December 25, 2005

New Seed Funds: Right time, Right Place, Right Model

On Monday (Dec 19), I attended the soft launch of Mentor Partners, a unique technology-focused seed fund, in Bangalore. The firm plans to initially invest $1 million each in 10 product-focused companies in the IT and telecom space: around $500,000 as seed investment or "bridge loan" and the remaining as part of the first round investment along with other Venture Capital firms.

With two partners on the ground in Bangalore (Ravi Narayan who earlier co-founded Nextone Communications in the US and V.Prabhakar, a co-founder of Bangalore-based software testing services firm RelQ), Mentor Partners will help its investee companies get access to top companies in India, the US and other markets via its about 35 other members in its network. The network includes those who are either operating managers (like Vish Narayanan, Head of Telecom Operations at General Motors in Chicago) or "been there, done that" entrepreneurs (like Rosen Sharma who has founded several start-ups like Solidcore, VxTreme, Ensim, Stratum8 and Green Border).

While the number of entrepreneurs with good products ideas is growing rapidly in Bangalore and other cities, the bane of genuine early-stage investments in recent years has been lack of ability and willingness on the part of VCs to provide seed capital (a typical VC firm cannot invest less than $3 million) and more importantly, play a hands-on role in growing start-ups.

Mentor Partners plans to raise its corpus from high-net worth individuals and Silicon Valley venture firms. (Several Sand Hill Road firms have recently made similar investments into local VC firms in China. There are several reasons why it makes sense for Silicon Valley firms to make such indirect investments-despite the issues it create with respect to “double carry fees” for their own investors. For instance, they don’t have to prematurely invest in setting up a full-time team and office in these developing markets. Plus, they get proprietary deal flow for making follow-on investments.)

A key source of strength for Mentor Partners is that there are enough follow-on investors (including some two dozen Silicon Valley VC firms and strategic investors either already on the ground or very keen to invest in India) who can invest $3 million or more into their portfolio companies - when they are ready for it. Plus, as B.D.Goel, a member of the Mentor Partners network, points out, "success" for such a seed fund would be in validating the business models of their investee companies and helping them access name-brand investors as part of the first round. Mentor Partners will then rely on the follow on investors to take its investee companies to the next level, rather than having to hand-hold companies all the way to an exit. For entrepreneurs too, this is much better than having a larger fund invest $1-3 million when their products are still being built and then, just when they seem to be getting their marketing act together, start pushing towards a premature exit.

Mentor Partners' model-including its relatively small fund size and its unique partner network-is a welcome addition to the Startup-VC ecosystem in India. What's even better is that there are more similar seed funds that are either up and running or being raised. While Bangalore has seen the launch of the $3 million Erasmic Incubation Fund, Mumbai-based angel investor Mahesh Murthy has teamed up with Pravin Gandhi (a co-founder of Infinity Venture) to raise a $10 million fund to be called, well, “Seed Fund”.

Here's hoping that these seed funds-which are filling an increasingly obvious and large gap in the eco-system-will close their funds quickly and invest in creating some very exciting technology companies out of India in 2006.

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.

November 24, 2005

"Make your VCs accountable"

Jeff Bussgang recommends entrepreneurs "not be shy about holding their VCs accountable".
Just as the board of directors evaluates the CEO/entrepreneur every year for their performance against results, the CEO/entrepreneur should have the license to evaluate their VCs for their performance. Who did they help recruit? What business development introductions did they make? Were they proactive in giving critical strategic advice? Were they available and responsive when needed for emergency issues?


The article also points out how VCs apart from being answerable to investors in their funds (the "Limited Partners" or LPs), also have to answer to their partners.
In a VC partnership, each VC is investing the money of their peers as well as theirs, and affecting the overall results of the fund. And so while an LP may not hold a VC accountable for periods shorter than 6-10 years (the period after which fund performance is well-known), VCs are accountable to their partner every week at the partners meeting. For 4-6 hours, the partners pour over their strategies for deploying the capital, high-priority projects and individual portfolios. Every week, each individual VC must stand and deliver and demonstrate in front of their partners that they are on track to fulfill their obligation to their LPs to make money.

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.

"One founder usually not enough"

Bangalore-based incubator/early-stage fund Erasmic has decided it will not invest in any company which has just a single founder. Subrata Mitra, Founder & CTO of Erasmic said at a recent presentation at a TiE-Chennai event that this decision was driven by the founders' past experience with their own start-ups plus, given their small fund size ($3 million), Erasmic's ability to take risks was that much lower.

Vineet Buch of BlueRun seconds this in his blog post:
The best tech companies were founded by two people. Oracle, Cisco, Sun, Microsoft, Google, Yahoo ... the list goes on. One is usually not enough, three is acceptable, but having four founders can lead to committee-think - the antithesis of creativity. So, my entrepreneur friend, the first thing I recommend is finding a co-founder who has complementary skills and with whom you are comfortable spending your evenings and weekends. Munjal and I complemented each other perfectly while brainstorming on Ojos (a.k.a. Riya); he had the market vision, I had the tech savvy and process discipline to channel that vision.

As a single founder myself, I agree totally with Subrata and Vineet. From an investor's - and even the company's own perspective - having just a single founder is a dangerous thing for many reasons.

If you agree too, you might want to check out my earlier post, on how to select your co-founders.

If not, please do post your reasons as comments.

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.

November 19, 2005

ICICI's unique loans for R&D

Businessworld has an article on ICICI Bank's "Sponsored Research and Development" (SPREAD) program that has "helped companies like Biocon, Shantha Biotech, Neuland Laboratories and Samtel lay their foundations".
Now SPREAD loans are being used for innovative products and processes only a few companies in the world have developed or, in some cases, are now developing. For example, Strand Genomics in Bangalore is using the loan to develop new methods of predicting the toxicity of drugs. Proalgen Biotech in Chennai is using the loan to manufacture natural beta-carotene in very large quantities. Electronica Mechatronic Systems in Pune is developing very precise magnetic tapes for measurement. And so on. These companies would definitely sell their products in the Indian market, but their technology would be contemporary enough for them to sell in the global market too.

It is not difficult to see the impact of these projects on the Indian industry, as early stage funding is still difficult for technology companies. Venture capitalists (VCs) usually come in at a slightly later stage. In any case, VCs do not fund R&D. The Technology Development Board (TDB) of the Department of Science and Technology (DST) finances commercialisation of R&D but not the R&D itself. So for an Indian product company, there is no place to go other than SPREAD. This programme, along with a few similar programmes, helped more than 100 companies catch up with the developed world in the 1990s.


...A SPREAD loan comes with conditions most would welcome. The payback starts only after commercialisation of the product. The loan is written off if the project fails. Sometimes, ICICI gets the repayments through royalties on the product. ICICI also insists on the company collaborating with an R&D institution. In the case of Strand, it was the Central Drug Research Institute in Lucknow that performed the lab experiments to validate Strand's models.

In the last decade and a half, more than a hundred companies and an equal number of institutions used the programme to develop new technology. Having tasted the value of R&D, several companies have gone for a second loan. The impact of SPREAD is now seen particularly in biotechnology, the most R&D-based industry in India now.

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.

November 17, 2005

"VCs have the best PR machine in the world"

Jeff Cornwall has a nice post pointing out that Venture Capital gets much more attention that it deserves (from entrepreneurs seeking financing, that is):

I often think that venture capitalists must have the best public relations machine in the world.

Only a tiny fraction of a percent of entrepreneurial ventures ever get or need venture capital financing, and yet the two most common phrases that come out of most aspiring entrepreneurs mouths are "business plan" and "venture capital." It is as if the venture capitalists have done such a good job of branding that their product name has become common speech for financing a business (like Kleenex for tissues and Xerox for copying).

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.

Why your Business Plan should just be a PowerPoint

David Cowan of Bessemer Venture Partners has some great advice on why Business Plans – at least those presented to VCs – should be in PowerPoint format. He also has some nice tips on what the slides should talk about. There is also a nice discussion happening in the comments section of the post where David critiques a BP submitted by one of the readers.
1. The cover slide should offer complete contact info, and a tagline if you've got it. One of the benefits of a powerpoint plan is that it forces you to perform the critical exercise of describing the business in very few words.

2. A mission statement is a good idea to present, unless it's rather obvious from the tagline (as in BlueNile.com: Education, Guidance, Diamonds and Fine Jewelry). Select a mission statement that is achievable, but not yet achieved....

A clear mission statement also includes a clear idea of what the startup will NOT do. Here are some nice ones...

"Prolexic will create and dominate a new network service category that defends web applications from distributed-denial-of-service attacks."

3. Introduce the team...

4. Without yet getting into your product or service, describe the nature of the problem you address. Emphasize the pain level and the inability of incumbents to satisfy the need.

5. Introduce your product, and the benefits (which should obviously address the market problem you just described).

6. Elaborate on the technology or methodology you have developed to enable your unique approach...

7. Show off early customer or distribution progress: numbers, logos, testimonials.

8. Sales strategy. Show the expected cost of customer acquisition.

9. Competitive landscape...This is also a good slide on which to show market size estimates.

10. Earnings Statement, historical and forecast...



UPDATE: Guy Kawasaki on his new blog points out the "The ten topics that a venture capitalist cares about" in the PowerPoint:

1. Problem
2. Your solution
3. Business model
4. Underlying magic/technology
5. Marketing and sales
6. Competition
7. Team
8. Projections and milestones
9. Status and timeline
10. Summary and call to action

November 12, 2005

Hiring in India; Tips from an "in the trenches" entrepreneur

Gaurav Bhatnagar has a great list of practical tips for hiring for a startup in India; especially hiring programmers.
Hring in a hot market like India is especially hard. And for startups, even more so. My experience has been quite in contradiction with common wisdom. And my experiences are probably more relevant for startups and small companies which do not have an army of recruiters and which do not need to hire by the 100s (if not 1000s).

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.

November 07, 2005

US recruitment firm specializes in "angel employees"

With Internet-based services companies back in favor among US VC investors (a phenomenon aka "Web 2.0" or "Bubble 2.0"), can service providers and wannabee start-up executives be far behind?

Scripps Howard News Service has an article on PeopleConnect, an exectuive search firm that actually has a branded program called "Employees Without Paychecks" that focuses on placing executives and tech professionals who are willing to work at start-ups without pay until the clients' VC funding comes through.

PeopleConnect is the first search firm to market a program of recruiting employees who will work for equity. "A friend of mine calls them 'angel employees,'" (PeopleConnect CEO) Max Shapiro, said, comparing them to angel investors, who fund early-stage companies.

... Shapiro markets the Employees Without Paychecks program to early-stage companies that, like Commendo Software, are just a few months away from seeking venture funding. He selects client companies carefully to avoid placing candidates at ventures that have no chance of success.

Candidates are initially treated as independent contractors and paid with stock options, with an understanding that they will become salaried employees when the company gets VC funding.

PeopleConnect charges a contingency fee of 25 percent of the candidate's first-year earnings. It takes a small portion of that fee in a combination of cash and stock options right after the candidate starts. But most of the fee is due when the candidate goes on salary. If the client company never obtains the resources to hire the person, PeopleConnect doesn't get paid.

"In a way, we're investing in the companies as well and hoping they get funding," Shapiro said.


UPDATE: Jeff Cornwall cautions entrepreneurs on the potential dangers of recruiting "angel employees"

While this is a great way to save cash and lower the breakeven point, it does have the potential to make things complicated. All of these managers are now shareholders and have legal rights. The more partners in the deal, the more complex things can become. I would only recommend this strategy for businesses with a clear and relatively quick exit plan. I would not recommend this for entrepreneurs who plan to build and hold their business. It is a recipe for too many headaches with so many added equity holders.

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.

November 06, 2005

Entrepreneur-turned-VC launches blog

Alok Mittal, the co-founder of JobsAhead.com (acquired by Monster.com in 2004) and now a venture capitalist with Barings India Private Equity, has launched a blog titled VentureWoods.

In one of his early posts, Mittal talks about "Band of Angels India", a group of successful entrepreneurs and executives (of which he is a member) with a passion to invest in and mentor early stage businesses.

The application process to BoA involves sending in an executive summary to any of the members (yes, investors themselves take decisions here, there are no “investment managers”) and convince them that what you have is a potentially successful business. The member than “sponsors” the proposal to the whole group. Members in the group make individual decisions on whether to invest in any particular opportunity — for example, 4 members may decide to fund a given venture. The members continue to be involved in the mentoring process.

Typical deal size at BoA is less than Rs 2 crores. We expect higher investments to be supported by other venture capital players. BoA is diversified in its industry coverage — we will invest in any industry where we have members (and hence an understanding of that space). We look at deals from across the country. Some coverage on us. You may mail in your proposals to any of the members directly.

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

October 23, 2005

Technopreneur Promotion Programme

Last week, I came across an interesting ad by the Ministry of Science and Technology in The Economic Times and The Hindu inviting proposals for the "Technopreneur Promotion Programme (TePP)" .

The TePP aims to extend financial support to "individual innovators for converting their innovative ideas into working prototypes/models". Jointly operated by the Department of Scientific & Industrial research (DSIR) and Technology Information, Forecasting and Assessment Council (TIFAC) of the Department of Science & Technology (DST).

Here are some extracts from the FAQ section of the DSIR web site

# Who can apply?

Any Indian Citizen with an original idea/invention/know-how to develop working prototype/processes can apply for TePP support. Even, the proposal from the owner of a ‘start-up’ company/industry may be considered for TePP support, if the annual turnover of the company / industry doesn’t exceed Rs. 30.00 lakh per annum.

# How much support one can expect?

The maximum TePP support would be up to 90% of the project cost . The remainder part of the cost i.e. 10% amount in the project would be invested by the applicant. The upper limit for TePP support for the proposal at present is Rs. 10.00 lakh.


Here are some examples from 114 existing projects funded under this scheme:

"Everybody’s Solar Water Heater" (by a Professor at a engineering college in Tamil Nadu)

"Bullock operated generator with accessories for multi-uilisation" (by a person in Varanasi)

"Arecanut peeling machine" (from Kerala)

"100% Cure of Baldness within 40 days" (Bareilly, UP)

"Treatment of Diarrhea in Animals" (Ahmedabad, Gujarat)

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.

Presentations at TiE-Silicon Valley now available via streaming video

TiE Silicon Valley has launched "TiE-Webstream Zone" showcasing videos of presentations by various speakers at its various forums. From Vinod Khosla and Tom Friedman keynoting at TiECon 2005 to the various interesting presentations at the monthly meetings, the selection is indeed wide. Entrepreneurs from around the world will definitely find quite a few vidoes well worth watching.

Thanks TiE-SV for this great effort!

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.

Great TiE-Chennai event featuring Chandu Nair

The TiE Chennai Chapter, which hasn't been very active in the recent past, seems to have become vibrant again.

The Chapter's latest "Success Close Up" event on 19th October - featuring Chandu Nair, Co Founder & Director of knowledge process outsourcing firm Scope e-Knowledge Center - was especially interesting and useful.

The Success Close Up event is envisoned as a presentation "by a Successful Entrepreneur who...are willing to share with others candidly their life experiences in an informal setting".

Chandu Nair delivered on all this and more in his very engrossing presentation and sincere and thoughtful answers in the subsequent Q&A session. The presentation and discussions covered how Scope was created (serendipty), challenges faced (one of the main being the need to let people go, ameliorated somewhat by active outplacement help), relationships between the founders (better be direct about issues rather than let them simmer), support from the entrepreneurs' families, etc.

Hats off to Chandu and the organizers for an excellent event.

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.

October 20, 2005

Lessons a VC learned from a good exit

Bill Burnham of Celsius Capital has a great post on the lessons he learned from investing in Datapower, a company that was recently acquired by IBM.

The entrepreneur "sometimes" knows his market better
Just after Datapower had launched its first product, a performance oriented appliance, Eugene lobbied for the company to accelerate the launch a second security oriented product that had been planned for a quarter or two in the future. At the time, I remember cautioning Eugene on the potential distractions and costs of having two immature products in the market at the same time. Eugene lobbied hard to take the risk and thankfully he won the day. I say thankfully because not only did the company land a $300K order that quarter for the security product, but it was able to establish significant mindshare in the security space well ahead of its competitors. To this day the security space continues to have the most robust market demand and competitors that failed to quickly launch a security product suffered in the market. The lesson for me in this was that VCs have to be careful not to micro-manage product development in a rapidly emerging market because demand can move very quickly and in unexpected ways.

# Shotgun Weddings Don’t Work.
...The lesson for me as an investor is that you should never insist on making a company hire a specific person a condition of investing as that dramatically raises the potential for conflict. You are much better off investing in advance and helping the company recruit someone great that everyone is 100% confident in.

# VCs can indeed be very unethical.
Prior to raising his first significant round of venture financing, Eugene had raised a seed round from a few individuals and a couple of investment funds, one of whom was a reasonably well known VC fund...Everything was ok until Eugene decided to raise his Series A financing. At that point the VC fund submitted what was clearly a low-ball term sheet and pushed very hard to close it. When Eugene objected to the terms and announced that he would try to generate some alternative offers to see if this was in fact “market” he found that he couldn’t get any traction with other Boston based VCs most of whom would either not meet with Eugene at all or who told him that they would not do the deal without also including the original VC (at the terms they had proposed). Now I don’t know if the original VC had an active campaign to try and discourage other investors from doing the deal, but they obviously knew that new investors would not want to do the deal without them (if the original investors don’t invest that is typically a big warning flag that something is wrong) and used that leverage to try and get a better deal... However after Eugene rejected their term sheet and instead ultimately accepted mine, the VC in question went ahead and not only invested in a competitor, but installed the same executive that they had installed at Datapower at their new investment. Within months, this competitor began spouting very similar marketing messages and appeared to be executing against a carbon copy of Datapower’s product and market roadmap.

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

"Top Ten Commandments of Venture M&A"

Bill Burnham of Celsius Capital has a great post. While it is a VC's angle, it has relevance to entrepreneurs as well.

Given the importance of M&A to both VCs and start-ups, it’s important to realize that the seeds for M&A success or failure can actually be sown quite early in a start-up’s life and well before any potential deal materializes.

With this in mind, I offer the following Top Ten M&A Commandments with the idea being that if a start-up follows these commandments it will be able to avoid some of the most common structural and financial issues that have the potential to blow-up a deal or dramatically reduce its value. These commandments include:

# Thou Shall Not Give a Strategic Investor a Right of First Refusal, Right of First Offer or a Protective Provision that Enables Them to Block a Sale.
If you must have a strategic investor in your company (and in general I recommend against it) by all means do not give them a Right of First Refusal, a Right of First Offer, or an ability to block a sale in the event of M&A....

# Thou Shall Require “Drag Along” Agreements In All Series of Stock....


# Thou Shall Not Enter Into Contracts That Create Liabilities More than 2 Years In Duration.
When big companies buy small companies they want as few complications as possible. Long term liabilities, such as 10 year leases or long term supplier contracts (which will no longer be needed if the acquisition goes through), usually won’t kill the deal, but they will lead to direct reductions in the price that the acquirer is willing to pay. With this in mind it makes sense for start-ups to keep most of their agreements to as short a term as possible. Even if a vendor or landlord is offering a significant discount for a 5 year deal as opposed to a 1 year deal, it actually makes more sense to take the 1 year deal, not only from an M&A perspective but also because start-ups are so dynamic that you never know what you will need 5 years from now.

# Thou Shall Write All Customer Contracts And Partnerships Such That They Can Be Transferred to An Acquirer And/Or That Such Contracts Can Be Terminated With Reasonable Notice.

# Thou Shall Not Enter A No-Shop Without Hammering Out All of the Key Terms and Conditions of a Sale First.

# Thou Shall Not Allow A Buyer to Interview Employees Until At Least An LOI is Signed.


# Thou Shall Discuss Exit Expectations With Management and Board Members Prior to Funding and At Least Twice a Year After That.

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.

October 16, 2005

A quiz for wannabe entrepreneurs

Business Week has a cute little quiz to help wannabe entrepreneurs find out if they have the stuff.

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.

October 14, 2005

VC-spamming that entrepreneurs can do without

Paul Kedrosky has an entertaining account of an "all too common" type of "value-add" from VCs that entrepreneurs can do without.
Too many venture guys do virtually zero heavy-lifting when it comes to qualifying the people they toss at already stressed and over-worked portfolio company CEOs. “Here, talk to this guy, maybe you guys could have an alliance … here, talk, to this guy, he’s with a big company that I met recently.” It’s closer to spam than real added value.


Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.

October 09, 2005

What's so great about being the founder of a start-up?

"Genuine VC" David Beisel has a list of "Seven Reasons To Become a Founding Entrepreneur", including

Creation. The essence of a founder’s job is to create something where there was previously nothing. An idea becomes a plan; a plan produces a product; a product launches a company. To me, the notion of conceiving and building something both tangible and real is paramount.

..Variety.The title “Founder” is function-agnostic. Sure, someone may be a technical founder or a founder with expertise & a formal leadership role in another function (sales, marketing, etc.), but during those exciting early days everyone is wearing many different hats. The diversity in the tasks required of someone in this role necessitates that there is rarely a dull moment.

Control. Many jobs leave the much of one’s destiny to the group he/she works in, the company he/she works for, etc. Obviously, there are extraneous unmalleable factors with everything in life, career paths are no exception. But a founder is in a unique position to be largely in control of his/her own destiny like few other roles allow.

Passion. A founder with authenticity doesn’t just conceptually understand the problem being solved or value being created, he/she believes and knows it. This deeper resonance produces a reward and benefit that potentially overshadows the others.

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.

What motivates a corporate VC?

Until 2004, Intel Capital was probably the sole active corporate VC investing in the Indian technology sector. As I have written earlier, Flextronics with its string of rapid acquisitions of telecom R&D companies in 2004 - quite a few of them, interestingly, with Intel Capital as an investor - has emerged as a significant new player.

2005 has seen the VC arms of Nokia, Cisco, IBM, TI and other hi-tech companies - begin to actively scan the Indian market for potential investments. Add to this, the active investments in by some of the Indian business groups - like the Godrej Group and more recently, Reliance Capital - it certainly seems as if corporate VCs are going to play an increasingly important role in the Indian technology landscape.

In this context, it is important for Indian entrepreneurs to understand the factors that drive corporate VCs vis-a-vis pure financial investors. A recent Knowledge@Wharton article, quoting the work of Gary Dushnitsky from Wharton and Michael J. Lenox of Duke University, provides some useful pointers.

The authors feel "venture capital is an essential tool available to a corporation to increase its innovativeness".
Corporate venture capital is one leg of a three-legged stool whose other two legs are a strong internal R&D capability and strong alliances with academic or government researchers.

Corporations that have stayed the course with venture investing -- DuPont, Johnson & Johnson, IBM and others -- tend to make equity investments in innovative startup companies with strategic rather than simply financial motives, and in time reap both strategic and financial benefits.


While having an VC arm might be good for large companies, start-ups can often discover that having such strategic investors on board may not always be a great idea.
Over the years, many examples have arisen of disputes between entrepreneurs and their corporate suitors over alleged misappropriation of trade secrets during the process of negotiating a corporate investment or acquisition, according to Dushnitsky. He cites a litany of such disputes: Simple.com versus McAfee.com; CardioVention, now defunct, versus Medtronic; a Stanford University professor versus Rockwell International. "The logic is that in these environments, because you cannot protect your idea, more of the technology is likely to be kept secret," Dushnitsky says.

So, when does it make sense for a start-up to go with a corporate VC?
"When corporate venture capital is least likely to attempt imitation," Dushnitsky writes. Based on a matched sample of 258 entrepreneurial ventures and 74 corporate venture capitalists, he concludes that the probability of a relationship between the two parties "decreases if the products are potential substitutes and increases when the products of the two are complementary."

If the products are potential substitutes, "there are incentives for a corporate venture capitalist to behave opportunistically and copy the venture's novel technology," he writes.

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

September 30, 2005

How to select your co-founders

Allen Morgan of Mayfield, has some great suggestions on how entrepreneurs should go about creating their start-up team - especially selecting co-founders.

He points out how VCs most often pass on interesting ideas because they don't like some of the co-founders.

..for a VC firm that is comfortable with early stage startups, an incomplete startup team is preferable to a team with the wrong team members.

First, VC’s pride themselves (some are even good at it) on being good at helping their companies recruit. If a startup has an attractive couple of founders and a terrific business idea, a VC can imagine how additional, world-class team members could be recruited to fill out the team.

...Second,.. it’s always hard to transition the “wrong” co-founder out of the Company – it’s also economically unattractive to the remaining co-founders.

Org-charts

We’ve all seen a “standard” organization chart. It has (1) the CEO at the top, (2) Four to eight Vice-presidents below, each in charge of a business function and reporting to the CEO, (3) Directors in the reporting chain below the Vice-presidents, and (4) a variety of folks with different (and non-standard) titles in the reporting chain below the Directors.

I would claim that this “standard” org chart is actually a good template to follow in organizing a startup through, say, the first 40 people. ..there is an interestingly strong correlation between (1) startups with org charts that were “contorted” in some way (compared to the “standard” one) and (2) startups that ended up with some kind of founder trouble. Thus, if there are “odd” lines of reporting, or if there are “odd” titles that don’t fit in a standard org chart, it usually raises a red flag. If you’re having trouble fitting one of your co-founders into a standard org chart, you should think about whether he’s the right person (or, at least, in the right role).

...Another thing founders often fail to realize: not every member of the founding team has to be a Vice-president (or higher). It’s OK to have “TBD” in a number of the Vice-president “boxes” in the org chart of a startup (and elsewhere). For example, don’t worry if you have a great Director of Engineering but no Vice-president of Engineering in your startup. Any Director worth his salt should be able to manage a startup engineering team through 6-8 people, particularly if the CEO has technical experience. In this situation, the VC’s question will be: will the combination of the CEO, the Director of Engineering and the company idea be attractive to a great Vice-president of Engineering when hiring one becomes appropriate.

..Almost guaranteed, any startup that has both a CEO and a President/COO has the wrong person in one or the other (or both) of those roles. This sort of title inflation and proliferation is almost always – like most other “contortions” of the standard org chart – a red flag to VC’s. Can easily be taken to indicate that some of the co-founders are more worried about titles (and ego’s) than success.

.. My advice, however, is to not be afraid of putting “Interim” in front of anyone’s title when it’s reasonable to assume that an early task of the startup is to recruit someone else to that role. This is particularly, but not exclusively, true of the CEO role. VC’s love entrepreneurs with the self-confidence and guts to start a company, as well as the wisdom to realize that they’ll need help.


UPDATE: Allen has followed-up with a very useful suggestions on how to avoid the problem of the "forgotten founder"

UPDATE 2: Jeff Cornwall provides the Why, What, How and Who of selecting your co-founder

Why:
My last set of start-up ventures worked well because my partners and I balanced each other's personalities. One of us was the aggressor; one was the worrier; one was the analyst. We always kept each other in check. This helped us to generally be fairly prudent in our decision making. Also work habits, personal goals and so forth are all important factors to consider.

What?
During the pre-venture stage of your business, one of the first challenges is to assess the specific needs of your new venture. Is there specific business expertise that you need in your particular start-up? If you will need access to a significant amount of capital, that is millions of dollars, then you will want to have someone on your team who has experience in securing such funding. I often see entrepreneurs suffer from either over kill in hiring or from under estimating the skill set needed on the team. If the venture is only going to need limited funding, say $200,000, it would be over kill to bring in a business person whose experience is in moving venture through multiple rounds of venture capital financing. On the other hand if you do need multiple rounds of VC money it is best to have that skill set somewhere in your team. Before you start adding people to your start-up, have a clear enough vision for the business to begin to know what you really need in terms of help.

How?
Just because you need help on your team does not mean the person needs to be a partner. You can often hire high level talent and offer them a limited equity stake in the deal that does not make them your equal in the venture.

Who

Here are some issues you need to explore before "tying the knot":
- Do your share the same vision for the business?
- Do you share the same aspirations for the business? Does one want to build an empire while the other create a simple lifestyle kind of business?
- What are your work habits and work ethic? Are they compatible enough to keep the partnership feeling fair to all the partners?
- How much time off to you plan to take each day, each week, each year?
- How much money will you put into the business?
- How much do you expect to get out of it?
- Who will be the President of the company? What roles will the other friends play?
- How will decisions be made?
- What is everyone's credit rating? Can all help to guarantee a loan, if necessary?
- What if one of you gets married and the new spouse gets a job offer in another city? Would you move away?
- What are your core values and how do you want to see them play out day-to-day in the business?
- How will employees, customers, suppliers, etc. all be treated?
- What will you consider to be real success in this business?

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.

Managing the board

Allen Morgan, quoting his friend John Kernan, has tips on conducting board meetings:
1. NEVER have the board meetng "at" the board meeting. ALWAYS call every director a few days before the meeting and run every important issue by them to get their input, Also update them on company performance, especially the bad news, and let them "beat you up" privately. That way, the meeting can focus in a constructive fashion on problem-solving and building the Company for the future.

2. Maximum Powerpoint show is four slides from any presenter, especially yourself. This should be the limit of director interest in detail.

..4. Have your key team members do almost all the presentations. It gives them exposure and allows you to make sage comments along with the rest of the board. A perfect board meeting is when 10% of the talking is done by the CEO, 60% by the team, and 30% by the directors.

..8. For VC directors, try to picture how they are describing your Company to their partners, and what questions their partners are asking. Your job is to make each director a hero to their partners (or corporate boss).

If you work hard, always act in good faith and in the best interest of the Company -- and if you follow these 10 rules -- most VC's will still be interested in financing your next deal, even if the Company tanks.

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.

September 27, 2005

"Why risk a start-up when MNCs pay such high salaries?"

Rajesh Jain's has posted on a topic that I have heard several times from other entrepreneurs and VCs.
(I had a discussion) with a US-based venture capitalist of Indian origin who had an interesting take on the problems with entrepreneurship in India. He made four points.

First, salaries in India will rise faster than cost of living which would make it unattractive for employees working with the international majors to quit and create or join a start-up. Second, even the ones who are venturing out seem to be more focused on services than products. Third, the few in the products area seem content OEMing their creation to the market leaders rather than taking them on with full stacks. Finally, Indian companies lack vision to think big and global. I agreed with him on all four counts and added one of my own. It is well nigh impossible to do a tech, product-oriented start-up because angel and early-stage funding is simply not there.

The post also features interesting comments from other entrepreneurs and wannbee entrepreneurs.

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

September 25, 2005

"The Top Ten Reasons Companies That Should Make It ... Don't."

Jeff Cornwall quotes bankruptcy lawyer Bobby Guy:

10. Over-expansion. The need to get there first or to demonstrate revenue growth to anxious investors leads businesses to grow too fast.

9. Poor Capital Structure. Companies take on too much debt....Enough said!

8. Failure to Control the Controllable Costs. Businesses spend down the initial cash before it is flowing in at a positive rate.

7. Failure to Prepare for Volatility of Uncontrollable Costs. For example, energy, materials, labor, or insurance.

6. Add New Products or Divisions that Drag Down the Profitable Ones

5. Poor Internal Controls and Execution -- customer service, accounting controls, theft, fraud

4. Poorly Designed Business Model

3. Reliance on Critical Financing that Dries Up

2. Failure to Adapt to a Changing Market

AND THE #1 REASON? Management in Complete Denial......

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.

September 19, 2005

"Time is the entrepreneur's enemy, but the VC’s friend"

Jeff Bussgang on what’s an entrepreneur to do in the context of a fundraising process when time is their enemy, but the VC’s friend?

One piece of advice is to simply recognize this difference in this attitude towards time and try not to fight against it.  One wizened general partner at a top firm once remarked to me about a particular deal:  “They told me I had to make a decision in the next few days, so I told them I’d save them a few days and simply pass.  It’s VC 101 – anytime an entrepreneur puts a gun to my head, I pass.  There’s always another deal.”  

If you can create a sense of urgency in the fundraising process, you’re running an unusually charmed process.  More typically, you can expect to run a fundraising process where you simply have to give VCs the time they need to “soak in” the deal, live with it for a few months and then, at the right moment, try to call their interest to question.  Rushing the process only gets the VC alarm bells ringing.  For the entrepreneur, this start-up is their life’s work and on their mind every moment of every day.  For the VC, there’s always another deal.

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.

September 17, 2005

"Why most start-ups should avoid VC funding"

Extracts from a great post in SiliconValleyWatcher.com by Greg Gianforte, CEO of RightNow Technologies:
-If you start by selling your concept to potential prospects (rather than stock to VCs), you will either end up with initial customers or a conviction that your idea won't work. Why raise money and then find out which one it will be?

-Raising money takes time away from understanding your market and potential customers. Often more time than it would take to just go sell something to a customer. Let your customers fund your business through product orders.

-Adding VCs to the mix early gives you an additional set of masters you must serve in addition to your customers. It is always hard to serve two masters, especially in a startup.

-With no money you can't make a fatal mistake. This is a blessing. Without VC money, you are forced to figure out how to extract funds from your customers for value you deliver. Ultimately that is the only thing that really matters.

-Raising VC money determines your exit strategy. You will either sell the business or take it public. What if you end up with a very profitable, modest sized business that you want to just run? That is no longer an option once you raise VC money.

Arun Natarajan is the Editor of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.

September 15, 2005

Negotiating your earn out deal

Today, a lot of start-up acquisitions come with a “earn-out” provision for the founders – i.e., a part of the payment that is linked to their sticking around and meeting some performance targets. A Business Week article advises entrepreneurs on how to deal with the earn out agreement.

The key to a successful earnout lies in negotiating smart, achievable targets, making sure they're spelled out clearly in your contract, and keeping some power over decisions that directly affect them. You'll also want to nail down your own position in the new company -- and your eventual exit from it.

...Many experts recommend using revenue targets instead (of profits). "It's harder for buyers to do things that will depress sales than to depress income," says Mihanovic.

...No matter which type of target you use, fight for sliding-scale rather than all-or-nothing payments. That ensures that "if you're within 80% of the threshold, you'll get 80% of the payout," says Dexter. Ask also that disagreements over how costs are determined be submitted to binding arbitration.

...Then there's the unenviable task of trying to guess the future. What if the acquiring company gets sold? Or goes public? What if your division gets transferred overseas?

...The last task is getting your own employment contract. Without one, "They can pull the rug out from underneath you," says Phil Thompson, a partner with Thompson Associates, a law firm in Richmond Hill in Ontario, Canada.


Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.

September 11, 2005

Make “no shop” and other clauses in the VC deal mutual

From Tom Evslin:

My advice to entrepreneurs on this clause is to say politely and firmly “what is sauce for the goose is sauce for the gander.” The no shop should prohibit the VC from entering into financing discussions with competitors broadly defined of the company during the exact same period when the company can’t talk to other investors. If your VC won’t agree to this, don’t hesitate to ask what discussions they are engaged in

In general it is good negotiating advice to make sure that every clause which can be mutual is mutual. Often this technique helps in reaching agreement. For example, with a truly mutual no shop neither party will want it to be very long and both have a strong incentive to complete negotiation quickly.

Assembling a startup team that sticks

BernardMoon of GoingOn Networks, Inc. has some good advice in this AlwaysOn post:

The bottom line is that no matter how good your team appears to investors, what really counts is how your team works together in the trenches. Poor team dynamics and failed chemistry can sink even the most promising companies—a fact many founders and investors discover too late.

...Partner with people you trust. My first piece of advice for any budding entrepreneur, and one I always overstate is, "Trust is essential." If you have any doubts about a potential partner, clear the air or steer clear completely. As John Doerr of Kleiner Perkins Caufield & Byers puts it, "You must ask, 'Are these the people I want to be in trouble with for the next 5, 10, 15 years of my life?' Because as you build a new business, one thing's for sure: You will get into trouble."

...Keep the communications channels open. Don't horde information. In today's fast-paced technology world, it's important that all members of your company have access to the best and latest information. Establish a culture in which there are no information gatekeepers. When one person controls the flow of information, a fiefdom usually emerges in which that individual plays one side against another to increase his or her own perceived value. This creates conflict and inefficiencies—neither of which startups can afford.

...If your network doesn't present a capable candidate whom you know well, take a test-drive, if the situation allows it.

September 06, 2005

Be careful with your angel round valuation

Make sure your angel round doesn’t make you walk off a pier, advises this post on the IBD BlogAngels tend to have higher valuations than venture firms. The angel investment instrument is often a bridge loan to the close of the Series A round. The problem with high valuations is they may stop the VC from investing. Angels must feel comfortable that a Series A will close. Otherwise, a bridge that doesn't get finished is called a pier, and you don't want to walk off of a pier.

Is your company VC fundable?

We primarily fund early-stage companies looking for 1st round funding, which is typically $3-5 million. I want to see the potential of a $100 million revenue per year company. It’s interesting to me when I see company projections and forecasts based on compound interest. I don’t think about compound interest. I can do Excel, too. I invest in companies to get 2-3 times the multiple of revenue (implying at least a $200M exit valuation). And sure, VCs have bigger appetites these days to build smaller, more targeted companies, in less time. And yes, M&A is the more likely exit. That’s the trend. I look for deals that will get 10x the return, and I don’t really care if that takes 3 years, 5 years, or 8 years.

-- George Zachary, Partner of Charles River Ventures in IBD Network

September 02, 2005

And MBA or a PSD?

"I would say that I'm an Ace Greenberg P.S.D. Ace has a saying: 'I won't hold an M.B.A. against you; but I prefer Poor, Smart, and a Desire to be rich.'"

-- Bear Stearns vice-chairman Fares Noujaim in New York Magazine.

August 24, 2005

Great panel discussion on tactical stuff for start-ups

There’s a great audiocast of an entrepreneur panel at The Churchill Club – moderated by Guy Kawasaki - that discusses tactical information for building a successful startup.

Example: Never use a headhunter for start-up hires. Hire only people you have worked with and if that’s not possible, people who have worked with people that you have worked with.

Just download and listen. Its both fun and useful.

August 23, 2005

Tips for getting a winning edge

Jason Caplain, a partner with Raleigh, NC (USA)-based Southern Capitol Ventures, shares a list of "exceptional strategies implemented by some of our portfolio companies and others in the market to give them an advantage over their competition":
1. Service your competitor's customers when they have problems

Are some of your prospects using the competition, but they struggle to get help when they need it most? Offer your assistance at this pivotal time. Furthermore, tell them to call you anytime. Eventually, they will bring their business to you as they realize that you are readily available and your competition is not.

7. Work with partners, not service providers

Think of all the people you work with: lawyers, accountants, bankers, etc. Are they thinking about just the tasks you give them or are they thinking about you and your company? There is a big difference. A lot of local firms with help make introductions to potential customers, employees, partners and venture capitalists. It helps when they are always thinking about how to grow your company and can offer that kind of assistance and commitment to your company.

August 20, 2005

Why "founder sales" are actually a good idea

Venture capitalists never like deals where their money is used to buy the shares owned by founders and other early investors. They like the money they bring in to go "into building the company" - ie, towards hiring people, building a product, etc. Unless, that is, they are desparate to get in on the deal.

Gary Rivlin of The New York Times reports that such "founder sales" deals are now becoming more common in the US. Companies like eHarmony, Webroot Software, Fastclick, etc., have witnessed the founders "using venture deals to cash out some of their equity without the bother of a public offering or an acquisition".

If the VCs are so hungry for the deal, why do the founders want to cash out early? Are they not as confident as the VCs about the success of their business and hence, a getting a much larger payoff at a later point?

The reason, Woodside Fund partner Thomas Shields explains, is since a founder is typically "stock rich but cash poor". Such a situation is actually not good for the company as a whole since such a founder "just might be overly conservative in his or her business decisions for fear of losing everything." "If you can give these guys a little bit of liquidity so they're comfortable taking more risk, but not so much that they're not hungry anymore, then it can be a very good thing."

What Shields says makes a lot of sense. So much so that I think it might be a good idea for VCs to actually insist on "limited founder sales" when they invest in a company. I think this will help reduce the all-too-famailiar clashes between founders and their VC backers post the initial honeymoon period. Letting the founders take "a little bit off the table" reduces their risk in doing what VCs what companies all their investee companies to do: grow faster.

August 12, 2005

"There's no risk in attempting or working for a start-up"

Sunil Goyal, who is with Gurgaon-based mobile content technology start-up Wirkle (where all employees blog!), has a great post on why he thinks more people in India can now afford to venture beyond wage slavery:
I think there is NO risk at all. And if any to the minimum. My perspective to this question is "What's the worst situation I can be in ?" May be I loose out on money, spent months on something which didn't work, may be at the end I don't have a job. I can't think of a more worse situation, if you can please do let me know..

On the other hand, any one who joins a startup will have steep learning curves both in technology and management, see how small startups need to work, how product has to be conceptualized, developed, deployed. Everyone in the team works for that. One enjoys the journey which might be bitter at times. Experience and the work that one learns, I think a corporate environment lacks that dynamism. So you can learn in 6 months what you will do in an year or even two within a big company.

So Where's the loss?

If startup worked, you would reach a prominent position. Will gain all the attention. Even if it didn't work, you will be more bold than before, will have more experience than others, will rise ahead from your peers. And getting job is never a problem, atleast the way current job market is moving in India.

I couldn't have said it better. In fact, this is what "The Startup Journey" is all about. Thanks Sunil.

Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

July 29, 2005

Board Behavior Tips for VC-backed Firms

Brad Feld points to an article by Dennis Jaffe (Saybrook Graduate School) and Pascal Levensohn (Levensohn Venture Partners) titled "After The Term Sheet: How Venture Boards Influence The Success Or Failure Of Technology Companies."

"Written in 2003, this is one of the best articles I've ever seen of the issues and dynamics surrounding the board of a venture backed company," Feld says. I agree.

An Extract:
The Board, and the roles and behavior of its members, evolve with the venture in three developmental stages:
• Start-up/Seed: An embryonic Board assembles as soon as capital is invested and VCs join the Board as preferred shareholders. Their first joint task is to recruit talented employees and define their roles. The optimal size of a start-up Board is between three and five people.This breaks down into one management representative and two venture investors, or two management representatives and three venture investors.
• Early Commercialization: A typical commercialization-stage venture Board has three VCs representing the largest investor in each series of preferred stock offerings (the A, B, and C rounds) and two insiders (the CEO and one other member of the management team, possibly the CTO or a co-founder). As a company grows, a successful Board adds new members with management and financial experience. As it enters the early commercialization phase, the company continues to demand active participation from the Board. Often the participation required is of a different and expanded scope than when the company was in pure research and development mode. Committees may form on an as-needed basis, including strategic review, merger and acquisition, and management integration.
• Productivity/Expansion: At this stage, typically three to five years after inception, the company has successfully launched its product and attracted customers. The VC Board Member is now looking ahead to exit options and helping the company become self-sustaining. While the CEO may be occupied with the company’s performance, the VC Board Members are motivated to look for exit options, such as a sale, an IPO, or a merger, and must also be looking for their own replacements on the Board. Independent directors who are likely to remain on the Board after an IPO often become more active at this time. Board Members skilled in structuring exits through mergers and acquisitions also may play an increasingly important role.


Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

July 28, 2005

"Bring new investors in, build value with each round"

Fred Wilson has great advice on what entrepreneurs need to do to protect from investor deal fatigue:
Bring new investors into the syndicate every time you raise money. The investors who wrote the checks in the A round might be tired by the E round, but the D round investors will have fresh legs.

Third, start with a low valuation and slowly and carefully build it in each investment. The investors will be less tired if they see the value of their investment increasing in each round. But if you start at too high of a price and then get stuck there or worse, go down, then you are in for trouble. There is nothing worse than a tired investor with a paper loss on his or her hands.


Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

"Have a downside scenario in your financing strategy"

Fred Wilson has great advice on how start-ups should plan for their next round of financing:

So how do you go about hoping for the best and preparing for the worst?

I think its best to start with the downside scenario. What happens if your company can’t get anyone to step up and do the financing on terms that are acceptable?

Well there are a couple approaches to this. The first is to do the financing when you don’t really need the money. That’s a great strategy. Maybe you’ve got nine months of cash left in the bank. Maybe you go out and talk to three or four potential investors to see if you can get something done with them on terms you’d like. If you can’t, you stop the process, go back to work, and come back to market in another six months.

If you don’t have that luxury, then you need to turn to your existing investors as your downside scenario.

There are a couple of ways to think about this.

The first is to get the existing investors to tell you on what terms they’d be willing to do an insider round. Get that locked down and then go out and see if you can do better. If you can’t, then you come back with your tail between your legs, but comforted in the knowledge that your company isn’t going to hit the wall.

The second way to deal with this is to put a bridge in place. Get the existing investors to loan the company enough cash to fund the company for say six months and agree to convert the bridge into the next round.

You can even marry these two approaches by getting the investors to bridge a portion of a potential insider round while you go out and try to find a new investor to provide the balance of the round and set the terms.


Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

July 02, 2005

Tips for Recruiting

Adam Shah has some good tips for recruiting - especially on interviewing and checking references:
# recruiting. [Apr'04] Recruiting is the single biggest determinant for success, with the people you hire literally being the DNA of the company. The challenge of recruiting is often under-appreciated by people who've never been responsible for it. First, you need to "sell" people on joining your venture, which isn't easy. Remember the old adage "good help is hard to fine"-- that's because smart, reliable, hard-working, no-nonsense people are never without work, so you have to lure them away. Here's some basic tips: (1) strategize: list reasons why people would join your venture instead of others, including reasons they wouldn't. Then, use this to source candidates. For example, when talking with recruiters, let them know these things. When considering how to source candidates, emphasize channels that tend to fit your criteria. (2) treat hiring like a project, including realistic schedules, budgets, risk analysis, contingency plans, etc. This avoids a lot of heartache when candidates ask for a lot more money, can't join when you need them, etc. (3) use pipeline management-- an ordered set of steps, with tracking of how candidates are getting through the process. You can optimize the pipeline by front-loading the steps that are most likely to filter-out candidates, and which are the least time-consuming. A proper pipeline also lets you optimize each step separately. For example, my first contact with a candidate is designed to be cheap-- usually an email with some basic information. I call candidates who express interest-- sadly, I haven't found a way to avoid these bazillion calls, since I don't like to pre-screen too much. (4) respect legal and ethical guidelines. Long before lawsuits or violence, hurt feelings are common in hiring. Since life is long, you may run into candidates in the future, where they remember your rejection. The world is a small place, so be careful of your reputation in the hiring process. Ditto this advice in day-to-day management after hiring. If you're recruiting for someone else, remember that you've built a relationship with the candidate, and should be available if problems arise. I like to check in from time to time. (5) tips for checking references. Of course, you check references, right? good. And you don't hand this to HR, right? good. They ask dumb questions like "how long did you work with X? what are X's strengths and weaknesses?" These questions have obvious "correct" answers, which neither avoids fraudelent references, nor elicits the issues that would lead to not hiring the person, much less provide information on how best to manage the person after they're on board-- which is the real value of reference checking IMHO. And HR won't impress the reference-giver, who will often talk with the candidate afterwards about their experience. Instead, you can chat up the reference-giver and impress them that (a) you know the candidate and can articulate why you're excited about working with the person, (b) your company and department are a great place to work and that (c) you'd be an awesome boss. Oh, and this is also an opportunity to source candidates for other positions. Some good reference checking questions:
- what project(s) did you and X work on? This detects fraudulent references, and also tells you how sharp the reference giver is, which IMHO is a good gauge of whether you should trust this reference-giver. Make sure the reference describes project(s) in enough detail.
- what was X's most shining moment? This helps gather stories, which you can then use to butter-up your management if you need to ask for deal-terms (e.g. money) that are outside your parameters. This question also butters-up the reference-giver for more difficult questions, such as...
- can you describe a situation in which X failed to deliver on his/her goals? Then followup with "how long did it take X to realize s/he wouldn't succeed?" and "how did X communicate this?" and "how did management react?" This detects "kicked-dog" syndrome, and lets you know what sorts of sensitivities the candidate might have, and how they might react in a politically-charged situation.
- can you describe an corporate culture or environment that X would NOT be successful in? You may have to push a little and pidgeonhole the reference who's intent on blowing sunshine. It helps to ask this before you describe your company, of course.

(6) interview tips. Obviously, respect is the key here. Don't show up late, take a phonecall or eat a burger during an interview. And treat every minute as precious and not recount stories from childhood. Don'y ask stupid HR questions like "describe your strengths and weaknesses"? when you could instead ask "what do you like about this position and why do you want it?". Don't ask a easy or trivial technical questions when you can instead ask deep, hard technical questions that detect junior vs. senior talent and detect incompetence. This is best phrased without acronyms or jargon. For example, my favorite question at Addamark for engineers was "managing big data-- say several terabytes-- is a big pain in the neck. Can you describe some of the challenges?" Junior people will talk about technical details, senior people will talk about fundamentals. Incompetent people will get those details wrong. There are a slew of miscellaneous tips I've found-- YMMV. (1) I try to schedule interviews for after lunch, say 2pm. This avoids wasting all day in a first interview, avoids taking candidates out to lunch, which empirically seems to hurt the hit rate (sorry, I have no explanation), and also uses the staff when they're least productive and most reasonable, i.e. while digesting burritos. (2) ask a person the range of cash compensation they want in the first phonecall, apologize for the awkwardness, and do it before saying anything about you want to offer. This avoids interviewing people you can't afford. Also, some people will name low-ball numbers which could either be a good or bad sign. If the number is in range, I tell the candidate up front, which puts people at ease and lets them focus on the job itself, rather than compensation. (3) stock compensation is messy because candidates either under-value or over-value the stuff, which creates deal-closing and post-deal management problems. (4) In an hour-long interview, I look for the candidate to tell me something (relevant to the job) that I didn't already know.

Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

Is your idea a project, product, or a company?

Adam Shah has some good advice:

Before getting too excited about your latest idea, ask yourself if it's a project, a product or a company.
A project is some useful and innovative tool or service, but unlike a product, it's unclear if anybody will enough pay for it to justify its manufacture (and delivery, i.e. through channels) -- much less whether this is still true in the presence of substitutes and knockoffs. Products are projects that are sellable-- they have financing, designs that incorporate feedback from prospects or customers ("people who can pay enough"), reasonable quality controls and processes, legal representation, etc.
A company is a product with headroom: infrastructure to grow, a fleshed-out management team, the ability to create multiple products, etc. Since companies can be tiny and have one product, the real distinction between "product" and "company" is whether the financial returns of the product justifies the corporate structure necessary to make it successful. A classic problem is starting a company that doesn't attract enough capital or talent to give it life beyond the founder's personal investments in time and money, thus starving the company of longevity, the ability to weather storms, the plethora of different skills to execute on the vision, etc.

Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

Reading List for High Tech Startup Entrepeneurs

Adam Shah has a good "must read" list, including:

# High Tech Startup . Some financial and legal subtleties of the game. It is worth noting that the normal rules of business simply don't apply, and you need startup specialists to help you in HR, accounting, legal, office management-- and of course, financing. Nesheim's book explains many of the important details.

# Crossing the Chasm . How to get a general-purpose, new technology to be embraced by a mainstream audience. This is the startup playbook, read by virtually everyone in silicon valley.

# Selling the Wheel . A light-hearted, fictional account of how the wheel was brought to market. A great complement to the Moore books above -- but an easier, faster read.


Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

June 24, 2005

Being paranoid about your idea doesn't help

Guy Kawasaki explains why in his Forbes.com Q&A column:

What stops someone who already has the money from implementing your idea? Time, expertise and passion to name three factors. Venture capitalists don't want to be entrepreneurs. They want to invest in entrepreneurs. They don't want to do the work, they want to find people to do the work. The deal they want is: I give you money, you create something great.

...Here's another way to look at it. If merely telling someone your idea means that it can be ripped off, then you hardly have a defensible product. If secrecy is your main weapon, then it will be hard to find investors. By the way, what happens when you ship? Are you going to ask every customer to sign a nondisclosure too?

There is no way to force a nondisclosure agreement with any potential investor whose money you'd want. If you can get an investor to sign it, just to learn what you're doing, then that's dumb money. Even if you get a nondisclosure agreement, then there's no way to enforce it--what funds will you use to sue the investor? Do you think your investor is going to say, "Sure, take the million I gave you and sue."

So the bottom line is: Use your head, don't show your stuff to someone who has a competitive portfolio company. Figure out which investors really should be interested, unveil enough for him to understand what you're doing (as opposed to giving him source code), and go for it.

Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

June 21, 2005

Five things that make a great deal

Extracts from a recent IBD Network event on Venture Capital (held at Menlo Park, CA) featuring Ron Weissman, Apax Partners (as Moderator); Raj Atluru, Draper Fisher Jurvetson; Tim Chang, Gabriel Venture Partners; and Venky Ganesan, Globespan Capital Partners:

1. An idea that fits with one of the VC's investment theses
2. A rock star team
3. A business model that is highly capital-efficient
4. The VC having good chemistry with the team
5. The ability for the VC to really add value (helping with liquidity events, or helping to hire talent)

Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

How to pursue multiple exit strategies and opportunities

Don't smell like you're trying to get liquidity. That's not very attractive. Pursue your core business, grow smartly, and others (VCs or potential acquirers) will see what an integral part your business could play that will benefit them, and that's where you will find yourself - cutting the deals.

- Michael Markson, VP, Business Development, Topix.net in IBD Network

Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

June 15, 2005

Each venture firm has a different process

David Beisel, a VC and former entrepreneur, explains:
For example, I know of one firm that formally assigns both an “advocate” partner and a “skeptic” partner to evaluate a potential investment. Others will consider an investment less formally. Some will write diligent investment memorandums based on specific, itemized checklists to ensure that all basis have been covered. Others rely on more of an intuitive approach to evaluation. Some have regularly-scheduled investment meetings, while others will convene when a deal is “hot.” Some firms have a formal voting process, while others are consensus-driven.


Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

June 14, 2005

Why a VC firm's fund size matters to entrepreneurs

Jeff Bussgang explains:
Well, a critical thing for an entrepreneur when fundraising is to find a firm that's going to fit their capital profile. After all, if a VC is trying to force too much money down the entrepreneur's throats, it will mean more dilution than they'd like. And not having deep pockets means there's a risk of getting caught short just at the moment when a few extra million might be needed to get to the next level. Thus, the Goldilocks Rule applies to VCs and fund size: not too big, and not too small, but just right.

How much capital does fund X really want to put in behind each company? The marketing materials may say one thing (I once saw a VC claim they would do deals from $50K to $50M!), but the reality is there's a sweet spot that every firm has and if you are in their sweet spot, you're better off than if you're not. The nature of that sweet spot comes down to the size of their current fund, not their total capital under management, for all the reasons discussed above. Thus, always ask a firm what their current fund size is, not what they have under historical management.

Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

June 10, 2005

And here's why you should remain small even as you think big

Seth Godin on why "Small is the new big":
Enron (big) got audited by Andersen (big) and failed (big.) The World Trade Center was a target. TV advertising is collapsing so fast you can hear it. American Airlines (big) is getting creamed by Jet Blue (think small). BoingBoing (four people) has a readership growing a hundred times faster than the New Yorker (hundreds of people).

Today, little companies often make more money than big companies. Little churches grow faster than worldwide ones. Little jets are way faster (door to door) than big ones.

Today, Craigslist (18 employees) is the fourth most visited site according to some measures. They are partly owned by eBay (more than 4,000 employees) which hopes to stay in the same league, traffic-wise. They’re certainly not growing nearly as fast.

Small means the founder makes a far greater percentage of the customer interactions. Small means the founder is close to the decisions that matter and can make them, quickly.

Small is the new big because small gives you the flexibility to change the business model when your competition changes theirs.

...Small means that you can answer email from your customers.

...A small law firm or accounting firm or ad agency is succeeding because they’re good, not because they’re big. So smart small companies are happy to hire them.

...A small venture fund doesn’t have to fund big bad ideas in order to get capital doing work. They can make small investments in tiny companies with good (big) ideas.

...Small is the new big only when the person running the small thinks big.

Don’t wait. Get small. Think big.




Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

Acting like a big company from the beginning

BusinessWeek has an interesting article on how entrepreneurs should prepare for growth:
Doing it all may be encoded in entrepreneurial DNA, but it's hardly the best way to manage a growing company. Entrepreneurs risk burning out and taking down their businesses and their personal lives with them.

...Managing growth successfully comes down to getting the right help at the right time. At the outset, it's important for entrepreneurs to develop relationships with professionals such as accountants and lawyers, then make sure the right hires come on when they're most needed. As the company grows, it may be wise to explore partnering or outsourcing -- or even stepping back from the helm of your company.

...It's important to keep an eye on the future, even if you're working out of a spare bedroom. "Start out acting like a big company from the beginning," advises Marty Schmidt, president of Solution Metrix, a small business consultancy in Boston. At a minimum, create professional accounting procedures and hire an accountant who specializes in small businesses.

...Getting started on the right foot extends to office space, too. Yes, cost can be an issue. But Humphrey found that several would-be employees who sounded promising on the phone failed to show up for interviews. "I realized later that candidates had been driving up, seeing this ugly building, and driving off," says Humphrey.

...That little epiphany prompted him to stop thinking like the founder of a struggling startup and to start acting like the CEO of the company he hoped DrinkWorks would become. In 2000 he hired a director of operations. The next year, DrinkWorks moved into a 2,000-square-foot space with room to expand. "We created a fun, amazing environment, with a large creative room for brainstorming and a surround-sound system on which we played our favorite music," says Humphrey. "Immediately we found that good people wanted to work for us and we had almost no turnover." By 2003 the $6 million company had 14 employees.


Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

June 05, 2005

How to do due diligence on a VC

Rick Segal of J.L. Albright Partners has some interesting tips on how entrepreneurs can check out VCs they plan to do business with:
Ask different questions. The purpose, like the above, is to get insight into who you are dealing with so, go down a list of things like:

A. What's your favorite blog?

B. What kind of laptop do you have?

C. Which cell phone do you favor?

D. Do your kids do the SMS thing?

E. What do you hate about serving on boards?...

...Show up unannounced to the firm just to drop by. See what kind of reaction you get. Think about it. We are family, working close together, long term relationship, blaah blaah. Right. Show up unannounced, ask to use an office, the phone, grab a free pop, whatever, but note the vibe, it will be telling.

Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

May 30, 2005

What Microsoft looks for in an potential acquiree

Will Price reports from Microsoft's VC Summit in Mountain View on what MSFT - according to its CEO Steve Ballmer - looks for when it considers acquiring a company:

* technical innovation with impact
* protected IP (patent portfolio)
* market understanding
* engineering excellence
* alignment with sales capacity (can you sell it?, do you know how to sell it?)
* timing and tenaciousness
* understanding of value chain and how to partner to win

Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

May 21, 2005

Don't ignore celebrating your accomplishments

Jeff Cornwall points out quite rightly that "in the rush of meeting orders and collecting enough cash for payroll, many entrepreneurs don't take enough time to celebrate accomplishments."

But why is celebrating important?
Celebrating on-going accomplishments is a way of building a positive, growth-oriented, and hopefully 'fun' culture within your business.


Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

May 14, 2005

Being prepared for getting acquired

Advice from a recent panel discussion organized by IBD Network on prepating your company for M&A:
* Don't...
o ... run your company without contemplation of a sale
o ... sell from weakness, not from strength
o ... be piggy: don't expect to double the initial bid
o ... tip your toes in the M&A pond: be in or be out

* Issues that make buyers walk away from a deal: the buyer's lack of comfort that may not stem from anything as dramatic as fraud or misrepresentation, but from a feeling that the seller's processes are not solid

* Valuation
o Sellers tend to use public market comparables or deal comparables: they are easily obtained and tend to increase the valuation
o Buyers prefer to use multi-year discounted cash flow (DCF) analyses

* Structuring deals
o Buyers do small deals for cash, not for shares; if they want IP or a team, they will structure the deal as an asset purchase
o If they are buying an ongoing entity with revenues and customers, they will do a stock purchase
o Unanimity that earnouts don't work and inevitably lead to bad blood and disagreements


Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

May 12, 2005

Want VC? Go get some peacock feathers

Wonder why VCs place more emphasis "on the secondary stuff" - like what you and your other team members have done before - rather than your actual product or service? Kevin Laws has an interesting explanation and analogy - to the mating behavior of peackocks!:
Are you really worth $2 million more the day your first two customers write $10,000 checks? No, you’re worth $20,000 more. However, both a bad company and a good company can claim that they will sign up two paying customers in the next month. Only the good company can actually show you the checks a month later. Before you had the check, you were facing the “uncertainty discount” – you might be a bad company (or more likely, a well intended but overconfident company).

That’s why VCs pattern match on credibility factors when deciding to spend more time with a company rather than diving directly into the details. When having such a wide selection of available mates, sorting out the good from the bad can be a matter of looking for a nice tail. Feathers in this tail include a high quality board of advisors, a good law firm, a good bank, management with a past track record, or the first paying customer. While all of these things can be very valuable to a startup company, their value to a venture investor can appear out of proportion to the value they bring through their work. As a result, sometimes it may appear that management is sacrificing the long term goals of the company to establish the feathers necessary to get funded. In that case, they really can be peacock feathers - things that may slow down long term success, but that only good companies can take on. In certain models where significant funding can make the difference between success and failure, those actions may be required to succeed at all.

Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

May 07, 2005

Dealing with a customer who wants a kickback

Business Week has a nice article explaining how a sales person can refuse to pay the bribe - and still make the sale.

Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.