Some other interesting metrics, albeit obvious to most folks.
  • Fresh out of college applicants were at least 18% of applicants in the US compared to 2% in India.
  • US had a lot more applicants with 2 or more founders, whereas in India solo founders dominated the applicants.
  • US applicants overall had far fewer employees than Indian companies at comparable stage. In fact very few were more than 5 people. Indian startups bulk up early.
Personal

What are some ways to tackle the lack of time problem?

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There are many things that I am unable to prioritize high or make time for anymore. One of those things is taking time to make serendipity happen. Just random, chance meetings. Those happen, only face-to-face.

I tried dialing back in 2012, only to fail miserably.

The problem is like most other folks, I am unable to say no.

That leaves me with very little time for things that are absolutely important and I end up shortchanging those the most.

The last year in particular I have worked – attended meetings, spoken at events and hosted events on 23 of my 52 Saturdays. 

I dont like that at all since it takes time away from me spending time with my kids and family.

I have a new project with my daughter for the last 2 weeks that we are working on which should take us 30+ weekends. My son’s cricket sessions need me to be there at least 1 day a week to catch up with the coach. Finally my youngest daughters need more time to just hang out with me. I have also committed to mentor 3 folks who I work with closely.

So I unfortunately have no time for new projects or mentoring new entrepreneurs at all. I apologize.

I love helping new entrepreneurs a lot. I enjoy my interactions. I cant make time.

So I am going to try and not be at any new startup events unless we have them at our office for this quarter. Let me see how that goes. I have one commitment to meet folks in Delhi on Feb 22nd.

I have a question:

Is it okay for me to ask folks to reduce the time they can meet me and talk about their product / company to just the time of the event? I wont be able to give a lot of time, even at the event, but that’s a choice I am making.

Is that being too selfish?

Other

Where would you put $50 million in the next 5 years?

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Lets play Venture Capitalist for a day shall we?

Assuming a 5 year investment horizon starting in 2013 in 50 startups and a total of $50 million, what areas (technology categories) would you put money in to get the best return by 2018?

Some rules:

1. You have to put the same amount of money in each company and it cannot exceed $1 Million.

2. You have to put all the money in technology companies alone.

3. You can get “exits” before 2022, but your entire portfolio will be liquidated on Dec 2022 (10 year fund).

A partial list of categories for you to consider. You can put 100% in one or spread them around, or ignore a few categories as you wish.

1. Consumer Internet

2. Mobile applications

3. SaaS applications

4. Cloud infrastructure software

5. Gaming

6. eCommerce

7. Robotics

8. 3D printing

9. Social Networking

10. Storage software

11. Networking (like Cisco, Juniper, etc.)

12. Data Center technology

13. Education technology

14. Healthcare technology

15. Big data

Any other category I missed.

Why I am putting this together?

I will be putting together our investment thesis and our mix of companies so I’d love to crowd source some of the thinking behind startup investing.

If you think its better to do a form or a survey type web page, let me know, else just give me your spread and mix in the comments.

Entrepreneurship

Dont ever worry about the cynics – Do good for the sake of it

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Most people want to know why we dont take any portion of company even though we offer so  much at the Microsoft accelerator.

The cynics even think we are in it to acquire these companies, or to force them to move to Microsoft technology. Its neither.

Its actually relatively simple.

Its to get more engaged with the startup community. At Microsoft we have multiple programs to do this including BizSpark, but we are not deeply engaged with startups as we’d like. We want learn about their challenges and how we can make our products a better fit for their needs as well.

I believe this to be true for my own personal life as well.

I spend a lot of time with startups (23 cities, 800+ people over 1 year), providing free sales training, spending my money for travel as well, with no intent of ever getting anything back.

I know critics and cynics thinks so I can build a brand or to “make lots of money later”.

Actually so far I have never made any money from all of these interactions and I never will.

Its simply because I want do good and I enjoy doing it.

So never bother about the cynics. Ignore them and keep doing good. It feels great and you’ll be better for it.

Marketing

How to do very bad marketing – an example

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<Being rant>

The latest trend among US marketing folks is to put a blog post of 50 sentences into 50 slides. Not sure why a simple one page blog post wont cut it – actually wait, I do. Its to get “multiple outposts” which all say the same thing in “different ways”. Some viewers prefer SlideShare as the way to read stuff instead of text.

So what ends up happening is to read something in 2 minutes you will end up clicking 50 slides to read 50 sentences.

The part that makes no sense is that its just text in those slides. No images, no visuals, not storytelling.

Which makes it look like a Word document pasted into a PowerPoint deck.

Rather lame. Dont you think? Or am I missing something?

</End rant>