April 22, 2008

Startup Funding: The Luck Factor – By Sanjay Anandaram

We hear all the time about the amount of money that's available to fund startups. For example, that private equity funds invested over $ 3.3 billion in just the first 3 calendar months of the current year. That VCs are always looking out for good deals as most of the plans they see merit little or no attention. That they invest in about 5-10 a year out of the 500-1000 business plans they get. And so on…But the truth is that a majority of deals that get funded are those that come through a referral or because the VC knows (of) the entrepreneurs; its natural because VCs don’t have the time to look at all the plans that they get to pick out the Rediff, Naukri, or Tejas Networks. Deals that come through some trusted source or through a trusted filtering process are therefore valued higher and rise to the top of the pile of business plans. It is therefore easy to see how many plans don’t get funded. And also how competitive the race to secure funding really is.

Given this situation, what then makes a VC invest in an unknown company started by an unheralded first-time entrepreneur? Imagine this situation: A first time entrepreneur in say, Bengaluru with degrees from Tier 2 educational institutions, average work experience in a regular job in a reasonably well-known company, but with no experience in building a business, no references you know or care for, and with no experience in building products or delivering productized services, sends you an email describing his vision of the way software will be used in the future. Now ask yourself: Will you take that entrepreneur seriously? Will you invite the entrepreneur for discussions? Will you then fund the business to the tune of say, a couple of million dollars with no business plan? Answer honestly.

Sure, there is passion in the eyes of the entrepreneurs; sure, they have conviction and confidence; sure, they have researched the market and the business model; sure, they have a powerful business idea; sure, they know what they were talking about; But then so do many other entrepreneurs.

Is it the element of chance? Is it that elusive thing called luck? Is divine intervention? What would have happened to such a startup if the founder had not had a chance meeting with the VC in a conference? After all, it was only because the founder met the VC at the conference was he able to talk about his plan, a plan that made the VC resonate with his business idea, right? Surely that meeting was due to luck, right? Especially, when other VCs had rejected the idea?

Well, in our haste to qualify it as luck, we overlook the fact that the business idea and model had emerged out of research and market validation. Not from a pipe dream. We overlook the fact that the entrepreneurs at the startup were superbly prepared. And yes, they were in the right place at the right time. Luck is what happens when opportunity meets with preparation. Without preparation, opportunities cannot be recognized and capitalized upon. Without opportunities, preparations can go abegging. So the next time somebody ascribes something to luck or chance, ask them if they were adequately prepared to exploit the opportunity. It seems that “lucky” people constantly encounter such opportunities whereas unlucky people don’t.

A 10 year research project that led to the 2003 book The Luck Factor by psychologist Richard Wiseman has revealed that “lucky” people generate their own “good fortune” through four basic principles that every entrepreneur will do good to internalize:
i) They are skilled at creating and noticing chance opportunities
ii) Make “lucky” decisions by listening to their intuition
iii) Create self-fulfilling prophesies via positive expectations
iv) Adopt a resilient attitude that transforms “bad luck” into good

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.

TIE-Canaan Entrepreneurial Challenge 2008 opens for entries

Extracts from the Press Release:

Canaan Partners and TIE come together to launch the second edition of the TIE-Canaan Entrepreneurial Challenge

Canaan Partners and TIE, today announced the launch of the TIE-Canaan Entrepreneurial Challenge, a business plan competition open to early stage entrepreneurs from across the country.

Entrepreneurs from across India will have an opportunity to compete for business mentoring, access to early stage investors and recognition in the second edition of this unique business-plan contest.

To compete in the challenge, participants will need to download and submit their applications from http://www.tienewdelhi.org/canaan/. The deadline for submission of the business plan applications is May 12, 2008.

Eight teams will be shortlisted based on their potential scale of the business, the strength of the team and sustainable differentiation in the business model. These shortlisted applicants will be invited to participate in the final round in the month of June which will see them presenting their plans and ideas in detail to an eminent jury of the country’s leading entrepreneurs and corporate heads. At this stage the shortlisted participants will gain valuable inputs and be mentored on their plans by these jury members.

This year’s jury will include Pramod Bhasin (CEO & President, Genpact), Raman Roy (Chairman, Quatrro BPO Solutions), Saurabh Srivastava (President, TIE Delhi), Sanjeev Bikhchandani (co-founder and CEO of Naukri.com), Mahesh Murthy (Partner, Seedfund) and Alok Mittal (Managing Director, Canaan Partners India).

April 06, 2008

The Illusions of Entrepreneurship

Businessweek has an interview with Scott Shane, professor of entrepreneurial studies at Case Western University, and author of a newly published book with the above title.
At the individual level, the core fact here is the typical, median, right-smack-in-the-middle entrepreneur is a failure. The cost is everything associated with that. So if you start a business and the business dies, you could have been working for somebody else. You could have been making a salary. You could have had the stability—you wouldn't have had that kind of stress that comes from the up and down of running that business.

So there's the personal costs. From an individual level, the myth is that somehow if you manage to hit the average or hit the median, you're going to be fine. The reality is that the distribution is so skewed you have to hit the top for it to matter, and in fact, you have to hit the top 10% to have income as an entrepreneur better than what you would have gotten working for other people.

...It makes a lot of sense if people say, "You know what? I'm going to earn less money running my own business, but I really don't like to work for other people, and that's why I'm doing it. It's making me happier and I really don't care." I think that's great. The part of it that becomes a problem is when people just won't admit the reality that it may make them happy and they're doing it because they want to be independent, [but] then they delude themselves into believing that also it's financially better.

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.

Do QCs on the VCs - by Sanjay Anandaram

India is an attractive venture capital (VC) destination today and the future will only get better. Many more VC funds will come in and entrepreneurs, at least the good ones, will be badgered by VCs for “lets-get-to-know-each-other-better” meetings. This capital availability and increased VC activity is good for the entire entrepreneurial ecosystem.

But, in all this hype and hysteria about round and about VC and entrepreneurship, something has been missed. Namely, that in as much as due diligence is performed by VCs on entrepreneurs prior to making an investment, a reciprocal arrangement needs to be in place for VCs. Wheat needs to be separated from the chaff, the genuine from the pretenders.

Classic VCs are partners in business, not purely opportunistic money makers. They see themselves as company builders, not just as investors. They don’t take short term stock market oriented investment decisions. They help build successful businesses, not spend time on financial engineering. In the early days of the Indian VC industry (that’s less than 20 years old!), most of the VCs had a lender’s mindset where risk minimization (zero risk?) took precedence over risk management. They found it hard to understand the startup situation used as they were used to more stable and less risky companies. The situation today has undergone a sea-change with the entry of Silicon Valley style VC funds. Therefore entrepreneurs will do good to keep the following in mind:

a) Don’t adopt a servile attitude towards VCs (perhaps a social ill that puts someone with the ability to invest on a higher pedestal?) or for that matter, anyone! Learn to also ask questions. Among other things, probe the backgrounds of the VCs, examine their track record of investments, talk to fellow entrepreneurs who have raised money from these VCs, understand their investment focus and approach, and what can be expected from them. The real quality of the VC is known during the singular moments of crises in a startup: Do they want to cut their losses and run? Or, are they willing to help redefine the business? Can they bring in additional resources (management, financial, technical) to boost the company? Can they help make the deals? Can they open doors? Can they help hire people?

b) Get to know the person who’s going to represent the VC firm on your company’s board. Even if a top notch VC firm is investing in your company, it is useful to know which individual from that firm will be dealing with your company. At the end of the day, it is this individual who will play a key role. Is this person experienced? Can this person really help your company? What is this person’s experience with companies in your stage and sector? Is the person a straight-shooter who will give feedback or someone who engages in back-room wheeling and dealing? Can you trust the individual to take speedy action or is he someone who’s bureaucratic?

VCs spend a lot of time and effort understanding the market opportunity of the startup, the backgrounds of the founders, the business model, and the likely paths the company could take post-funding. Entrepreneurs should also do the same with the VCs. After all, the entrepreneur and the VC must see eye-to-eye and there must be absolute congruence on objectives and philosophies. For example, timelines can be an important consideration. Is the VC willing to wait to realise value from the investment or is the VC in a tearing hurry to exit? Notwithstanding the fact that the nature of the business calls for a minimum of 4 years to build a successful company? A mis-match in time-lines that can therefore lead to unwanted complications.

Choosing the right partner is therefore as important to the entrepreneur as choosing the right entrepreneur is to the VC. After all, when you don’t even buy a washing machine without talking to a few people, shouldn’t you at least talk to a few people to check if your VC will take you to the cleaners?

Remember VCs need QCs (quality checks) too!

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.