Category Archives: Entrepreneurship

Entrepreneurship, Learning

The pretender and the contender wear the same clothes

8 Comments

In the last year I have talked to over 800 entrepreneurs. About 200+ were discussions over 15 minutes. That roughly equates to about 1/2 my work time. This time was split between listening and learning from them and the rest was spent sharing some “gyaan“. For what it was worth, most of them were very nice to me and politely nodded when I dispensed my 2 minutes of “framework advice”.

What I have learned is that it is very hard to give an answer that’s cogent, well thought out and precise. In an era where there are enough advisors, mentors and other folks giving lots of advice, there’s a cottage industry sprung up around trying to “help” entrepreneurs and “grow” the ecosystem.

Here’s the challenge for us as entrepreneurs. The pretender and the contender both wear the same clothes, speak the same language and likely use the same words. We have to discern who’s who.

So what’s the framework to use to determine who you should listen to and who you should ignore?

There are enough folks suggesting that peer learning is the way to go. After all, what better than someone “like you” who has just been through the same path before. The pros of peer learning are usually – practical advice, “here’s what I did and it worked for me” and knowledge dished out without airs and graces. The cons are lack of context, the inability to give you a framework to think and providing answers to questions that you might never encounter.

There are other folks suggesting that “successful entrepreneurs” should provide you with the right advice. Meaning, folks who have seen relative measure of success and would be likely able to share more refined nuances of their journey. The pros are well thought out arguments, balanced perspective on what works and does not. The cons are that success comes over a long period of time. The things that worked a few years ago are rarely going to work as effectively.

Still others say the best advice is from “failed” entrepreneurs. They can possibly tell you everything you should not do, but not all the things you most likely should do. The pros are that you get to really understand that the rose colored glasses that are worn tend to be tinted anyway. The cons? – What should you do? Opposite of all the things the failed entrepreneur did?

At the end of the day it will become obvious that to have some modicum of success, you will have to blaze your own trail. Else someone who has done the “exact” same thing that you did, will likely “clean up” before him, leaving nothing but crumbs for others to “feast” on.

The only way to know who the pretender is and who the player is to watch them in action.

Which is why I highly recommend that you work with the advisor and mentor for a few weeks or a month before you actually bring them on board. For the first month, if they truly believe in what you are doing, they would offer their time for free, then you can overcompensate them for their work post that effort.

Entrepreneurship

Are Indian entrepreneurs “thin skinned” or misunderstood?

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There are so many great tech entrepreneurs of Indian origin in the valley who have been successful over the last 2 decades. A last count indicated over 40% of all startups in Silicon valley were either started by or had an Indian cofounder.

This has led to several of them (entrepreneurs from the valley) and a few “industry observers” commenting and comparing the startup ecosystem in India to that in the valley. Most are not encouraging. From the outside looking in it is relatively easy to say “There are too many clueless people running incubators” – actual quote from a self-proclaimed Silicon Valley expert, or “Focus on local opportunities, not on global ones” – actual quote from a Tech Crunch article.

In both cases, many entrepreneurs in some closed Facebook groups that I am a part of, were all up in arms about these broad generalizations. The articles themselves were focused on many aspects of entrepreneurship as well in India, and the quote alone, taken out of context would be construed as a “passing mention”. Nonetheless many entrepreneurs took umbrage and the conversations denigrated into an abyss.

Back to my question about Indian entrepreneurs. Are we just thin skinned or misunderstood?

First, our startup ecosystem is fairly nascent. Comparing it to the valley is not doing either location any good. Both investors and entrepreneurs complain about each other constantly in both locations, though. Many investors claim entrepreneurs lack the depth, knowledge of the markets and understanding of what it takes to build a great business. Many entrepreneurs claim investors are risk-averse, predatory and bean counters without the expertise to build a business.

They are both are right, but both are wrong as well.

Market dynamics and conditions in India force both of them to play hands they are dealt with and I think so far we have done well. Comparing a teenager (Indian startup ecosystem) to a mature adult (Silicon Valley) does not make any sense though.

Second, I do believe that we can be more appreciative of each others positions and show a lot more empathy for our investors and founders. I am not suggesting a group therapy session, but knowledge and understanding of the constrained markets India has and the small exits that we generate does not help investors is important. Neither does expectation of Silicon valley type exits or “traction” help entrepreneurs.

Can we all get a little more thick skinned as well? – possibly. For most parts if you read a “self-professed expert”, such as myself or others, claiming to understand the nuances of the ecosystem, which you believe are incorrect, be direct and point it out, with a cogent argument explaining your point of view, instead of vitriolic comment spewing or worse – name calling without context.

Entrepreneurship, Management

How to encourage more amazing people to join #startups – for #investors & #entrepreneurs

9 Comments

In the last 2 weeks I have had to catch up on several shareholder’s agreements that startup founders have sent my way to review.

It is very disappointing to see that most of the Indian founders keep 10% or less towards Employee Stock Option Plans.

There’s no better way to say this. This is silly, very backward in its thinking and has no justification.

I dont buy the argument that employees dont value stock options. They dont understand them and hence they tend to ignore them.

As an investor and startup founder it is your duty to make sure employees understand the value of stock options.

All successful startups will agree that the startups with the best people usually wins. Not always the best product or best technology but the one with the best people.

The best people dont come cheap. They have multiple options – Working at a large company, working for themselves or striking it on their own to build their own startup.

If you want to encourage the best people to consider startups, you not only have to pay well, but also give them enough incentives and “upside” to ensure their success.

I am also very disappointed that investors are not asking this of startup founders. The long term viability of the ecosystem depends on the best folks making good money so they can become entrepreneurs or investors again.

The wealth needs to go around. 2-3 folks in any company making a lot of money while the rest slave away for paltry sums is a recipe for a host of B and C players being early startup employees. None of us want that.

I dont think this is very sustainable.

If you are a startup founder, one of the most important things you need to do is to ensure your employees make a lot of money as well if there is a big upside.

I want to be a big force of this change for the good.

Starting today (as part of Microsoft Ventures and my own personal investments) I pledge I will ensure that every startup (starting in India) has at least 15 if not 20% of the shares kept aside for early employees. I also want to make sure that the shares do get granted to employees. Finally I also will make sure that our portfolio will share the wealth with the employees as well. I understand that means we might have to take a haircut on valuations or even reduce our ownership. So be it.

If any of our co-investors do not agree to our model for equitable employee contribution, we will not do the deal.

Be the change.

Entrepreneurship, Funding

Outcome based ownership – an Accelerator model for the future

9 Comments

While accelerators have helped nearly twice the number of companies grow and start, there are still many questions about the value they provide to a startup. Which is why I see a dramatic change happening in the next few years in the model that accelerators operate in. The change, will be subtle but will have dramatic consequences on their operations.

Startup entrepreneurs are largely used to paying for outcomes – they don’t mind paying (in India they will negotiate a lower rate, but will be open to paying) for customers acquired, revenue produced or key resources hired.

I think the same will happen to accelerators. As entrepreneurs start to question the value of the accelerator, some of the progressive accelerators will start to offer outcome based ownership ratchets. Currently most accelerators get a fixed 6-10% of the company in exchange for $10K – $50K, regardless of outcomes.

The future will see a sliding share of ownership based on outcomes the accelerator generates for the startup.

This will also coincide with the un-bundling of services offered by accelerators. Currently the services include – space, some money, mentorship (advice, guidance, consulting) and network (access to the investor list, partnerships, etc.)

I can see the future when the initial amount of money (which itself will be optional) invested results in a small fixed ownership (say 2% – 3%) and then a 1-2% on closing the financing round which was initiated or supported by the accelerator or 1-2% per customer closed or 0.5% based on the accelerator helping hire a key resource, etc.

In fact many accelerators will offer the initial seed money as an option as opposed to a default.

Startups would then choose whichever services they see value in or those that they seek outcomes for.

Why do I think this will happen?

First, the perception among most entrepreneurs is still that accelerators are for “first time”, “student” or “inexperienced” entrepreneurs. The large exits and even larger companies are being created by entrepreneurs who skip the accelerators and directly go after financing by an angel or venture investor. Accelerators want to ensure those experienced “hot” startups or entrepreneurs also come to the accelerators as their first choice. These experienced entrepreneurs though, dont value all of the services equally, thus the un-bundling.

Second, many entrepreneurs are still not clear on what the value is that is being provided by the “mentorship” or the “network”. While the seed money provided has definite value, it is a very small amount to warrant a 6-10% dilution.

Finally many entrepreneurs still dont believe accelerator interests are aligned a 100% with theirs. Although most entrepreneurs know that the success of their startup is largely due to their own efforts, they should expect to see tangible value from the accelerator to help put them on the right track towards success.

Do you know of any accelerators that are aligning their interests to the entrepreneur’s outcomes? Any progressive accelerators that are trying this model?

Angel investing, Entrepreneurship, India

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

10 Comments

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).

Entrepreneurship, India

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

17 Comments

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.”
Entrepreneurship, Funding, India

Which universities produce the most #startups in #India?

32 Comments

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.

Entrepreneurship

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

32 Comments

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.

 

Entrepreneurship, Funding, Learning, Personal, Research

The age of “speed gauging”: how entrepreneurs are changing cognitive decision making

4 Comments

I have been on a long road trip to meet investors and entrepreneurs abroad including, Sri Lanka, the US and Switzerland (besides many in India) over the last month. The schedule does not get any better for the next few weeks, so I am very disappointed that I am not able to write as much as I would like, but nonetheless, this is an important point that’s been brewing in my mind for the last few weeks.

Entrepreneurs the world over are changing one very important aspect of decision making – the pace and speed of it.

I spoke to over 135 investors in 15 min to 1 hour conversations (some in a group of 5-8 over dinner) over the last month to figure out that investors the world over are now under immense pressure to make decisions quickly. That was not the case a few years ago.

(P.S. I did read the PG piece on startup trends, so if he’s asking investors to move even more quickly than they are, he’s asking for a LOT, which I suspect most individuals are not ready to sign up for).

A few years ago a typical angel investor (individual, investing their own money) took 1-3 meetings and a month to make a decision to invest in a company. A venture capital investor (professional, investing other people’s money) would take longer, 3-5 meetings and at least 2 months. Then the legal paperwork and negotiations began post the “verbal commitment”.

Now it is not unusual to hear investors in the US taking 1 meeting and 60 minutes to give a verbal commitment and 15 days to funding. In India, that number is changing to 3 meetings and 45 days to funding.

Most investors have 3-5 top criteria and a subset of 5-7 sub criteria for every opportunity they evaluate. The criteria is usually entrepreneur, market, product, traction, exit potential etc. The sub criteria for market, as an example might be a) Size b) Speed of adoption c) Competitive landscape d) Pace of change in that market etc.

I am very intrigued by the sub criteria for entrepreneurs. Since I operate at the very earliest of early stages, putting money or resources when there’s just an idea, with very little or no traction, it becomes absolutely important to make sure you back the right folks.

Since I am on the plane a lot and have a new kindle I get to read a lot as well. I have been reading these books and research pieces to understand how to be a better judge of people when time is limited and the stakes are high.

a. How to read a person like a book

b. Cognitive decision making – a mathematical model

c. Thinking fast and slow

I have built a 21 criteria list for evaluating people quickly (well, quickly compared to the fact that I was not doing it at all before) and I am trying to figure out over the next year, which criteria matter and which ones dont.

Before you think this is too many criteria, let me tell you that most sophisticated investors have mentioned to me that they use between 35 and 50 verifiable and “soft” criteria” and keep tweaking their top 5. Some of these criteria can be a simple yes or no and others require you to ask specific questions. The most cultured investors, who bet lots of money have a cognitive sense of evaluating every word spoken by the entrepreneur and putting them into buckets while evaluating if the criteria they are looking for are met or not.

I am not ready to reveal the criteria since people will game the system, but I am now able to process those better. My evaluation takes now about 20-30 minutes to process each individual after I have a chance to meet them for 30 minutes. Usually I do this when I have some downtime – during commute, running, etc.

The most amazing revelation to me personally has been that nearly 30-40% of my “gut instinct” on people dont match my criteria. I used to pride my people selection based on gut feel a lot more before. Let me give you an example.

I met a really smart entrepreneur in Sri Lanka. who had thoughtful answers to nearly 7-8 very difficult questions that I had, and was articulate, concise and honest. When I went back to my evaluation checklist (which I have documented on my phone), I found that I had overlooked a few important questions and decided to talk to him the next day to ask him more questions. He stumbled on them all. Then I realized he had been asked by many folks the same 7-8 questions that I asked before, so he answered them with aplomb, but questions which he had not encountered before flustered him immensely. I dont have a problem with people not having answers to questions, but he seemed genuinely confused.

I think this field of rapid cognitive evaluation is going to see a lot more research and work being done.

Personal, Research, Tips

Startup idea: Product attribute database

5 Comments

There are over a million online retailers in the US alone and over 2.5 Million worldwide. Many are in categories that are large and well defined (apparel, electronics, books, etc). If you are a online buyer one of the many things you want to do is to research a product well – understand the features, options and compare it to other similar products.

These are defined by what I call product attributes.

Comparisons & reviews are largely subjective and prone to long tirades and endless sentences without getting to the point. Here’s an example. Notice that current attributes that are already stored by Yelp include time the restaurant is open, expected attire, etc.

Those are some of the things I’d like to know.

A large number of things I’d like to know are not really comparable.

They are mentioned in the 88 reviews provided by end users. Taste of the food, visual appeal of the food, softness of the bread.

Reviews that are unstructured are a pain – to sort, filter, compare and review.

There are many who claim that the product attributes for products such as cameras and mobile phones are fairly complete and those are problems already solved.

I think that’s broken thinking.

If you look at how people search for cameras, many (not all) “lay people” dont search for HD pixel density, dual core Snapdragon processors etc.

They search for “how to take good pictures in the dark with your <favorite phone>” or “how to record a live band in <favorite phone> without the background noise”.

The attributes that customers want are those they use the product for. Unlike the specifications and features that manufacturers (or producers / service providers) build them with.

I think if you build a product to classify the attributes that matter for every product (start small and build by category) with a combination of technology and crowd sourcing (or any other mechanism), you will build a valuable company. 

Not to mention that its highly likely that Google, Yelp, Microsoft or others will buy you.