Scaling Good Advice In India’s Startup Ecosystem – A Research Paper On PNGrowth Model

In January 2016 iSPIRT ran the largest software entrepreneur school in India, called PNgrowth (short for Product Nation Growth).  The central vision of PNgrowth was to create a model of peer learning where over 100 founders could give each other one-on-one advice about how to grow their startups. With peer learning as PNgrowth’s core model, this enterprise was supported by a volunteer team of venture capitalists, founders, academics, and engineers.  See iSPIRT’s volunteer handbook (https://pn.ispirt.in/presenting-the-ispirt-volunteer-handbook/)

However, unlike a regular “bootcamp” or “executive education” session, the volunteers were committed to rigorously measuring the value of the peer advice given at PNgrowth. We are excited to announce that the findings from this analysis have recently been published in the Strategic Management Journal, the top journal in the field of Strategy, as “When does advice impact startup performance?” by Aaron Chatterji, Solène Delecourt, Sharique HasanRembrand Koning (https://onlinelibrary.wiley.com/doi/10.1002/smj.2987).

TLDR: Here’s a summary of the findings:

1.
 There is a surprising amount of variability in how founders manage their startups.  To figure out how founders prioritized management, we asked them four questions:

“…develop shared goals in your team?”
“…measure employee performance using 360 reviews, interviews, or one-on-ones?”
“…provide your employees with direct feedback about their performance?”
“…set clear expectation around project outcomes and project scope?”

Founders could respond “never,” “yearly,” “monthly,” “weekly,” or “daily.”

Some founders never (that’s right, never!) set shared goals with their teams, only did yearly reviews, never provided targets, and infrequently gave feedback. Other, super-managers were more formal in their management practices and performed these activities on a weekly, sometimes daily, basis. Not surprisingly, the supermanagers led the faster-growing startups.  Most founders, however, were in the middle: doing most of these activities at a monthly frequency.

2. Since PNGrowth was a peer learning based program, we paired each founder (and to be fair, randomly) with another participant. For three intense days, the pairs worked through a rigorous process of evaluating their startup and that of their peer. Areas such as a startup’s strategy, leadership, vision, and management (especially of people) were interrogated. Peers were instructed to provide advice to help their partners.

3. We followed up on participating startups twice after the PNgrowth program. First ten months after the retreat, and then we rechecked progress two years afterwards.

We found something quite surprising: the “supermanager” founders not only managed their firms better but the advice they gave helped their partner too.  Founders who received advice from a peer who was a “formal”  manager grew their firms to be 28% larger over the next two years and increased their likelihood of survival by ten percentage points. What about the founders who received advice from a laissez-faire manager? Their startup saw no similar lift. Whether they succeeded or failed depended only on their own capabilities and resources.

4. Not all founders benefited from being paired up with an effective manager though. Surprisingly, founders with prior management training, whether from an MBA or accelerator program, did not seem to benefit from this advice.

5. The results were strongest among pairs whose startups were based in the same city and who followed up after the retreat. For many of the founders, the relationships formed at PNgrowth helped them well beyond those three days in Mysore.

So what’s the big take away: While India’s startup ecosystem is new and doesn’t yet have the deep bench of successful mentors, the results from this study are promising. Good advice can go a long way in helping startups scale.   iSPIRT has pioneered a peer-learning model in India through PlaybookRTs, Bootcamps, and PNgrowth (see: https://pn.ispirt.in/understanding-ispirts-entrepreneur-connect/).

This research shows that this model can be instrumental in improving the outcomes of India’s startups if done right. If peer-learning can be scaled up, it can have a significant impact on the Indian ecosystem.

Clipping The Wings Of Angel Tax

 

2000 startups. 100 meetings. 25 articles. 7 years. 3 WhatsApp groups. 2 whitepapers.

1 unwavering ask:

No More Angel Tax.

This evening, when we first got to see the circular from DPIIT/CBDT that formalized key recommendations suggested with respect to Angel Tax or section 56(2)(viib), we admit our minds went blank for a moment. After all, this one document represents the tireless, collaborative efforts of iSPIRT, the entrepreneurial community of India and ecosystem partners like IVCA, Local Circles, IAN, TiE, 3one4 Capital, Blume Ventures etc., and the proactive support from the government. It has been one relentless outreach initiative that has seen us become a permanent fixture at Udyog Bhavan and North Block (I even checked with the guards regarding the possibility of a season pass). My colleagues Sharad Sharma, TV Mohandas Pai, and partners such as Siddharth Pai, Nikunj Bubna, Sreejith Moolayil, Monika, Ashish Chaturvedi and Sachin Taporia deserve a big shout out for their diligent efforts at connecting with various ecosystem partners and initiating a regular cadence of dialogue with the government.

The key takeaways from the circular are as below

  • Blanket exemption for up to INR 25Cr of capital raised by DIPP registered startups from any sources
  • Amendment in the definition of startups in terms of tenure from 7 to 10 years
  • Increase in the revenue threshold for the definition of startups from INR 25Cr to INR 100 Cr
  • Breaking the barrier for listed company investments by excluding high-traded listed companies and their subsidiaries, with a net-worth above INR 100Cr or a Turnover of 250 cr, from section 56(2)(viib)’s ambit

Each of these points is a major win for the startup community. If one looks at the data from the LocalCircles startup survey in January 2019, nearly 96% of startups that had received notices regarding angel tax, had raised below the permissible limit of INR 10cr. Expansion of this limit to INR 25cr is a huge boost and instantaneously removes thousands of startups from the reach of angel tax. There is an effort here to critically analyse, define and differentiate genuine startups from shell corporations. It includes measures such as increase in the revenue and tenure threshold that will not only help startups with respect to the challenges posed by angel tax but also open up eligibility for benefits under Startup India schemes and policies. We have been talking about the need to encourage and protect domestic investments and the government has paid heed to our concerns by introducing accredited investor norms and by breaking the barrier for listed company investments.

Initiated in 2012 by the UPA government, Section 56(2)(viib) or the “angel tax” section has been a relentless shadow on the entrepreneurial ecosystem. It taxed as income any investment received at a premium by an Indian startup. This provision saw many entrepreneurs clash with the tax officials about the true value of their business and pitted unstoppable entrepreneurial zeal against the immovable tax department.

All of us from the policy team at iSPIRT have been at the forefront of this issue since 2015 when we began petitioning the government to exclude startups from section 56(2)(viib) as taxing investments from Indian sources would cripple the startup ecosystem. We laud the government for appreciating the urgency of the situation and prioritizing this issue.

We first had an inkling of things to come at the February 4th, 2019 meeting held by DPIIT. It was unprecedented as it saw a direct dialogue between government and entrepreneurs wherein both sides could better understand the issues facing each other – how section 56(2)(viib) was hampering founder confidence and how it is a needed tool in the government’s arsenal for combatting the circulation of unaccounted funds.

After this, a smaller working group was constituted on February 9th, to review the proposals made by DPIIT to address this issue, in consultation with the CBDT and the startup ecosystem. iSPIRT were part of both meetings and contributed actively to the discussion.

We can now heave a sigh of relief as we have finally achieved to a large extent what we had set out to do. We finally have a solution that ensures genuine startups will have no reason to fear this income tax provision and the CBDT can continue to use it against those attempting to subvert the law.

This could not have been possible without the help of well-wishers in government departments like Mr Nrpendra Misra, Mr Sanjeev Sanyal, Mr Suresh Prabhu, Mr Ramesh Abhishek, Mr Anil Chaturvedi, Mr Rajesh Kumar Bhoot, Mr Anil Agarwal, who patiently met the iSPIRT policy team and helped develop a feasible solution.

At long last, domestic pools of capital will no longer be disadvantaged as compared to foreign sources. At long last, Indian entrepreneurs will no longer have to fear the questioning of the valuations of their businesses and taxation of capital raised.

Who knows, someday we might have a movie on this. On a more serious note, it is a step that will go down in the chronicles of India’s startup story. This puts the startup engine back on track. More importantly, it shows what can be achieved when citizens and the government get together.

By Nakul Saxena and Siddharth Pai, Policy Experts – iSPIRT

Angel Tax Notification: A Step In The Right Direction, But More Needs To Be Done

There have been some notifications which have come out last week, it is heartening to see that the government is trying to solve the matter. However, this is a partial solution to a much larger problem, the CBDT needs to solve for the basic reason behind the cause of Angel Tax (Section 56(2)(viib)) to be able to give a complete long-term solution to Indian Startups.

While the share capital and share premium limit after the proposed issue of share is till 10 crores and helps startups for their initial fundraising, which is usually in the range of Rs 5-10 Cr. Around 80-85% of the money raised on LetsVenture, AngelList and other platforms by startups is within this range, but the government needs to solve for the remaining 15-20% as startups who are raising further rounds of capital, which is the sign of a growing business, are still exposed to this “angel tax”. Instead, the circular should be amended to state that Section 56(2)(viib) will not apply to capital raises up to Rs 10 Cr every financial year provided that the startups submit the PAN of the investors.

The income criteria of INR 50 lakhs and net worth requirement of INR 2 crores is again a move by the government that requires further consideration for the investing community. Therefore, to further encourage investments by Angels or to introduce new Angels to the ecosystem, there is a need to look towards a reduced income criterion of INR 20 Lakhs or a net worth of INR 1 crore, enabling more investors for a healthier funding environment. We also, need to build a mechanism to facilitate investments by corporates and trusts into the startups.

Most importantly, any startup who has received an assessment order under this section should also be able to for the prescribed remedies and submit this during their appeal. They should not be excluded from this circular since its stated scope is both past and future investments. The CBDT should also state that the tax officers should accept these submissions during the appeals process and take it into consideration during their deliberation.

So, to summarise:

  • Section 56(2)(viib) should not apply to any investment below Rs 10 crore received by a startup per year or increase the share premium limit to Rs 25 Crores, from Indian investors provided that the startup has the PAN of the investors
  • Section 56(2)(viib) should not apply to investors who have registered themselves with DIPP as accredited investors, regardless of the quantum of investment
  • The threshold stated should be either a minimum income of Rs 25 lakhs or a net worth of at least Rs 1 crore
  • Any startup who has received an assessment order should be able to seek recourse under this circular during their appeal

Through this circular, the government has reaffirmed its commitment to promoting entrepreneurship and startups in India. With these suggestions, the spectre of the “angel tax” will end up as a footnote in the history of the Indian startup ecosystem.

We look forward to the early resolution of these pending matters. For any suggestions, Do write to us [email protected]

The article is co-authored with Siddarth Pai, Policy Expert – iSPIRT Foundation and Founding Partner – 3one4 Capital.

What lies beyond the horizon: Digital Sky & the future of drones in India

Drones have been around for a long time, going back as far as World War II. For most of their history, they were considered part of the military arsenal and developed and deployed almost exclusively by the military.

However, the past decade has seen a tremendous amount of research and development in the area of using drones for civilian purposes. This has led industry experts to predict that drones will be disrupting some of the mainstay industries of the global economy such as logistics, transportation, mining, construction and agriculture to name a few. Analysts estimate a $100 billion market opportunity for drones in the coming few years  [1]. In spite of the overwhelming evidence in favour of the value created by drones, it has taken quite a few years for the drone industry to take off in a commercial sense globally.

The main reason for this has been the regulatory challenges around what is allowed to fly in the air and where is it allowed to fly. A common theme around the world is the unconventional challenges that old governmental structures have to face as they try to understand and regulate new technologies. Hence the default approach so far for governments has been reactionary caution as they try to control what are, essentially, flying robots in the sky.

However, with electronic costs coming down, the hardware becoming more accessible and the software interpreting data becomes more powerful a number of humanitarian, civilian and industrial application have emerged and as governments across the world are realizing the potential of drones, we are starting to see the first version of regulations being drafted and adopted across the globe.[2]

Closer home India has a relatively adverse approach to drones or more lackadaisical rather. [3]

But as India continues to drive to become a more technology-oriented economy the role of drones in the worlds fastest growing economy and the potential benefits it can bring are hard to ignore.[4]

However, India’s approach to drone regulations cannot be that of other major economies that have the luxury of friendly neighbours and a large network of monitoring apparatus, India has had to take an approach that has to be novel and robust. Something that balances the security landscape while also being designed to allow maximum utilization of the potential that drones offer. Out of this need to both regulate secure how and where a drone can fly and keep multi-ministerial stakeholder interests accounted for was born the Digital Sky, India’s foundational framework for all things drones.

What is the Digital Sky and how does it work?

What the Digital Sky accomplishes beautifully is to fill the institutional void that needs to be collectively fulfilled by so many institutions and make it easier for the industry and consumers to interface with the government legally through one platform. Permission to fly drone no longer requires a 90-day intimation with an arbitrary number of NOCs to be approved by umpteen number of ministerial bodies at the central and federal level. The industry and the public now know one place to interact with in order to register their drone, get recognised as a certified operator and apply for permissions and all concerned government agencies ensure their overarching interests do not interfere with the large-scale adoption of drones.  

There are crucial components required for the Digital Sky concept to work, the most central being that drone operators should not be able to fly drones if they are not approved by the government. To accomplish this the Drone 1.0 regulations revolve around the concept of No-Permission-No-Takeoff (NPNT).

Our maven Tanuj Bhojwani explaining NPNT at the DigitalSky RoundTable on 4 Dec 2018 in Bengaluru

What this implies is that unless a drone has got valid permission for a particular flight through tamper-proof digitally signed permission tokens, it will not be able to take off. The Digital Sky is the platform to automate the processing of these permission tokens as they flow in from different parts of the country without overwhelming the authorities through a flight information management system (one of only three countries to build this nationally after China and the USA). In order for this vision to come true, there will be an enormous change in the way drones are manufactured and operated. Entire new industry verticals around getting existing drones compliant, developing interfaces that interact with the Digital Sky platform and making applications for India’s needs will develop. Hence this begs the question.

How are the current state of the industry are changing with 1.0 regulations

Until the introduction of the regulations companies especially in the UAV operations were doing non-restricted work and end up becoming the jack-of-all-trades. Companies in the manufacturing domain were unclear of who is their target customer and what they needed to build. All the companies in this domain were working with no clarity on the safety and permissions.

With the introduction of the Drone Policy 1.0, there is a buzz which has been created and efforts are being made to understand the regulations by all the entities who are set to gain from it. They understand that there will be a new aspect that needs to cater to i.e. the sense of accountability.

For manufacturer’s The NP-NT mandate will be the most immediate requirement, the most common route to implement the mandate will be through changes to existing firmware architecture. The changes themselves are being driven by open source initiatives with various operators, system integrators and manufacturers contributing to the shift to NP-NT for all major drone platforms in the country. The Digital Sky has inadvertently catalysed the first industry-wide initiative to bring together all members of the ecosystem. Other requirements such as ETA bring in much-needed standardisation in the hardware space, this allows benchmarking of products, easier availability of information about the standards to look out for end users.

For operators, a massive increase in the volume of business is expected as they can now focus on getting certified drones into the air, and not so much on getting approvals. The Digital Sky brings in much-needed certainty and predictability into an industry that will be focused on balancing demand and supply of drone-related operations in a market that has a huge need for drones and their data but limited expertise to acquire and process it. This also puts onus an industry to become security and privacy conscious and insurance agencies will play an important role in this regard. It will also immensely help in changing the thought process of the companies providing services and their customers. Customers will start understanding that they also need to have a defined plan, process and execution instead of a haphazard existing process of execution.

How industry/playground will change over the coming years?

With the introduction on the regulations and a platform like Digital sky enabling the ease of doing business for the companies who are serious stakeholders in this domain, there is no limit to what developments will occur in the coming years. It opens up possibilities for utilization of Drone and its related technologies in Agriculture, Medical, Energy and Infrastructure and transportation.

The existing players will become more mature and more focused. They will understand that with regulations in place a more focused approach is the key to scale. They will look at opportunities to compete with the global market also as the solutions that are developed around the Drone Regulations 1.0 and 2.0 will be key factors that contribute to the Indian ecosystem to becoming a global standard to test, adapt and innovate drone applications and management.

What are the opportunities? What does that mean for the current and new players?

UAV/ Drones as a business was a far-fetched thought for many entrepreneurs and has been a struggling industry in the past in India. Going forward it is guaranteed that it will be one of the biggest markets in the world for UAV as a business. What the regulations and Digital Sky platform will enable is a new levelled playground ground for the UAV companies to initiate good scalable business models both existing and the ones entering new to the sector.

The existing companies with the right resources can now plan to scale their operations and also have the added advantage of doing work for the private sector in India. Due to the restrictive method of operations adapted previously the solutions to private agencies was unavailable. Now going forward the companies will shift their focus from being a B2G entity to a B2B entity. Many new businesses for UAV air traffic management, surveillance, AI and ML-based UAV solutions and deliveries will emerge out of India with technology specific to India.

If you want to join our future roundtable sessions on Digital Sky and more, please register your interest here.

The blog is co-authored by Anurag A Joshi from INDrone Aero systems, Abhiroop Bhatnagar from Algopixel Technologies and Gokul Kumaravelu from Skylark Drones

White Paper On Section 56(2)(viib) And Section 68 And Its Impact on Startups In India

Angel Tax (Section 56(2)(viib)) has become a cause celebre in Indian startup circles due to its broad-reaching ramifications on all startups raising capital.

This paper traces the origin of this section, it’s analysis, impact, how it adversely affects startups. Special mention is also made of the seldom covered Section 68 and it’s used in conjunction with Section 56(2)(viib). The paper also proposes recommendations to ensure that genuine companies are not aggrieved by this while the original intent of the section is preserved.

For any support or query, please write to us at [email protected]

The History and Future of Angel Tax

“I propose a series of measures to deter the generation and use of unaccounted money. To this end, I propose:

Increasing the onus of proof on closely held companies for funds received from shareholders as well as taxing share premium in excess of fair market value.”

When ex-Finance Minister Pranab Mukherjee introduced angel tax in 2012, it created an uproar in the fledgeling startup and angel investor community. While the purpose of this section was to reduce money laundering by imposing the hefty tax rate of 30.9 percent, it had several inadvertent consequences.

There were several cases of money laundering by Jaganmohan Reddy that were caught by the Enforcement Directorate, who revealed that people had “paid bribes to Reddy in the form of investments at exorbitant premiums in his various companies to the tune of Rs 779.50 crores apart from making payment of Rs 57 crores to him in the guise of secondary purchase of shares and donation of Rs 7 crores to the YSR Foundation”.

To prevent such abuses of the law, the government clamped down and stated that any unjustified share premium given by a private company would be taxed as income in their hands. But to catch one culprit, they threw the book at many innocents. The relevant law known as section 56(2)(viib) of the Income Tax Act came to be known as the angel tax section. Many startups which are private companies and had issued shares at a premium to angel investors ended up facing notices from the tax authorities under this section. This premium is treated as income in their hands, classified as “income from other sources” and taxed at the maximum marginal rate of tax.

The ‘Startup India’ initiative changed all that. Under the stewardship of the Honourable Prime Minister, startups became a focus area. As per the ten points in the Action Plan, if a startup was registered post- April 1, 2016, then the angel tax was not applicable to the startups. The move had helped startups operating in that area, but a problem still existed for startups that were incorporated before 2016. In fact, in December 2017, many startups received notices and orders for the Financial Year 2013-14. A few entrepreneurs who faced income tax notice hassles launched an e-petition called Change.org in January 2018 so that the government could take some concrete action in Budget 2018.

iSPIRT has taken up the matter with MoF and DIPP on the same. We had made some representations to MoF specifically before the budget. In the budget, the Finance Minister made a statement on continued assistance to the Angel Ecosystem. Due to rigorous efforts that went into sharing of information by these startups, we have recently seen MoF making the welcome announcement.

As per the latest announcement, angel tax would not be applicable on startups which are incorporated before 2016, fulfil the criteria under Startup India Policy and have been granted angel funding up to Rs10 crores. It is believed that at least 300 startups will get a breather from angel tax. The government is also likely to establish a separate committee for the recognition of startups that meet these criteria.

In a further relief to startups, the Finance Secretary Hasmukh Adhia also announced that income tax officers would not take precipitate action and will proceed only after the first set of appeals decided in appellate cases. The exact phrase they used was “no coercive action”, which helped many startups heave a collective sigh of relief. All pending appeals by March 31, 2018, will be quickly addressed.

If you are a startup and need further guidance on angel tax, you should follow the steps below:

  1. Register at DIPP for a startup even if you were incorporated before 2016 and currently are still a startup as defined by DIPP by logging onto this site and filling up the form at https://www.startupindia.gov.in/registration.php.
  2. If you are a startup as per DIPP definition, then get your DIPP certification. All startups which may have raised funding post-April 2016 and are registered with DIPP will not have angel tax applicable to them.
  3. If you are a startup which has received income tax notices for years before 2016 and is still eligible to register as a startup, then please register yourself with DIPP. You can share the registration certificate and relevant notifications with the assessing income tax officer to get an exemption from angel tax.
  4. If you are a startup which has received income tax notices for years after 2016, then please repeat step 2 mentioned above and then appeal against the order. It is important that due process is followed so that the redressal measures taken by the tax authorities can come into effect.

These startups do not have to pay 20% of the tax order at the time of appeal as this has been a one-time exception granted till 31st March 2018 to avoid hurting the sentiments of the startup ecosystem. You can share the order with iSPIRT.

Also, pursuant to our meeting with MoF, we have been assured that the income tax officers in the various jurisdictions have been directed to exercise leniency on this till the new taxation regime for angel and venture capital investors comes into place, as announced by the Finance minister in his budget speech. The officers are aware of the hardships that startups now face and are doing their best to mitigate this within the ambit of the current law.

DIPP and MoF are also in the process of allowing a waiver to the earlier startups facing the angel tax issue, provided the investment made is under Rs 10 crores and subject to an Inter-Ministry board approving the same. This should happen in the next 5-10 days.

We will encourage all startups which have received notices and orders under Section 56 to follow the above steps to chart their way across the new announcements.  

Please forward your orders to [email protected] enabling us to use these orders to take a strategic view to policy to help with this issue in the long term.

Start up India.

Stand up India.

This post is co-authored by Nakul Saxena and Siddarth Pai, Policy Expert Council Members, iSPIRT Foundation

What’s the TAM Chasm?

How one entrepreneur’s mountain looks like a VC’s molehill

The apocryphal story of a newbie B2B founder, with deep domain knowledge, but no experience as an entrepreneur or in a startup. Note that while this example is not based on a single entrepreneur, it’s a composite to highlight the extremes.

Amita was a deep domain expert, with 15 years of experience in Wicro’s manufacturing services vertical. She identified a specific problem that a few of her customers had, costing them millions every year, which would get solved with a software product she dreamed about building. Being bitten by the entrepreneurial bug (her classmate founded FlipDeal), she decided to work together with a few old friends and colleagues, and start a business attacking the problem, with a couple of trusting old customers agreeing to do a paid pilot when she had the product ready.

As Amita and her team built the product, they initially used their own savings. Friends advised her to go to VCs, since this was exactly the kind of high-tech manufacturing software product that many VCs said they would fund. Amita was excited, she had seen FlipDeal raise a few Billion $, and felt that though her startup didn’t need as much, it would be good to raise a few million to hasten the pace.

The first VC meeting was a disaster, she was asked for their TAM (Total Addressable Market). And she was hardly able to define it well enough on the fly. The VC also said that manufacturing software was passe, IoT was the future.

What’s my TAM?” she wondered on the ride back to the office.

What’s our TAM?” the team asked her.

On the one hand, the specific problem they were solving was only for manufacturers in the auto ancillary business. This was a big sized market they thought, 60 odd large customers and a few hundred smaller ones spread over US, EU. The problem their product solved cost the large companies a few million dollars a year, and cost the smaller companies a hundred thousand dollars a year. Overall solving this problem would save the industry $300M. Of this, they estimated, they could charge $75M for the product.

The team was happy. There were few competitors and they felt they could become a good solid $25M business.

The next meeting with another VC was even worse than the first one.

$75M TAM for an IoT product? For someone as experienced as you, and with the stellar team you’ve got, why are you taking so much risk — 8/10 startups fail you know — for such a small market?” advised the VC, running a $100M fund. “We will only fund you if you’re looking at a $1 billion market, and can make $100M annual revenue, otherwise the risk/reward doesn’t work out”.

Amita was baffled at how easily she and her team had been about to step into such a bad risk/reward tradeoff, even though they were smart, thorough professionals, who should have known better.

She decided to attack a much larger market, that was nearly the same as what they were trying to solve a problem for. Of course she didn’t know any customer in that area, but they were manufacturers too. Wouldn’t they have the same problems? No one in her team had done sales to the new segment, but how hard could it be to sell to a new vertical?

Back in the office, the team brainstormed the new market, $3 Billion wide, IoT for manufacturing across different verticals. Now the product roadmap had to change, since they needed to address different problems for different verticals, and they needed to make the product more generic. They had to drop some of the more intricate features for the auto-ancillary features too. That market was only a small drop in their overall bucket. So they obviously couldn’t do everything the small little market needed.

Miraculously the next VC agreed to fund Amita’s IoT product startup in a $3B market, and the team was now flush with cash, $2.5M to be exact. “Off to the races, let’s hire more people, build the product, get some more early customers” Amita thought.

But soon things weren’t rosy any more. Building the generic product that spanned multiple markets took much longer than expected.

Their early believers in the auto-ancillary turned sour, the product they were building was now not solving the specific point problem they had.

Their small initial pipeline ran dry, but they had a large pipeline of new prospects who they had never met before, who were all looking good to start engaging. But the sales cycles turned out to be much longer than expected outside of auto-ancillary. Perhaps the problem wasn’t as serious for others?

Their money was running out too, the $2.5M was designed to run for 18 months. Now at 12 months, staring at 6m of runway, with no product launched, no pilots won, and increasingly long sales cycles, Amita was at a loss.

Where had they gone wrong?

Wasn’t it supposed to be less risky to go after a large market?

Shouldn’t they get a great pipeline from the new sales guy they hired for a lot of $?

When their product built for a $75M TAM generated solid early paid pilots, why were they struggling to get any engagement in a $3B market?

Wasn’t it validation that they had a world class VC on board?

_________________

This is the story of some of the most capable founders with deep domain expertise, that I meet every month. While they have tons of deep experience, product ability, and network, it’s typically in a small specific domain, and not in a large, deep market.

In the process of building their startup, IF they move from small markets they know like the back of their palms, to large markets where they don’t know as much, the risk they are taking explodes.

On the other hand, if they are domain experts in the larger market, or end up creating a new large market, out of the small market they start in, then they have a great chance of building a true $1B+ business. Deep domain experts with 20+ yrs of expertise, selling and building for F500 — are best off hunting Whales, or Brontosaurus as Christoph Janz writes.

Typical VC fund economics

VCs with $100M funds need to return $300M to their investors. That’s the promise they make to their investors, 4X gross returns in 10 years as Fred Wilson shows, from a portfolio of top notch startups. And as Tomer Dean points out 95% of VCs fail to deliver sufficient returns to their investors!

So with 8/10 funded startups failing, a VC needs each startup in the portfolio to shoot for a $100M cash return to the fund. With a 20% ownership at exit, the startup must be worth $500M at exit, in 7–10 years from funding.

A startup seeking VC funds, therefore needs to rocket from $5M-$500M market cap in 10 years or less to be a success for a VC. To do this you have to build a $100M revenue business. This demands a market size well in excess of $1B.

At this return rate, the VC is ok if 90% of their startups fail the test, and fall short of returning $100M cash to the fund. That’s the risk/reward the VC is talking about.

At the other end, for a founder who has initial customers, has solved similar problems in the past, has a strong team, there’s actually little risk in making the first $1M revenue. Factor in a small market where no one else is solving the particular problem really well, they have little competition, and may win customers through referrals quickly. They have a good chance at building a $10M revenue startup, which might be valued at $40M.

Computing the risk/reward expected outcomes

In the VC model, going after a large market, the founders/employees end up owning 20% of the company at exit, with a 10% chance of getting there.

20% x $500M x 10% = $10M expected outcome.

In the bootstrapped model, going after a small market, the founders/employees own 80% at exit, with a 40% chance of getting there.

80% x $40M x 40% = $12.8M expected outcome.

Very similar expected outcomes, but very different risk profiles.

On the one hand, VC money is like strapping a nuclear fuel powered jet packon your back. When it works you get to orbit, but 8/10 times when you’re not ready for it, you’ll die.

On the other hand a longer slower more arduous climb up Mt. Everest, the rate of death is still high, but substantially more manageable risk wise.

Which path you choose as a founder, should depend on the size of the market you’re chasing, the cost of acquiring customers in that market, whether there are network effects that aid early movers, how much it will cost to build the product out to the quality the market demands, your own affordable loss, and more. And as Clement Vouillon says both paths are fine, but do know which path you’re on!

Too many founders are going to VCs with sub-scale markets (< $1B), and blaming them for not taking risks. A VC is NOT in the job of taking risks. They’re in job of building a high reward portfolio, and a small market can’t give a high enough reward.

Many founders think this is a one-time decision. Absolutely not! As Atlassian, Github and others have shown, it’s totally possible to bootstrap to find the right market-fit, and then take growth capital when you’re truly ready.

If you’re an early stage SaaS founder, and want to do this better, stay tuned for some hands-on assistance to grow past this choice.

Thanks to Manoj Menon for reading an early draft.

From Bootstrapped to Angeled : Is it your idea or product ?

You’ve shaped up your business idea to flag off. You have a pool of talent believing in that idea and lined up with working prototype with feedback. Now, it’s time for funding to take your idea to concept to design to product to a successful business.

Depending on the idea, startup projects can be particularly expensive and often incur new, unforeseen costs. That is particularly true of technological ideas, which are currently in vogue but require exploratory costs (to pay experts to determine if the idea is feasible) and initial product development costs. Even if a team proves the idea is feasible, they often need to build a working model or prototype to prove that to investors, which can sometimes add thousands of dollars to startup expenses.

Bootstrapped to Angeled_To_Raise_Seed_Capital 1

The vital idea behind bootstrapping in commercial means is to borrow as minimal finance as possible. In two words, you only rely on either on your own budget and savings, on some crowdfunded amount or simply on loans from friends and family. This scenario urges you to borrow insignificant amounts of money and thus keep interest costs minimal. But as the market dynamics populates further, the wider entrepreneurial community starts delivering differing views.

Guy Kawasaki has proclaimed that “you should always be a boot-strapper… too much money is worse than too little” but goes onto to suggest “if you do get offered venture capital, take it, but don’t spend it”.

Most people focus all their time and attention on building their idea, and forget that even the coolest product or service is worthless if people don’t use it. Creating a successful product or service requires two things:

  • A solid implementation of the idea.
  • People that use it.

For the best chance of success, you need to identify the smallest core of your idea that has value to your potential users, build only that, and release it.  This “minimum viable product” or MVP serves as the ultimate idea testing ground.  It lets you build a relatively inexpensive version of your idea, test it with real users, and measure adoption.

Investors see a lot of ideas, which is why they won’t sign an NDA (your idea is not original, no matter what you think). But if you have a team that has delivered products in the past, worked through adversity, and has a failure or two to learn from, then the investor can see a group of people who will protect his investment, and has demonstrated the skills to do so.

So No. An idea will not get you funded.

To be investible, a start-up needs to have a good product-market fit and the potential to scale up quickly to a large market. It needs to be defensible with intellectual property or some other competitive advantage. And it needs to have a credible team in place, people who investors will believe can execute. And there needs to be some kind of proof, also called validation, also called traction.

Building an early prototype also helps you attract tech talent, because it gives people something to look at and play with, and it communicates your idea in a more “tangible” form. Then you can shop it around to potential technical co-founders to get them excited about your vision. If you have the means to actually build a working prototype, so much the better!

Most Angel Investors (and VCs) won’t pay much attention these days without some other sign of traction, especially because the financial and technical barriers to entry are getting lower and lower. Bootstrapped to Angeled_To_Raise_Seed_Capital 2

Additionally, the current market size doesn’t matter. The market size in 10 years is what really matters. You want to be in a small but rapidly growing market. You can change everything in your start-up except the market. So spend a lot of time up front to make sure you’ve thought through your market. “Having value” and “being fundable” are two completely different things.

Two of the most valuable things that the investor community seems to have been seeing from close quarters are: customer feedback and data from pilot research, which can enable them ask questions that lead to product breakthroughs. Angel Investors would need to know how your idea has improved to a bit more than a fledged product wireframe, so that their willingness to invest into those ideas via money, and social reach can increase to ensure that the success of your product is further defines by cutting-edge product development process.

Following guidance is thus seems to have gained ground and immovable traction for all the aspiring entrepreneurs who are progressing from a Bootstrapping channels to Angeled funding:

  • Be value-driven rather than fund-driven
  • Be independent of technologies that make you lose control over your idea
  • Make the customer a base for your product than profit
  • Base your ideas on supply and demand and not on the money it can attract

Once again, this isn’t a strict definition, but the seed round is normally used to fund the initial stage of your company where you’re finding product/market fit, and the following rounds are meant to help with scaling. That said, the road from concept to readiness (aka product MVP) is long and winding. Entrepreneurs’ single greatest challenge in this sphere of activity is balancing bursting creativity with structured, method-driven decision making.

 

Dymystifying Valuations & Investors – an opinion from an entrepreneur!

Valuations often have seemed to be a “Black Art”, but they seem to be crucial in determining your strategy for outside investment!

Are they really? How is the early stage entrepreneur going to decide what is reasonable?

Some other questions that routinely come up in the mind of entrepreneurs:

1. How does the process of creating value effect me, my co-founders, my team & investors?
2. How do I maximize value for everyone?
3. How do I get the best valuation in case of an exit?

Entrepreneurs need to understand how money works and see the world from the investors world.

One of the area VCs in the US once described to me this scene sometime back, just after their firm had decided to invest in the start-up:

“There was a lot of interest in this company, and the founders had a fair amount of leverage. They used every ounce of it to extract a higher valuation,” he said. We kept saying that our firm would bring a lot more to the table than money, and that the mentoring, strategic advice, network resources, and political capital we could offer were almost unmatched.”

“The founders however set all that aside and made it about the money. It left a bad taste in our mouth. The deal was still worth doing—barely. But we have less of an equity stake in the company than we would ordinarily want, and given all the other portfolio companies that need my attention, I don’t feel any obligation or desire to give these guys additional assistance.”

The point is that the founders undervalued the non monetary value resources the VC firm had to offer, or they assumed that mentoring and strategic support would inevitably be available from the firm. Given that the negotiation for money and term-sheets is a high stakes exercise with various emotions and personalities
present in the mix, one should not forget that the document at the end lays out how much equity and control a VC will have in return for its cash is all about assigning rights, carving out protections, and haggling over claims to future returns.

So these negotiations are fundamentally about picking the right long-term partner and forging a relationship that can survive the inevitable disappointments, resolve the unforeseen conflicts, and monetize the mutually earned successes to come.

Now as a management consultant, I have tried to put these dynamics into some of the mistakes and solutions of how to avoid them in this blog.

At the end of the day, term sheets can be difficult to understand, and you may need help determining what the various provisions—liquidation preference, anti-dilution protection, pay to play, drag along rights, vesting schedules, no-shop clauses, and so on—imply for your current and future rights and obligations. At the very least, you should contact other companies in the VC firm’s portfolio to find out what was negotiable, why they made the choices they did, and what terms were the most consequential in the months and years after the deal.

So try to check out various VCs and see who you can work with, who has done investments in your space (target market you address) and what it has been for others to work with them.

“Remember you are looking for a partner for the long term and people who you work with will matter in terms of bringing value to your startup especially

the non monetary type!”

So here are some things to consider –

Understand your leverage

One of the thing is the more alternatives you have which means number of other VCs who are interested in your startup, it gives your more leverage. Try to use this to fight for the terms that are important for you. Sometimes one common problem is running out of cash since its hard to forecast the burn rate, and too little willingness to give up equity. As a result, you may fail to take in enough money during early rounds of funding. So look for someone who is willing to fund subsequent rounds or offer bridge loans without significant dilution of founder equity. Its better to negotiate this during the first round of financing when you have numerous alternatives and could command a better price. Many founders have discovered that doing a slightly bigger first round than seems necessary—or perhaps negotiating an acceptable formula for future bridge loans at the outset—can pay off in the
long run: It’s bad when you have few options, but considerably worse when you are running out of options and out of money!

Its okay to look at the long-term goals of the VC partner and take the time to understand what the other side cares about and hope for from their investment which includes accepting money in installments tied to milestones with no dilution in equity.

“So don’t just focus only on your own options.

Understanding the other party’s interests can give you leverage”.

Strive to maximize thrust for win-win situation

Imagine you are the verge of closing a big financing round at the end of the month. When you pitched
last month, the business was gaining momentum and you are on target for all your financial projections. Since then, a major customer deal you were counting on falls apart, and a key employee is on the verge of leaving. Question would be if you would have any legal obligation to reveal this situation, probably not, but imagine you picked up the phone and revealed it. Maybe you think they may re-negotiate the terms of the deal. But most often than not, VCs would reward you for your honesty since they would like to put a premium on your trust! They would value your upfront gesture of delivering bad news as you would deliver good news to them!

Another thing would be around terms, to comparison shop, and to use whatever leverage you have to renegotiate the deal. Its all okay as VCs expect you to ask for better terms, but not after you have given your word on an agreement. The VC world is small and they all keep cross checking on each others deal flows all the time.

“In VC relationships, as in any long-term partnership,

It’s much easier to build  trust than to rebuild it.”

Focus on value and not valuations

If you’re selling your house, for instance, you might not even meet the buyers, and despite issues such as inspections, financing contingencies, and the closing date, the selling price is far and away the top priority. In this case focusing on a single, top-line number sometimes makes sense!

But in case of accepting someone’s money at a startup, the signed contract is the beginning of the relationship, so its a mistake to focus too narrowly on price and not enough on drivers of long-term value. Its like when negotiating a job offer, for example, people tend to obsess over the starting compensation, but factors such as geography, responsibilities, prospects for learning and advancement, and even length of commute can have a greater impact on their enduring happiness and success.

More than one VC has identified this shortsighted emphasis as founders’ biggest mistake.

“Entrepreneurs focus too much on valuation and not enough on control,” one VC told me. “It’s amazing how much control founders are willing to sacrifice in order to obtain a $4 million valuation instead of $3.5 million. These numbers don’t matter much in the long run, but the impact of diminished control can last forever.” The tendency is especially remarkable when you consider the passion most founders have for what they are trying to create, for their company’s mission, and for their vision of its future. Once founders have sacrificed board control or ceded voting rights on too broad a category of decisions, those decisions are, of course, technically out of their hands. Most VCs are very reluctant to use their control rights to contravene the wishes and objectives of management, but if conflict or a breakdown in trust between management and the board occurs, founders may find themselves severely constrained, if not replaced.None of this means you should ignore valuation—it’s an important consideration. But it’s a mistake to confuse it with value, given that most founders also care a lot about factors such as their role, prestige, self-identity, and autonomy.

“To maximize valuation without regard for non-financial considerations

is to sign something of a Faustian bargain.”

Strive for Understanding not Conflict

Even when control is not the concern, you ought to pay close attention to terms other than valuation; there are additional provisions that can have a huge impact on how much money you’ll eventually see. And if you look at them carefully, the terms a VC firm proposes can help you understand its unspoken concerns and assessments of your start-up’s future.

Well as in any relationship you need to look well beyond the contract and far beyond today. The lessons offered above are targeted toward those who are striving to create strong partnerships with VCs—but they are relevant for anyone negotiating in a world where a signed contract is not the end but merely the beginning.

So folks go develop products & solutions and please don’t forget to connect your wares to a customer persona and a pain-point they may have to resolve and rest will follow!

I will do more posts on understanding terms like liquidation preference vs. participation for example in term-sheets from the perspective of an entrepreneur.

Tête-à-tête with Ram Shriram

A mentor and guide to many, Ram Shriram, managing partner at Sherpalo Ventures and one of the first investors at Google, addressed a rapt audience last week at the Bangalore office of [24]7.  Opening the hour long session with his reaction to the start up scene in India, Ram Shriram applauded the dynamic vibe of the IT capital of the country, even as he lamented the lack of infrastructure and the paucity of good Universities to channel the talent of the nation.
A few snippets from the conference for those who missed it.

Meeting Magic Mike Moritz XXL

What is common to Cisco, Oracle, Google, Apple and WhatsApp?

Besides being some of the most iconic technology companies in history, all these marquee firms share one more thing in common – an investor named Sequoia Capital.

Sequoia Capital is arguably the most prestigious VC firm on the planet and its chairman, Michael (Mike)Moritz is undeniably a legend in the tech investment arena. In a glittering career spanning over thirty years, Mike Moritz has presciently identified and backed companies like Google long before they were the behemoths that we see today.

Mike was recently in Bangalore and shared some insights in an event organized by iSPIRT, India’s leading technology thinktank.

Backing unfundable startup chasing seemingly impossible dreams

When asked about what Sequoia looks for in a startup, Mike says that they look to fund people with a deep sense of purpose working on ideas that seem unfundable to others. In his view, the best entrepreneurs are obsessed with a particular idea and see it as their life’s mission to make that idea work.

They are ready to perseverefor years and make painful decisions to achieve this mission and exhibit an almost unnatural clarity of thought when they communicate this dream to others.

Start small, dream big

While history inevitably builds a romantic narrative around successful companies post facto, Mike believes that at the time they got off the ground the household names of today, each worth billions of dollars, started off with things that seemed small with little inkling on how that their startup would evolve into anything big.

On day one, very little is obvious – but as time goes by, opportunities open up almost magically so much so that a seemingly arcane PhD thesis about a way to index information metamorphosizes into a platform called Google that is valued more than Microsoft.

Steve Jobs – what to emulate and what to ignore

Many Indian founders are besotted with Steve Jobs and are fashioning themselves after him. Mike knew Steve Jobs well, in fact he authored a seminal book on him. He feels that the media largely missed the truth about Steve Jobs – while there are multiple stories about his temper and acerbic personality traits,at his essence, Jobs was a dreamer obsessed with his ideas on personal computing.

Despite all the failures that he had to face, he preserved through over a very long period and brought out innovations like the iPhone and the iPad. Rather than emulate his personality traits, Mike feels that entrepreneurs should learn this sense of playing the long game against impossible odds from Steve Jobs.

Go East

Mike is of the opinion that while hitherto, the US had a near monopoly on tech innovation, the next twenty five years will belong to the East.

He feels that the biggest companies of tomorrow will emerge from China and to a lesser degree from India. This has as much to do with the large local markets where competition is fierce as it has to do with the greater appetite for work, the resilience and the stronger fortitude that entrepreneurs from the East have.

In an era where competition is global and information is transmitted instantly, these qualities put Eastern entrepreneurs at a marked advantage compared to their Western peers.

Unicorns that may go extinct

While there is so much euphoria about Unicorns – startups that are worth at least $1 billion – Mike feels that there is a good chance that many of these companies are overvalued and will die sooner rather than later. In his considered opinion, the best companies will not get stuck up in valuation but will instead try to build sustainable business models.

Epilogue

While Mike’s insights were valuable and his humility and candor were admirable, one couldn’t help but notice a proverbial sting in the tale.

Does the thought of backing unfundable entrepreneurs still hold true in a world where VC firms are fiercely competing with each other to fund the next hot startup in thehot category du jour? While traditionally Sequoia has avoided funding competitors, six of the largest funded hyperlocal startups in India are all funded by them opening up seemingly irreconcilable conflicts of interest.

Similarly, it seems incongruous to caution about Unicorns and bubble valuations but simultaneously deploy huge rounds of capital in unproven companies in crowded winner-takes-all markets feeding the frenzy further.

While history has already recognized Mike Moritz as a doyen of technology investing, time will tell whether his firm will continue to build on his pioneering path or chalk out a completely different destiny.

Startup Founders: Give no room for confusion

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As part of my job I meet a lot of startup founders. These Founders, despite numerous job options, have chosen entrepreneurship as the way forward. They are dead serious about their startups; highly passionate; and very hardworking.

What bothers me the most is that many of the Founders don’t critically think through what makes teams and companies fundable.

All founders must critically assess their team, as well as their idea, and bucket their startup into one of these two categories:

  • a) our startup is fundable or
  • b) our startup is not fundable today. Therefore, I need to get to profitability with minimal angel money.

A majority of startups that I meet, unfortunately haven’t done their homework to understand what type of companies get funded and whether their startup belongs to the category of fundable companies. Most of the Founders, for some reason, postpone understanding the rules of the funding world and spend way too much time trying to raise money, when the idea or team itself is not fundable.

Please note – not all teams and their ideas are fundable.

It doesn’t mean these startups have no future. A significant number of high-quality profitable companies are built with no money from VCs. These companies focus on revenues from day one and continuously iterate in making their products for revenue generation. By generating revenues and getting to profitability, these companies become self sufficient and they are not at the mercy of anyone. Many times, these companies raise growth capital when they want to scale as well, or for liquidity.

The worst thing for Founders is getting stuck in between the two options: they can’t raise money and they don’t have enough runway to get to profitability. Once they are stuck, it is not an easy escape, and this impact  can be detrimental to the startup ecosystem.

Founders, before time runs out, critically assess your team, idea, strategy and pick your path accordingly.

The purpose of this article is to get all entrepreneurs to take action of discovering their path. There is enough content on the web on what makes companies fundable or how one can build bootstrapped companies. The other way is to talk to those who have done it, but, get on this work sooner than later

If you want to do something, don’t over-analyze it! We do mostly Series A Funding! Helion Ventures #ThinkInvestor

ThinkInvestor is iSPIRT and ProductNation’s new initiative to serve as a catalyst between Venture Capital firms, Angels, Angel Networks and Entrepreneurs. It is to go beyond brochure ware and dig deeper into the whole life cycle of a typical investment; from introductions, funding, styles of on-going engagement, to exits. And in the process, capture their views on global and local trends, and the entrepreneurial ecosystem in India. This interview is done with inputs from Shashi Bhagnari.

think-investor-helionHelion Venture Partners is a $600 million venture fund focused on India with offices in Bangalore and Delhi. The company is an early to mid-stage investor in Indian startups in sectors such as Enterprise software, Internet, Mobile, Outsourcing, Retail, Education and Financial Services. In a conversation with iSPIRT, Helion’s Alok Goyal, Partner, talks about the company’s funding strategy, evaluating projects and making the right investments.

Tell us about the company’s background. What is its focus? What is your current fund? What is it looking at?

We formed the firm in 2006 with four founders that included Ashish Gupta, Sanjeev Aggarwal, Kanwaljit Singh and Rahul Chandra. Besides our team of analysts, our CFO doubles up as an operating partner for finance. We also have an HR advisor who works closely with our portfolio companies. We recently got someone in Product Management from Google to help portfolio companies. We are now a group of 15 people and have our offices in Gurgaon and Bangalore in India.

We focus our investments on early to mid-stage ventures, investing in technology-powered and consumer service businesses in sectors like Outsourcing, Internet, Mobile, Technology Products, Retail Services, Healthcare, Education and Financial Services. We have done about 60 investments so far.

In our current fund, we have raised about $250 million. The focus of this new fund will be divided between technology side and tech-enabled consumer investments. We will continue to look at Internet services like Makemytrip where we invested earlier, taxi services like TaxiForSure etc.

What’s your strategy on verticals? How do you characterize them?

Within e-commerce, we are bullish on Internet-only brands and marketplaces. For example, YepMe–a Web only brand focused on tier two and tier three markets. We have also invested in a venture called ShopClues which is an eCommerce marketplace.

Within consumer services, we have invested in consumer facing travel ventures like TaxiForSure. We have also made an investment in a company that makes planning travel experiences much easier. We have also funded a housing and real estate venture, Housing.com.

What stage of investment are you most interested in? Seed funding or later stage investments?

We are mostly the first or one of the first institutional investors in the company. Our sweet spot would be Series A or Series B funding. I would imagine 70 to 80 percent of our investments are in Series A. We invest between $10 to 20 million over the lifetime of an asset.

Any interesting investments you have made recently?

We had been looking at investments in the healthcare sector for a while now. We have recently invested in Denty’s, a chain of dental care units. This Hyderabad based company focuses on dentures, jaw replacement and other high end dental care treatments.  We have also invested in the area of enterprise mobility, in a company called Rapid Value that provides services in the area of mobilization of enterprise applications. Another recent investment is Linguanext, which has created a unique technology for language translation. It allows Independent Software Vendors (ISVs) and enterprises to translate any application from one language to another without any changes in the application itself.

How do entrepreneurs get in touch with you? Is there a defined process they need to follow?

Entrepreneurs are at the heart of the venture capital eco-system. It is as much or more of our job to find entrepreneurs than they reaching out to us. In fact, we use a lot of our bandwidth to get to reach out to entrepreneurs.

Entrepreneurs are most welcome to reach out to us directly. There are two ways entrepreneurs typically get in touch. First is through our personal network. Second way is through bankers. We also like to make ourselves visible in forums and events so that entrepreneurs can reach out to us and we can reach out to them.

We also have a strong outbound program through a team of analysts.

What is your due diligence process? Is it specific to all?

We view around 1500+ business plans each year. The process is similar for most. Usually the first meeting takes place with one of our analysts, unless it comes from personal contacts. Different analysts focus on different areas and they all gain a good idea after the first meeting, which is then followed up with another meeting with one of the partner(s), to understand the business better.

Due diligence for us is more Market Diligence. We also do primary research, secondary research and make reference checks. After we are through with the entire due diligence, we invite the entrepreneurs to present their business plan to the whole team.  If the partnership is positive, we issue a term sheet after which financial/legal due diligence cycle along with documentation is completed.

The entire end-to-end process is completed within a month and a half typically.

How do you interact with your entrepreneurs? Is there a process outlined for this?

Investment is not only about money. We have developed reasonably strong relationships with our entrepreneurs which begins when we start the process of due diligence. We have both formal and informal interactions on a periodic basis.

In the early stages, face-to-face meetings are held every quarter, in addition to monthly calls. But outside of that, we do not interfere in their work at an operational level. But entrepreneurs reach out to us whenever they need help. For instance, if they need clarity on product direction or to connect with other prospects, they contact us. Those interactions are in fact, quite regular. However, I personally find myself being in touch with them on a very regular basis.

Do you have any avenues where you meet your portfolio company CEOs informally during the year?

Yes, we are doing this once a year. We have also started to form groups now. For instance one group that focuses on product management can share tips with portfolio companies in that area.  We also reach out to our portfolio companies through webinars.

Tell us about your recent exits? What do you think of the climate for exits in India like?

We are just an eight years old entity, so there have not been too many exits. Our first was an IPO exit from MakeMyTrip when they went public. We also exited redBus when it was acquired by Naspers. Then we got out of Amba Research. We are hopeful that the market climate in the next few years will get a lot better for favorable exits.

What excites you about entrepreneurs these days, and what is it that you like to see in them?

In all my discussions there is a general belief that the quality of entrepreneurs has gone up significantly. We are also seeing a whole class of entrepreneurs moving back from the US. We are seeing a generation of entrepreneurs starting their second ventures now. Their scale and thinking is different, very bold.

What we’d like to see is stronger talent in Product Management. It is relatively more difficult in India compared to a place like the Bay AreaWe are also not seeing as many deep technology assets. What we are seeing are more applications based and light IP based businesses from India. Over a period of time, I have no doubt that India will create more deeper technology companies as well.

What advice would you like to give young guys who want to start a new venture?

You should ask yourselves if you have the entrepreneur inside you or not. If you are over analyzing, you are probably not. An entrepreneur has to be “foolish” enough to purse the dream besides being passionate about it. If you want to do something, don’t over-analyze it. The important thing is the ability to take the plunge.

Entrepreneurship is not a solo sport; but a team sport. You need to find complementary capabilities in others. The bottom-line is that you should be able to pull together a team that has complimentary skills and the same passion to do it.

A startup is successful because it is focused. Defining that focus is important. Startups succeed because they choose a specific market segment or a specific problem or a specific customer set etc. and serve that market better than anyone else.

Lastly, it is important to be close to the market. You need to continuously listen, learn and act with agility. It is important to be able to iterate quickly. 

The redBus Founders on Motorbikes Story! Interested in India Domestic Consumption Start Ups! Seedfund #ThinkInvestor

ThinkInvestor is iSPIRT and ProductNation’s new initiative to serve as a catalyst between Venture Capital firms, Angels, Angel Networks and Entrepreneurs. It is to go beyond brochure ware and dig deeper into the whole life cycle of a typical investment; from introductions, funding, styles of on-going engagement, to exits. And in the process, capture their views on global and local trends, and the entrepreneurial ecosystem in India.

Seedfund is an early-stage venture capital fund, with operations in Bombay, Bangalore and New Delhi. Seedfund was founded in 2006 by Bharati Jacob, Mahesh Murthy and Pravin Gandhi and the team has grown to include Paula Mariwala, Sanjay Anandaram, Sarabjeet Singh, Shailesh Vickram Singh and Tarana Lalwani. All Seedfund team members have been entrepreneurs at some point or the other in their careers. Seedfund investees include AFAQS, CarWale, Chumbaka, EduSports, Fetise, Frontier Markets, Healthizen, Heckyl, Ixsight, Jeevanti Healthcare, Jeeves, Level10 Comics, Lifeblob, myDentist, Nevales Networks, Printo, redBus, RupeeTalk, Sportskeeda, ThinkLabs, Uhuroo and Vaatsalya.

ThinkInvestor-SeedFund

 

 

 

 

 

ProductNation sat down with  Sanjay Anandram, Venture Partner of Seedfund for this interview.

Here’s what we heard :

What is Seedfund? Tell us a little bit about your fund, stage, investments you like? How are you structured? What’s your current fund? How far along are you in your current fund?

The name Seedfund implies only seed funding but really is a seed or early stage fund that likes to get in early and stays on through multiple rounds of funding. We can invest up to $5M in a company. The sector is India Domestic Consumption – anything that the Indian consumer spends money on; financial services, entertainment, travel, hospitality, healthcare, education, etc,. We are structured like a regular VC fund. Our first fund was a small $15M fund but our second and current fund is $55M. The first fund is nearing its end of life and the second fund is about 2 years and 10 months old.

How do you get to know companies and entrepreneurs? What’s the best way for an entrepreneur to get in touch with you?

Sanjay-AnandramWe are less driven by broad trends than by the specific opportunity and the category we find them in. In many cases, we have invested in companies that created a whole new category. For example, when we invested in redBus, there was no category called Bus Ticketing Services but they created one! Our investment in Vaatsalya created a category called Hospital Chains for Tier 2 and Tier 2 towns. Our investment EduSports created a category for Physical Education Services for schools. Sportskeeda is a Sports Online Community site. All these have been started by people completely embedded in that space.

We have a large network and many companies and entrepreneurs we get to know through referrals. We also have a number of companies approaching us directly also. I started in 1999 an online magazine aimed at entrepreneurs. In 2002 I started one of India’s first VC fund called Jumpstartup. Since 2006 I have been associated with Seedfund as a venture partner. All of this means that we have been long enough in this space to build a large network and get to know people. That’s how we get a lot of referrals and many of them come in directly as well, through email for example.

How long does it take for you to do the due diligence process? What is your due diligence process?

At the stage of the companies we are dealing with, there is usually not a lot of due diligence we could do because many of our portfolio companies create their own categories. That said, we place a few phone calls to check out the space a company is in, any competition they may have. Apart from the usual things like checking out the team, sometimes, we may need to clean up existing company structures if they have involved a lot of friends and family investments. Sometimes companies need time to pull things together for us to do due diligence. All of these typically take from about 3 to 5 weeks time.

What kinds of interesting new categories are you seeing in India? Exciting business models, technologies?

There are two ways to look at the categories we see – one could be the mode of delivery – cloud, mobile, SaaS, etc. The other is along verticals that correspond to consumption of the Indian consumer – financial services, education, healthcare, entertainment, travelThe interesting companies we are seeing deliver something faster, better, cheaper to the Indian consumer in these verticals using one of these delivery methods.We are not seeing a lot of fundamental technology advancement plays from India. We are seeing  more innovations in Business Models, throwing together unusual methods of delivery being the innovations.

Although we are focused on the Indian market we have invested in a company like Heckyl that provides financial analytics that includes social media targeted towards brokers and traders. This company has international markets in its scope.

We are very excited about Chumbak, a designer, a brand and a retailer that does India designed Motifs and colors. They have a presence in Japan, have retail stores also in addition to the online one and growing extraordinarily well. Chumbak is creating a brand new category for Indian designed, Indian made products. 

AxisRooms is a one of a kind cloud-based start up in the hospitality industry. It enables an exchange for price and inventory discovery to bring together agents and consumers in the hospitality industry with hotels in real-time. Till now there has never been a single place where all travel agents, consumers and hotels can interact, transact business, and get contracts done.

Sports advertising market is about $800M in size and growing at 25% per year. Sportskeeda is right in the middle of this market to serve consumers with a multi-sport content and community platform. Jeeves is a portal for in-warranty, extended warranty and out-of-warranty appliance repair in India.

What caught your attention about redBus? Any stories or interesting pivots you want to share about that company?

There are a few remarkable things about redBus. They proved that you can build a large company in a very ethical way, focusing only on the Indian market, and building a strong consumer brand without splurging money on marketing and advertising. They also proved that it is possible to create a category by co-opting all the players – the bus operators, consumers, ticketing agents and the Government. It wasn’t easy at all; they had lots of roadblocks but they overcame all those! They made a high-end service possible for the end consumer and at the same time, made it transparent to the bus operators how much money they can make by using redBus, and where their weak points were with consumer feedback. Now a lot of the bus operators’ growth is tied to redBus’ growth and vice-versa, a symbiotic relationship! It was a very unorganized, unprofessional, not transparent business. redBus made it a transparent, democratized one!

Here’s an not often mentioned story about redBus: It was one of those early days when they were selling 30 to 40 tickets a day which was really, really small.  As happens in small start up companies the co-founders were helping man the customer service phone lines one evening. They got a very angry call from a customer whose Bangalore to Mumbai bus was cancelled and he was stranded in the middle of nowhere with his luggage! It was late at night and Phani, and one of his other co-founders got on their motorbikes and met this irate customer where he was. From there they took him and his luggage on their motorbikes to Bangalore airport, bought him a ticket on a late night Air-India flight to Mumbai and saw him off! Although they were not directly responsible since the bus operator was the one that cancelled the bus, they took it upon themselves to make sure that their customer was treated right! The customer reached Mumbai, wrote them a nice letter thanking them for their service and has been a loyal customer since!

Another remarkable thing about redBus is their commission structure for the tickets they sell for large bus operators and smaller ones. It has been the same and they have resisted lowering it for larger operators that bring them more business or increasing it for smaller operators that don’t bring them that much! It is always a standard transparent one for all of the operators. They have done this in spite of intense pressure from larger and smaller operators alike! Over time everyone understood the value of a transparent, consistent commission structure.

The point I am trying to make is that it is possible to conduct business in India this way – ethical, fair, transparent and consistent!

Once you have invested in a company, what’s your engagement model? How do you interact with these companies?

It’s informal and easy-going (but not at all lax). We focus more on helping the portfolio companies build their business rather than manage from spreadsheets. We focus on strategies and tactics for the company; hiring, customers, business model tweaks, what would the next round of financing look like, partnerships they need to create, what kinds of mentors and advisers they need to bring on board, etc,. We see ourselves as partners rather than investors who write a check, and disappear.

There are formal board meetings with the companies on a pre-arranged calendar. Beyond this the informal interactions are all driven by the entrepreneur needing us to help with something. We share interesting anecdotes, articles, meeting minutes, etc,. Apart from these, we do have CEO meetups a few times a year where they share problems, solutions, experiences, lessons learned, especially in the areas of hiring, sales, etc,.

Let’s move to exits! How do you help them prepare for exits? Do you prepare them for exits?

We believe that you build a good company the exits will suggest themselves automatically! CarWale built a good business around a portal for buying and selling new and used automobiles. The German group Axel Springer and the India Today group did an acquisition.  With redBus we were out raising funds when the Naspers group came along and acquired it.

There is no general preparations for exits. Our responsibility as investors is to see the company grow and if they grow well, exits will happen automatically.

What are your thoughts on what’s happening in India? Advice for entrepreneurs and start ups? What’s your advice for people leaving stable jobs for start ups?

There is a lot of activity in India currently. However, we advise entrepreneurs not to get too excited after reading TechCrunch and things happening in Silicon Valley! You need to be excited about opportunities that happen in India! There are enough problems to be solved right here. The customers are here, you can build partnerships here. It is important to be grounded and present in the market for you to build something worthwhile.  It is possible to build big,  interesting companies, businesses right here in India. But for that to happen, you really need to understand the customer problem you are solving and why they would write a check for your business. A lot of youngsters get excited about what’s going on in Silicon Valley. But you should be spurred by customer problems here, not what’s happening in some other market.

You don’t do a start up because you want another job. Not for sex appeal or the glamour! You do it for the passion. You do it because you want to do it! You may need to get used to downsizing your life significantly. You may not have the same compensation and others things that go with a stable corporate job. You may need to deal with social pressures because your friend continues in a corporate job and has bought a brand new house and a Mercedes recently! I have written extensively about these economic and social pressures, why should you be an entrepreneur,  and should you be an entrepreneur. When your passion to go out and do something is greater than the analytical assessment of all these costs, you should do it! You will have to deal with a lot of emotional issues such as self-esteem.

Think of all the possibilities! Don’t let constraints come in the way! It is easy to blame the ecosystem, the lack of money, VCs, Angel Investors, etc,. This question is like asking Is it possible to climb Mt.Everest? Yes. It’s always possible. The key questions are what is required to make it happen? You need to be physically fit, you need to know the lay of the land, you need to have people who have knowledge and experience with doing it before, you need to have the right equipment, a timeline that is suitable and all other resources for such an expedition to succeed. You need to lay all of these in sequence and execute and in 18 months or so you may be on top of Mt.Everest. Constraint based thinking make us give up too soon when you lack one or more of things that are needed. Entrepreneurs use possibility based thinking to address and overcome these limitations one way or another. That’s the difference!

What’s your take on companies getting Mentors? When should they look for one?

Before answering this question it may be better to get some terminology defined correctly since people tend to use words rather interchangeably.

A Consultant is one you bring in to solve a transient, bounded problem. How do I put in an IT system? How do I do Risk Assessment? How do I design a compensation plan?

An Adviser has a longer term strategic and functional objective. What should my IT Strategy or technology be? How should I be doing my marketing?

A Mentor is a like a coach helping them become better. 

In Mahabharata, Krishna tells Arjuna to aim and kill Duryodhana below the waist. That’s a Consultant!

When Krishna give Arjuna advice on how to kill Bheeshma, he’s an Adviser!

Before the battle, Arjuna asks Krishna how he could kill his cousins and grandparents in battle. He’s very conflicted about this. Krishna’s advice then is Mentoring!

It depends upon what the entrepreneur needs. Mentors are needed for high level coaching type of advice. Not for finding customers or helping with this or that. You need to be sure that the problem you have needs a Mentor, not an Adviser and definitely, not a Consultant!

We invested in Ezetap, the Square for Emerging Markets! Mobile, Internet, Payments interest us! AngelPrime #ThinkInvestor

ThinkInvestor is iSPIRT and ProductNation’s new initiative to serve as a catalyst between Venture Capital firms, Angels, Angel Networks and Entrepreneurs. It is to go beyond brochure ware and dig deeper into the whole life cycle of a typical investment; from introductions, funding, styles of on-going engagement, to exits. And in the process, capture their views on global and local trends, and the entrepreneurial ecosystem in India.

AngelPrime is a Seed-stage fund that sits between incubators/accelerators/angels and large VC firms. Started by serial entrepreneurs, Bala Parthasarathy, Shripati Acharya & Sanjay Swamy, Angelprime believes in getting deeply involved with the companies they invest in. They have been serial entrepreneurs that understand that entrepreneurship is a long and lonely journey and having multiple minds spend sleepless nights on the business dramatically increases the chances of its success.

ThinkInvestor-AngelPrime

ProductNation sat down with  Sanjay Swamy, Managing Partner of AngelPrime for this interview.

Here’s what we heard :

What is AngelPrime? What’s your Stage, Focus and typical investment sweet spots?

We are a group of serial entrepreneurs and we bring the perspective of an entrepreneur to our fund. We are very seed stage and we are hands-on investors. In the early 70’s  in Silicon Valley, VC firms worked side by side with entrepreneurs building their companies. Later on, they evolved to become more of financial investors. India now is somewhere in the middle. However, we believe in working side by side with the entrepreneur in building companies. We help our portfolio companies in product definition, building teams, building products, getting them validated in the market and building a global strategy if needed. There are Angels and Incubators that may invest in the order of a few lakhs. Typical early stage VC firms may do $2M to $5M and do 8 to 10 deals a year. We are in the middle, and we can dedicate a lot of time to the companies. We have bandwidth only to do 3 or so highly curated deals a year.  Our typical investments have a broad range,  from  $100K to a $1M. Our sweet spot is $400K to $600K.  Our focus is Technology-led Start ups, Mobile and Internet, Financial Services and Payments. All three founders of AngelPrime were volunteers with the UID program in India and so we are very interested in Identity related start-ups. We are seeing a lot of companies in the healthcare space and have invested in a recruiting start-up. Most important thing for us is how much value can we add.

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What’s the best way for an entrepreneur to get in touch with you? What works and what does not?

Referrals are still the best way to get in touch with us. However, we still get to know entrepreneurs and their companies through email. One of our portfolio companies HackerEarth, we bumped into at a conference! We are also finding early stage incubators to be a rich source of deals. We have found interesting companies at incubators like the Microsoft Accelerator, GSF India and Morpheus. We find that the deals we come across at these places have gone through some level of curation already, with something of a team in place, and some limited level of product validation already done. These are the kinds of referrals that we like! Typically we are the first institutional money and we are also the larger lead in a seed round.

How long does it take for you to decide on investing? What is your due diligence process?

The first thing we assess is the caliber of the entrepreneur; we look at the scrappiness of the entrepreneur and the typical two person (or so) team.  If the members of the team are similar in backgrounds, that’s not necessarily a plus. We are looking for teams made up of people who are complementary in backgrounds but work well together.

The second thing that’s important is the size of the market. This is not something you can create. It is what it is, but we assess how the entrepreneur is wanting to go take a piece of that market.

Coming to the due diligence process, we try to move very fast. We don’t believe in stringing the entrepreneur along but sometimes additional market validation may be needed. Typically at this very early stage, very little has happened that we can do do due diligence on.  However we look at how the company is structured and clean it up if we think it can create problems downstream.  We make sure that the founders, vesting schedules, CAP structures are all set up properly.  We look at the legalese and make sure that’s all good. We are very strong believers in clean and simple Silicon Valley style term sheets. No funky clauses; our liquidation preferences are usually 1X, non-participating.

Typical timelines for a decision have been as fast as 24 hours where the company is ready and it’s in our sweet spot. Sometimes we may need to go do some research on our own before a decision. Sometimes it becomes a question of our learning an area as well.  Due diligence and paperwork takes about 3 weeks.

Once you have invested in a company, what’s your engagement model? How do you interact with these companies?

There are two ways we interact with our portfolio companies. The first one is the formal weekly or bi-weekly meeting. More interesting is the informal interactions we have. We have a co-location space in our office where many companies situate themselves at this stage of their development. It helps us to have a number of water cooler-type conversations with them. We learn about new things and we also provide our advice as relevant, and asked for by these companies. We tell these companies that we can take on a variety of roles for them all the way from mopping the floors to wearing a suit and meeting with bankers with them.

There is another way to look at this hand-holding, in three phases:

1. Experiments: We help them in do a series of experiments both in the technical approach, and also with the business model. These days the cost of doing experiments is very low and the cost of not doing them, very high!  For example, in payments,  is it a per transaction fee or a subscription model? The cost of doing A/B testing these days is not much. Many times we  end up learning something from the entrepreneurs,  when they push back and say “this is today – this is what works unlike something five years ago”, because they may be  closer to the market.

2. Narrowing Down: The second phase is the weeding out of those experiments that failed and narrowing down the business and building the team for “scale-hacking”

3. Scaling: The third phase is scaling the business and in parallel preparing the company for the next round of funding. We address questions like – Do we raise additional monies here in India or the US and help facilitate introductions to suitable investors.

What are some of the exciting companies in your portfolio now? Exciting new business models?

Ezetap is a company we incubated, invested $5ook initially. It is a very exciting company where we took a very different approach than Square. We designed and developed the hardware in India instead of the usual approach of going to China for it! We took an Apple-esque approach to keeping all of the hardware and software development in house. The business model is also not a per transaction fee model like Square but a SaaS based subscription model. We raised a $3.5M Series A round from Social+Capital. Chamath Palihapitiya brought in other investors like Peter Thiel and David Sacks in this investment. Ezetap has gone on to raise another round from a consortium of Helion Ventures and Berggruen Holdings who are very well connected in Europe.

HackerEarth is a company that has put a nice business spin on TopCoder!. They are providing a very useful solution to the problem of sifting through 100’s of resumes in India to find those few programmers whose skills are  excellent! HackerEarth has solved this problem with some clever algorithms that automates this sifting process. Top companies like Adobe, inMobi and Symantec are using this solution for their hiring. The two founders are from IIT Roorkee, in their early 20’s and are phenomenal in their speed of implementation of ideas!

We have invested in another company in the Mobile Wallet space that we have not yet announced. This was also founded by two young entrepreneurs whose ability to execute is phenomenal, have boundless energy and ultra capital efficient! We have invested in another company, SmartOwner. SmartOwner is a company that allows individuals to invest in highly curated real estate deals for investment purposes.

ZipDial is not technically part of this fund but I am a co-founder, and we all individually are investors in the company. ZipDial makes clever use of the “Missed Calls” phenomenon in India where a call is made but never completed by mutual agreement. ZipDial piggybacks various kinds of actions – marketing, customer service, etc. You could send marketing messages or customer service can send back a message about being very busy now and other suggested times to call. Political parties in India like the Congress and BJP are using it for increasing engagement of voters. Out of AirTel’s 200M customers, only 60M or so have ever sent a text message. Text messaging literacy is not that high but number literacy is. They can dial numbers easily. By dialing a number toll-free (since it is a missed call), you can get feedback or information. For example, a market survey ZipDial missed call sends back a question about your MLA’s performance. It sends two or more phone numbers for each of the possible responses. You just do a missed call to the right one and it is done! This is a completely India-based business model but the funny thing is that the founder is an American, Valerie Wagoner! ZipDial was rated #8 in FastCompany’s most innovative companies!

What kind of advice would you have for someone interested in becoming an entrepreneur, especially from a stable job like at a services company?

There are some very great fortunes to be made in the entrepreneurial ecosystem. I think we need more people willing to be early employees in start-up companies. The risks look daunting but the rewards, especially in India could be huge! Get out of your comfort zone and take some risks! The opportunity cost of not trying is very big! The technical challenges involved in putting together an innovative start-up that changes people’s lives, could be rewarding in itself.  You get to conceptualize products, test them in the market and if it works out, watch it scale. If it doesn’t work out, you can always go back to a safe job.

A lot of entrepreneurs hesitate to say that they are in it for the money. Culturally, we are not yet attuned to this but there is no shame in it! Secondly, we are not accustomed to failure and fear the stigma attached to it! We don’t celebrate failure – the best lessons are when things go wrong!

Exits are crucial for Product companies to have money come in through the front door as investments. What are your thoughts on what’s happening in India?

There have been very good exits like  Little Eye Labs and the Redbus, The Little Eye Labs was a good technology company exit and Redbus took a dis-aggregated market and consolidated it nicely. MakeMyTrip had an IPO exit. There were also a number of exits that were not talked about – VentureInfoTech was a $100M+ acquisition by a european company. Prizm payments was acquired by Hitachi for over $275M. For technology companies,  Silicon Valley still seems to be the destination. Services companies are being acquired by European entities. Considering returns,  we need a little more patience in India. Things take longer but have started happening.

We advise our companies to think they are building houses as if they are going to live in them! People will come to buy the house at the right price if it is built right!