Disclaimer: This is my perspective alone, one data point. YMMV.

I had a very interesting question that I was asked at the sidelines of the TIE Entrepreneur Summit last week. It was “What is your decision criteria for investing in any company”? It was not why I invest in companies, but more which ones do we decide to invest in?

The quick answer for me is I weigh these criteria in (approximate, not scientific) in parallel, not sequential:

1. Entrepreneur(s) – about 60-70%

a) hustle-ability – how badly do they want to be an entrepreneur, what all have you tried to get your idea off the ground. Included in this is your ability to persist and keep going when others give up.

b) education – I prefer an engineering background to an MBA (yes, I am biased), I am not sold on the IIT/IIM background, so I have funded mostly non IIT engineers so far. That does not mean I wont fund an someone who studied there, it just means I dont think you need an IIT degree to be an entrepreneur.

c) communication – can they express their passion clearly (unfortunately for me and you, if you are a bad communicator, but you have great ideas, you will be filtered out)

d) sense of humor: ridiculous you may say, but I have to like you. I like people with a good sense of humor and so if you are not into practical jokes, fun in general, and I dont enjoy hanging out with you, you will get filtered  out

e) experience (if relevant) what have you done so far? I have a positive bias towards certain companies because I believe their hiring, talent management, grooming entrepreneurs and culture fits startups more than others. Some examples are Cisco, DELL, Future Bazaar, InMobi, Google and Yahoo.

2. Market you are targeting – about 20 – 25%

a) I prefer small niches segments where possibility of acquisition is obvious or confluence of two large markets, which are immensely competitive

b) In terms of geography I prefer folks that target the US market or global and have been not very positive on B2B market in India. I have avoided companies that target SMB markets in India, but if you are targeting the US SMB market, I would take a look.

c) Segments: I prefer SaaS companies with software to help specific titles within large companies, eCommerce (Global, not just India) and Cloud infrastructure (solutions aimed at developers). I have avoided Education, Healthcare, Real Estate, Enterprise software, Generic CRM and Green technology (capital intensive).

3) Quality of your idea – about 10 – 15%

a) I think execution matters, but so does your idea. If you are doing something truly disruptive, I am more likely to take a look

b) Your willingness to juggle multiple ideas and discern between useful and useless feedback that will change you idea.

I know these 3 dont add up to 100% but that’s the art.

I got mixed responses to my post on What should you really have ready before approaching me as an angel investor? yesterday. The comments on my blog and email (yes, I get email responses to my blog posts) were mostly from entrepreneurs who understood the changed landscape. The comments on my facebook stream from entrepreneurs indicate that my post was bordering on being a venture investor. So, I thought I’d clarify.

The landscape has dramatically changed from a year or two ago when companies got angel funding in India (and I suspect all over the world).

What’s changed you ask?

a) Accelerators and Incubators have increased startup quality. Friends Nandini & Sammer (Morpheus), Pranay Gupta (CIIE), Vijay Anand from India and Dave McClure (US) are doing such an excellent job with accelerating startups that angels are spoiled for choice. A company after having been through their program is a lot more ready and further along the process than others.

b) Angel List, VentureSutra, etc. have made an opaque, fragmented market more open. I get proposals from Israel, US and India for angel investing from companies at various stages now much more efficiently than used to 5 years ago. Previously finding good entrepreneurs was mostly relegated to networking at events or through word-of-mouth. No longer. I took myself off these lists (lack of time) because of the number of requests I got from very high quality entrepreneurs..

c) Global competition from higher quality companies. Fellow angel investors such as Pallav and Abhishek (Seeders) and Ravi Trivedi are seeing this also. We get proposals from companies in the US (started by Indians or native Americans) or from Israel (started by locals) a lot more. Indian entrepreneurs (and angel investors) are competing on a global scale. The quality of entrepreneurs is tremendously high and the bar has been forever raised, I believe.

If you are an entrepreneur competing for funds, you no longer are competing against other startups in your domain or geographic area.

So, what is the difference between an angel investor and venture capitalist now is the next question?

I believe there are 3 things:

1. Quantum of funds: If you are an entrepreneur who wants to dilute less and needs less money to grow (for any number of reasons), and your ticket size (amount you need to raise) is less than <$500K, you are more likely going to an angel. It does not stop you from going to a Venture Investor, but the size of the funding means the VC is less likely to give you significant time.

2. Size of market opportunity: There are several opportunities to get exits via smaller acquisitions in the range of $5 to $50 Million. These dont excite most VC’s, but might excite an angel investor.

3. Ability to provide you relevant network and connections. Angels’ who have domain expertise in your startup’s area of focus have depth of relationships which VC’s might not (they have breadth instead).

I had a very interesting conversation with many of the GOAP members when they were in Bangalore over the last few days. After 10 days in India, they had heard from over 150 founders, entrepreneurs and had multiple perspectives on what’s the startup scene like in India.

A couple (Paul Singh, I’m looking at you) of them really pushed me to fund more companies in India, mentioning that most entrepreneurs said angel investors were a) far and few between, b) were offering onerous terms (i.e. 35% for $250K) and c) were taking too long to make decisions.

As an entrepreneur I can relate to the feedback. There are very few “good angel” investors in India since angel investing in India is relatively new. There’s a lot of education required to get angel investors to understand the risks, rewards and objectives of investing. I do have another perspective though, and I summarize first.

Fred Wilson on “How much to burn…”.”Basically he and Dennis worked for nine months without any pay and built V1 of Foursquare all by themselves for basically no money other than their time which they were not charging the company for.”

Basically the point I want to make is “The bar has been raised dramatically for what gets funded even by Angel investors“. I want to make sure entrepreneurs internalize this.

1. If you are looking to get funding for an eCommerce company, please dont tell me “We spent the last 6 months building the platform and now are going to start getting transactions”. Show me 3-6 months of transactions trending up and to the right. I get 3-5 of these types of proposals every week. Nothing different, in any of these plans except for the category they picked.

2. If you are building a Saas application, show investors the working prototype instead of a PowerPoint of the screenshot. Share the daily unique visitors, # of free trials and # of converted (hence paying) customers.

3. If you are building a iPhone / Android / mobile application, let us download the app, play with it, instead of sending us a Balsamiq screen capture. Show me how many downloads have already happened, how my users are actively using it and what your approach to building the app(s) is going to be next.

Like most of you, I have a full time job. I unfortunately dont have the time to evaluate every plan that is sent my way. If I see traction, then I can even spend some time to evaluate the company. In the absence of that I have to go with how well we know each other.

P.S. I dont like to invest in certain sectors – I dont like the education vertical (have not figured out where in the value chain you can make money), healthcare (overall), real estate and anything related to radio, TV and news media.

I would love to invest in more entrepreneurs, but I just dont have the time to learn and do due diligence, since this is not my full time gig. If you can please help me out, with more effort on your side, then it makes the process easier for us both.

As a fellow entrepreneur (and secondarily as an investor), I promise the following to you if you are an entrepreneur:

1. I will respond to your communication (email or phone or text message) within a day (unless I am on vacation).

2.I will share what I learned from my experiences so they can possibly help you without as much bias or holding back.

3.I will support you even if you fail at your venture, because I have failed multiple times.

4. I will open my network & connections fully and transparently to help you.

5. I will be honest with the assessment of your idea, product or company.

If I break this promise at any time, feel free to call me out in the comments and help me keep this promise.

I had an opportunity to meet with 10 companies that were batch 3 of the CIIE (Center for innovation, incubation and entrepreneurship) in Ahmedabad last week. A few weeks before that I had a chance to meet 12 companies those were a part of the Morpheus startup acceleration program. Both these (and many others in India) are fairly similar and are modeled around the YCombinator model – 12 to 15 weeks of mentorship, guidance, and invest about 500,000 to 1,000,000 rupees ($10K to $20K) in funding for 8-12% equity.

The entrepreneurs are mostly young, very enthusiastic and extremely confident. It is amazing to see the progress they make in a few months, which reinforces the value of focused effort with structured help in short bursts.

The challenge with startup mentoring and incubation is that not all startups are the same. For the mobile applications company, B2C Ecommerce Company or small web Application Company, the 3 month effort suffices. For startups focusing on building software for the SMB or enterprise market, however the 3 months are hopelessly inadequate in the Indian scenario.

The reason I believe it is insufficient (for companies selling to other businesses) is because of the effort required for market development. The reason for changes and “tweaks” to the US model (like YC or TechStars) is that these companies are selling to the Indian market in most cases. Finding those early adopters takes lot longer in India. Indian businesses of all sizes are a lot more risk averse. Most of them look for a personal incentive to adopt first, and would reject a solution even if their company would benefit (Yes they value personal benefit over their company’s gain).

I have personally seen this in several startups whose founders get the first 5-10 quickly customers due to personal connections and networking. That leads them to believe they can scale and they tend to raise money to hire more sales people in various regions. That’s when unpredictability comes up. The average sales cycle time in India is a misleading number. If you have the relationship, the deal takes 1 month, and if not, anywhere from 3 months to 2 years.

There are 3 solutions to this challenge, each of which comes with its own set of issues:

1. Only focus on a non-diverse set of companies looking to build B2C businesses (consumer facing) and continue with the 3 month program
2. Take in far fewer companies in each batch (say for e.g. 5 companies, not 10) thereby giving more time and energy to fewer companies
3. Tweak the “graduation” rules – companies that hit specific milestones can graduate (at say 7% equity) and others that need more help need to give up more (say 12% equity)

I don’t claim to have the right answer, but copying the YCombinator model to the T, given different market conditions is not going to work for certain set of startups. The US market is a lot more evolved and hence adoption of new innovative solutions tends to be faster, unlike the Indian market.

I believe advisors (mentors) want to be involved with a company because of the following 3 reasons:

1. They believe it will help them professionally (who does not want to brag that they were an advisor to the next Google)
2. They believe it be a financial benefit (it is good to get a return for the time spent)
3. They like the entrepreneurs or /and the idea or the space and want to help (either as a way to give back or to make a difference)

So what does an advisor bring to the table that warrants an entrepreneur to give up their precious stock? Advisors typically add value to a startup in the following 5 ways.

1. They have industry knowledge (domain expertise), startup experience (help you avoid making simple mistakes)
2. They can open doors to potential customers (contracts, connections, introductions, etc.)
3. They can help hire potential recruits or vendors (hiring, consultant connections, vendor connections, etc.)
4. They help introduce you to potential financing connections (for funding, equity or debt)
5. They have gravitas (their association with your company, lends it credibility)

There are a couple of ways I have tried up come up with equity to give advisors in my previous companies.

One is to understand the value they bring – reputation, contacts – hence introductions, customers, follow-on financing, etc. and appropriately provide percentages of stock to them on that value.

Other is to treat them as a consultant (a very highly paid one) and put together the requirements of their time and deliverables, then understand their per hour rate, and finally give them equity that’s somewhat more than what they would get in cash at a big company, in equity, because of the risk.

In both scenarios, you have to account for the stage of the company (idea stage, you give more, growth stage, less).

There are some India specific issues that change the equation for equity to advisors, from the Founder Institute recommendations on TC a few months ago. The recommendations go from 0.25% to 1% at Idea stage to 0.1 to 0.6% at the growth stage. Please review the table on this post.

My personal “rule of thumb” for Indian companies, is to take Founder Institute percentages and bump them by 50%. Here’s why I make that recommendation:

First, there’s a dearth of quality advisors (or mentors) who have “been-there-done-that” (btdt) in India. Either because the ones that have BTDT don’t have time, or are unwilling to share their knowledge. So although the demand for quality advisors is high, the supply is very limited.

Second, exits are not as frequent or ones with very high valuations for Indian companies (purely anecdotal, I don’t have hard data to back this up) compared to those in US.

Third, the requirements of most Indian companies (in terms of time spent) are a lot more than ones abroad. This commitment and the expectation of time spent (or number connections made) is what I have heard most, as the reason many quality advisors are shying away from helping young entrepreneurs.

So, my suggestion is first understand what stage your company is at. Idea stage is obvious, startup stage is typically when you have raised a seed round and have a product, and finally growth stage is when you have significant revenues and have raised a series A (or B).

Then depending on what (all) you want the advisor to do, offer them 18 month or 24 month vesting on the stock at percentages that motivates them to do all it takes to get you to the next level. My recommendation is to give 0.4% to 1.5% at idea stage and 0.2% to 1% at growth stage.

Thanks to Ravi Trivedi for helping me think through this post.

According to Wikipedia:

“The term endorphin rush has been adopted in popular speech to refer to feelings of exhilaration brought on by pain, danger, or other forms of stress”

An adrenaline rush is … one’s body releases dopamine which can act as a natural pain killer.

I am a card carrying member of the productivity p0rn cult. I am always looking for ways to be more productive. I know most of the keyboard shortcuts on applications I use daily. Cut a minute here, a minute there and it all adds up.

To give me a lot more time – to waste.

Thankfully we don’t have a television at home, which was my biggest time waster, but that time is being quickly consumed by Facebook and Twitter. I gave up reading physical print a long while ago, primarily because of the inconvenience of recycling them. But then I found techmeme and hacker news. They now consume 50% more time than pre-1995 when I used to read printed news and paperbacks.

I do like to get a lot of things done. I generally have a list of 1-3 things I want to get done daily, which I work on, early in the day. Post-lunch, when I am more likely to fall asleep, I try to schedule most of my meetings.

I know that doing fun things like reading the 2 millionth post on Steve Jobs does not make me more productive (which I correlate to an adrenaline rush), but I get happy – at which point the Endorphins kick in.

So as an entrepreneur, I am constantly fighting the battle between having moments of fun throughout the day (let’s say 5-10 min every hour) or having lots of fun for an extended period (say 30 min every evening).

For most of my working life as an entrepreneur I have vacillated between the two. I can imagine that at big companies, the bosses want you to be productive so they cut off Internet access or access to things that are fun (I don’t mean that kind of fun, I mean PG13 fun), like facebook.

I realize now that for me (and I suspect most people in technology) periods of intense focus and concentration cannot last many hours. I suspect this is the main reason for the origin of the 1 hour meeting.

So I have followed the method to get small bouts of endorphins (Facebook for 2-3 min every 2 hours) with a good adrenalin rush (getting work done).

This week, though I am trying the alternative, delayed gratification strategy. This equates to 1 hour a day of reading news, blogs, facebook, twitter. My phone is on silent, so I am not disturbed during the day. I am returning phone calls that I missed 3 times a day only and checking email 3 times daily.

While it’s too early to tell (this is day 1) I get a sense that the endorphin rush all day in small bouts is more suited towards my style. I intend to watch this all week and then decide if parts or all of the new approach is better.