All posts by Mukund Mohan

My discipline will beat your intellect
Angel investing, Entrepreneurship, Funding, Venture Capital

Getting funded by US investors vs. Indian investors – a perspective

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This is another post to force the debate. I have heard many Indian entrepreneurs say that they would rather be funded by a US investor than and Indian investor. In fact most would prefer specific Silicon Valley investors.

There are many pros and cons to both Indian and Silicon Valley investors.

Lets do the valley first.

Pros:

1. Investors move quickly. They make no decisions fast and yes decisions faster. Some companies (Cucumber town for instance) have been known to take a few days or upto a month to raise a seed round of $300K.

2. Investors are willing to invest in breakthrough ideas, instead of me-toos. In fact they have deep liking for disruptive ideas.

3. Willing to lead a round, and help you syndicate other investors.

Cons:

1. There’s tremendous deal flow. Competition to get funded by a valley investor is huge. Lots of companies that have 3 to 10 times the traction as their Indian counterparts for the same stage of company.

2. Valley investors dont like funding anything outside the valley. In fact an investor told me “I dont like to drive to the other side of the bridge (I am sure he mean Dumbarton bridge, given how close it is to Menlo Park) to fund a company”.

3. You have to move to the US (Maybe this is a pro for most Indian founders). The biggest hassle is immigration. H1B visas (working permits) are much harder now than 5 years ago.

Now lets look at India.

Pros:

1. Competition is a lot less. There are far fewer product companies in India than US. Some might even say there’s too much money in India chasing too few deals. Entrepreneur’s dont necessarily agree with that, though.

2. There are many funds raised just to invest in Indian product companies. They are willing to provide the same amount of money, as their US counterparts from as low as a few hundred thousand dollars to many millions.

3. Traction requirements are a lot less. A lot less in India. For a sapling round (assuming you raised a first seed from an accelerator or from friends and family) many companies are getting funded with far fewer customers or users than in the US.

Cons:

1. Indian investors (angel and seed) move very slowly. Slower than molasses in fat. We have a company with a 2 month old signed term sheet, that’s waiting for the money, and expects it will take 6-8 more weeks.

2. Their terms are lot more onerous and they require a higher percentage of the company during the seed round.

3. They rarely add any value after putting money into the company at the seed round, usually only asking for “3 year financial projections” when the product is in beta.

If I were an entrepreneur and I have the ability to go to the US and have some (small or otherwise) network in the valley I’d go and raise money there in a heart-beat. If my customers are primarily in the US, then I’d also consider moving there.

If I have never set foot in the US and want to stay in India or have my market here (for any number of reasons), then I’d be better off raising money in India.

What do you guys think? Did I miss any obvious pros and cons?

Funding, Venture Capital

What is Venture Rate of Return?

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Entrepreneurs usually ask me why VC’s take so much of their company when they are only providing money and the entrepreneurs themselves are doing all the work.

Its very simple actually. VC’s and other professional investors raise money from other people (usually funds and high net worth individuals) who are expecting a return on their investment.

Right now in India, fixed deposit rates hover around 10%. That means each year you are getting 10% return on your money as a “safe investor”. Real estate investing over the last 20 years has returned in India (not all but many) close to 15%. Granted both these are fairly “not very liquid” investment classes.

Venture investing though is less liquid. Until the companies “exit” they dont return any money to the investors.

So if you as an investor are willing to take a risk, you expect a higher rate of return. Some other asset classes return higher than real estate, but they would be more risky.

The term Venture rate of return is the % of money the investment will yield annually over a period of time in a venture fund. Used to be that period of time was 7 years, now it is close to 10 years.

Lets say for sake of discussion the rate of return you expect as an investor in a fund is 25%. It seems reasonable given the risk.

That means, the VC has to return 25% each year on money raised.

Lets say that the VC raises a $10 million fund. In year one that fund has to be “worth” $12.5 Million, $15.65 Million in year two and so on until in Year 7 when it has to be worth $47 Million and in Year 10 it has to be worth (and return) $93 Million.

So the $10 Million raised has to return 9.3 times its value over 10 years.

VC’s have operating costs as well so they take 2% of the fund every year as a management fee for say 4 years. That means they have $9.2 Million to invest and $93 Million to return over 10 years.

Ten Times the Money raised.

Now this money should not be in paper alone. It has to be funds returned to the investor. Which brings us to the “exit”.

If startups dont “exit” – go public or get bought, then the funds dont get their money back and everyone is unhappy.

Unhappy since VC’s wont make the return they have to for their investors and the investors in turn will stop putting money in VC funds, which means fewer startups will get funded.

What does this have to do with % ownership for VC’s? They have to own a significant % of your company so when the company exists, they can provide that return to their investors.

If you are a VC and you are investing the $10 Million in 10 companies (its not as simple as put $1 Million in each company BTW), you need to have at least 2-3 companies “exit” because 7-9 will close and die. Startups have a very slim chance of success. Success in this case is providing an exit.

Success, however for an entrepreneur is a growing, thriving business. That’s the dichotomy and a discussion for a later post.

Here is a spreadsheet for a review.

Fund Raised  $  10,000,000
Management Fees 2%
Year 1 Mgmt fee  $        200,000
Year 2 Mgmt fee  $        200,000
Year 3 Mgmt fee  $        200,000
year 4 Mgmt fee  $        200,000
Total Management fee  $        800,000
Total available to invest  $    9,200,000
Expected Annual return 25%
Fund Value Fund Return
Year 1  $  12,500,000
Year 2  $  15,625,000
Year 3  $  19,531,250
Year 4  $  24,414,063
Year 5  $  30,517,578 3.05
Year 6  $  38,146,973 3.81
Year 7  $  47,683,716 4.77
Year 8  $  59,604,645 5.96
Year 9  $  74,505,806 7.45
Year 10  $  93,132,257 9.31
Entrepreneurship

Law of averages applied to everything else; Lessons from 3rd month of running an accelerator

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There’s no science behind the quote from Jim Rohn

“You’re the average of the five people you spend the most time with.”

It does seem somewhat right though.

This was the thought that’s going through my mind as our third month came to a close at the Microsoft Accelerator. – Shameless plug, apply now for our Summer 2013 batch.

The biggest learning for me was that any accelerator is as good or bad as its filtering criteria alone.

That’s it.

Select good founders, you are a rockstar. Select not so good ones, you are a dud.

Surprising is it not? Or maybe obvious to many.

I think many of us (investors, accelerators, mentors etc.) assume too much credit for a startup’s success.

Truth is, its largely up to the entrepreneurial team, the founders and the early employees and maybe a little/lot of luck.

In my first batch I was largely trying to avoid messing up our founders too much. The last thing I wanted was a bunch of entrepreneurs at the psychiatrist’s couch talking about coulda, shoulda, woulda, had it not been for me.

What prompted me to think this was my visit to the valley. At the Angelpad demo day, the companies seemed flawless, crisp and very high quality. They all seemed ready and “investable” from the minute they presented their case.

Then I went to meet many more founders in the valley from various parts of the world at a co-working space called Rocket space in SF. The best and the brightest do come to the valley from the world over. Just as the best and the brightest come to any place where there are other best and brightest people.

Some simple and easy to understand observations at our accelerator:

1. Startup teams worked as hard (or not) as the average of the other startups. One or two teams were working extra hard, whereas others largely followed the middle path.

2. Most startups had traction that was largely the average of all startups, with no exceptions.

3. Most startup presentations was also the average of all startups.

And so on.

So what’s the learning for entrepreneurs?

Seek and hangout with the best and the brightest.

Even if you feel inferior to other founders, who are better, (in fact way better) than you.

Its human tendency to settle in the average, but push yourself to only be with other founders who have lots more traction than you do, lots more smarts than you do and more funding that you do.

Largely because you will be the average of all others. If you seek out the best, your own level will rise.

India, Research

A meetup of Indian accelerators

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I had mentioned a few weeks ago that we at Microsoft are putting together a meetup of the top accelerators in India so we can all learn from each other and help each other get better to help the entrepreneur community. Here are more details.

The meetup is going to be held on Feb 1st at the Accelerator and the agenda is driven by the accelerators themselves. It is a closed door event with only invited guests participating and a few members from the VC and entrepreneur community. They are there primarily to help us all learn how we can serve entrepreneurs better.

If you run an accelerator and want to be invited, please drop me an email. There are 40+ people attending from all over India. It will be a day long event with moderated sessions. It is free to anyone that’s running an accelerator or incubator.

Be a force of good.

India, Marketing, Mobile, Research, Tips

The 99-0.9-0.1 rule for Indian Startups

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Jakob Nielsen is given credit for the 90-9-1 rule of Internet participation.

The “90–9–1” version of this rule states that 1% of people create content, 9% edit or modify that content, and 90% view the content without contributing.

In the last 6 months, I have gotten 21 Indian web and mobile consumer applications data on visitors, engagement and contribution.

In India the numbers are closer to the 99%, 0.9% and 0.1% in terms of lurkers, participants and contributors of any consumer application.

This explains a lot of things, including the 2-speed nature of Indian market adoption.

Its not that we don’t have early adopters, its that most people (99%) are really laggard adopters.

The difference between 1% and 0.1% is dramatic for startups who need the early contributors to get the community going.

To give you an example. Lets take a mobile application which has 3 competitors in India. Each of the 3 products has been in the market for about 6 months and still they total about 140K total downloads.

In the 1% scenario they would total 1.4 Million downloads. This assumes 140M total Internet users for both mobile and web. In reality there are only about 50-80 Million real broadband users.

Is it cultural? I have heard many folks blame (yet again) our Indian culture & education system which values listening to others than voicing our opinions. I don’t quite agree with that though.

I don’t know why exactly we have only 0.1% of people contributing.

This however has dramatic implications for “traction” among startups.

If you are going to show traction and have between 20K to 50K users or downloads, then you should realize that the 99, 0.9 and 0.1 % rule applies again to your users.

Only 0.1% of those who download will actually be contributors (such as check-in to locations if you are Location based service).

So the engagement metrics will be consistent but woefully low compared to what our US counterparts are seeing.

Traction among Indian consumer startups is not really “traction” in other markets.

P.S. I am still trying to see if this is the same for ecommerce startups. I am hesitant to think it will be the same, but among new and smaller (lesser known) ecommerce companies, these numbers are in the range. However, among established companies, the US engagement (or purchase) numbers are probably more valid.

Entrepreneurship, Funding

How to hack your seed round in India? Winter 2012 Edition (Bonus: List of Indian angel investors)

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This post is for first time entrepreneurs who are looking to understand the maze of Indian seed funding options. If you have raised a seed round already and are looking to raise your series A, then please read the 5 step post on raising series A.

If you want to raise a sapling round (after the seed round, but before the series A) then this list is still your best bet.

If you wish to get into an accelerator instead of raising a seed round, there are several options available for you, including the Microsoft Accelerator, but you will still have to raise a seed / early round after going through the accelerator.

Here are some assumptions I make:

1. You have a product that is in either prototype stage or you have an early version.

If you are at the idea stage, then please raise money from friends and family. If you are looking to build a services company, then get customers to give you some money in advance.

2. You have bootstrapped your company and you have <5 people in the company.

3. You are looking to raise < 1 CR or $200K.

4. You are based in India and your market is either India or US.

5. You have some customers either using or trying your product.

The first step to hacking your seed round is identifying your investors and making a list. From my experience I have made a list for you below.

Download the Indian Seed and Angel Investor List.

The second step is to get introductions to these folks and talk about your company.

The third step is to follow through, follow up and follow on. Nothing kills a fund raise more than giving up because the process is hard or long. Raising money is not easy so its not for everyone.

There are 5 options ( or categories) for raising seed round in India.

1. Individual influential angels. There are only about 5 who matter in my experience. Rest are largely followers. Although there are over 250+ individual angel investors in India who are independent (not registered with Angel networks), most of them rely on a lead investor and will typically follow than lead. Vishal Gondal, Sunil Kalra, Krishnan Ganesh, Pallav Nadhani, Vijay Shekhar Sharma, Harish Bahl and Abhishek Rungta are  some of the prime movers.There are others who matter such as Alok Mittal and Rahul Khanna of Canaan partner (but more as individual angel investors) but they dont do more than 1-2 deals every year at most.

2. Angel network champions. There are 15 angel networks in India, but the 4 that matter are Indian Angel Network, Mumbai Angels, Hyderbad Angels and Harvard Business School Angels. Keep a lookout for Innovation angels and Chennai angels, but they dont do many deals yet.

For IAN, to hack the system you have to get a lead. There are 3 leads who do possibly 75%+ of all deals – Sharad Sharma of Bangalore, Rajan Anandan of Delhi and Rehan Yar Khan of Mumbai. There are others in each location who lead some deals like Manav of Eka Software and Naga (both are from Bangalore), but if you want to get funded by IAN, these guys have to champion your deal, else things just dont happen.

For Mumbai angels, Sasha Michandani and Anil Joshi matter. Deepak Shahadpuri might also be able to move things. Rest will follow. Get one of these two folks to champion your deal.

For Hyderabad angels, Srini Koppolu matters. Shashi Reddy also does. Rest will follow.

For HBS, Raj Chinai and Ravi Gururaj should be tapped to lead. Given that Steve Lurie’s moved back to SF, dont expect him to champion deals.

For Innovation angels, Shekhar Kirani, Palani Rajan and Rajesh Rai matter.

3. Seed stage institutional investors. There are 7 that matter. Nexus VP, Blume Ventures, 5 ideas, Angel Prime, 500 startups, India Internet Fund and Seed fund.

For Nexus, get help from Sandeep Singhal or Suvir Sujan (Mumbai) and Sameer Varma (Bangalore).

For Blume, Karthik Reddy, Adit and Sanjay are key, but Karthik’s everywhere so you are likely to run into him.

For 5 ideas, Pearl Uppal and Guarav Kachru matter.

For Angel Prime, Sanjay, Bala Parthasarthy and Shripathi will make deals, but you have to be in Bangalore.

For 500 startups, Pankaj Jain is in India, based in Delhi.

For India Internet Fund, Anirudh Suri matters.

Seed Fund is an interesting option, who I have been told, (not seen first hand) does seed deals as their name implies, but yet to really hear it from entrepreneurs. Bharti Jacob matters here.

4. US based individual angel investors. If you dont know the US angel investor personally because you have either worked with them before or they know you in any other personal capacity then dont bother. The distance alone makes most them unwilling to invest. This network you should tap only if you know the individual well. Angel List might be a good start.

5. IT services company CEO’s: (of companies doing > 10 CR or $2.5M in revenue). I am seeing more of this category starting (early signs) to pop up.This person has been a 1st generation IT entrepreneur who has built a services company and has been running it for the last 5-10 years. They have the money, expertise, time and energy to mentor and fund new startup founders. I have only seen 2-3 of these folks, but Arvind Jha is an example. If you find more of these please let me know.

Funding, Learning, Tips

Lessons from tennis – The one rookie mistake every entrepreneur looking for funding makes

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Admiring the shot instead of preparing for the return

Early this year I got a new tennis coach, since the one that was helping us left for Hyderabad. It was a big change for the entire family as we all got new coaches and the adjustments were tough. Most new coaches try to understand your game for a few weeks before they point out changes you need to make, but the new coach focused on only one aspect of my game.

Although the rest of my game is pretty average, I have a mean forehand cross court. I knew that it was good. So I’d never give up the chance to show how good it was. Play to my strengths has always been my motto. That still does not result in winning points, though. It just resulted in many people admiring my shot.

After about 15 minutes of playing with me, my coach stopped, asked me to come mid-court and said

The biggest reason you are losing more points, is because you are busy admiring your forehand cross court shot, instead of preparing for the return.

It took me a while to understand that. Having been told always I was good at that particular shot, I was expecting him to help me improve it. Instead, while he said it was good, he pointed out that I was too enamored by it to prepare for the return from opponent. That’s where I lost my points.

I see this also in many entrepreneurs who ask me to review their pitch deck before they seek funding from VC’s. Their pitch deck is awesome, super tight, glitzy and slick.

Their operating plan is an afterthought.

It’s almost as if they don’t expect the investor to take things forward, so they are unprepared.

Similar to my forehand cross court shot.

I expect most shots to be winners, so I am not prepared for the return, instead I am admiring the shot I just made. Trouble is over 50% of the shots were being returned.

Same with investors

In golf there’s an old saying.

Drive for show and putt for dough. (quote)

I am going to modify that for funding.

Pitch for show and plan for dough.

If you want to get funded, focus on getting your sales, marketing, hiring and financial plan in order, because that’s what investors value. Its showing them how you are going to use the money to create value for the company and a return on their investment.

Of course, without a good pitch deck you won’t get to the next step, but since most entrepreneurs do a fairly good job of focusing on the pitch deck, I’d recommend you spend enough time on the operating plan as well.

Entrepreneurship, Tips

Strong Entrepreneurial traits – How to develop a thick skin

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Over the weekend I was at the IPMA conference hosted by Ravi Padaki and his team. I was in at about 11 am and missed a good session by Ram from eBay. I was at the session with Alok Goel of RedBus. Long an admirer of Phani, I am even more impressed with his ability to recruit star players such as Alok. His talk was funny, insightful and full of great examples.

After the talk, I was part of a panel with Sanjay Jain of Kosha labs and Dhimant Parekh of Hoopos. Both are strong product management experts and I was excited to participate in the event just to hang out with them.

The session was billed as a product clinic, which is similar to the ThinkNext events we run at the accelerator and what we have done at Delhi, Bangalore and other cities. In this session 4 entrepreneurs were to bring their product issues or go to market issues and were given 5 minutes to present their company and problem and the jury got 10 minutes to help troubleshoot. The cynic in you might say this is “gyan” session and what some people term as “too simple”. I disagree completely with that thesis that you cannot provide some guidance, largely because most issues with companies fall into the basic 3-5 buckets of problems which are easy to diagnose but hard to provide solutions to.

One of the presenters was the founder of a company that started in July and had built 4 products. One of the products was a dentist appointment system for patients. When he presented he mentioned the market was fairly commodity and that his product was one among 5 others with similar capability.

It was fairly obvious that they were trying a lot of things to see what sticks, but it baffled me that if he knew that the market was commodity and he still chose to build a product with no immediate differences than what was already available. It seemed to me that he was really building a services company with an interest in products as opposed to having a product focus upfront.

I did admire the founders ability to build a team of 13+ people in <6 months, get 3+ paying customers but did not get a chance necessarily to point that out, given the short amount of time we had.

So I chose to point out the need for focus and mentioned that he ought to try and get one great product as opposed to 4 commodity ones.

He was genuinely upset.

I could totally relate to his reaction, given how tough it is to accept criticism of any sort towards your baby.

One of the things I do admire in a lot of successful entrepreneurs is their ability to have a thick skin – the ability to take criticism well, take a lot of body shots and still keep going.

Then I read an interview with Ratan Tata over the weekend.

“In my interactions with business leaders in India, as against elsewhere, there is this feeling that they are looking for cracks in your armor in order to pull you down; this happens not just to me but to everybody,”.

I am torn. I really admire Ratan Tata and I think he’s a role model for many, but I cant help but feel that the emotions are misplaced.

I try to help entrepreneurs do it with the intent of making them stronger and better. Not with the intention of “pulling them down”, but I can totally understand if it comes off as “beating them up”.

I never intend to really deflate another entrepreneur’s zeal, but a reality check is in order.

I think the best thing I could do is to “say it better”.

With empathy and emotion as opposed to with a detached sense of being.

So I am committing to do that.

If you are an entrepreneur and in any of the clinics I do make it blunt and you get a a sense that I am “beating you up”, feel free to call me out.

It will help me be a better person.

Regardless of people like me, please do develop a thick skin. It is the trait of strong entrepreneurs.

Funding, India

What’s getting funded by Indian seed investors? Winter 2012 edition

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I am going to write some quick posts each quarter (let me know in the comments if it needs to be more frequent) on the patterns I am noticing on companies / ideas getting funded in the seed stage. These are particular to India, and are based on a) interactions with entrepreneurs b) discussions with investors (angels, angel networks and seed stage investors) and c) database of investments from all types of companies.

How can you use it? My first reaction is ignore it.

Businesses are built not with financing alone, but with passionate entrepreneurs and eager customers.

Then why am I writing it you ask?

This might help you position your company differently with investors if you are seeking funding. The same company focused on a B2B market vs. B2C market comes out looking dramatically different even though the core “idea” might be the same. If you are a company that’s in the “not getting funded right now” list, take heart, sometimes it may be good to swim against the tide.

So here’s what getting funded or moved along in the funding stages with investors.

1. SaaS companies focused on marketing & targeting the US market. The mega trend is Marketing automation is going to be a large market.

2. Payments & payment enablers that help reduce costs for eCommerce companies in India. The mega trend is reducing costs for over 60+ eCommerce companies that have been funded over the last 3 years.

3. Software companies that build apps to help consumers take control of their health. The mega trend is the slow ageing population the world over and especially the unhealthy lifestyles creeping into India as well.

So whats taking longer to get funding or getting passed quickly?

1. eCommerce companies for physical delivery of products or niche eCommerce companies. Most (or all) are running into strong headwinds in trying to raise their Series B.

2. Consumer Internet companies focused on the India market with limited downloads or traction.

3. All kinds of education software companies – there’s a general pause I hear from investors since they are trying to figure out where in the value chain of education will there be money made.

P.S. I would love to name companies as examples for each, but I get so much hate mail from company founders I have funded myself on why they dont want the “unwanted” attention to their companies or their fund raising efforts.

Community, eCommerce, Entrepreneurship, Research

Microsoft Accelerator Research on Starts and Closures in Indian tech startups

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We are planning to release research findings every month week as part of our startup support program at the Microsoft Accelerator in India. There are about 50 different topics that we are curious about and are consistently doing research to find out ways to help our accelerator companies perform market research, target early adopters and focus on getting more customer traction.

This series is part of our accelerator database on engagement with startups, investors, mentors & entrepreneurship. Last week we did a report on Smartphone usage in India.

This week our focus is on the rate of companies starting and closing in the technology product space. Over the last few years Microsoft has been tracking new companies as part of its Bizspark program. Besides this we have access to several databases from multiple sources which has allowed us to consolidate all these into a single system to track startup activity. While we currently track over 73 different elements including founders, starts, closures, funding, etc. our focus is on trying to find patterns that can give us more clues to remove the roadblocks that reduce entrepreneurial failure early in the system.

We track over 6200+ entities – which includes services companies with a “product” they are building and also many viable side-projects, where the founder is generating some traction or revenue and 3900+ companies that are solely focused on building products (includes SaaS, eCommerce, traditional software, consumer Internet, etc.) in India.

On average there are about 450+ starts annually over the last 3 years, which has grown dramatically thanks to eCommerce.

While Bangalore has the most number of technology product startups overall, at neary 40%, Delhi/NCR came a close second in 2011, only to return to normalcy in 2012.

In terms of closure, 26% of companies still close within a year of them starting (either the founders giving up and moving on, or the company going dormant).

The biggest issue for closure (given that nearly 80%+ of all companies are bootstrapped) is collecting money from customers who have committed to paying for their usage of the product.

While not being able to raise funds is really #1, that seems to be a generic reason enough and a motherhood-and-apple-pie situation.

Unlike the valley (anecdotal information alone) most failed entrepreneurs dont go on to start another company or join a startup, but instead go to work at a much larger company (over 60%). Most reasons given were because of loans to payoff or pressure from parents (surprisingly not from any others).

Our recommendations are for new entrepreneurs to have a “cushion” of nearly 18 months in funds in their personal capacity before they delve into a new venture as opposed to 6 months.

We also recommend asking new customers for an advance in payment as part of the Proof of Concept instead of payment after the fact to aid in managing cash-flow more effectively.