What’s the most difficult part of a pivot? The internal communication

tldr: When the problem you set out to solve has changed, first focus on getting the internal communication right to your own team, before investors, customers or anyone else. That’s the first step towards your pivot.

“Why is our customer clicking on these links that lead to other what they most recently said on twitter instead of their contact info?”.

“I thought you said the primary difference was that the heart of our system was the individual, not the social media post?”

“We just moved from a tab based UI to tiles and you want us to move again to a news feed UI? Do we even know what the customer wants?”

All these were the questions that I got within the first 4 minutes of talking to my team about changing our product direction (it was not fashionable to call it a pivot at that time).

We were cruising towards alpha in Sep after a few glitches when I scheduled a call with 5 of our early customers, most of whom were on the East coast. The call and demo was scheduled at 7 pm IST and about 930 am Eastern. I was going to go over the demo with Paul Dunay, who at that time was at Bearing Point. Paul was one of our early champions and a very astute guy who understood what we were trying to build. I was at the office with my CTO and friend Giridhar who was listening intently to what Paul had to say about the product. It was as much his sweat and tears as mine so he was hanging on every word. It took us about 3 minutes to finish the demo. The product was in its alpha so there wasn’t much to show I thought. After what seemed like a really long pause, Paul said “Well its good to see the progress guys, but I think you’re a little ways off from when we can use it for Bearing Point”.

That set off a series of questions to understand why we missed the mark. Even before the days MVP (Minimum viable product) was a sexy term, we thought that’s what we had. Turns out the problem that we were initially thinking we had to solve had changed.

Dramatically.

In less than 3 months.

The new problem required a solution that had to first have us change our data model, our user interface (new wireframes, too) and finally required access to data sources which we had not planned on acquiring. So basically a “total rewrite” as Giridhar put it.

Problems change. The perception of the problem changes. The customer’s needs change. When you are on the cutting edge of an unsolved problem you ought to expect that.

So what did we do?

We had to get buy-in first from our engineering team. There’s one way that worked and 3 ways that did not work.

The things that I tried that did not work:

1. Showed them a few competitors applications and told them about what the new problem is – big fail. Most engineers I worked with really did not care much about the competition. They were convinced no one was solving the problem the way we defined it.

2. Put together a wireframe, complete user interaction scenarios and use case description. Interesting, but they were not convinced we had the “new” problem nailed, since they felt we were grasping the last available straw.

3. Took them all out to lunch to detail why all the 5 beta customers were logging in, clicking on all the “wrong links” and then logging out within 50-58 seconds.They felt the customers still did not know where to click.

What worked:

We scheduled a call with our beta customers – Ross Mayfield, Paul Dunay, Mike Prosceno and did a remote record as each user went through the application one screen at a time. We made sure all of our 3 engineers were both on the call and also looked at the entire 9-10 min video recording of each customer’s interaction with our application.

Its an old adage – “Seeing is believing”.

When you have your engineers hear and see customers struggling and clicking on the wrong part of the application looking to find what they were hoping to, they get religion.

 

Why mentos is now legal tender in India

I really enjoy writing about the intricacies that make up India. Here’s another of those “stories”.

Obtaining “correct change” is an absolute pain here in India. Everyone from the bus conductor to the auto driver to the restaurant wants exact “change”. Most of them would refuse a customer if they dont provide them with the right coinage.

Take the Bangalore bus system, for example. The bus fare (for where I travel to and from) is usually an odd number between INR 10 and 20. The conductor (who gets money from 100’s of commuters every hour and still apparently gets no change) always demands exact change, even if he has a plethora of coins in his bag.

For most parts its so you can take the easy option and just pay him cash (a lower INR 5) for no ticket and hence goes into his pocket, than hunt around for the exact change. In case you refuse to do so, he’ll write the amount he owes you on the back of the ticket, and its up to you to ensure that you hunt him down for the change before you get off the bus. That in itself is an amazing feat, given that he’s always in the other end of the bus from where you are at the point you want to get off. In 50% of the cases you may not be able to hunt him down, which means he gets to pocket the difference.

But giving and providing change has been a problem at retail outlets too, which have come up with a “creative solution”, involving giving you a mentos for denominations less than INR 5. So if you are buying something for INR 14 and give him a INR 20 note, he’ll likely give you INR 5 and one mentos to make up for the INR 1 he owes you.

I experienced this several months ago (as did a friend last week) when I was taking the toll road out of the city. The attendant at the toll (when the charge was INR 19) did not have change for INR 50, so he gave us INR 30 back and a mentos. I was obviously peeved at the mentos, but since I did not have an option, kept it at the dash of the car.

Returning the same day, and passing by the same toll booth, I paid INR 18 in cash and gave back the mentos to the toll attendant to account for the INR 19 in toll charges. He did make a fuss about it, but I said that’s the choice he has, since they other attendant provided that to me last time around. He did accept it, but that opens a whole new area of currency arbitrage.

I suggest you go to the friendly neighborhood supermarket, and buy a box of mentos at INR 70 for 100. Then hand them out back to the retailer, each time to cover for the lack of small change. You are in the gain for INR 30!

2012: A year to dial back

I started this week thinking about what I wont do in 2012. 2011 was a very eventful year for me and my family. We bought a house, sold a house, bought another home, started a new company (Jivity, and Vinita started Social Hues), invested in several startups and also committed significant capital to specific projects. All this coupled with a hectic travel schedule of speaking engagements, which saw me out of the office for 84 days out of 250 working days and 25 days on leisure travel.

There are multiple things I would love to do but dont have time for at all. The focus of my time is being spread too thin to get enough value from my own company sufficiently.

So, here’s a list of things I am not doing to do in 2012.

1. Reduce speaking engagements dramatically to less than 1 a quarter. In Q1 I have committed to being at Kolkata to help friend Aninda Das at NASSCOM, and one more at Coimbatore which I committed to in late Nov last month. That’s it, and I dont plan to either attend or speak at more engagements until March. Just to compare that to 2011, I was committed to 41 speaking engagements throughout the year. This also means that I am going to reduce the number of entrepreneur networking events, dramatically.

2. Less mentoring and advising startup entrepreneurs. This is something I really enjoy and like, but I have to give up, since I just dont have the time.

3. Definitely not writing a book. I was toying with the idea to write a book on sales & selling to help entrepreneurs, but the commitment of time is tremendous, so I have to pass on that also. I would really enjoy this project, especially since I love writing.

4. Not work on any more new “ideas”. Like most of you, I get multiple ideas each day / week / month. Some I pursue and many I drop. The ones I do follow up on, I have done a fairly shoddy job, since there are too many competing priorities I am juggling.

5. No more startup investing. Having committed money to several startups in the last 2 years, I have much to learn still and more to digest. 2012 is my year to digest and step back and watch on the sidelines. I will no doubt miss several promising entrepreneurs and some important trends, but this too will have to be passed for lack of time.

Why this strict regime, is a question I got asked by a good friend over lunch last week?

The biggest reason is focus.

I was doing too many multiple things that I enjoyed, without a clear focus on the one thing that would get me the best return. I was not practicing what I preached to most folks – Focus on doing one thing very well, instead of multiple things poorly.

So what am I going to focus on for 2012. Just to take Jivity to the next level and focus on maintaining good physical health – primarily by reducing my intake of junk food.

I will you all an awesome 2012!

How to survive the sine-curve of emotions at your startup?

I have mentioned several times that working in a startup is like a sine-curve, or a roller-coaster rider. Its multiple ups and downs every hour, day, week and month. It takes a special kind of maturity to handle them as they come and not lose focus of your goal or the near-time milestone. I have tried to share some of the things we did in my previous companies and would love to hear what you guys do to handle the ups and downs.

The thing is, the ups are easy to handle, (that was obvious wasn’t it?) but the lows are make or break. So here are some things that might work for you to handle the downs.

1. Choose you favorite videos / songs and create a YouTube playlist for you and your co founders. Since  I love Dire Straits, Why worry now was part of every playlist and so was The bug.

Funny story: Our office was on the top floor of a building, and the owner “lived” in the first floor. Mid-week after a particularly bad meeting we “synchronized” our laptops to play some music and pick our spirits up. Turns out it was too loud, so our owner’s 60+ year old father trudges up the stairs to find out what’s going on. He saw a bunch of us doing some kind of really bad jig (when were engineers ever good at dance?) and ended up “showing us” how to do it right. I cant remember when we laughed so much. We recorded him making some “good moves” and posted it on our servers as a pick-me-up every week.

2. When you are doing demos with a client, record them by using Skype. Then keep the recording of the best feedback and save them so you can listen to feedback that’s a positive reinforcement.

3. Create your own holiday in the middle of a bad day/week and take many photographs. Post these photos on the glass of a few windows where you can see them daily.

Funny story: Summer months are awful in terms of holidays. There are so few of them that its not even funny. Adding to the misery was the incessant heat and the fact that most kids were out playing while we were working. So we created a mid-week holiday, where everyone in the team had to identify the top 3 places to eat in their neighborhood. The company would pay for them and their significant other’s breakfast, lunch and snack. They could take the day off and spend it recharging themselves and eating at the places they love.

4. Take photos of your first customer order or all your positive customer emails. Then print the photographs or emails them and paste them up on your kitchen area or conference room

5. Pick a favorite restaurant that the team likes which is fairly close (could even be a Baskin Robbins or Subway) and celebrate those down moments by eating out with the team.

What do you do to manage the sine-curve?

How does an investor decide to invest in a company?

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

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

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

1. Entrepreneur(s) – about 60-70%

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

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

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

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

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

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

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

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

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

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

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

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

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

What valuations are early stage startups seeking in India ?

We (@vinitaananth and I) got 264 requests for funding in 2011. Of those we met with about 50 companies and ended up funding 3 (we lost out on 2 companies, one because of valuation and another because of mis-communication) . The companies were from across multiple categories including SaaS, eCommerce, Mobile applications, education and hospitality.

The number one question I get from entrepreneurs is what is the valuation I should expect at the seed round? Second question – “Is there a formula or spreadsheet that I can calculate my valuation”?

As many people might have told you already, there is NO standard formula for valuations. None whatsoever. I wish there was. There are several methods or techniques people use to get valuations, including

(a) # of engineers – mostly in cases where there are all star engineers from IIT / Google, etc.

(b) market size

(c) revenue multiple (if applicable)

(d) forward revenues and

(e) made up on-the-fly and pulled out of thin air.

If I had to guesstimate the % of times these different techniques are used, I’d say 80-90% are of type (e) – grin.

Of the 50 companies we met, we got to talking numbers with 20+ of them. Bear in mind these were all types of companies. There were 4 distinct buckets of valuation that we saw, and it was regardless of traction, product, market, etc.

1st: was valuation of 1 CR ($250K), – this was typically 2 people with an idea and early prototype, looking to raise about 10-20L ($20K – $40K)

2nd: 1 CR to 5 CR ($250K – $1M), – typically SaaS & education companies with 1 founder, looking to raise about 10L – 50L ($20K – $100K)

3rd: 5 CR to 10 CR ($1 M – $2M), looking to raise between 40L – 1.2 CR ($90K – $250K)

4th: greater than $2M – this was typically company with customers & some traction/revenues, many eCommerce companies were in this bracket, and they were looking to raise anywhere from 1.25CR to 4 CR ($500K – $750K)

As expected, the number of companies seeking higher valuation were few. We saw 8 companies in the first bucket, 7 in the second, and 4 each in the remaining 2 buckets.

As you can also see the implicit assumption is that the expected ownership of company to the seed investors was going to be about 10%. I have hear horror stories from many entrepreneurs that some angels were asking for 20-30% of the company at the seed round, but I have no way to confirm that.

Caveats: This is only one investors view, limited data set and is across multiple categories and sectors, but gives you a view into some of the numbers startups are asking for, YMMV.

P.S. The companies I actually funded dont want me to share either their names or numbers, so I apologize for being opaque on that. I dont get it, but sharing of data and information by a lot of Indian entrepreneurs and investors is limited to non-existent and leaves a lot to be desired.

The changed landscape for angel and venture funding in India

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

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

What’s changed you ask?

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

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

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

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

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

I believe there are 3 things:

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

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

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

What should you really have ready before approaching me as an angel investor?

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

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

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

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

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

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

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

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

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

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

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

An investor’s promise

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

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

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

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

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

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

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

What’s needed to tweak the “Incubator” model for Indian entrepreneurs and startups?

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

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

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

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

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

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

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

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

The personal blog of Mukund Mohan