To stay put or to fade away

Conventional wisdom often tells upstart investors in the stock markets to invest thro mutual funds if they are not sure of their own stock picking talent. The logic – mutual funds engage expert fund managers to do the investment on behalf of investors in return for a fund management fee. The fund managers are specialists that watch every day market movements closely, track the businesses of companies they invest in, market momentum, liquidity situation in the economy etc., on the basis of which they pick up early trends. Yet, seasoned investors have often observed that markets surprise everyone on the upside as well as the downside. No one is spared from its vagaries. The question then crops up in the mind of every investor – if the fund manager who is an expert is also equally vulnerable as I, why would I trust him with my savings and why would I pay him to make mistakes? Had I taken a direct exposure and made money, both the fortune and accompanying thrill is mine. And if I had lost, I am richer by experience (of the bitter lesson) which I would never repeat.

I take a parallel and am thinking about professional investors like Angels, VCs and Private Equity veterans. I am much used to the refrain from these folks over the lack of fundable ideas, extreme valuation expectations of entrepreneurs / managements. Why wouldn’t these moneybags stop bemoaning and start an enterprise of their choice and invest in it? Why expect others to dream up an idea that has all the elements of (what they think as) a good investment in it?

The fact of the matter is, some investors do turn entrepreneurs. But turning an entrepreneur is a different ballgame because founding a business is not as easy as much simpler capital allocation that investors are wont to do. When you are an investor, you need to study an existing business, analyze its history, evaluate its management, compare its market standing with its peers and track its growth momentum. But if you were to found a business, then you have to start from the scratch – dream up an idea, find the right team with the right talent, assess the market potential, do the paperwork for compliances, lay down systems and processes, develop the prototype, have it tested by potential customers, fine tune it before you get it going. Then is the big question of how much to invest in or whom to partner with.

Of both the above choices, the former is relatively easier, only relatively because you are investing in an existing, well founded going concern. In the latter, you spray and pray. But the returns from investing early in a (seemingly) successful startup is huge in comparison with investing in a going concern. You get to buy a slice of a startup business at dirt cheap prices because startup founders need the money badly (not many would like to take seed stage risks) and they can’t haggle on valuations beyond a point. Existing businesses, will have many suitors and so you have to pay the top dollar to win the bidding war and own a stake. This is a critical difference why we still find venture investors amongst us despite the significantly greater risk involved in a seed stage enterprise.

Yet the most important temptation to invest in a startup is because besides the financial fortune, you get a lot of personal satisfaction of being involved in the venture (probably a domain of your choice, in which you have some knowledge) right from the word go, guiding the founders along the right path and learning from them as well. Bright young upstart entrepreneurs brimming with new ideas do not hesitate to tread the unbeaten track, adopt the most unconventional ways to meet an end blissfully unconcerned about the cost of numerous trials involved. They are fired by the endless energy of their dreams, of achieving the feature they imagined, to unleash the power of their idea. They put their most creative, often disruptive imagination to work, and work from effect to cause to deliver solutions that erect very high entry barriers for the also ran. That earth shaking disruption, could drive fears in the minds of existing players that could tempt them to adapt fast and review their own businesses. Those that are able to adapt quickly will survive, others will be in a hurry to buy the startup out, in case if they are willing. The name of the game is survival, at any cost. That’s the startup founders’ biggest dilemma as well – to build it to last or to flip !

Intrigue your investor

Vijay Anand muses about building “businesses that don’t make money”.

It poses a question – why are VCs insisting on a business model?  Clearly the stress here is on investing in intuitive ideas that drive user base for everyone to benefit from. The trouble is in getting investors to fund it early when revenue visibility is poor or seemingly non-existent.

So, how to get around that?

I think the trick is in seeing things that lot many others don’t. Often opportunity comes in coveralls that look like work. Get around to work on some idea that isn’t good now because the infrastructure just isn’t there, but will be good five years from now. Capture your imagination in a logical sequence, spread it across a visual format to be evaluated by investors. Go easy on them. Most VC pitches fail not because the idea was bad, but founders didn’t know how to sell it.

Be passionate. Be always-on. Recognize likely problems and figure out ways to solve them.  Does work feel like work?  Ask yourself. If the answer is yes, you failed the test of passion. Don’t go further. 

If you’ve passed it, all that is left is to intrigue an investor; make her see right through you!

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Easy, guys !

Steve Brotman, a New York VC on pitching to VCs.

 “….complicated pitches make the potential investor feel stupid. Entrepreneurs sometimes err on the side of complexity. There are a million ways to be complex. Some entrepreneurs insist on showing you a detailed demonstration of the product. Others will launch into arcane science or algorithms that only an MIT doctoral candidate could understand. There is a subtle psychology here that could be plumbed, but showing someone you are smarter by confusion isn’t a productive strategy.”

It’s a good advice for founders to worry about the business of technology than be obsessed with technology itself. 

Can’t agree more because I am guilty of advising several founders to focus on selling their idea to investors at the pitch and not attempt to educate them – because what they said beat me 🙂

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Throwing stones from glasshouses and making sense of it

Luke Johnson, chairman of Channel 4 and head of Risk Capital Partners, a private equity firm gets upright about entrepreneurs and their quirky instincts.

“A weakness of many entrepreneurs is that they have just too many ideas. They cannot stick at one thing and make it great – they get distracted and rush off to conquer other worlds. Their intelligence is the sort that dreams of endless possibilities – but follow-through is not always their strong suit….”

Well, being an entrepreneur and having associated with many others of the tribe, I can vouch for that.  I like to be a free agent, open to ideas all the time – as long as it makes money and I enjoy doing it. 

But Mr. Johnson also runs a PE firm and I was really surprised he said something like this about financial services –

“Ours has been an age of financiers, but perhaps this great period of leverage is drawing to a close. The investment bankers, hedge fund managers and – God forbid – private equity houses are no longer in the ascendant. Now the field is more open to those who actually run things.”

 Apparently, Mr. Johnson can live with a few broken glass panes, I suppose 🙂

Ego-system turns ecosystem

Looks like VC firms have shed their ego-system affinity to blend in better with local ecosystems. 

Earlier these very guys, recently Jet lagged, used to say, “we will invest in areas where we have specific domain and strategic expertise. We don’t invest in companies outside our area of core competence.”  I took them for a disciplined lot.  It’s their investors money and they know best to deal with.

But later they realized they are not getting very many investible ideas.  Even as they felt the need to look outside IT sphere, they couldn’t easily let go off that elitist talk, let alone admit to their late blooming. So conceited were they, I had felt even in restaurants they don’t even look at the menu — just tell the poor waiters what they want to eat, and the chef will have to make it for them. 

Now sample this. Srini Vudayagiri, of Lightspeed Advisory (India arm of Lightspeed VC), says the company now plans to start investing in companies outside the technology business in India. He said “40–50% of our investments in India will now be diverted to the non-tech sectors. This has been prompted by local market needs. We will mainly invest in consumer-driven sectors and allied infrastructure-led companies.”  Srini says, Lightspeed is aggressively looking at non-tech investment in India because of strong economic growth, rising consumer demand and growing spending power. 

What a change?  During those days, I had a tough time telling these guys why they should look outside tech in India because that’s where the opportunity lay.  A couple of companies that badly needed capital then had to take the difficult debt route but today their shares are quoting 20 x their prices then. In the end, VC’s loss was the founders’ gain… 

Mine too, to a small extent that I owned their stocks… -) 

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What ails Indian Startups…

I often hear startup entrepreneurs ranting about VCs not funding their idea.  They point to Silicon Valley ecosystem and say the VCs out there took large bets on young upstarts and that’s how they got a Google, Amazon or Apple (alternatively their founders Larry/Sergie, Jeff Bezos, Steve Jobs in that order).

They also go on liberally about how Startups in India are done for money and not for passion (I am yet to see someone settling for “Nirvana” and not prosperity – anywhere in the world), Media is poor, dearth for good teams, VCs bet only on sure things and how they have no reality perspective etc…

Does that mean startups have no future in India? I say, look to the past.  You’ll get all the insights.

Imagine the India before the VCs came trooping in. There were entrepreneurs around even then. No, I am not referring to the famed Tatas, Birlas, Ambanis – I think of the millions of kiranawallas (local shop owners, general stores, sweet shops, caterers, informal event managers) that qualified far better as startups and never griped about lack of an outside investor to fund their ideas !  Several of them made it, quite a few of them may have bitten dust too.  They all had ideas, no teams, no investors – but they stood out by betting the farm (or whatever in its place), started small, settled for a street side shack (where they also slept in), kept shops open from 9.00 am to 11.00 p.m and the whole family ran errands.  One thing that never probably crossed their minds had been valuations, and all the illusions and assumptions that come with it. They just worried about stocking up enough to serve the customers the next day. Period. 

While it’s good to expect VCs to get a reality perspective, startup entrepreneurs too can do some introspection and figure out a way how not to imagine being a Bill Gates, Larry Ellison, Steve Jobs and start thinking like a Harishbhai, Chandulal or a Kesavan nair – even as you work on something like a Google, Amazon or Oracle.  Having the right local values, (we have it by the ton) is important – if you want to make it.

So, let’s talk of `localisation’ of startup minds – for a change.  If not, just shut up and stop being livid.  I for one think, this is the best of times for Indian entrepreneurs. We never had it so good. If you can’t make it now, you’re never gonna make it. Argue with me at your own risk….

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The Peter Rip-up

Here’s a post from my favorite VC Peter Rip for many a VC / founder to take heart from.  Look at the way he gallantly admits mistakes made by the Teqlo team and how they’ve chosen to rewire it all over again.  He has masked the specifics Teqlo is working on for good reason, but the narrative is all candor.  Excerpts – 

“I figure the only authentic thing to do is to talk about this again, even when it is in an ambiguous period of re-birth.  This ugly period is a re-tooling of the premise of the business to give it more clarity of purpose.  It’s not fun being in the sausage phase.

First, let me admit we went down a mashup rat hole. We have a general technology for snapping together web services.  “Because they can” is an insufficient answer to “why do people want to create mashups?”  We failed to commit to solve a specific problem for a specific market, preferring instead the broad appeal of generality.  This has changed.”

Scroll down Peter’s blog and you’ll find a few gems more – Love at first sight and Flattery gets you nowhere.  Keep it coming, Peter.  We love you for that. 

VC misfits find it tough

I was expecting it to come any time. Matt McCall is saying it now. A trend where people that flocked to private equity from mainstream industry getting fatigued, disillusioned and seriously planning to quit.

The business of Private Equity / Venture Capital is to “invest” and not to “deliberate” endlessly. Hence it is a space for Foxes – people with an investors’ mindset and NOT for hedgehogs – that of an investment professional or engineers. A Fox knows many things but a hedgehog knows one big thing. While an investment professional will analyze a startup idea to death, the Engineer will debate endlessly on technology. Between the two, any viable project gets crushed and that stymies the passion and drive of the founder.  

Investors judge an early opportunity by instinct more than facts, because if you wait for complete facts to arrive someone else would’ve eaten your meal. They know a good team when they see one because they look for winning traits and not specific skillsets. “Back-a-winner” is the name of the game. Unfortunately many VC firms hired brilliant engineers at the investment desk and their fixation with technology deferred ROI considerations.  An investor would never forgive that.

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A little off the VC plate

This is a sort of follow up on my recent post in my other blog. 

I found this nice article in Matt Marshall’s Venture Beat, where they had asked Ryan Floyd, venture capitalist with Storm Ventures, what the traits are of the most successful entrepreneurs he’s backed.

Ryan is apparently a climbing enthusiast, going by the mountaineering metaphors that he has liberally quoted. Quite apt, I thought since startup entrepreneurs life can’t be compared with nothing else for its arduousness. I sensed the delight that was in store for me from the word go, as I read Ryan’s opener “I am not sure there is a stereotypical entrepreneur right out of central casting”.

Some gems from Ryan’s piece – 

On determination and commitment – “It can be a roller coaster ride for even the best funded companies. When companies are small, the risks and challenges are tremendous and it’s easy to get discouraged. To expect to grow a company without these obstacles would be a fairytale. Entrepreneurs and founders need to have the gritty determination and commitment to succeed no matter how high the hill”. 

“Commitment [to entrepreneurs themselves, investors, employees] is beyond passion for a project or idea. It’s about knowing that failure just simply is not an option”. 

“Up until several years ago, I spent a significant amount of my free time climbing in Yosemite. The concept of commitment in climbing is very analogous to a start up. Once we were on the wall we were committed regardless of weather, injury etc., especially on multi-day routes. We had to put 100 percent of our emotional and physical energy into being successful because, as climbers will tell you, usually the first instinct after going up a wall is to immediately want to come down. Living with gravity has that effect. With startups, many smart people will tell entrepreneurs and founders that they won’t be successful, the bigger companies will crush them, etc. The great entrepreneurs listen, reflect,and keep climbing”.

On Intellectual honesty and integrity – “While some may believe that intellectual honesty is in conflict with passion or belief in an idea, I think that the greatest entrepreneurs find that constantly questioning their assumptions and maintaining a healthy dose of paranoia about competitiveness and value creation pushes individuals and organizations to achieve more with confidence. It also helps to make the never ending small course corrections in a business that lead to success”. 

On need for domain expertise – “One of my partners once told me that when he walks out of a board room and feels as though he knows a lot more about the business than the team, he knows he is in trouble. Many entrepreneurs reading this may find it comical that a venture investor could resist trying to prove he or she is the smartest person in the room. The best entrepreneurs I have worked with always make me feel like I am the one trying to play catch up. Entrepreneurs and founders should make it their business to know more about the individuals, the competitors, the customers etc. that make up their industry than anyone else”.  Notice the humility and reality perception here, hallmark of a great VC…! 

May be it is not an exhaustive list as confessed by Ryan for having left out traits like leadership, ability to build a team business experience, prior successes, or the ability to understand their customers and deliver a compelling product or service.  But I liked the narration powerful and hard hitting.   

I enjoyed the read. Hope you did too…!

When a VC play goes south…

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I was reading the TechCrunch story filed by Michael Arrington – FilmLoop betrayed by investors and came away with some serious doubts on VC process.

Filmloop raised $7 million from ComVentures in May of last year. Nine months later, with $3 million reportedly still in the bank, investors shut it down.  Apparently, it appears the ComVentures did it when forced by its Limited Partners ( investors in the VC Fund ) to clean up their act and get rid of loss making investments. The worst part is that the sale was forced to another portfolio company of ComVentures ( Fabrik ) for much less than a song. Now there could be two versions of the story here – one from the founders and other from the VCs.

But some questions need answers.

a)      If VCs are clueless about what technology and/or idea will be successful, why would they recommend investments at all ?  Is it because it’s not their own money ( it’s the Limited Partners’ ) and they are assured of their $ 500 k ++ salaries anyway ?

b)      We hear VCs often say, only one out of 10 investments that we make succeed.  Now that talks a lot about how good their selection process is and if so are they not just a bunch of pampered kids ?  Even FilmLoop appears to be a clone of YouTube and was ranked # 98 by Alexa.

c)      VCs are pulling out of a company and they think they are smart because of that?? That is the most ridiculous thing I’ve heard.. Who gives money to VCs who act like that? Do they disclose their practices to their investors?

 d)      VC’s are trying to portray the idea that there is a ‘magic bullet’ when it comes to a new idea or a start-up. Is there one ? I don’t buy that.  I still believe in cause and effect. However, playing with other people’s money, blood and sweat is so easy.. that’s why they can only turn 10% (if that!) into winners.

There is one major problem here.. Some VC’s really have people with little or no experience, no vision – just kids (a lot of times, out school!), basically, posing God because they have access to someone else’s checkbook..

Come to think of it – you had a 10% success rate at what you do, where would you be ?

And to think that the VCs are saying that so easily.. I’d fire those guys in a sec just for saying it. So, if the VC tells you that THEIR success rate is 10% – just RUN away from them as fast as you can.