Personal

The fallacy of “funding” event as a key media story

10 Comments

Every one of my journalist friends asks me for “exclusive” stories, which I can understand. What I am very upset about is that their next request is for “exclusive funding stories”.

I had a reporter come by to talk today to me about our companies. He mentioned that his opinion was companies that were funded performed better than those that were not.

His primary reasoning was that those companies were  “filtered” by investors and the “due diligence” was done, so they were “better” companies.

There are many times I would disagree but keep quite and move on. This time I did not.

 

<Rant>

This was one of those times when I felt the person was just plain misinformed, misguided and did not really look at any of the facts, but preferred to have anecdotal information color his opinion.

The mountains of evidence that proves his opinion incorrect was insufficient for this reporter  to change his fundamental position.

1) Funded companies have higher % of failures than unfunded companies.

2) Funding does not guarantee success but success guarantees funding.

3) The value that an investor provides towards “due diligence” is limited. If you take a look at venture returns over 90% of funds do not have any success in picking “winners”.

I am the first to admit that its extremely hard to get any kind of funding. Its harder in India, but does that mean companies funded in India are somehow “better” than those that are not funded? At best my argument is they have just about as much chance of success as any of the others.

What does a funding event really tell you about a company?

Its tells me that the company needs money and was able to get it.

Does it tell me that the company will succeed? No? Exhibit A is the eCommerce companies that many investors funded in 2010-11 in India.

Does it tell me that the company is targeting a large market? Possibly, but that’s true of the many other companies that did not get funded, but are chasing the same market.

Does it tell me that this company has potential – it has as much or as little as the others that are not funded.

In fact over 73% of publicly listed companies were not venture backed.

I would consider any reporter downright lazy if they left the “due diligence” only to investors alone, because investors overall (including me as an individual) are more wrong than right.

Why do I make a big issue of this with reporters as opposed to any other person?

1. They are supposed to be objective and fact based as opposed to have their opinions color their judgment.

2. They are supposed to question their assumptions and seek the truth not report fallacies.

3.  They wield an inordinate amount of power given the number of people that read their pieces.

I’d love a counter argument and understand why reporter love “funding stories”.

P.S. I also dont understand why people wont debate their positions. It tells me that they are not confident about any of their hypothesis or positions and would rather be ignorant and prefer to have misinformed opinions.

</Rant>

Entrepreneurship, India

The Indian startup ecosystem should look at Israel as a role model

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I love Israel. Having been there 7-8 times over 5 years when I worked for a company (Mercury Interactive, acquired by HP) that had its development center there, I believe they have some of the best developers, product thinkers and execution oriented folks.

They are also amazing at marketing. They have successfully convinced the world that they are the “startup nation“.

Never mind that they have 1/3 as many product startups as India produces annually and never mind that Indian companies acquire or get acquired twice as much as Israeli companies. Indians also make up 52% of Silicon valley startup founders, whereas Israelis make up less than 8%.

Take a look at those 3 data points and tell me they are not facts. The PWC report is for 2012, so its relatively recent. The # of companies we track in India versus Israel startups in our database is three times as well. The # of companies on Angel list or Crunchbase reveals a similar statistic.

Still its Tel Aviv that creeps up on Silicon Valley as the top startup center. If you read the startup genome report, you’ll be convinced of the same based on their methodology.

What are the arguments I have heard against India being the startup nation?

1. Quantity not quality:  We produce numbers, but not quality. Many of our startups are clones of Silicon Valley companies featured on Tech Crunch 3 months post launch. I looked at the 3 top Israel incubators and found that over 60% of the companies they were helping were clones as well.

2. Exits: We dont have a significant number of $billion or hundreds of million $ exits. I have found that while we do not have those exits, the number of companies listed on the stock market in the US for both Israel and India are comparable.

3. Market access: Israel has excellent knowledge, insights and know-how about US markets. Since Israel itself is a fairly small market, most Israeli entrepreneurs focus on US markets solely, even though they are geographically closer to Europe. Technically the # of people with market knowledge of the US in India far exceeds that of Israel, but they are not in product startups but at large companies.

4. Services mindset & positioning: Thanks to the ginormous success of Indian services companies who helped position India as the “world’s backend” (comparable to China being positioned as the world’s manufacturer) we have been already positioned as low value, low margin, consulting providers.

5. Late start: Even though Israel is 60 years old and India as a nation is a little older, we had a late (2001 or so) start to technology startups. Compared to Israel which had some interesting companies (need references here, what I have heard is mostly anecdotal) in the late 90’s as well.

Why do I still say Indian startups should look at Israel as a role model?

1. They champion their startups very well. They are very well vested in their startups success. They are constantly talking about how good their startups are, how they are possibly better than the valley and why they have the best talent in the world focused on startups.

2. They take significant risky bets. The # of investors in Israel (seed, angel and institutional) is comparable to those in India even though the number of startups is a third.

3. They look out for each other. The community is so well connected with each other that they genuinely look out and help each other. I dont know of any other place that supports their own as much as Israel does.

If you have been to Israel or have lived / worked with Israeli’s please tell me in the comments if there are a few data points I missed.

If you have any good data (not anecdotes, I have enough of those) to counter any of my arguments, feel free to call those out as well.

eCommerce, Entrepreneurship, India

The goodness from the eCommerce bubble in India

18 Comments

Over the next few weeks and over the last few months, many naysayers have been & will be talking about “why the eCommerce bubble is going to  (or has) burst”.

Its true but misses the point.

Yes, over 21 companies that raised over $500K in funding have “merged” or have “been acquired” for paltry sums.

Yes, the model was unsustainable with discounts ranging from 30-70% off list price.

Yes, end consumers made hay while many institutional investors funded their “free shipping”, “COD” and “no questions asked returns policies”.

I am undoubtedly an optimist, so I see many wonderful first generation entrepreneurs that came out of the ordeal alive.

That can only mean one thing – serial entrepreneurs are for the taking.

Assuming some / most of them start companies again.

Some of them have talked to me about how they learned from the experience and how it will shape their new venture. Others are venturing into investing in startups.

The BEST thing that’s happened to Indian startups in the last 5 years is the rise and fall of eCommerce.

Of the 450+ eCommerce companies (of which 75+ raise some money either from VC or seed investors), a full 63% were first time entrepreneurs. (source: Microsoft India startup research).

That’s amazing. Really awesome.

They will live to tell the tale and venture again.

I have one request though:

The next time you meet an entrepreneur who had started an eCommerce venture and moved on, thank them for taking the risk. They did something so its easier for you to convince your family and relatives that starting a company is glorious. Even if it is not a runaway success it teaches you about taking risks, venturing on your own and going down a not-so-well-trodden path.

Side note: The hare and tortoise story though still has a lot of merit.

I personally know 5 companies in eCommerce, growing at 30-50% annually (not monthly as the VC’s wanted 2 years ago) and breaking even. A few companies chose to not raise capital (or truthfully no one would give them capital when they tried to raise it) were forced to focus on profit and sustaining pricing models. They are stronger and better after their experiences.

Funding, India, Other

Reverse Pitch 22nd Mar, Fri in Delhi, where Investors pitch entrepreneurs

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If you are an entrepreneur, you know how difficult it is to keep refining your pitch and answer difficult questions about your market, differentiation, target customer, etc.

Now you get to play jury and judge, in Delhi, to investors both seed and VC.

After 3 successful editions of the Reverse pitch, in Bangalore and other locations, we are now bringing it to the NCR region.

The structure of the event would be 5 minutes demo/pitch by investors and 5 minutes Q&A. The pitch would include Operational Experience, Ticket Size, Sectors, Investment Thesis and Portfolio. The pitch sessions will be followed by networking with investors.
Date: Friday, 22nd March 
Time: 3:00p to 7:00p
Venue: 91springboard, B-1/H-3A, Basement, Mohan Cooperative Industrial Estate, Mathura Road, New Delhi – 110 044, India.
 
Please feel free to reach out to Apurv if you have any questions. You can reach him at (+91) 88006 04703. 

 

Confirmed investors include Saif partners, Lightspeed, Seedfund, Microsoft Accelerator, IAN, Blume, Helion and the Hatch.

Other

I am not going to use Google Keep for other reasons but I agree that yanking products arbitrarily does a lot of harm.

Om Malik's avatarGigaom

Google (s GOOG) today launched Keep, an app that allows you to save things, clip stuff from the web, hoard notes and what not and put them all onto your Google Drive. Yup, you guessed it — it is an imitation to Evernote and many other such applications. It is a good thing that Google has decided to compete with the likes of Evernote — it validates their market.

It might actually be good, or even better than Evernote. But I still won’t use Keep. You know why? Google Reader.

I spent about seven years of my online life on that service. I sent feedback, used it to annotate information and they killed it like a butcher slaughters a chicken. No conversation — dead. The service that drives more traffic than Google+ was sacrificed because it didn’t meet some vague corporate goals; users — many of them life…

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Entrepreneurship, Tips

Why founders split? 3. The shiny new object syndrome

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R, Ra and M were the 3 co-founders of a SaaS company, I met first more than a year ago. R and Ra were related to one another and M had worked at a company that R was a client at. R was the “domain expert” and knew the business problem fairly well, whereas M was more the “tech person”. While M was not a developer per se,  he was most technical of the 3 co-founders.

Ra was the “business development” person whose role it was to talk to customers, get some “partnerships” signed and talk to potential investors. (Side note: I dont understand business development roles in any small company. Either you are a sales person or you are a developer. Everyone else is overhead). In other words a catch-all bucket.

Ra was asked to join by R, who felt that between M and himself, they both did not have enough of a sales background and decided to get someone they could trust to do the role.

Ra himself was previously a new business development executive at a large corporate bank. He had done well at the bank and had made his way to associate vice president in less than 5 years. He had very little knowledge about the space in particular or passion around it. He wanted to do a startup and since he was approached by R to be a co-founder, he was pretty excited about it.

For the first few months, getting potential customers to talk to, with respect to the new product they were building, was not difficult. Most people who R knew were interested and keen to talk and learn about the new product. Ra was involved in all discussions and was trying to get up-to-speed with the intricacies of the market and customer problems.

R was the most passionate of the lot and knew the most about the problems, while M leveraged 2 external outsourced resources to get the initial prototype ready. Things were going well apparently and I met them at the Microsoft accelerator during an event.

4 months later I heard that Ra had left. I did not meet Ra, but R had spoken about him highly, so I was curious why he left.

R said he could not close any new deals and did not “understand the market”.

While I pointed out that R knew about this before since Ra was not a market or domain expert, he evaded the question with “but I expected him to learn quickly”.

When I spoke with M separately he mentioned that Ra never got really passionate about it and there was little effort on Ra’s part to understand the market. While he felt that Ra setup a lot of meetings with other potential customers and investors, none of them really “closed”.

Ra, sent me a LinkedIn request a few weeks ago. In his invite he mentioned he was working in a new project and would like to come and meet me. Over email I quickly asked him why things did not work out. He said that in his perspective the market was clearly not ready for the product and he found that he could find better things for him to do with his time and he “lost interest” because he found a really awesome new idea that he was focusing on.

The final in the series why startup founders split is something I have heard from 2 teams, so I dont necessarily think I have enough data yet to confirm that this is a trend, but its important to document.

Founders usually split because they have different visions for the future of the company or one of them is not executing to the plan.

The shiny new object syndrome occurs when the company does not have enough or sufficient traction and the founders finds something new that they would rather do.

There’s a lot to learn from the story above that talks to more than why they really split, but the bottom line I gathered was Ra was not completely bought in and did not have the passion for the space, so the shiny new object got him more excited than anything with limited traction.

While I think its fair to lose passion for something you dont see too much traction, many a time I have personally seen that you need to spend a lot of time before you really get significant momentum.

Entrepreneurship, Learning

The mystery of success and the articulation of failure

7 Comments

Yesterday a comment was made about why I dont interview successful founding teams instead of focusing on why founding teams split. Actually I did. I spoke at length with Sachin from Flipkart a few weeks ago as I have done several times with Amit Gupta of InMobi and Phani of Redbus and Vivek of Interview street.

Successful people are loathe to describe their success, often talking about “luck” and most often calling themselves “not yet successful”.

Those that failed, however, at anything are often able to point to 1-3 things that they believe were the reasons they did not take off.

I think its relatively easy to assume that 100 things need to go right to be successful, whereas only a few things (or in some cases 1 thing) needs to go right to be a failure.

That directly contradicts my core hypothesis that in any given startup its never one thing that causes failure but a series of things that are not executed well – back to Mark Suster’s comment about lines not dots.

I also think most people analyze failure a lot more since it hurts. That’s a contradiction as well. I  would think most people would not like to think about things that are not “fond memories”. Turns out we remember bad things better because they affect our memory systems more. There’s research that suggests this to be true.

Still that does not explain why people cant articulate success as well as failure. Or am I just asking the wrong questions of the wrong people?

Entrepreneurship, Hiring

Why do founders split? Performance and Execution

5 Comments

Both A & V met at their company cafeteria a few months before they decided to work together and start their venture. A was a front-end developer and V was a SEO and web analytics consultant. They both worked at the large company separately for 3+ years but did not have the chance to work together at all.

They were both in different teams and their paths did not cross very much. While standing in the cafeteria line, they got chatting about a weekend event and found they had several common interests and similar aspirations.

They decided to spend the next few months, talking about various ideas they had, mostly around starting a new venture in the eCommerce space. Neither had much experience in ecommerce, but they figured they would be able to add an operations person later.

4 months after their meetings they chose to build a online platform (one that held no inventory, but sold multiple products) for computer and mobile accessories of all kinds.

A, built the first version with some help from another friend who was the backend expert who offered some time in exchange for coming on board full-time if the venture got funding.

V focused his efforts on talking to suppliers and also helping A on some of the SEO work. Besides setting up their social media profiles, he also spent time taking to courier, payments and logistics partners to setup relationships.

3 months after starting they did a launch with friends and family. Response was good (relatively speaking), with 3 orders in the first day and over 5 in the next week.

I met them when V sent me their plan and asked for a meeting to discuss their seed funding requirements.

Given that I have had a poor track record with eCommerce companies and I dont like investing in them I declined the meeting.

A few months later, I met V at a startup event, when he mentioned that they both had split. He mentioned that the site kept going down and A was a good front-end engineer but not a strong developer overall, he said that they both had decided to shut down their venture.

I have not met A, but did check out his work and website. While I would not call his work legendary, it was not too shabby either.

The second biggest reason why founders split besides having differing vision is they both dont believe the other person is performing or executing as well as they are.

Rarely do they look in the mirror to see their own shortcomings.

There have been 2 other cases where I saw this similar situation. One person is either not executing at all – for various reasons or a deliverable or two is missed and friction sets in.

In one case a founder had a new born child within a month of the venture getting off the ground and had to spend a lot more time at home, which made the co-founder irritated and angry. They split and eventually closed the company.

I was surprised that they did the venture together knowing that one of them was going to have a baby.

When a pattern of execution and delivery on commitments is not set, then friction sets in very easily.

Its very hard to figure out if someone is executing well based on their “resume”. Most resumes are inflated (I am guilty as well) to “sell” and “position” the candidate in the best light. Even if they have worked at a position where its fairly easy to determine if they deliver and execute or not, it is mighty difficult to discern whether they were good because of the system built around them or because their manager extracted the best from them.

The only way to determine that is working together.

What takeaway do I have from this second reason for founder’s splitting?

I prefer to fund teams that have worked together in their new venture for more than 6 months. That’s an arbitrary number no doubt, but I dont have an alternative.

Teams which have worked together before, need to be working together again before I am sure that they know how to work with each other in a new environment without the support system they had before. There are exceptions, but they are rare.

I am hoping again that this is a demand and supply issue that resolves itself in a few years. Right not there are too many opportunities (thanks to Angel List) for good companies with high performance teams that have worked together for a while for me to even consider teams that have relatively younger working histories.

Entrepreneurship, Learning, Personal

Why do founders split? 1. Differing visions

7 Comments

Over the last 4 months, I have heard of or at least 8 companies closing down because of “founder issues”. Overall this number of companies that I have been tracking personally where the company closed was 14. So relatively speaking the number of companies that closed because the founders split is larger than “lack of funding”. The only other reason I have heard have been lack of traction. These are companies in the valley and India BTW.

Why do we have so many companies which close because of founder issues?

I tried calling and talking to many of the founders separately to understand what the issues were and its not clear that there are the same that plague most “marriages”.

Most married couples split because of financial issues, compatibility issues or “cheating”.

With most founders, I cannot point to the 3 main causes yet, since I have limited data, but I can share what happened in some of these cases, based on my understanding of their situation. Sometimes, my understanding was colored by my impression of one of the founders, but I tried to remain objective about the situation.

Differing vision of where to take the company. This was cited by most of the founders.

“We  used to talk about where we wanted to take the product. We had a general direction and were fairly aligned. Then it started with a few features that we had different opinions on. In a matter of weeks we would constantly fight about every feature. The constant fighting drove our team mad and we decided to split”.

“We started with targeting large enterprise customers, since my co-founder had a few relationships there. We found that many had a long time frame to get us on board as a vendor. Then we decided to change our target to mid-sized companies. That changed the vision of our product and some key features, which the developers could not deliver on. I still thought we could focus on larger customers, but my co-founder did not and we decided to split”.

Many times, the vision of the company is considered very sacred by the founders. Which is a good thing. Alignment of vision is hugely important. I can also see how the vision changes at times, since the initial assumptions made, usually change as you go to market and meet customers.

Some founders are flexible about that change and are willing to be patient about finding that vision, whereas others want to stick to a vision they originally came up with.

If you are a solo founder and are looking for a co founder, it is hard to determine flexibility of your co-founder since most people seem reasonable and fairly flexible during the first few months. I tried to formulate a list of questions to ask – largely scenario based, such as what would happen if this were to occur, or how would you react if this happened?

Most times when I asked those questions of people I got fairly good answers which I consider are reasonable.

These questions did not help very much though, since as we talked about before, vision’s change and so do people’s impressions.

When you ask the objective question in a non threatening situation, it is easy to be collected, objective and composed.

That’s rarely the case when product shipments are behind, payroll is delayed and a customer contract is taking longer than anticipated.

What takeaway do I have from this main reason for founder’s splitting?

If you have not worked together for a “significant period” of time, its very difficult to find out if your co-founder is flexible to change.

So what do I now do as a result of this learning?

I prioritize teams where founders have not worked together for a significant period of time, much lower. If you have a co-founder you have met at a hackathon event, or a startup event, and have been working on your company for 4-6 months, then I would likely pass on your company.

Its not because I dont like your idea or product, its because of demand and supply. Right now, I get many more companies where co-founders have worked together for much longer and have recency of shared vision.

In the next post I will talk about another reason why founders split – performance and execution.

Angel investing, Community, Funding

Why do investors use boilerplate emails instead of telling you the plain truth?

6 Comments

Most every day I get 2-3 requests to review companies for investment in the seed stage as an individual investor. Since I keep a fairly open network on both LinkedIn and Twitter, I get many folks sending me an email to review their plans. While I do read all of their emails, and send them a response, only 1 in 10 get me to open their plans.

It tends to be fairly easy to decided not to pursue based on their description of the problem or their background. Although I have put my criteria for investment on my blog, rarely do people read it.

I dont think entrepreneurs have internalized the changed landscape for funding of all types.

I do send a quick email to everyone of the people who I dont intend to invest in with a short 1-2 sentence reason. Either its because I dont like the market, the idea or dont believe it will work.

I used to be brutually honest initially (a few years ago) and have mellowed down over the last year. These days if I say I dont have time, it really is the truth. Its not because I dont like the plan or the entrepreneur or the idea. Its just because I dont have the time to evaluate the company.

The main reason I mellowed down was the feedback I heard from many entrepreneurs who had not developed a thick skin that my response was really disheartening and counter productive.

I read today, Paul Graham’s piece on VC boilerplate that Harj Taggar wrote and was amused initially, but the reality is most entrepreneurs prefer to read emails from investors that have some boiler plate stuff rather than the honest truth. I mention most, not all.

Its hard to find know which entrepreneurs prefer the straight up honest truth versus the ones that prefer to get a pat on the back with some encouragement to keep going.

Practically speaking the email from Harj, has 25 sentences too many. If all the email said was “it’s currently a little early for us to step in here.”, that would suffice. If there was more detail, i.e. the number of users, or too few customers, etc. it might help, but really it rarely does.

Why?

Primarily because you get into a shouting match about why the entrepreneur thinks you should be investing at this stage and why you are not an “angel investor” if you wait longer or that you (as an investor) are very risk averse. See comments on my post earlier on what you should have ready before you approach me to get a sense for that.

I invest in very few deals every year (most likely 2) and so do most VC’s. Like most of us we are all pressed for time. Short email responses with quick no should help, but realistically most entrepreneurs dont like that.

The personal blog of Mukund Mohan