Suspiciously Round Figures ?

While we were on vacation, Twitter raised a 100mill, supposedly at a #1Billion valuation!

As I read this, the nose twitched. What is it with the round figures ? I mean they sure do their due diligence, and Twitter probably did some work on how much cash they need. I can understand guys keeping it at back-of-the-envelope levels when doing seed stage, or even series A funding. But at this scale, for folks who're still trying to figure out monetization, sounds a little too strange. Why not 87 million (imagine how many startups you could fund for 13 mill!) and why not a valuation of 0.93 Billion ? Are these numbers arrived at through some kinda-shoulda-perhaps-maybe hand waviness ? Is there more ? Perhaps a contigency chest for an acquisition thats part of the deal but not really available unless... ?

Someone who knows the insides of these deals please throw some light. $100 million of a $1 billion valuation - it just reeks of laziness or fuzziness otherwise.

Ownership Issues. Founders too!?

At first, there's an idea. There's some debates that follow, some iterations that help refine the idea. Then there's often a co-founder, some hectic activity and a prototype! The job is bid adieu to, the servers bought/rented, expenses planned for and the passion-of-the-founder has soon given birth to another startup.

Pitches are readied and made, and if you're onto something or an investor thinks you are, you get funded! Nirvana!

A year later, there have been hiring issues (people are so tough to find, or too expensive otherwise), development issues (its never as easy or as complete as you'd imagined), and issues with selling the product that you pushed off to 'once the product's ready' right from the beginning. The traffic hasn't taken off, and you take shelter behind the "alpha" tags, and in any case, the "full, matured" version with some critical pieces that will make all the difference isn't done yet. That will fix everything.

Iteration 2, and 3 and more come and go. Things don't look that great. You tire a little. There may be telltale signs, from a diffused market strategy that tried to please all, to multiple major projects running simultaneously - one of which will hopefully do it for you. You engage with a designer to fix UI, a mentor for advice, a PR firm to try and fix it on the marketing front, and maybe even get some big names on board to shake things up.

Familiar story ?

Somewhere, the tiredness does bite, and the ownership starts to dim, and even entirely vanish. Why ? Its the same people who were madly optimistic about their idea at one stage, after all.

Carrot uncertain, stick missing ?

Human motivation has got a lot to do with either the pursuit of pleasure, or the avoidance of pain. In fact, more or less all actions could be linked to one of these. At first, the dream that the idea promised is big, possible and a huge motivator. But, especially during a turbulent phase that comes after multiple bad patches, the dream can, and does fade.

Unlike a home loan, though, there's nothing to pay back! So hardly any stick. Sometimes a little bit of a pressure does help to come up with smart solutions that make things work. Sometimes you do your best only when you come out fighting from a no-hoper. But there's little egging you to do that.

I'm hardly suggesting that VC funding be replaced by loans - but its also true that founding a startup, at least for some and at some stage, does become merely a sexier, and in fact more comfortable job. Sure there's more to do, but if you're looking for that sort of a thing, its a great, risk-free (once you get funded) opportunity to have a ball! Its not just the founders though - even potential employees often tend to look at startups at a no-loss-possible situation. Better salaries, cooler image, better work and responsibilities so why the hell not ? The "struggle" bit is more or less limited to the pre-funding stage. Once there, there's only an upside...

If I were a VC, I'd be working on models to change this. Or even if I were a founder working on a new idea. If nothing, to ensure that the wrong kind of motivations got weeded out.

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!

Smaller, cheaper, faster

I've come to believe in this philosophy for starting something, and here's some more support for the cause. (From Getting Real - a book by 37Signals) (Thanks Sid, for the link)

The main advantage that I think comes from working under constraints:

"Constraints also force you to get your idea out in the wild sooner rather than later — another good thing. A month or two out of the gates you should have a pretty good idea of whether you're onto something or not. If you are, you'll be self-sustainable shortly and won't need external cash. If your idea's a lemon, it's time to go back to the drawing board. At least you know now as opposed to months (or years) down the road. And at least you can back out easily. Exit plans get a lot trickier once investors are involved."

From even a product management pov

"Think hard and determine what's really essential and what you can do without. What can you do with three people instead of ten? What can you do with $20k instead of $100k? What can you do in three months instead of six? What can you do if you keep your day job and build your app on the side?"

Give it a read - the whole book's available online - free. Of course, there's a world of effort, training and belief between knowing it and living it. But there's always somewhere you start....

The stories That Aren't [Told]

Everyone's heard of the huge IT Services in India. A lot many are giving products a shot. Some are exploring SaaS and a few are even swimming in the shark infested waters of the web-products-for-the-arrived world!

But there's some mundane stuff thats unknown, for the most part:

How big is the assembled server market in Bangalore ? Its AMCing ?
What margins do data recovery businesses have ? What are the volumes ?
What is the "chip-level-repair" industry ? Is it attractive ?

Is any of the above a scalable business ? Is there a Dell-on-some-scale waiting in the wings ? How much is the organized, and how much the unorganized market ? These guys obviously have a deep sales reach - what can that be used for ?

The current focus of the Ecosystem - especially the technology related parts of it - is limited to a narrow band of technology activity. This is probably driven by the dollar or potential-stardom value of the technology. Its a similar story for investors - both angels as well as VCs. The lack of exits in the current market has probably got to do at least partially with the huge valuations at which those wil make sense given current investment sizes.

Are there smaller stories in there ? Take Bangalore's best data recovery guys nationwide ? Or help an efficiently run AMC business scale, reach out to the government and big business and grow ? Or explore if there's an aggregation story in there somewhere ? Or data collection and market research ?

I was speaking to my cousin the other day about some ideas. He's been in the hardware space for a while (hence the bias of the examples above towards that industry). He's moved from a large org where him and his partners sold a lot of hardware at low margins, and some services of various sorts at better margins, to his own outfit where he's focusing on the margins and has cut out the pain of sales completely! He also knows his customers really well ("not servicing the software industry right now at all!"), and can hit them for upselling related stuff!

There's many such entrepreneurs, and many such stories. We can glean a lot of wisdom from these, and possibly spot opportunities for co-operation, investments on a different scale/model, lowering our costs, getting a foot in the door with customers, etc.

I daresay my cousin's lessons in entrepreneurship have been a lot more valuable, richer than mine. I also think engaging with other, real-life industry around us will help us think of our work with more ground truths and reality included in our plans, pricing and projections. It will help us realize and respect true customer needs and sentiment, and step out of the echo-chamber for a while.

The breath of fresh-air-nee-reality will do us all a lot of good :)

HungryBangalore raises investment!

HungryBangalore - now HungryZone - have been working with Zook since their early days - and ours too. The closed their first round of funding yesterday, as reported by Pluggd.in.

Good to see their hard work and perseverance bear fruit. Of course, this is only a start, and while they were the first ones in this arena, there are more players now. How they differentiate and scale will be critical from hereon, and we'll help as best as we can.

Congarts Priyanka, Ritesh and gang. May you fill a lot many more tummies :)

Why the VC focused market is a thin slice

I've always held that VCs represent a narrow slice of all entrepreneurial activity, and there's dozens of ways to "go start your own thing" without being too hung up only on VC funding.

While deciding what you want to do, if you think without the VC funding constraint, you can think in terms of the natural way your particular idea or business should grow in. Not every business needs or can have 10x returns, or a global footprint. There are a huge number of ultra local, ultra satisfying yet profitable ventures possible that may not appeal to Venture Capital.

Of course, if it so happens that your idea seems a good fit for VC funding, use that for sure! They bring in lots of validation, and often visibility and help to the table. However, "landing VC funding" cannot be a goal for your venture.

To start thinking outside the box, get rid of this mother-of-all-boxes first :)

Edit: I typ(o)ed "Think" instead ot "Thin" in the Title - and thats a totally different discussion too :)