Forgiveness – a virtue in founders

7-flipside-turtleneck“I want to take them to Chennai. And Goa!”

My daughter was all excited, in that way that only teens could be. She was making plans to bring her friends to Bangalore – next summer. And even before that she was keen to take them to not just Chennai and Goa but Benaras – as she calls it – and “Oh. But how can we not take them to Kerala.” If there’s one lesson that I’ve learned from my daughter, it’s to let her speak uninterrupted. At least till she pauses to catch her breath. Or if I can do it, wait till she asks, “Well. What do you think?”

The amazing and scary thing for me with this entire episode was how much of a chip off the old block my daughter is. I was exactly like she is today. Keen, maybe even overanxious, that my friends experience the things about India or my family that I had and that they ENJOY them. It’s surprising that I had any friends left. The truly scary part is why it was not evident sooner.

In many ways doing a startup is a journey of self-discovery.

As a founder, you are going to learn a whole lot about yourself that may not just surprise you but make you doubt yourself. All that stuff you’ve read about Steve Jobs or other self-confident (err arrogant) founders may make it sound successful founders make decisions and move on without much self-doubt. Reality is that any founder, worth their salt and with a pulse, will discover each day – many times a moment too late – that there are things that they could do way better. A lot of this is programming that’s happened before we became even remotely self-aware – our desire to please, or unwillingness to confront, avoidance or procrastination.

In many ways doing a startup is a journey of self-discovery. How costly or expensive this is depends on how fast you learn about yourself and most how soon you accept and forgive yourself.

In my own case, having a great team of folks around me helped me gain the self-awareness. But as they say, you can only bring the horse to the water. So it’s not enough to make or drink the kool-aid. As a founder you’ve got to be prepared to stare at the image that’s reflected in it!

One of the advantages of growing older (and startups can sometimes help you do that fast!) a certain degree of self-awareness grows (or is foisted on you by your team). So rather than berate myself I’ve learned to recognize that is who I am and to recognize the need, in most cases, to change.

My daughters don’t hesitate to tell me if it’s not for the better.

4 Lessons from 3 Months as a Gaming Startup

Since 1988, when I began working, I’ve been part of three multinational firms (National Semi 1988-96, Synopsys ’99-2000, SiRF 2006-08), two startups (Microcon 96-97, Sasken 97-99), started two companies (Impulsesoft ’99-2006, Zebu – 2009-’11) and one non-profit (NEN, 2011-14). Between 2006-2011 I also invested or advised a variety of startups, a few of whom have thrived and a few died. Most of course are hanging in there. You’d have thought I’d have learned a few things over these 26 years and I have. Yet, doing a gaming startup has brought home loud and clear how much more there is to learn.

Follow The Dots

In mid November, my partners and I began working with a young man, for now code-named Don Knuth to pivot Zebu Communications – our originally marketing automation, then marketing consulting startup – to be a gaming studio. Since then we’ve launched two games on Android HomeBound and Follow the Dots and one on iOS. This post is a quick summary of 4 Lessons that I’ve learned (some granted needed reminding). Some of these are true for all startups but particularly relevant when embarking on a startup outside your own area of domain expertise.

Act fast and often I’ve never stop to be amazed to discover how much I STILL don’t know – not just about game mechanics, App Store Optimization or customer acquisition, monetization or mobile eco-system and even doing press releases. I’m sure there’s more stuff that I don’t even know that I know nothing about. Yet whatever I know, that I need to know, came from doing things. We got our first Android game out the door in 3 weeks – sure it didn’t set the world on fire (yet) – but I’ve learned more in this time, that’ll keep us rolling for the next one year. Reading is good (and I’m a big proponent of it) but acting fast and often, especially when it’s a new domain is very important.

Business first Doing a startup, particularly a gaming one, is loads of fun – there’s ton’s to do – games to play, code to write, logos to design – it’s very easy to keep busy. And as you learn stuff (see above) there’s even more stuff to do. Of course all the things that involve product development (concept, design, coding, testing, competitive analysis) are all in your “control” and feels like “real” work. So there’s a real risk that you’ll spend all your time doing these “fun” things and its easy to lose sight of the fact that you are a business – in other words you need customers – who’ll generate revenue for you – whether by paying you, through ads or other purchases. So spend as much time thinking about how you will make money and validating that – fast and often. We are yet to figure this out, but think about it and try things every day.

Consult others Luckily both the entrepreneurial community and gaming in particular is quite giving and willing to share. There are so many unknowns in building a gaming business that it is both an opportunity and a risk. So talk to people who are in the business. For instance a friend introduced me to Rajesh Rao, founder of Dhruv Interactive – India’s oldest game development company. They’ve been through the whole cycle – game development as a service, product development, to game incubator and Rajesh was sweet enough to take the time to give us an unvarnished view of the pluses and minuses. Others whether Vishal Gondal or Alok Kejriwal have been active speakers, writers and supporters of the gaming scene in India. Numerous indies have been forthcoming in sharing their time and insights locally and globally. It would be a huge mistake to try to do this – for any startup – on your own without consulting others and seeking their counsel.

Do your own thing Of course having sought others counsel, you still need to do your own thing – at least you’ll be well-informed. The challenge when you consult others is that you will get a lot of seemingly contradictory advice – do this, don’t do this. If we went completely by what others said – and I’ve done that more than once – we’ll come to rue it. What they said was most likely true – for them and at that time – the very opposite may be true now or for you. So getting to know what you need to know and what others have tried or not – regardless of whether it worked or not for them – is important but beyond that you gotta do your own thing. We were told that interstitial ads work better, but we found text ads worked better for us. Of course we may find video ads work even better or not. So do your own thing to verify.

Once a quarter, I will share our learnings as we embark on yet another startup journey. Meanwhile – support us by downloading our games, reviewing them and spreading the word. Thanks.

When should I start raising money?

This is amongst the most common questions I get asked. A young entrepreneur approached me with this exact question last weekend at the Unpluggd event. My response to her was, as always, “NOW!”

As an entrepreneur, it’s easy to get confused by all the conflicting advice that seems to be out there. It seems that when people pose the question “When should start raising money?” they get a variety of answers

  • When you have a prototype
  • When you can demonstrate market traction
  • When you have paying customers
  • When you [ fill in your favorite future event]
Photo: HowardLake via Compfight cc

Photo: HowardLake

These answers clearly aren’t wrong. But they often are answering the question, “When am I likely to get funded?” and not “When should I start raising money?”

Fundraising, in many ways, is analogous to marketing and sales of your product or service. In this instance, the product is your team, company and business plan. So things we’ve come to accept and address in a typical sales process apply to fundraising as well.

Process or cycle Just as making revenue involves a selling cycle, raising money also involves a cycle, with its own elapsed time (typically 6-9 months depending on how big a round you are trying to raise, market conditions and of course your business and team). Which means the sooner you start, the better it is. At times you begin the process before you have a product or prototype (whether selling or fundraising) but in general, sooner you get out there the better it is.

Relationship-building Just as in a product or service selling cycle, you’re only hustling your offering – but building a relationship with your prospect. Ideally, you want the customer to buy more than once, you want them to buy sooner, at a better price. All of this involves a trust-based relationship. Fund-raising requires similar comfort and trust in the relationship, which requires more than one meeting – only time and repeated meaningful encounters, whether in person, phone or email is it built.

Risk Mitigation A first-time customer is taking a risk, when she buys from your startup – of course, this risk is usually finite and not life or job-threatening for most customers. In the case of a potential investor, they are taking a much larger financial risk when they choose to invest in your business. This once again takes time for them to understand your business and your capabilities to adequately de-risk investing in your business. Part of this de-risking comes from when they find you making steady progress from meeting to meeting (whether customer traction, product milestones or team building) – all of which takes time as well

Given all three things, the process, relationship building and risk-mitigation take time, the sooner you start, the better off you’d be.

To be fair, raising money poses its own set of risks – notably eating up time that you should be spending on building your business or distracting and possibly de-focusing you as you get varying inputs from different sources. You need to balance that with your need for capital and the timelines within which you need that capital. Happy hunting.

How much money should you raise?

An example of a cheque.

The best answer to this question, as you’d probably guess is “Depends!”

The most common answer I hear is, “As much as you can” – which I’m not sure is the right answer, for at least two reasons. If you raise far more than you actually require,

  • you’ll be diluting more of your company at a price lower than you need to
  • you run the risk of developing a wide range of bad habits starting with mistaking raising money with running a successful business

Entrepreneurship literature suggests too much money can be as much (or greater) a cause for business failure as not enough money. Of course the same literature suggests that under-capitalization is the primary cause of slow to no growth of startups.

Better minds than mine have grappled with this issue, in a variety of manners. However most of them are set in the context of the US of A.  I provide links to several at the end of this post.

Whether you raise money, in what manner and how much will depend on

Nature of business – is it a service business, that is better boot-strapped? Web design, IT services, most consulting businesses all fall into this category. Does it require significant capital expenditure or up front investment – multi-location courier service or restaurant, manufacturing or high tech businesses fall into this latter category. Of course a slew of businesses fall in between these two – which would put them in the sweet spot for formal fund raising.

Nature of capital – are only friends, family or fools going to fund your business – most businesses would fall into this category – particularly service businesses that are going to stay small or local.  If you are already profitable or revenue making and are looking for capital to grow, you’re likely better off with debt. Of course in the Indian context debt may be non-trivial to access, despite a pile of money being available. Or do you need equity capital – as offered by angels or venture capitalists?

Assuming that you are a fundable business, I’d suggest asking the following three questions to determine how much money you should raise in your seed, angel or a series A round.

  • How much are you likely to spend over the next 18 months for your business plan?
  • Do you intend to raise another round and If so how many rounds do you anticipate?
  • How much of your business will you be diluting in both the first round and subsequent rounds?

Fred Wilson’s advice to US startupsis largely applicable in the Indian context too with a couple of caveats. He advises

  • raise enough for 12-18 months of business – in India I’d recommend at least 18 months
  • try not to dilute more than 10-20% – in India this might have to be as high as 25% percent

Can you raise too little money? Absolutely. Two things to keep in mind are

  • Things take much longer than you anticipate – the product ship, the first customer, incoming payments  In India a rule of thumb would be
  • It easily could take six months from the time you start your fundraising to when the money hits your bank

Good hunting!

What is the right amount of money to raise at a startup – Mark Suster
How much money to raise? – Fred Wilson
How much money should you raise from an early stage investor? – Seedcamp
How much should we raise? – Venturehacks

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Valuation 101 – for startups looking to raise their first round

maths

A recurring topic in conversations with young entrepreneurs and journalists across India has been that of startup valuations. Despite all the writing that’s out there, innumerable forums and meet ups, some questions – often very basic ones – persist. The questions themselves vary in actual phrasing from

How do VCs or angels value startups?
How much should I raise?
How much should I dilute? 

And each time as I’ve attempted to answer the questions raised, I’ve found us going back to the basics of What does valuation entail – what are its components and the math behind it. 

Note: In India, when people talk of valuation, they are usually talking of post-money valuation and the dilution refers to the percentage the investor owns, after their money is invested.

At the risk of oversimplification, all fund raising and valuation – regardless of fundraising round (angel, seed, Series A) – breaks down to three variables, which from the entrepreneurs’ perspective looks like:

I believe my company is worth so much today (pre-money) pV
I intend to raise so much money-  A
You sir investor will now own D% of my company

The reality though is more like this

Amount  (how much money you absolutely need to raise?) A
Dilution (% you’re prepared to give & investor’s ready to accept for A)  D%
Valuation (what the company’s worth post the investment (post-money)) V

Math dictates that the post-money valuation is Post-money valuation

(for the curious, pre-money valuation is obviously pV = V-A)

Valuation_triangle

In this scenario, the valuation (V) is an artifact of how much money you absolutely need to raise (A) and how much ownership (D) you are prepared to give up (or how little the investor is prepared to accept). Once you fix any of  these two variables the third is automatically fixed. So it’s important to understand which of the variables are really in  your control and what degree of flexibility you have in them.

Amount So how much should you raise? Any kind of serious fund raising can easily take you six months between first discussion and the money hitting your bank. So it’s a good rule of thumb to raise money for 18 months of operation, so that you can focus on running your business for at least a year without having to worry about raising money. You’d need this money to cover the operational expense of running your business over the 18 months and any capital expense or investment that you’d make in the business. For a startup that’s not raised any outside (of friends & family) money, based on your business plan this amount may vary from as little as Rs. 45-50 lakhs ($65K) to say 1.5-2 Crores ($250K). So this fixes one variable (A) in the valuation triangle. Of course if you plan to start an airline (Indigo) or overnight delivery (FedEx) or semiconductor firm, you’ll need a lot more money to start with, but most of us can start with $60-100K.

Dilution Particularly for any first round (seed or angels) the investor likely would expect to get 20-25% of the equity. Depending on where your business is at – concept, prototype, early customer traction, they may go as low as 15% or want as high as 30%. This is largely a matter of the maturity or stage of your business, the perceived de-risking done and the line of business you are in.

Comparables (what other companies in your line of business, in your geography got valued at) are relevant as is your revenue, margins, free cash flow but treat them as rough guidelines rather than definitive stakes in the ground. Sure, your market size and share, your business plan, your product or service state all matters – but usually, in the Indian context valuation is not absolute but a direct output of answering the two questions.

  1. How much money do I need to raise in this round?
  2. How much ownership am I prepared to dilute

So for instance, if you seek to raise Rs. 60 Lakhs (Rs 6 million) and desire to dilute no more than 25%, then your post-money valuation is

Valuation

Just as easily for the same money, if you have dilute more – your valuation could change without any real material change in your business. Depends how desperate you are and how greedy or generous the investor is. The table below shows the effect of A and D on valuations.

Valuation options

Reality rarely is this clean. Happy hunting.

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Why I Tell Indian Entrepreneurs “Stop reading TechCrunch!”

Every time I hear an entrepreneur in India tell me “It’s Angel List meets GitHub” I try not to grimace. Given the ardor of youth and the desire to get their elevator pitches easily understood, I can certainly understand young entrepreneurs pitching in such a manner.

TechCrunch (Alexa score 369) is more popular than livemint.com, India’s #2 biz paper (837) or nextbigwhat.com (640) and yourstory.in (802) – two popular Indian startup destinations. At one level just as the BBC (112), Huffington Post (264) and New York Times (305) are popular in India, it’s not a big surprise that TechCrunch given its brand and Silicon Valley pedigree is followed closely and devoured by the tech startup community in India. However the fact that something is understandable doesn’t make it healthy (as with my Doritos-eating habit).

Silicon Valley, even within the context of the United State is in many ways unique – and unlike anything in India. From the time Fredrick Terman first began molding young minds at Stanford, more than three-quarters of a century has passed before Instagram, Twitter and Facebook appeared on the scene. And before them came the first generation Internet folks – the networking and computing folks before them and the granddaddy semiconductor firms before them, who were themselves preceded by the likes of Hewlett-Packard and Litton. So nearly five distinct generations of companies and innovation preceded this current crop.

Alas, ​young Indian founders approach TechCrunch without any of this context. For most of them, 2005 when I sold my first tech startup, is practically the dark ages and 1999 another geological era altogether.

As an angel and mentor when I encounter entrepreneurs, I find that TechCrunch plays an inordinate role today in their thought process. This is true particularly with startups dealing with bits rather than atoms.

Many of their assumptions are not grounded in the reality of today’s India – may not even in today’s America.

All they see is that a startup to sell tampons online raised $250K with just an idea on a napkin. Or Pinterest raised whatever astronomical amount of money without any real monetization strategy and Fred Wilson invested in Zemanta (who’d by then acquired a million downloads) even whilst acknowledging that none of them were clear how they’d make money.

The reality of the Indian entrepreneurial ecosystem is that we are yet to see more than one turn or “generation” of tech entrepreneurs. A large amount of money is following very few quality deals. The VCs are acting as PE players would elsewhere. Angel groups are acting like VCs would. Everyone’s looking for revenue, customers, and traction (all of which are good), but not quite the high risk/high reward perspective of early stage funders. To be fair to the funding community in India, the supply side problem of deal quality is compounded by the fact that there have been very few exits, and their LPs may be looking for medium risk/medium returns.

The needs of the Indian market and Indian consumers are quite distinct. Enterprises in India do have needs similar to those of companies elsewhere – databases, analytical tools, HR software, CRM systems – but their behavior and culture often are different. Consumers, on the other hand, can and do have very different needs. So when we talk about “building the Amazon or Zappos of India,” and unimaginatively try reproducing something done elsewhere, it serves no one well.

The good news is that oodles of young entrepreneurs are starting companies each day in India. Now if only they paid a whole lot more attention to what their customers are saying and what problems those customers face than what TechCrunch is reporting from the Valley, I’d like to think, we’d see a whole lot more innovation and business building amongst Indian entrepreneurs.

Who’s pain are you trying to address?

Regions of the cerebral cortex associated with...

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Over the last two months, I participated in a number of meetings with founders of startups – as an adviser, reviewer or investor. Interestingly in nearly every one of these meetings the same questions kept coming up.

In particular four different companies  –  two nascent startups and a couple in their early tweens – were facing eerily similar issues. Despite the startups being in very different spaces,  the varying ages of their endeavors and having  smart and motivated founders – they were all trying to come to grips with the lack of market traction. This despite a great deal of time spent talking to prospective customers, partners, building and launching working prototypes.

I must admit after the first couple of meetings it appeared they were having different problems. In one, a marketplace that was not getting suppliers nor buyers off the starting block, in another focusing on the technology to the exclusion of all else, and yet another having a solution looking for a problem. However, by the time the fourth meeting rolled around it was plenty clear, that all of them required a sharp focus on answering the question

“Who is your target customer?”

and more importantly,

“What pain are you trying to solve for them?”

Two years into our own start-up, we find ourselves returning to this question with reasonable – some would say troubling – frequency. When we got started on dog-earz, the newsletter tool for the rest of us, we defined our target customers as “marketing & sales folks in SMBs” and the pain we were trying to solve for them was How to keep in meaningful touch with everyone in your Rolodex, even if there wasn’t a deal on the horizon.

Of course, it helps, if your target customers actually exist (ours did) and are accessible (a little more difficult) and truly felt this as a problem (not clear). Our solution seemed more a nice-to-have vitamin rather than make-my-pain-go-away Aspirin. We hung in there, as we felt we were target users ourselves. With time it was clear that we’d better solve their pain rather than imagine that they will behave the way we’d. Seems obvious in hindsight, doesn’t it?

Things are not always as evident as we’d like them.  I once had an opportunity to talk to Phanindra Sama, founder of redBus.in about his understanding of what pain they are solving for their customers.  Phanindra shared his view that the pain his customers felt was not in purchasing bus tickets – as I’d have thought. In fact it might still be more convenient for a traveler to call someone to hold a ticket and pay for it at time of boarding – only one phone call needed, but it is the absence of reliable information – as in how many buses, when and at what price or location will leave from Bangalore to Chennai (or better yet from Jalandhar to New Delhi?) that was the customers’ pain point.

Ask yourself these two questions, repeatedly and validate them by getting out of the office and asking your target customers about their pain points. Once you nail this down it makes, at the very least, decision-making a whole lot easier. Knowing this is of course only a good start, but not knowing can kill your business.

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