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.