May 31, 2007

Performing due diligence on VCs - before the meeting

Suzanne Dingwall has some good tips on things to check about a VC before the meeting.
You should never take a meeting with a VC until you've determined whether there is a likely fit between the two of you. Where is the VC in its fund cycle - is it at the beginning of a new fund? Is it about to start raising its next fund? Is this VC raising a fund now, and having difficulty? The answers impact your ability to build an investment syndicate (who wants to co-invest with a lame duck fund?), and suggest how you need to adjust your pitch to fit the circumstances.

If the VC is a generalist (most in Canada are), you may want to adjust your pitch so it focuses more on how the current opportunity is an extension of other industries in which they have had success - for example, pitching enterprise 2.0 as an inevitable extension of current enterprise applications, rather than as a business model discontinuity.

If your VC is focused on your sector, you need to understand where it has already invested in the value chain, and whether your business overlaps with those plays. This VC is not looking for a missionary investment, but for a company that creates real barriers to entry. No "first mover advantage" slide here (in fact, keep that phrase out of all your pitches, please).

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the Private Equity and Venture Capital ecosystem in India. View sample issues of Venture Intelligence India newsletters and reports.

"Remote leadership doesn't work"

VC Rick Segal post on how he hasn't found remote management (as against remote workers) to be successful at companies he has worked with (including as an investor).
..virtual companies are tough to manage and, in almost no set of circumstances will it work when the core team is in place A and the senior manager (or managers) are remote. When we've hired senior managers for various portfolio companies, we've insisted they be with the team and not commuting in from another remote location.

Coming in and working 3 days a week, for example, and then working from a home office the other time, has not worked well in the various situations I've witnessed. One CEO was doing it via every other week in Vancouver while living in Portland, OR. Another VP of Marketing lived in Ottawa and came to the Toronto office 2 days a week. In almost all the cases I've looked over the years, rarely does it work.

He has also provided the following extract from Jack Welch's column which is along similar lines:



Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the Private Equity and Venture Capital ecosystem in India. View sample issues of Venture Intelligence India newsletters and reports.

May 30, 2007

How start-ups can compete with MNCs for talent

Sanjay Swamy, CEO of mobile payments technology firm mChek has an interesting answeer to this question in an interview to pluGGd.in:

How do you think startups can compete with well-known players [like Y!/Google etc] when it comes to talent hunt? [sky-rocketing salary, better infra/brand name] - Do you really think Indian IT crowd is coming out of it's comfort zone and is ready to take a plunge?

If we are competing for the same talent, then one of us is making a mistake – because the talent that would naturally fit in a startup is a misfit in a big company, and vice versa. In a startup you need to have a disruptive mindset – in a big company you need to be creative but work within a relatively more rigid framework. Google is perhaps an exception to the rule to some extent. As far as being able to compete with such companies, from a talent perspective - I think ONLY startups can compete with such companies.


Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the Private Equity and Venture Capital ecosystem in India. View sample issues of Venture Intelligence India newsletters and reports.

May 24, 2007

Jason Calacanis interview on Venture Voice

Venture Voice has a cool interview with Jason Calacanis, one of my favorite media entrepreneurs. (The Venture Voice web site/RSS feed seems to have mixed up the audio link for the Jason interview with that of Garage Tech Ventures' Guy Kawasaki. The text of the interview with Jason is here.)

Here are some of tips offered by Jason in the interview:

Don't waste money on office space. Offices are good at creating two things: commute and politics. What's important for a start-up is people who get things done.

Thank god for a down market! Weblogs inc. It was started in 2003 - today it is so hard to get your new blog noticed about the noise

Always start your venture by working weekends and nights - so that the basic stuff like company formation, etc. are done and you have a couple of customers before you plunge in full-time.

Hire salespeople who are confident enough to take their pay only in commissions.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the Private Equity and Venture Capital ecosystem in India. View sample issues of Venture Intelligence India newsletters and reports.

Lessons from Startup School

In his VentureBeat article, Mark Coker provides an interesting roundup of "the more compelling tips given by several tech industry luminaries — including Facebook’s Mark Zuckerberg, Google’s Gmail creator Paul Buchheit, Sequoia Capital venture capitalist Greg McAdoo — at the Y Combinator Startup School event.

Zuckerberg: He said it’s important to hire mostly coders, even in the marketing department, so if they want to change something on the web site all they have to do is log into the back-end and change copy on the fly.

Levchin:
For user interface, Levchin told the audience to measure how their visitors interact with the sites. Slide.com tracks mouse clicks, mouse overs, abandonment rates, the funnel, and more. Levchin and his team mine the data for intelligence that helps guide future iterations of the site.

For channeling the user, Levchin says founders must step inside the minds of their target customers. In Levchin’s case, he says he must imagine himself as a 15-year-old girl with attention deficit disorder who’s looking for digital bling to dress up her MySpace or Zanga web page, while at the same time she’s chewing gum, talking on the phone, instant messaging with five friends, listening to music, and twirling her fingers through her hair.

Levchin cautioned his techie audience to keep their customers in mind and not go overboard with technology for technology’s sake. He pointed to the early social networking site, Friendster, which lost critical momentum when it ran into scaling problems because of a “cool” feature that calculated friend trees, and caused page load times of up to a minute. MySpace.com, by contrast, was successful because it cared less about technology and more about the user experience.

Partovi brothers:
The brothers warned founders to maintain a razor sharp focus on their company’s primary purpose. Ideas are a dime a dozen, they said. Founders should pick one thing and do it well. They cited eBay’s acquisition of Skype as an endeavor that could spread the company too thin, and distract it from its main auction business.

They said companies must make hiring a top priority, and should cultivate and protect their company culture. Perhaps just as important, founders should learn to quickly fire bad hires, because a single bad hire can poison morale.

Kapor:
Kapor also stressed the importance of creating a great company culture. He said founders set the culture, and it’s important to understand every action or inaction of the founders sends a message to employees. Hire great people, embrace diversity and resist trying to fit every employee into the same cookie-cutter mold, he said.

Kapor, who once worked at Valley VC firm, Accel Partners, advised entrepreneurs to tread cautiously with venture capitalists, and to understand where their interests are aligned and where they diverge.

Venture funds typically invest in a portfolio of 30 companies. They expect one or two big winners to supply the majority of the portfolio’s returns. Kapor says this can lead VCs to pressure their portfolio companies to go for the home run and risk striking out completely, when more sensible logic might dictate swinging for a single or a double instead.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the Private Equity and Venture Capital ecosystem in India. View sample issues of Venture Intelligence India newsletters and reports.

May 17, 2007

"Entrepreneurial Lies!" - by Sanjay Anandaram

It is apocryphally said that Benjamin Disraeli said that there were three kinds of lies – lies, damned lies and statistics. He was referring to the persuasive power of inaccurate but well presented arguments. Entrepreneurs will do well to remember this and some other obfuscatory arguments as they make their presentations to VCs.

“We have no competition”
Really? This statement demonstrates either of the two (sometimes both, unfortunately for the entrepreneur) situations: (i) that either there’s no market for the offering or (b) there’s inadequate understanding of the market and competition. Rather like horse-drawn carriages being blind-sided by the arrival of motorized transportation.

“We are unique”
Because we have placed ourselves in the top right hand quadrant and have thoughtfully placed everyone else in the other 3 quadrants. Of course, it is another matter that the dimensions of the grid chosen by us are absolutely pointless. Comparing product features and more importantly benefits against the competition’s is a good starting point for developing a unique position.

“There’s a huge need in the market”
Because I read a report in a magazine by a consulting company about how big the market for clean water is. Therefore, I can build a Rs 100crore company selling bottled water. Without talking to customers (i.e. those who actually use the product not talk about it) about why they would buy it, what would they pay, what specifically are they seeking when buying the product, why would they prefer the product over other products and so on, it is hard to convince anyone about the existence of a real need.

“Customers are ready to place purchase orders”
Only if we develop the product as per the specifications and at the price (free?) we’ve promised them for which we only need Rs 20crore and 9 months time?!! Well, unless customers are ready to speak to VCs and truly vouch for the value being provided, your credibility will be stretched.

“The following people are on our board and are advisors”
Having brand names on your board certainly helps. But, and this is a big but, having a steel tycoon on the board of an online ticketing startup doesn’t add much value compared to having the CEO of a travel company. It is important that the brand names on the board be able to vouch for the capabilities of the management team. It is usually not a validation of the management team if the board consists of well known relatives and family members. In any case, whatever the caliber of the board, it is the management team that must pass muster. Also make sure that the board members know they are on the board and are aware of the goings-on in the company.

“We have established partnerships with the following companies”
And then you go on to enumerate a list of no-name, capital starved, struggling startups. Not a good sign. Remember, two struggling startups are more likely to pull each other down than otherwise. Notwithstanding tales of love where partners survive on nothing more than love and fresh air, it is better to have partnerships where at least one of the partners has market and financial muscle.

“We are a proven team”
We have worked together in cushy jobs for a $5 billion global company for 2 years. We have no experience of working in a startup and no idea about how to manage things on small budgets and without expense accounts. What you should instead say is that you have the right experience and skills and the passion to succeed, that you are willing to do whatever it takes to succeed, that you are willing to surround yourself with people who know and that you are willing to step aside should the company need it.

“Our estimates are conservative”
Since projections are rarely achieved and if the estimates started out by being conservative, then it doesn’t say much about the team, right? Instead of saying projections are conservative, it is better to show the assumptions that’ve been used to arrive at the projections. And these assumptions should have been market tested.

What do you think?


Sanjay Anandaram is a passionate advocate of entrepreneurship in India; He brings close to two decades of experience as an entrepreneur, corporate executive, venture investor, faculty member, advisor and mentor. He’s involved with Nasscom, TiE, IIM-Bangalore, and INSEAD business school in driving entrepreneurship. He can be reached at sanjay@jumpstartup.net. The views expressed here are his own.

May 01, 2007

The FOCUS approach to pitching VCs

I’ve received several questions from entrepreneurs wanting to know how they should pitch to VCs and what they should be prepared for. While there obviously are no magic bullets and no guarantees or even any apparent rationality (at times!) underpinning certain investment decisions it is important to realise that VCs have short attention spans. They are only interested in knowing the following:

- Who are you?
- What is the problem you are solving/What is the opportunity you are addressing?
- Why will you knock the socks of the competition?
- How will you knock these socks off i.e. the business model?
- How will you make money?

Rule 1: Don’t have a 50 page presentation with a 100 page business plan with fancy binding. In short, the presenters became road kill due to the unwarranted overkill of the presentation.

Don't quote abstract numbers and statistics. The VC has access to the same market research reports (e.g. "The market will be at least $25 billion by 2009, with a CAGR of 100%") that you have. The VC also doesn't believe any of these market research numbers.

It is worthwhile to keep "FOCUS" in mind while making investor pitches. Its actually an acronym (that I just coined, as I thought it captured and conveyed the different elements of the presentation I wanted to convey), namely:

- FOCUS
- OWNERS
- CRISPNESS
- UNIQUENESS
- SIMPLICITY

FOCUS: It is critical to be able to get to the meat of the subject in a precise, clear manner. Don't beat around the bush. Don't get lost in abstractions. What exactly are you going to be doing/solving? Who is the customer? (e.g. Bad Answer: All companies. Good Answer: Companies with revenues between $100m and $1 billion with discrete manufacturing). What is the business model? How will money be made? How exactly will sales happen? How will employees be hired ? What are you seeking from the VC?

OWNERS: Ensure that the background of the management team (and key employee profiles) is adequately described and detailed. Explain how the experiences and backgrounds of the management team add value to the venture. Often times, this section is glossed over. One of the main drivers of investment in a venture is the quality of the team at the helm.

CRISPNESS: Deliver the presentation in a clear confident voice, determine what key points are to be made and make them, don't belabor points, don't keep reading from the slide, ensure that there are no more than 4 bullet points per slide. Don't confuse/bore the VC by unnecessary digressions and pontification. Solving world peace and world hunger is not what they’re listening to you for. It’s usually a very good idea to ask how much time is available. Plan your pitch accordingly. Don't lose your rhythm if a few slides have to be skipped or the order of slides is changed. Practise.

UNIQUENESS: Ensure that the uniqueness of your offering, your business model, the team composition, etc is highlighted. Why should a customer choose your company over the other 500 companies? Why will you beat competition?

SIMPLICITY: Keep the presentation simple. Don't have 5 slides with data from 10 research companies showing how huge the market is! Does it really matter if the market is $25 billion instead of $15 billion? If you cannot be a $100m company if the market is $15 billion, how likely is it that you will make it if the market were $25 billion?! The VC is interested in knowing how you will be a $100m company, not how large the market is. Show in 1 or 2 slides how you will get to be one.

Most importantly, don't use jargon and buzzwords. Lack of clarity and understanding of the business is hard to shroud in buzzword compliant terminology.

Plan on making the pitch inside a maximum of 40 minutes and less than 20 slides. If required, the VC will ask for details.

Albert Einstein was once asked to explain his Theory of Relativity in simple lay man terms. He said: "If you are sitting on a dirty street corner with a very attractive and desirable person, an hour passes in what seems to be a minute. On the other hand, if you are sitting in a beautiful park, on a lovely bench with an undesirable and unattractive person, a minute spent seems like an hour. The Theory explains this."

The most complex things can be explained in simple, clear, short, everyday language. But only if there's enormous clarity in the mind. Can you explain your business in the same simple terms?

What do you think?

Sanjay Anandaram is a passionate advocate of entrepreneurship in India; He brings close to two decades of experience as an entrepreneur, corporate executive, venture investor, faculty member, advisor and mentor. He’s involved with Nasscom, TiE, IIM-Bangalore, and INSEAD business school in driving entrepreneurship. He can be reached at sanjay@jumpstartup.net. The views expressed here are his own.