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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.

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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.

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On that age old debate, Bootstrapping Vs Venture Capital

“The best way to do something ‘lean’ is to gather a tight group of people, give them very little money, and very little time.” – Bob Klein, chief engineer of the Grumman F-14 program.

I first came upon this quote on Paul Graham’s website, and it always intrigued me, the small detail about the money – it could be little or a lot, but money is a factor, and a very important factor at that.

Bob Klein’s F-14 program is now legendary in aviation history; the Tomcat was one of the airplanes I was familiar with even in the Indian Air Force circles of the 90’s. Designed to fulfill duties both as a air superiority fighter as well as a naval interceptor, the F-14 Tomcat was easily one of the greatest airplanes ever built then, and Bob Klein did it, as he said, by keeping it fast and cheap.

Bootstrapping or Venture Capital

So is that the blueprint to build something amazing and meaningful? To just sit down, tighten your belt and do it, what we call bootstrapping, or is embracing the stability of venture capital a better way?

It’s an important question in the context of the product startup, and I believe there’s no right and wrong answer to it.

Last week, in a conversation with iSPIRT’s co-founder Sharad Sharma, this topic came up and proceeded to lay claim our entire discussion. When these days a bootstrapped startup is seen as something of an aberration, and scale is seen as validation, Sharad maintained that there’s no formula here; both these paths can lead to success, if followed with caution and perseverance.

Quoting Sharad –

“When you are building something that hinges on a market prediction, that so and so market will be worth so and so in 2025, and you want to be there to fill that gap, then VC funding for the idea and for you is probably the way to go. But if you have no such idea or bet on the future for what you are building; it’s much more experimental (which is ok, that’s how innovation happens), then bootstrapping might make better sense, even if just for the sake of flexibility and more control.”

I could find no reason to disagree.

The Zoho Example

The success of Zoho, the poster child for the bootstrapped product startup, is now quite well known. And all of it with not a penny in external funding. The company is growing, has always been growing, and has just announced a bold move to make one of its flagship products completely free. These are big decisions, made strategically and with a much larger gameplan. Zoho has always stood for something, and its clear, unmuddled decision making has been one of its strengths through the years.

Would Zoho have been able to make such decisions if a member of its board was an investor? Perhaps, but not very likely.

Which I think is significant. What ails the ecosystem these days is a ‘go big or go home’ attitude that typically results in an organization and a product that scales far ahead of its time, resulting in chaos and sometimes even graver problems. Zoho didn’t fall into that trap, it took its own time, and now stands tall as an organization.

Sometimes VC money, though a huge competitive advantage, can come with its own baggage, and the pressure of having to execute something extraordinary all the time can weigh down on doing what actually needs to be done.

But sometimes that baggage is exactly what you want.

The Zomato Story

When Deepinder Goyal started Zomato off, he certainly would not have known that the product he was building, a restaurant review and recommendations site that is today used in 40 cities across the world, would change the entire landscape of eating out. He would have had a vision, but of course he could never have knows what exact shape his business was taking. But he knew he had something; he raised funding. Venture capital stood him up as he expanded hard and fast and cool. It was great to watch.

Would Zomato have been able to scale the way it did without venture capital? The answer is an emphatic no. The awesomeness of the Zomato model rested on its ability to execute, and they did it magnificently well; waiting was something Zomato could not have afforded anyway.

In this case, the VC prerogative to execute fast and hard tied in perfectly with what Zomato itself wanted to do. What resulted is Zomato’s incredible success as a platform, a lovely example of using funding to take an idea big.

“There is no formula”

Again, though, Sharad put in a word of caution – it all depends. This may be a good rule of thumb but there is no formula. Product startups are all different from each other, and what works for one is not at all guaranteed to work for another.

And this is when it struck me that there’s a third category here as well, the perfect example of which is that darling of the younger generation, Instagram.

The Instagram Model

Instagram started out as Burbn, a location sharing app with the option of taking a photo thrown in, but then pivoted to the unbelievably successful photo sharing app we know. And they were funded from the beginning by Andreessen Horowitz and Baseline Ventures.

So here’s a venture funded company, which was trying to build something purely ‘social’ and ‘viral’ in parlance, and the VC’s let them experiment to an extent as to change the focus of the product itself. This is the third kind, the company which adds the no-commitments freedom of bootstrapping to the competitive advantage of venture capital, and becomes a sort of hybrid, absorbing the good in both approaches and ridding itself of the bad.

An important point here is that Instagram never really had a monetization plan in the first place (other companies like this include Tumblr, Twitter, Foursquare, and so on). Positioned for acquisition because of the exponential increase in their user base, they could tread this middle ground with the confidence of knife edged focus.

WhatsApp also did something similar. When Jan Koum and Brian Acton started working full time on WhatsApp, they already had $250000 in funding from friends, which meant that they had the freedom to innovate and at the same time had the stability of capital.

The Last Word

In 1986, Tony Scott’s Top Gun hit the silver screen, in which a young man called Tom Cruise flew a F-14 Tomcat to box office glory and superstardom. The immediate aftermath was that the US Armed Forces were overwhelmed with young people wanting to sign up for service, so much so that the US Navy opened recruitment desks outside cinema halls.

The Tomcat became the symbol of a generation, the high of the air and the allure of uniform combining to give an era its own narrative. And it was exhilarating.

It was a small team that built it. With the entire might of Grumman (later Northrop Grumman) behind them, Bob Klein could have done it in any way he wanted, but he and his team chose the best way for the specific thing they wanted to do, and executed.

And that’s exactly what we can learn from them – that there’s no ‘one size fits all’ answer to this question, and the ecosystem should encourage bootstrapping as as much of a viable pathway to growth as venture capital.

As for the startup, it should choose wisely.

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7 Critical Things to Understand about Venture Capital for Product Start-ups

If I had a Rupee every time I heard the words “If only Venture Capitalists were more active in building the Indian Product Eco-system….”, I would be a rich man!

I am guessing that this is because of a lot of mis-conceptions about Venture Capital and how they play in the product space, in India as well as elsewhere. As a Software Product entrepreneur, you owe it to yourself to understand VC money in all its complexity to make wise decisions about whether it is even suitable for you, and if it is,  how to get it, and if you get it, what are you in for?

It is impossible to capture all of the complexity of Venture Capital in a single article but here are seven basics every software product company in India should be aware of:

  1. Understanding exactly what business Venture Capitalists are in – They are not in the technology advancement business, not in the entrepreneur eco-system business but in the money multiplying business! They have bosses too – people who have given them money to invest expecting at least 10 to 20 times back! Unlike a bank that loans money to low-risk, low-reward businesses, VCs are expected to invest in high risk, high reward businesses. They can afford to take losses on 5 to 10 startups to make a 100 times return on that one big block buster – an Instagram, a facebook or Google!. Many startups return them 5 to 10 times the money and across all startups with other failures, they will be successful if they return 20% per annum over 10 years.  After the Dot com bust, many VC firms returned less money than was invested and Of course, they are out of business also! You get an idea of why VCs are looking for that big block buster company! So you will be wasting your time and theirs, if your startup does not promise that kind of growth quickly!
  2. Understanding Exit Strategies for you and them –  If you are planning to build a software product company, grow slowly over 10 to 20 years and have a leisurely IPO, Venture Capital may not be suitable for you. VCs need to return the money their investors have given them – usually in a 10 year time frame. So they really have a clock they are working against. Exits through acquisition by a larger company or through an Initial Public Offering (IPO) is how they get the money they have invested out. So if this does not suit your plans, VC money is not for you.
  3. Understanding what can increase your valuation periodically– VCs like to bring on other VCs to share the risks in the companies they invest in. They also would like to see the valuation of their investments rise rapidly so that the acquisition price or the IPO price is justified when that event is reached. Valuation is a notional concept (just what someone else is willing to invest their money for) till it hits the acquisition event or IPO when it becomes validated by the general marketplace (till then it is done by the private VC marketplace). Growth metrics usually provide the justification for the increase in valuations.
  4. Understanding how Market Adoption Rates and Penetration Help you get there – If your startup is dependent upon the 4% smartphone adoption rate in India as opposed to the 56% adoption rate in the US, you can get an idea of how fast your key metrics will grow to make your case for the first or the next round of VC money. It does not mean you are in a bad business. It just means that your business may not be a good candidate for VC money! If your business is already making money, then that needs to reflect this rapid growth or at least the promise. If you are following a freemium model or you are postponing the question of monetization for a later date but are focused on building membership, visitors and engagement, your metrics need to show this hockey stick growth. It is not because VCs have an illogical liking for hockey stick growth rates – those are the ones they can show the next group of VCs or others that want to invest in subsequent rounds and ask for a higher valuation! I wrote about this topic in my previous article – Develop and Pray is Bad Planning in Product Startups!
  5. Understanding what Riding the Tiger means –  When you watch Flipkart raise more money and doing all kinds of acquisitions, what you are seeing is catching the tiger by the tail, getting on it, and riding it! You don’t have an option of getting off, since the tiger will eat you if you do! Once you raise venture money, you need to plan for rapid growth and riding the tiger. Don’t even look for venture money if this kind of company building is not for you.
  6. Understanding that Venture Money is not the only way to build a Software Product Company – If you have a secret sauce in your product that no one else can copy in their product easily and you have a five to ten year advantage, you can afford to build your company at a slower pace, taking one or two rounds of angel investor money, keeping expenses low and ploughing back initial profits into building the company organically! Unfortunately it is less likely in the consumer space that you have Intellectual Property that cannot be copied easily than in the enterprise space. Also if you are successful in the consumer space, just for building out your infrastructure you may need to raise large amounts of money – usually that’s venture capital. You might have seen this portrayed in the movie The Social Network with what happened to facebook in its initial years.
  7. Go Big or Go Home if you plan on taking Venture Money – Unlike Services Companies, software product companies depend upon rapidly establishing a large market share in an emerging space. In almost every market, consumer or enterprise, you will see one or two large players splitting almost 70% of the market between them and a couple of other players splitting the rest.  The bright side of this is that there is so much innovation possible in the software product space that you can always define a new marketplace and become a leader in it! But for that you need to show rapid growth in revenue, members, visitors and active engagement. So it’s Go Big or Go Home!

Venture Capital is a vast subject with nuanced differences with every VC company, country or company they typically invest in. For the software product entrepreneur there are some common basics that can help them understand how they all operate in general, whether you are a good candidate for VC money and if you are, what is expected once you take it! At worst, if VC money is not for you, it will force you to do better planning. How will you sustain your company and grow, even if it is at a slower place that you are comfortable with? Have you thought about all of this?

An Investment in knowledge pays the best interest – Benjamin Franklin
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Who are the “early adopter” Venture Capitalists in India

Like you, I assumed that all VC’s are risk takers. I mean as an asset class if you have to provide the highest returns over the long term, I would suspect you have to take big risks to get big returns. The average Indian bank has been giving around 8% annual returns on FD (source), real estate returns about 13%, and gold loan providers will give you close to 15% I am told. So, VC as an investment class should offer higher returns given how ill-liquid they are and how risky they tend to be.

So, how do you really measure if a VC is an early adopter versus a late adopter? (lets keep it simple and only put them into 2 categories).

My thinking is the only way you can do that is to look at their investments (portfolio companies) and find out the categories of companies they invested in. Then find out if any other VC’s invested in another company in that category after the “first” VC did. There are other ways to do that, like ask entrepreneurs who responded the fastest when they were looking for funds, but those dont evaluate who puts their money where their mouth is.

Why is this question useful to answer?

For entrepreneurs who are innovating in a new area, this list of early adopters will help you determine who you should go to first versus who should you expect will fund a possible competitor.

Lets define our methodology and assumptions:

1. We will look at all their websites and make a list of the Indian VC portfolio. Fortunately we have that list of over 50 VC’s in India.

Flaw: Many dont update their website as frequently so there may be a 20% (or higher) error, but I have tried to be comprehensive.

2. We will then categorize their investment into 5 buckets – Media and content, eCommerce, Business to Business, Mobile and other (Education, Healthcare, etc). This is important so we know not only which VC’s are early adopters but we can also try to find that out by sector.

3. Then we will look at the announcement dates of their funded companies from press releases, Unpluggd, YourStory, ET and VCCircle. We will give them 2 points for every investment done in a sector before any other VC did.

Flaw: Most (I suspect over 50%) of companies report their funding 3-6 months after they have raised the money, so this will be a large flaw, but lets do the analysis anyway.

4. Finally look at stage of investment. If a VC puts money in the series A, I would give them two points in the early adopter bucket. If, however they participated in series B or later, they get one point in the late adopter bucket.

First let me give you the results (not in any order other than early adopters vs. late adopters).

Early adopters VC’s.

  • Accel (eCommerce, B2B) – 78 points
  • Indo US Venture Partners (B2B) – 56 points
  • Saif partners (Mobile, eCommerce), but they are late adopters in B2B – 49 points
  • Venture East (B2B) – 45 points
  • Sequoia (Media) – 46 points
  • Seedfund (Scored enough, but dont have a clear winning category) 42 points

In the middle

  • Blume ventures – 40 points
  • Nexus Venture partners – 36 points
  • Helion – 36 points
  • Ojas ventures – 34 points

Later adopter VC’s – all scored less than 30

  • Bessemer Venture Partners
  • DFJ
  • Cannan partners
  • India Innovation fund
  • Inventus Capital
  • Footprint ventures
  • IDG ventures
  • India Internet Fund
  • Lightspeed partners (but have done well in Education)
  • Norwest
  • Sherpalo

What I hope this list will do?

1. Make Indian VC’s think about being innovation catalysts rather than ambulance chasers. I understand you have a responsibility to provide returns, but you also have a responsibility to grow the Indian startup ecosystem. Might I suggest a 5-10% of your portfolio towards risky, “first time this is going to happen” investments?

2. Make Indian company founders announce their funding. Unlike the US, here entrepreneurs are loathe to do so. I can understand the competitive pressures, but not doing any announcement is just lame.

3. Educate Indian entrepreneurs on their target VC list. Depending on the opportunity you are trying to pursue, please target the right VC firm. The only thing you have (and dont have) on your side is time. Use it judiciously.

P.S. I have confidence in the methodology but I would be the first to admit its neither comprehensive nor scientific. If you are an eager MBA / Engineer / analyst and would like to help make this methodology and analysis more robust, I’d love your help. You can take all the credit. In fact, I can convince many publications to give you credit for the work if you desire and if you keep it updated every 3-6 months.

P.P.S. If you are a VC and not in the early adopter list, or you are not happy with the analysis I’d also welcome your associate’s help in making this analysis robust.