Community

How to lose friends and anger people: Learn from my experience

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I am prone to opening my mouth and putting my foot in it. I did it a few days ago with a reporter from Reuters who was covering The Startup Village in Kochi. Not particularly sure of what the background was regarding the Startup Village, its goal or its focus, I went ahead to trash it even without understanding.

It was a) unprofessional b) stupid of me to do it and c) an uninformed opinion of an ignorant person.

What the Startup Village is trying to do is admirable. They are trying to change the face of entrepreneurship in Kerala. They have been able to do what most cities and states around the world would love to do. Get engagement from the political system to support startup entrepreneurship.

And I rained on their parade. I am so embarrassed to even link to the article.

I got a call this morning from Sony Joy who I have known for years. He was so nice, that his first question was “Were you misquoted”?

Sadly I was not. I cannot blame the media or the reporter.

I cant even say I was having a brain seizure.

I was just plain dumb.

So I have to own up and apologize.

Sorry guys. As I promised, I will be in Cochin soon to learn more about the Startup Village and do my part to ensure you guys are successful.

Angel investing, Funding

The rise of the “sapling round” in technology startups

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I was in the valley last week meeting with over 23 investors (primarily seed and series A stage). From Andreessen-Horowitz and Accel to Sigma ventures and True ventures, we had a chance to talk to partners who are looking at over 2000+ deals every year to invest in less than 10 (in the case of older funds) to over 50 (in the case of a16z).

While there’s lots of talk in the valley about the series A crunch and its impact on startups, I wanted to bring to attention a new (to me at least) trend that is consistent among all valley technology startups.

It is the rise of the “sapling round” of funding.

The sapling round is when a company raises between $250K to $2.5 Million, syndicated among  5-15 investors, and is largely (over 75% in the valley) a convertible round.

It is a round that is raised between the seed and the series A round.

The reason why this round is becoming more prevalent is a combination of the rise of startup incubators and accelerators and the constant “raising of the bar” among series A venture investors.

Typically the incubator puts in the first “seed” round of about $25K and provides access to another (in some cases) a $75K through its partners. In case the startup does not go through an incubator, they raise a seed round from angel list or friends and family to the tune of about $250K or less.

Then the startup goes through a 3-4 month program and before or at their demo day looks to raise another $250K to $1.5 Million in a convertible note.

Why?

1. Series A investors have raised their bar for what constitutes their round. All of the investors I spoke with would put $2M to $5M in the series A.

Sean of Emergence Capital, whose firm focuses only on SaaS companies, said he has seen in the last 11 months little over 150+ companies in SaaS with over $1 Million in revenue and they have only funded 2. Another early stage consumer Internet VC mentioned they looked at over 50+ companies with between 2.5 Million to 10 Million active users (not yet making revenue) and invested in none yet. One of the larger firms that does Cloud infrastructure investments and Big data only has seen over 20+ companies with a complete management team, over 20+ paying customers and great market traction to invest in 1.

2. Companies are realizing that “traction” alone is insufficient (in most cases) to get money from the series A investor. While product + traction will still get you a seed round, the later stage investors are looking for revenue and growth in revenue as the primary metric. There are exceptions, but they are rare.

3. Startups are realizing that its taking 12-18+ months to get to that series A, so they are raising more convertible rounds and bridge rounds until they hit those series A milestones. Even in the valley getting to $1+ Million in revenue in less than 18 months for a product startup is rare.

What does this mean for startup entrepreneurs?

1. Most entrepreneurs are in “forever raising” mode until their series A. One even called it “passively always raising” or PAR for the course. They are looking to gain one investor at a time, in chunks of $25K or looking for micro VC or super angels to put in $100K+

2. The teams are lean for longer. According to Ali at Azure Capital, most of them were at 5-10 employees shacking out of a co-working space even at $1Million in revenue.

3. There’s a big push towards breaking even with the sapling round funding, so there’s a constant battle in the entrepreneur’s mind between growth and profitability. One is considered a “safer option”, while another (growth) is what the sapling investors and series A are looking for.

What trends do I see going forward in 2013?

1. The rise of the “priced” sapling round. While most seed round are priced (6%-10% for $25K from the accelerator), and series A rounds are priced as well, the sapling investors are stuck in the middle with a convertible note. That’s definitely going to change next year as they also try to maximize their earnings.

This has major implications on startup funding. If the sapling round does get priced, then it is officially, series A. Which means the current series A investors will become series B. This is consistent with the theme that its taking less money to get to start a company and even less money to get to $1 Million in revenue, than before, so seed rounds and series A rounds will be smaller than they were 3-5 years ago.

2. Early stage VC’s will continue to raise the bar higher, forcing most startups to go for the safer option (breaking even faster, profitability) in 2013, which will lead to the “lifestyle” business discussion popping up, all over again.

3. Many convertibles will convert, without a series A, as sapling investors will try hard to look for buyers of their portfolio company among mid-sized companies in their attempt to get an exit.

P.S. The term “sapling round” was coined by one of the founders in the accelerator, Bhaskar who was at our lunch discussion yesterday when we were reviewing the implications of this trend on our startups.

Angel investing, Entrepreneurship

Indian Accelerators are from Mars and startups are from Venus

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Yesterday I was at the AngelPad demo day, invited by my friend Thomas. 12 companies presented their products & traction in a breezy 3 to 3.5 minutes per startup. Overall, super high quality of presentations and a great set of companies.

Some initial impressions.

1. Each had 12-15 slides, crisp transitions and a really good flow to their presentations. Most 90%+ teams were 2 founders, but only 1 person presented when another was standing at the front with the co founder.

2. No live demos, and the pitches had a consistent flow to them. A one sentence “what we do”, a good description of the problem and some market stats, sizing. Some even had screen shots of their product.

3. It was a packed house and I had a chance to meet (and reconnect with) over 60+ investors. Most of the investors were impressed with the presentations and also with some of the ideas themselves.

I also had a chance to meet with 9 of the 12 founders. They had really excellent follow-through and I got 7 emails this morning to schedule time for follow ups to discuss their fundraising.

I also got to ask them what they really liked about the program, the schedule and the help Angelpad provided.

Many stated Thomas’s personal involvement and his passion to help companies first. They were so happy to have his time and guidance, that they had felt privileged to have him as their mentor.

A few of them mentioned the location and some of the other mentors as the second best thing in the program, followed by the group of other startups that were in the same batch as them. They felt they were truly motivated by the other teams and a sense of camaraderie was obvious.

As part of the Microsoft accelerator we have reached out to 28 accelerators in India over the last few weeks to get everyone together for a day of best practices and sharing. The event itself is a closed door, 1 day session at Bangalore, and over 20 of them have committed to being here. Our intention was to understand how other accelerators viewed success so we can help figure out our engagement with them and startups overall.

We get many questions about our accelerator and the top one is why we don’t give startups money.

In speaking to entrepreneurs, investors and other accelerators in the US, the TOP item they felt startups need is mentorship and advice to get many things right.

In my small sample of Angelpad startups they seeme to value the same thing.

In India, most (not all) startups only value money. Its a small amount really, ($10 – $25K), but somehow that small amount seems to indicate a sense of “skin in the game”.

I can totally understand that, but for an accelerator such as ours, that small amount does not really make us committed to the startups any more than without the money.

Second, the angel networks and investors in our mentor program don’t like the fact that Microsoft puts money in at the early stage, which creates a perverse incentive for us to “get a return from our investment”.

Third it creates an issue for other strategic investors (such as Qualcomm, which has looked at one of our companies for an investment) and venture investors, who prefer clean capitalization tables.

Unlike other accelerators which are not a corporate program, the key value to Microsoft from our program is startup engagement. We take pride in engaging with the startups and are extremely happy if they are successful, but the financial return from our investment is going to be largely negligible to us. Even if 1 of the 11 startups “makes it big” and we owned 6-10% of the company when it went IPO or got acquired, it would not be a significant dent to Microsoft by any means.

I understand why most Indian startups don’t value mentorship, the space, free food, customer traction, marketing planning, PR with blogs & press, full time design help and credits on technology platform.

I have learned from Angelpad that our primary motivation should be to ensure the next batch of companies value those things more than an investment of $10K to $20K.

I understand the bar is much higher to provide mentorship to the same level as Thomas, but that’s the goal we are aiming for.

Entrepreneurship, Tips

The right time to launch your product

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In my 14 years of developing and launching products, I have launched early, late and at “just the right time”. Truth is there is no “right time” if you have been working with customers and getting feedback. At that point the launch event tends to be largely a PR & AR (Press, Analysts & Bloggers) communication and outreach effort to create awareness, feel good about the traffic over the next few hours and get back to work.

Thanks to accelerators and the 3-4 month programs, almost every startup “launches” during demo day. To investors at least.

Since they want to launch “to investors” with some good momentum and traction, most startups are doing a soft launch or private beta a few weeks / months before and getting users and customers and some form of usage so they can show that traction to the investors.

I got a question about when to launch yesterday from an entrepreneur in Seattle. He’s been working on a consumer travel app and they have about 200+ active users that have been using the solution for the last 3 months. The beta criteria they kept for themselves (besides removing all the bugs) was active usage once a week by at least 10% of their registered users.

I ended up having a conversation of the pros and cons of launching early versus late. While I am fan of the “launch early and often” approach, I am also very aware of the problems of launching early, especially in a mature market such as the US. It tips of potential competitors who have a chance to be an better fast follower, that executes better given the lessons they can learn from the first mover.

Launch late and you will invariably get lots of people comparing you to the first mover and asking for features (right or wrong) that are already available with the competitor, making your ever so slight difference in the product strategy seem like an afterthought.

The easiest part of the conversation was my experience stated that the “Launch for investors” was the worst thing to do. Even if that’s your goal – to raise awareness so you can raise money, launching to the public the same day you do your demo day makes no sense, unless your product is aimed at investors.

Lets define launch of your company & product as the time you believe the product you are building is ready to be showcased so more people can be made aware of it. Its the equivalent of putting up the “Ready for business” sign outside your new restaurant.

Lets define purpose of the launch to be solely to focus on growing your users, customers and usage. Not to get feedback and tweak your beta product (which you should have done earlier), but to attract more potential users to your product.

There are 3 main strategies I have used to time the launch:

1. Time it around a startup event or conference (like Unpluggd coming up this weekend or Demo, TC Disrupt, etc.), so you can leverage the press, investor and influencer gathering to get most bang for the buck.

2. Launch it around an industry event (such as NRF in Jan for retail apps, or NASSCOM product conclave), which gives your more visibility among potential customers.

3. Launch independent of all dates and create momentum by reaching out to the press separately. This is fairly risky because you cant quite predict what else would happen on that day that might “steal the thunder” giving you less visibility than desired.

Regardless of the date, you still want to launch when your product is ready and your app is truly available to take more customers.

Entrepreneurship, Marketing, SaaS, Sales

How to B2B is morphing into B2A, B2D, B2M

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From the broadly 2 types of companies, those that focus on consumers (B2C) and those that focus on businesses / enterprises (B2B) there is an explosion of new types. While most of the new types are still a subset of B2B or B2C, the increasing sub segmentation of B2B is creating multiple niches among those trying to sell to the “enterprise”.

The problems with B2B are fairly well documented – Long & slow sales cycles, multiple decision makers with largely different agendas (procurement wants it cheap, CIO wants it to fit into their technology stack and end users want it to be usable).

There are a 2 very interesting articles over the weekend from Dave McClure and Christina Cordova  which document the changed landscape in B2C. What I am seeing among our startups in the Accelerator is consistent with what Christina mentions in addition to the initial problem with most mobile consumer startups – which is getting users.

Essentially the marketing mechanisms (ads, PR, email) create a lot more friction to getting users to try / download the mobile app versus the web app.

So you have to primarily use a combination of reviews, recommendations or in-app ads to get users.

What’s happening on the B2B front is even more interesting.

B2B is morphing into B2D (developers), B2A (Architects, as an example) or B2M (Marketers).

Thanks to SaaS and Cloud pay-as-you-go services, the products are inexpensive enough to get enterprise segments without the hassles of going through the entire Purchase order process for many products.

So most B2B companies are targeting a specific user who is also the person to approve, buy and select the product / service that works for them.

The implications are obviously dramatic and ones that change the landscape completely.

In a follow on post I’ll document the ways this changes the marketing and sales techniques.

Entrepreneurship

How do you measure the success of an accelerator?

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Since joining and running the Microsoft Accelerator for the last 2 months, I thought I’d take some time to follow up on what I learned in my first month running an accelerator with a question to understand how to measure success.

There are, in our internal tracking list over 100 incubators and accelerators in India, over 75% of which are run by colleges and educational institutions. Of the 30+ for profit, private accelerators and seed fund / incubators, nearly 25 of them provide space, initial funding and mentorship.

Over the last few months I tried to get a sense for what constitutes success at an accelerator.

The prevailing wisdom seems to be that the only metric accelerators should be measured by is to create companies that are “fundable”. This implies that accelerators and seed fund / incubators should only look to fund teams and companies that have a good chance of getting follow-on funding.

That’s also the #1 metric even the entrepreneurs at our accelerator judge us by. A few weeks ago CNBC did a 11 min video interview of our current batch and the only thing that came from each and every entrepreneur was the amount of money they wanted to raise at the end of the batch.

Update: From a few email’s I got from some of the founders at our accelerator, who said that they were asked by CNBC to only focus on the funding part during their interview.

The problem with this measurement is that it focuses the selection process to be a lot more risk averse and less open to risky and unproven teams. Since many in the industry claim VC’s are becoming more risk averse, who then takes the risk to develop entrepreneurs who are young and inexperienced?

On the other hand, I do understand many accelerators have raised capital and have a fiduciary responsibility to return multiple-fold that money to their investors. Which is why we continue to see copy-cat models which have a standard $10K – $25K in investment and a 6-10% of the company in exchange. The model is based on a spray and pray approach to look for 1-2 “winners” in a batch of  10 companies.

Which leads me to conclude that only funding should not be the metric that you judge accelerators by, but if that’s not the only metric, what else is measurable?

Lets quickly look at what accelerators provide. Space, Mentors, a set of graduates from previous batches, a Demo day, and some amenities (food, etc.) and a demo day to meet investors.

Almost every accelerator has about 20-50 mentors who help the portfolio companies. From a quick glance of their websites, nearly 20 of the 200+ mentors appears on all websites. So none of the accelerators can really claim “we have the best mentors”. In fact most good mentors I know help more than one accelerator.

There is one difference though: Product mentors are rare in India and very few have a person (or set of people) to help you think through building something that’s needed by customers or users.

Space (desks, etc.) offered by most accelerators tends to be largely the same, and while there are some exceptional spaces, most entrepreneurs wont really judge the accelerator by the quality of the space.Same goes for amenities. Although we provide free food for all at the Microsoft accelerator, that’s largely a nice to have.

Previous batch founders and other companies funded before also help a lot, but they tend to be as good or as bad as the selection process setup initially. Furthermore, since many accelerators and seed funds were experimenting their models earlier, many of the previous batches were largely work-in-progress.

So then we are back to the demo day and investor connections.

Which is why we built an early adopter network and system to ensure that entrepreneurs have access to the first few marquee customers that they need (who will pay as well) to ensure they are building something someone needs and is willing to pay for.

Hands-on design, architecture, marketing, PR (making connections with reporters) and sales are other things we are providing to ensure traction before their seed round.

The question is how do you measure the value of these items and more importantly the impact of these on the startup’s future?

Other

Why you should focus less on your Klout score and more on your Karma

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Over the last few months Klout has gained more popularity among Indian entrepreneurs. I have noticed not only more invitations on my facebook account for Klout but also more questions on Klout score optimization. Most entrepreneurs who are not technical (have a sales, business development or operations background) seem to be increasingly interested in increasing their Klout score in the hope that it will improve their chances of gaining customers or meeting investors.  It actually does neither. While Klout has its place in scoring social media engagement, it is fairly narrow in its measure of influence is my opinion.

As an early indicator of future success I always look at developers as the early adopters before Marketing and Sales professionals. I have never found marketers tell or show me something a developer had not shown me a few days, weeks or months ago. That’s not to say they are late adopters, but my feeling is that someone has to have developed it for the marketer to know about it. That someone is a developer. Developers tend to talk to other developers to get feedback and perspective first, which is why the early adopter set for most new and innovative products are developers.

Most developers have been focused on increasing their Hacker News Karma for a few years now and not their Klout score.

I have found that the single biggest source of traffic and converted users for either my blog, or two of the previous web apps that I was developing was Hacker News. More than a post on any of the top media blogs in the US.

So, if I were a marketer or sales person who was a founder, and am looking to get early adopters, meet with potential investors, etc. I would spend more time on HN, than Twitter, Facebook or LinkedIn.

Other

Guest post from Neil Patel: 5 reasons you ought to attend NASSCOM Product Conclave

 

Neil Patel
Neil Patel

 

Neil Patel writes a very popular blog Quick Sprout and he was in India a few weeks ago for the NASSCOM product conclave. He wrote a post about his experience at the NASSCOM product conclave as a guest post for this blog.

A few weeks ago I had the privilege of speaking at NASSCOM Product Conclave in Bangalore, India. And boy what can I say other than it was one of the best conferences I’ve ever been to.

The people were friendly, the audience was very receptive to the advice they were receiving, and everyone was helping each other out so they could increase their odds of succeeding as an entrepreneur.

Here are 5 reasons you ought to attend NASSCOM Product Conclave next year.

1.     Knowledge – even as a speaker, I learned a lot from the attendees. I actually sat down with over 30 companies and gave them feedback on their product and business. At the same time they were teaching me some cool tricks on how I could grow my business. One company shared the results of 11 a/b tests they ran on their pricing page and gave me some ideas on what we should do at KISSmetrics.

2.     Giving back – unlike most events NASSCOM is fully put on by volunteers. Every single person there who helped make the event come together, did it all for free. Because of this the conference had a different vibe from the get go, as everyone there was in the giving mood. Attendees gave back by helping other attendees with their business for free.

3.     Actionable insights – NASSCOM doesn’t just let speakers speak on whatever they want. Instead they make sure they are speaking on advice that is actionable. This means you’ll be able to walk away from a session and have key takeaways on what you need to do for your business.

4.     Comfort – it’s very rare that you feel at home when you’re at a conference. At NASSCOM, not only did I feel at home, but people went above and beyond to make me enjoy the NASSCOM experience. From picking me up from the airport to offering to take me around the city, people were always there to help me out.

5.     Food – don’t you hate it when you go to conferences and all they have to eat is boxed lunches? I know I hate box lunches. Well, you won’t experience that here. They have all types of foods and best of all, everything is freshly made and isn’t boxed. You can pick what you want right when the food comes out from the kitchen.

Hopefully you go to NASSCOM Product Conclave next year as it is one of the best events you’ll ever attended… both as a speaker and attendee.

Learning

I am thankful for…

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My wife, who plays the role of mom, dad, friend, console-er, shoulder-to-cry-on, lead investor and moderator to all my tantrums, antics, and diva-like tendencies.

My oldest daughter, who despite being so much of an overachiever, compared to what I had achieved even 15 years after she’s achieved them, is still humble, personable and thoughtful.

My son, who is quite possibly among the nicest brother I know (than I was for sure), still finds enough time and energy to keep the family laughing all the time.

My twin girls, who despite being on the receiving end of 90+% of my discipline, rigor and hard-work have the tenacity to keep forgiving me and still wake up every morning at 530 am and remind me that they love my hugs.

My mom, who realized her son is not the superstar engineer she always wished for, and rarely finds time to call her and just ask how she’s doing, still finds time frequently to call me after lunch to ask if I have eaten well.

My dad, who has always trusted my gut and instinct more than I have trusted my own and has never questioned a single decision I have made of which a significant number affected him sometimes adversely.

My sister, who puts up with all my constant bragging, covers up for all my short comings and blatant-overstatements-of-the-fact, with “yeah I know, but if he wanted to do that he’s the only guy who could”.

My brother-in-law and nieces who having been forced to state that I am their best friend and uncle still humor me with their constant boosting of my ego.

My friends (all of my facebook, twitter and offline ones are included no exception) who make it easier for me to hang in there for another day.

Happy thanksgiving all.

Other

Who should do the selling in a startup? Or “Is sales a team responsibility”?

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In the early days (<10 customers) of a startup, the founder typically is expected to do most all of the selling to get the early adopters. This helps solve the problem of understanding the customer’s buying process which aids in hiring the right sales person for your startup.

If the startup is founded by several people together, I’d advocate a single person running and managing the entire sales process. While its true that in a startup everyone’s selling and every person is trying to help sales, there should be one person who dreams, sleeps and eats getting customers.

The main reason for having one person for the role is accountability. That person’s sole purpose of being is to get customers and track their progress towards that end. If you are a solo founder, I’d recommend you hiring technical consultants or contract people to develop and architect or build your product, but do the initial sales (or customer development) yourself.

So the question is who is that one person who should be responsible for selling when you have multiple co-founders?

Usually I hear a variation of “My co-founder likes to talk a lot, so he’s taken responsibility for sales”, or “My co-founder is a better developer than I am, so I took responsibility for getting customers”.

For most parts I think that is a sufficient enough filter. If you have an inclination towards selling or are not as good at some other function, you ought to be helping play a critical role and I cannot think of a more critical role than getting early customers.

Even if you are the deemed “sales person” in your startup, you will realize quickly that you need more than 1 person to help you sell.

Sales people are (initially) mistrusted by customers who believe the salesperson’s sole purpose is to a) sell them stuff they dont want to buy and b)lie to overstate the capabilities and value of a product.

So the best situation to be in is to split the roles into 2 – the deal maker and the solution architect. The deal maker is still responsible for the entire process end-to-end. They will have to bring in the solution architect as required to help with the product aspects of the sales process and be responsible for the technical feasibility.

When you are ready to hire your first sales person here are some tips on filtering sales resumes for the right hustlers, process jocks and relationship sales professionals.

The personal blog of Mukund Mohan