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

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.

How can we change the format and structure of #startup events in #India

I had a chance to see the agenda for 6 startup events that are taking place over the next 2 months. NASSCOM Product conclave, TIE Con Delhi, TechCrunch India and 3 other media events by local folks.

As part of our work at the accelerator we also track the top 137 key “startup speakers” in India. Just so we know who the most frequent, popular and the most sought after speakers are.

Here’s the headline. The same 35 – 40 folks are speaking at all these events. Its almost as if we have run out of ideas in terms of speakers. There are possibly 2-3 reasons for this I think. One, event organizers feel if they get a top name speaker, then the attendees have a reason to come. Two, they probably do not want to “upset” the important folks so we end up having panels of 5-6 people on a 30 min slot and by the time we finish intros and a 2 min spiel by each panelist, we are done. Third, we really dont have too many articulate, insightful speakers so they same names come up all the time.

The second part of the problem is the format and structure of the event. There is a “same-ness” to every one of these – panels, reverse pitches, fireside chats. Throw in 10 “startup pitches” a-la American Idol and you have a $100K profit event.

Most of these events are fairly formulaic, now it seems. Throw in a few ecosystem partners, you will be guaranteed about 300-500 attendees and most likely this event is churning at the low end $50K to $100K or more if the event is larger.

While many event organizers will tell you this is what folks are asking for and signing up for, they are also looking for fresh ideas on how to change the format.

I think the number of events is going to increase not decrease in India because most folks running these events are making good money. While I used to think that 50% of the folks attending these events are the same that appear in each event, I have been told otherwise. Many of the folks (over 50%) are putting their toe into entrepreneurship and looking at ways to network with prime movers who are those 30+ speakers I mentioned above.

I would love to get some ideas on both topics and formats that you think we should experiment on.

P.S. I am as guilty as the others in helping program manage some of these events or help put the structure together for these, so I am as much a part of the problem. Which is why seeking help possibly redeems me.

Is the bias against women in technology subliminal as well?

I know I’ll get into trouble for writing this, but I dont know any other way than to write what I think. Sometimes I have thoughts that I feel bad about. This is one of those. I am hoping that writing this will help me remember and correct my bias. Although I dont think I have a bias, I think I am trying to be politically correct in speech but my own thoughts need better refinement.

I have always considered women and men alike when it comes to technology of all sorts. There may be fewer women in tech, but most all of the women I have worked with (I have had 3 women managers as well) were as good as the men I worked with.

So before I got into my bias (or perceived bias) I have to say I am a big fan of Marissa Mayer.

This morning I read Marissa Mayer’s Tumblr post on their new logo. I read it in its entirety and was pretty thrilled with its content, and she did a great job on the storytelling. After I read it though, I wondered if the CEO of a large company like Yahoo should have spent so much of her time on the logo. My first reaction after that was, imagine if she spent that time in front of customers convincing them to spend more on Yahoo ads. Or with the product team on a new feature.

Then I remembered later in the day reading Vic Gundotra’s blog post on Steve Job’s icon ambulance a few years ago. I remember being very impressed with the line

CEOs should care about details. Even shades of yellow. On a Sunday.

Then I wondered if I was as biased as everyone else.

Is it that she’s a woman, so I trivialized her obsession on the Logo and font? Versus Steve Jobs obsession of almost the same thing?

I dont know. I hate to think the answer is yes.

I felt awful for quite a bit thinking about this. I thought it was better to write this down than fight the daemons in my head.

Its okay for you to judge, but I would say that I have never felt that I have the bias ever.

How to be affectionate – From a shining example of one

My mom passed away last Friday. She was 65. She suffered from a Subarachnoid Hemorrhage caused by the rupture of an aneurysm in her brain. She was an amazing woman – and I am not just saying that because she was my mom. From reading the many messages that were sent to me and my sister over the weekend the one word that comes to mind about my mom consistently is, affection. She was the most affectionate person I have ever known – and to everyone she met, interacted with or had a chance to talk to.

She was born in a small town near Srirangam, and was one of 5 siblings. The only daughter to my grandparents, she was a twin. She has a younger brother as well, and the older brothers doted on her. There was nothing my mom wanted that she did not get from her family. Her dad was a functionary executive at a local temple, a very well read, endearing and disciplined man. My granddad would claim that my mom was the most-loved person in all of Trichy.

Most people make fun of me when they mention someone by name and I immediately find a connection with them – they are a friend of a friend, or a distant relative, or a college buddy or another remote connection – that’s my mom in me. She’d always have a connection.

Even if you have not heard of the term “people person”, before – close your eyes for a few minutes and think about what images come to mind, when you hear that word. You may have never met my mom, but most of the qualities & images that you associate with that word when your eyes were closed, would define mom. She was the original “people person”.

My parents were married in Trichy in the early 70’s. Dad was an urban city “Bombay” type and mom was from a traditional village. They moved to Bombay soon after the wedding and it took my mom several years to adjust to the hectic pace of the large city. She craved always to know everyone and took great pains to connect with as many people as she could even in the large city of Bombay.

There are 3 things that defined my mom – her immense belief in god and the power of prayer, her generosity and her love for music.

She would manifest her affection towards all people she met by one or all of these ways.

It would never take her too long to make you feel comfortable – many of my friends know her as a very welcoming, always supportive and easy to humor mom. I know many a time when we’d come home late at night after pretending to be “studying” together, when she’d wake up and make a full 3-5 course meal for all of us – from scratch – in less than the time it took us to wash ourselves!

One day a friend had come over to study with me at home. His parents were going through a rough patch and we had our exams in a few days. He went to to same school and grade as I did though, my mom had never met him or his parents. That did not matter though. The next few days he was told to concentrate on studying, while he was clothed, fed and sheltered from goings-on at his home, by my mom. She did not judge him or his parents, nor did she question. She just helped him get on his feet.

Prayer was one of the other ways that she showed you that she loved you and cared for you. I know a few of my cousins who believed her prayer was more powerful than any of the people they knew. I know of many other folks have mentioned that if she prayed, god would make it happen. After all, she prayed so much and so often and asked so little for herself, that god would keep all his reserve credits towards anything she asked for. I remember she would even pray for people she never knew. Simply because she that felt good things happened when you prayed.

Her generosity was another thing she was known for. Her generosity was selfless, all-encompassing and action-oriented. One of her core tenets was “paying it forward”. This was even before paying it forward was a meme.

I remember in 1987 a relative was suffering from immense pain, and mom traveled 8-9 hours by bus to take us to go and see them. All through the journey or the next few days, mom never mentioned to us that she was in severe pain her self, suffering through a very bad back. The only way we got to know about it was her favorite pain-killer – a heat rub, called Tiger balm, was finished by the time we got to the relative’s home. She’d  always think of you and do good for you. That, she herself, was in pain or need was largely ignored. The next 2 days she spent, in the kitchen, at our relatives home, cooking for her family, cleaning and helping out in many ways to ensure that she was able to rest through her pain, while my mom silently suffered through hers. She claimed that she was not in any pain, since she was serving others and their thanks were helping alleviate her pain.

She had no limits or bounds to her generosity either. From our help at home, to her relatives, to my own friends, my sisters or my dad’s friends, her generosity was all-encompassing. My dad would travel quite a bit during the 80’s and largely to Europe or the US. When he’d return, he would bring back loads of chocolates, clothes and stationary that in the 80’s, was largely not available in India very easily. My mom would first take about 40% – 50% of the stuff away and keep it aside for our help at home, relatives, her friends, friends-of-friends, an old lady, who lived next door to the neighbor of a friend, who she met 2 days ago. Then she would advice us to share the rest with our friends and folks that came home.

I remember distinctly a time when my dad bought her a very nice sari, which he wanted her to have. A relative came home that afternoon and loved that particular sari a lot. My mom gave it to her without any hesitation. When my dad came home that evening and asked her why she did that, she said, “I think she would look nicer in that sari”. Yes, she was that selfless.

Most every time she asked us for any money, it was because she wanted to give it to someone else. Another of her core tenets was “The more you give, the more you will get”. I dont think any of us comprehended it at that time, but looking back, we have been immensely blessed with simply because my mom gave away a lot.

Her generosity was also very action-oriented – not in words alone. She would do things – cook and feed you, pray for you or give you stuff to ameliorate your suffering. When she used her words, you would recognize her sincerity and motherly instinct immediately. Her way to show that she cared was to remove one of the things that was bothering you and do it herself, without either your help or direction.

Besides prayer and cooking, one of her life’s biggest passions was music. I remember my aunts and uncles telling me that she was a very accomplished singer and a person with a very sweet voice.  You did not need to ask her twice to sing – another thing I got from her (minus the sweet voice). She tried her best to get my sister and I into Carnatic classical music, but I guess that gene we picked up from my dad. Were were interested and eager, but were not blessed with the same innate music sense my mom was. She would travel wide and far to hear young artists, encourage them, buy season passes to their concerts, attend a few and then give the rest away.

You may have never met my mom, but in many ways you know her, because I suspect everything I have told you about my mom is like your mother as well. She was the most amazing living embodiment of mom that god ever created. I suspect your mom is the same. So, talk to her. That was the only thing she’d ask me for. “Call me”, she’d say. This text message, facebook stuff is not enough. I have to hear your voice. I can tell if you are in pain or you are happy just by listening to your voice over the phone she’d say.

So, to honor my mom I thought I’d help you – over the next couple of days I am going to write a blog post on a list of 101 things to talk to your mom about. Just stuff that I wished I talked to her more about. If you have a suggestion or two, drop me a note. More than anything, talk to your mom. Your mom would be happy you called (regardless of time or day) and so would my mom.

P.S. I know many of you tried calling me, emailing me or text messaging me. I thank you for it. I dont know how to deal with losing my mom – so I dont want to talk to you over the phone. I dont feel it is cathartic. That’ my way of dealing with it. So, if you want to know what happened, please read my blog post. If there’s a story of my mom you remember, please drop me a note. I may not reply, because I’d probably cry some more when I read it.

The Market cap, revenue & profit correlations of top technology companies

Fortune has a post on the “market cap” problem for Steve Ballmer. During the period from Jan 7th 2000 to Aug 23rd 2013 here is the change in market capitalization of the top technology companies.

1. Apple – 1836.30%

2. Amazon – 222.22%

3. Google – 703.44%

4. IBM – 70.7%

Those are the winners. Now for the ones that lost in market cap.

1. Cisco – (54.13%)

2. Intel – (46%)

3. ORCL (70.21%) and

Microsoft itself is (40.46%).

That only tells you half the story.

Lets look at revenues:

1. Apple – 1861.3% increase

2. Amazon – 12118% increase

3. Google – 55389% increase

4. IBM – 18.2% increase

5. Cisco – 143.3% increase

6. Intel – 58.1% increase

7. Oracle – 266.4% increase

8. Microsoft – 222.9% increase

Here is the table.

 Profit Growth % 2000 – 2013 2000 Revenue 20013 Revenue Revenue Growth % Stock price %
Apple  3046% 7.98 B 156.51 B 1861.3 1836.30%
Google  736000% 19 m 55.39 B 55389.0 703.44%
Amazon  2948% 573.89 m 61.09 B 12118.0 222.22%
IBM  46% 88.4 B 104.5 B 18.2 70.70%
Microsoft  (45%) 22.9 73.73 B 221.9 -40.46%
Intel  284% 33.73 B 53.34 B 58.1 -46%
Cisco  73% 18.93 B 46.06 B 143.3 -54.14%
Oracle  (4%) 10.13 B 37.12 B 266.4 -70.21%

What’s the story? The revenue increase for Apple has been excellently rewarded, Google and Amazon have also been well rewarded but they have done better and been rewarded less. No clue on why IBM stock has done well despite the lower growth in revenues compared to everyone else.

On generosity, selflessness and bias towards action

I dont quite know how to separate my public, business and private life. I treat all of the people I know as friends. I got that from my mom. She is the most privately public person I know.

On Tuesday, she had a pounding headache at 812 pm and was taken to the ER at a hospital near home. My mom does have a history (recent) of both high blood pressure and diabetes. This, though seemed serious.

Since I got many calls (apologies, I ignored them all) and text messages asking for more information, I thought I’d outline what happened, whats the status and what’s possibly next.

My mom had and aneurysm on one of the vessels carrying blood to the brain. Medical experts mention that many people do have the same, and it does not cause immense damage to most people. The aneurysm was 2.7 mm in size and it spewed blood all over the brain. Since it was the main vessel that was carrying blood to the brain, the spread of the blood was extensive. Combined with the fact that she had very high blood pressure at that time (nearly two times the normal) and that she was taking blood thinners, the spread of the blood was fast and vast.

She went into a coma almost immediately and did not respond. A CT scan done at a little before midnight revealed the extent of the damage and the doctor’s at that time gave her a 10% chance of surviving. What they did say was that the next 48 hours were crucial.

She was transferred to an neuro-ICU later in that night. The blood pressure was an exceedingly high 180/120 and things were not looking very good.

Early Thursday, things did not get much better. The doctors mentioned that surgery to block the aneurysm was out of the question since she was not responding to sensory moves. In the scale of responses she was an M1 or M2 (very low on the scale of response to external stimuli except involuntary). In clinical terms she was a 5 (most critical). She remained in coma, responding to nothing at all.

After a routine check in the afternoon it became clear that unless her condition improved – which would be calibrated by normal vitals (blood pressure in safe range, pulse normal and breathing normal) the neurosurgeon would not risk any attempt to either a) do surgery to block the aneurysm or b) do any surgery to remove the blood from the brain. The former was extremely risky and had very little chance of doing any good, and the latter was going to cause more pressure in the brain since the blood in the brain was extensive.

The doctor equated the brain to a pressure cooker, which if was let to relieve pressure from one side, would have the opposite side compensate by putting more pressure to create a “balance”.

That was possibly the lowest point – 2 pm on Thursday. The vitals were not stable, the prognosis was bleak and the outlook desolate. She remained in a state of coma.

A slight positive turn of events occurred when my ever optimistic sister spoke to her at the ICU and saw a few responses – attempt to pick her hand up, move her body. These were largely calibrated as “involuntary by the doctor”. The vitals stabilized during this point as well.

If you know my mother, you would know that the number of lives she positively touched with her generosity and selflessness was amazing. Prayers from all over were pouring in. Turns out, it worked ever so slightly. She was still coma, the situation was still extremely critical, but she stabilized.

Late Thursday night, things got even more “normal” – enough to have the critical nature of the situation to remain at 5, but the sensory perception moved up ever so slightly to nearly M3.

Early Friday things improve a little more (she was and is still in coma) but she was responding to our voice and attempting to hear / understand and respond.

The doctors now deemed the situation sufficient enough to warrant a surgery to prevent the aneurysm from rupturing again. This does not necessarily improve the condition but prevents another rupture from happening.

There were 3 possible options – Surgical clipping, Coiling or using a stent. These options are largely determined by a combination of the patient’s state, the size and location of the aneurysm and cost of the operation.

Surgical clipping, puts a metal (high end metal) to clip the aneurysm at the base preventing further rupture. This is an option only if the patient was normal – which my mom was not and hence, ruled out.

Using a coil was deemed the best option to prevent any further bleeding, which if it occurred would cause a further and irreparable damage to the brain.

The surgery, however, would not necessarily make the chances of her recovery better. It was to prevent a further deterioration of the aneurysm which could rupture again. Since my mom was deemed relatively young at <70 years of age, there was a good chance of her responding well to the coil. Given that all other functions were “normal” we remain positive, but we realize the chances are rather slim.

The key part of this equation still remains her own ability to fight through this trauma and get herself back on a track for the rest of the medicine to work. She draws positive energy I am sure from all the prayers and positive thoughts from you all.

Update on Friday at 5 pm – the surgery (2 coils were inserted) was completed successfully and she remains stable.

Why it is awesome to start a company when there’s a downturn

Over the last few days a slew of bad news on the economic front (falling currency, stock market tumbles) has had many entrepreneurs and folks in the press ask me if they should put off their entrepreneurial venture to a later year.

My own experience is summed up by an attitude I developed many years ago “Everywhere I go, I always take the weather with me”.

The best entrepreneurs dont care what happens around them. They are acutely aware, keenly observant, but largely undeterred and unconcerned – about the economy, macro conditions and price of fuel.

There are 3 great things about downturn.

1. There are far fewer companies starting, because the fence-sitters develop cold feet. So the “competition” is much less.

2. Since there are far fewer companies starting, the fight for both talent and funding is less so. I hired the best folks in 2001 and again in 2008 (when the sub prime crisis hit).

3. Everyone who is a service provider from lawyers and accountants to landlords and the telecom provider is willing to cut you a good deal.

As Nike says – Just do it.

Outcome based ownership – an Accelerator model for the future

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?

How to apply MapReduce() to your #startup #funding process

MapReduce comprises of 2 parts – Map() –  filtering and sorting and Reduce () performs a summary operation. The “MapReduce System” orchestrates by marshalling the distributed servers, running the various tasks in parallel. This speeds up the entire process dramatically.

I met with a startup founder who made the rookie mistake of “talking” to 3 angel investors, focusing his discussion on only 1 person, who was going to lead. He then realized after 6 months that the lead investor was in, but others had gone sideways and were not going to invest. He did not spend enough time with the other investors, assuming that the lead investor would corral them.

You will need a lead investor for your angel round. As the founder you will have to recruit, manage and keep the lead investor engaged. There are other investors who may not lead, but are going to be a part of that round.

Your first priority is to identify the lead. Then you have to soft circle and get the rest of the folks to pony up commitments.

Most founders talk to investors who are not leading in serial fashion, going after then one at a time. I would suggest you MapReduce the process.

I know that many folks recommend you have one person in your team responsible for fundraising. I would suggest you filter your investors and assign one person in your team -Map() – to keep other investors “in the loop” – emails, scheduled phone calls or in person briefings.

You (the person responsible to raise the round from investors) should be responsible for the collation and summary – Reduce ().

This reduces risk of waiting for 6 months to finally figure out that you need other co investors and also “involves” your co founders in your company to help with fund raising.

If you go about it in a serial fashion, (i.e. one investor at a time), the elapsed time to get investment done increases dramatically but your risk of closing the round is still the same.

What do you think? Anyone tried this yet?

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

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).

The personal blog of Mukund Mohan