VC, Know Thy Fundee

The Venture Capital industry in the US has given extremely poor returns in recent times, and some consider it broken. I'm not sure what the India numbers are, but the focus, modus operandi and problems facing the space are similar, and in some senses, less effective. The huge factors in their favour are the relative stability and ever growing domestic markets (of course, for those focused on India, and more so for those primarily into the PE story), and of course tremendous cost tractability vis-a-vis the Valley, for instance.

Now, imagine:

Don Corleone invests in a million bucks into a "business" run by a fledgling caporegime in a territory with lots of promise. A few months down the road, the monthly meeting is in a dark room full of cigar haze with tough questions flying across the table, and the Godfather surprising the capo with info gathered from the street that the capo might be trying to hide, or gloss over. It could either end in the capo getting a thumbs up for establishing firm control, or a "Its strictly business" list of to-dos to strictly be followed for ensuring the family gets there profitably.

Or, a traditional business family in India pitches in to get a young chap striking out on his own in a new town/business/opportunity afresh. They obviously need to buy in to the idea, and measure progress often enough. They also dig up every source to keep tabs on where the markets headed, what the guy's reputation, image and credibility is as he engages with the market, and offer both advice and tips, as well as harsh feedback on specifics that is passed on immediately and well - transparently.

Thats how businesses get built, sustained, nurtured.

The Venture Capital industry plays an important role in discovering and nurturing new market opportunities. In fact, the businesses they try to help build are usually much larger than what an average capo or a family businessman would attempt at creating. These businesses need even more nurturing, and inputs. Theoretically, at least, the VC not only brings capital to the table, but also helps keep the ship on course, plugging the gaps as they're spotted. They can help engineer the right contacts, aid the best executive hiring, enable appropriate mentoring amongst others.

But then, there's a gap when it comes to those value adds, at least in the Indian context. Unlike Don Corleone, or the average business guy on the streets, venture investors often fail to connect with their startups' work - operationally, technically and sometimes even from a consumer/customer point of view.

The best understanding of the businesses investors have today depend on "other-investors'-opinions" and on their own take on it. Generation, technology gaps, lack of empathy with the target market, and an uncertain understanding of what's really getting built ensure that the meetings are once-a-month "updates" affairs, and the data collection is usually limited to what their protégées tell them. Sure there's some cross questioning, and the numbers sometimes start communicating the true story (often too late in the game).

But to be able to really relate to whats happening, whats right and whats not, and most importantly, what the options are from thereon, VCs would benefit from a deeper, independent assessment of the businesses they're banking on. And of course, the technologies, products and target markets those businesses are banking on!

There is a need for a role which can better understand the domain or technology that the startup is built around. This is truer for technology startups than the others, but there's usually something technical/domain specific about every startup (at least the better ones) that differentiates it. Most investors are generalists and connectors, because of which they bring together a wide array of skills, perspectives and contacts! Obviously, their understanding of what's happening inside of their portfolio companies, and what course corrections could and should be made, is limited to the level of a higher level business scenarios that can only make uncertain assumptions about the finer, and often crucial, details of the product or domain. And we do hear a lot that execution is everything!

So, how do investors get to know better ? Call in the experts!

To someone in the know, the red-flags show up all over the place as you dig a little! One hears of huge investments in companies build around technologies (sometimes mere features) that could be build primarily around commodity stuff that might even be free to download off the web. Other startups build vanity-features that are unlikely to see much usage amongst their target audience. And a whole lot of startups do not even figure out who this "audience" is, and at the same time worry about the numerous textures the product could have.

Then there are obviously numerous "high technology" stories where the potential is enormous, but the success is extremely dependent on both the core as well as the packaging and positioning of the product. A lot many might potentially succeed in one of many avatars, and would benefit from rapid experimentation enabled by flexible product design.

Clearly, VCs would benefit a lot if they got dope on some of the above, early and regularly. This obviously needs a continuously updated understanding, and measurement, of what their companies are doing. Every decision around the product feature and roadmap, its architecture, and even the robustness of the process through which these are arrived at, makes a huge difference to the product's chances in the market. These cannot be gauged easily from a short monthly interaction with the CEO. You need a sharper focus on the goals, and ongoing engagement at various operational levels to ensure those are being worked towards.

Goals

What are the companies goals ? Are the same goals visible to all functions across the organization ? Are those the ones driving value for users/customers ? For instance, you're trying to create a service that delivers content over SMS along with contextual advertising, and a product loophole that allows people to essentially send free SMSes to friends could be the one driving traffic!

Roadmap

Is the Product Roadmap in line with the goals ? Often, beyond the first release, nimble startups get into a reaction mode where every little piece of feedback from users, VCs, the media and other assorted sources is incorporated, and every little idea that comes from competing sites, or merely sounds cool, gets implemented. You end up with a host of features and functions that are no longer coherent or cogent to your primary USP, which was .... ? Obviously, even the metrics gathered start reflecting this, and there's confusion both externally and internally about what the product or service really is ? Crispness is key.

Team, Hiring, and its first cousin - the Burn Rate!

Funded startups are usually at risk! There's money, and folks now have the luxury of pursuing the various ideas that have not been able to get attention so far! Add to this the ability to right away target multiple groups of customers and consumers, do branding, create pitches and soon, you're lost in infinite activity thats gong nowhere. There's a need to link all spending, right from the size of the team, the skills needed, the necessity of doing certain things all together, to the goals and the roadmap.

Keeping the burn rate down not only helps focus, and it gives the startup get operationally viable sooner, and provides both the founders and the investor a lot of buffer!

Obvious Benefits

The returns on getting onboard an operationally focused team are quite apparent. An investor would do well to have help at hand for regular, clear understanding of what's happening in the portfolio companies. This would ideally be a team which brings in both technology and product management experience from a in-the-trenches perspective. The startup would get better help, better focus and probably leaner.

Quite obviously, whats better for the startup is better for the investor!

2 comments:

vibhu said...

I have another observation to add here.

Indian VCs/owners etc whoever has the money reins - they are the traditional lala's. They give money, and expect that the workers do their job - without thinking how intensive that job is. They are also not in touch with the technology - most think that this is a way to make more money, so the people they put in should be able to magically make more money.

Furthermore , the software guys are not visionaries - but just workers who will do what the lala says - "yes master" kinds.

Add to it, the workers , though graduates, severly lack in imagination and skill. All they know is that cause of their degree they can get a good pay.

This leads to a great deal of laziness, shirking of responsibilities, and a blame game.

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