May 27, 2008

Hiring for Start-ups: Does an IIT/IIM degree matter?

US-based entrepreneur-turned-angel investor Paul Graham has an essay emphasizing why "it does not matter all that much where you go to college".
A recruiter at a big company is in much the same position as someone buying technology for one. If someone went to Stanford and is not obviously insane, they're probably a safe bet. And a safe bet is enough. No one ever measures recruiters by the later performance of people they turn down.

...Back in the days when people might spend their whole career at one big company, these qualities must have been very valuable. Graduates of elite colleges would have been capable, yet amenable to authority. And since individual performance is so hard to measure in large organizations, their own confidence would have been the starting point for their reputation. Things are very different in the new world of startups. We couldn't save someone from the market's judgement even if we wanted to. And being charming and confident counts for nothing with users. All users care about is whether you make something they like. If you don't, you're dead.

...Indeed, the great advantage of not caring where people went to college is not just that you can stop judging them (and yourself) by superficial measures, but that you can focus instead on what really matters. What matters is what you make of yourself.


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 21, 2008

Doing Due Diligence on VCs

These days, there is a lot of good advice online – see examples here and here – on raising Venture Capital in the Indian context.

A lot of knowledgeable persons advice entrepreneurs to do due diligence on a VC firm before accepting their money. For instance, here’s US-based investor Bill Burnham on his blog:
One of the more unfair aspects of VC fundraising process is that VCs are allowed to take months probing every orifice of your company, but entrepreneurs are expected to make one of the most important decisions of their life in a week or two and often with little or no information. There’s no good reason for this and all entrepreneurs would be well served by taking some time to do some basic due diligence on any investor who has offered them a term sheet.

I suggest, at a minimum, talking to at least two entrepreneurs that the VC has funded and then talking through with the VC (about) A) all the deals they have done and what happened to them (and) B) the current status of their fund and partnership.

Doing your own due diligence has 4 main benefits
1) it may help you avoid making a bad decision
2) it will create the perception of a competitive process
3) it will make you appear more savvy and diligent to the VC
4) it can come in handy when you are trying to stall while you get your second term sheet.

But how does an entrepreneur go about locating a list of VCs who might be interested in investing in his/her sector and also learn the list of companies they might have already invested in? Thus far in India, there has been no single place entrepreneurs could turn to for researching VCs and their existing investments. Which is why Venture Intelligence has come out with The India Venture Capital Directory providing an exhaustive view of VC firms actively investing in India.

The Directory helps entrepreneurs get a clear understanding of the VC landscape by providing a brief profile of the VC Firms, their focus areas, names of key executives along with the contact details in an easy-to-use spreadsheet format. Also, it includes a list of investments by each VC firm – so that entrepreneurs can avoid obvious conflicts-of-interest and select other entrepreneurs to reach out to for checking out the VCs.

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 19, 2008

"Get competing term sheets"

So, you have managed to convince a VC to issue a term sheet? What next? Is it time to celebrate? Not according to VC-turned-hedge fund manager Bill Burnham, who has a post on "4 Things to Do After You Get Your First Term Sheet".

Here's item 1 (emphasis mine):
Get a second term sheet: It may sound flip, but this is the single most important thing you should do upon getting your 1st term sheet. Nothing loosens up a VC’s purse strings or makes them more flexible on a particular term than the threat of competition. Without competition (real or perceived) you have very little leverage against a VC. Now getting one term sheet, let alone two, is tough enough, but getting two must be your goal and you must not waiver in pursuit of that goal even after you get the 1st one.

The biggest problem most entrepreneurs have executing on this strategy is that they have mismanaged the sequencing of their fundraising. Many entrepreneurs make the mistake of pursuing an “in order” fundraising process whereby they take one meeting, run that process to its logical conclusion and if that doesn’t work out try to get a meeting with another VC. VC fundraising must be pursued concurrently! You must put as many irons in the fire in as short a time as possible so that all the firms start the process at roughly the same time.

As firms progress through the process, you should do your best to try and “herd” them along by trying to slow down the ones pushing ahead and speed up the ones lagging behind. The ultimate goal is to ensure that when you receive your first term sheet you have several other firms that are very close (within a week or so) to potentially issuing their own term sheets. Proper sequencing ensures that you are not forced to take an inferior “bird in hand”.

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 free samples of Venture Intelligence newsletters and reports.

May 16, 2008

THE BUSINESS PLAN – PART I - By Sanjay Anandaram

I’m writing this piece from Singapore where I’m on a teaching assignment of a course called Business Plan Workshop at the INSEAD business school. And given the last Indipreneur column, I thought it would be good to also talk in some detail in this and the next columns about one of the more important documents an entrepreneur will deal with (outside of dealing with investment documents and a last will!), namely, the business plan. A business plan gives birth to the start-up. It enables the entrepreneur and the team to envision and plan how the business will be run and how funds will be raised. The business plan addresses the needs of both the investors and the entrepreneurs because both have a similar objective – creating a successful business.

Writing a business plan is easy. Writing a clear, concise and fundable plan is not. Investors are not likely to be impressed by gimmicks or by flashy and flaky presentations. If they are, you probably don’t want such investors.

Clarity of thought, understanding of the market and its dynamics, building a competitive advantage are some of the elements that the plan should demonstrate. Usually, savvy investors don’t spend too much time looking at the financials of a startup as opposed to the team, business model and market environment.

So having said that, what’s a business plan to look like? Should it be the size of a dictionary or the size of a pamphlet? How should it be structured ? While there are no hard and fast rules, its usually a good idea to keep a business plan to a maximum of 20-25 pages in length. Number the pages, check spellings, and make sure the document is logically consistent. Investors don’t have the time to read a 100 page document to understand what you are trying to sell!

One good way to approach a business plan is to first develop a presentation in a maximum of 15 slides (including the cover and the “thank-you” slide), then the 3-4 page executive summary and finally the business plan. The presentation should have no more than 5 bullets per slide and use diagrams to explain key points. Remember, a picture is worth a thousand words. The executive summary is a like a candidate’s resume – you should want to meet the candidate after reading the resume.

Here are some guidelines for writing a business plan. As mentioned before there are no hard and fast rules, but following the guidelines below will force discipline and ensure focus. All of the following has to be condensed into a 20-25 page document in a clear and precise manner.

Section 1.0 Introduction
When was the company formed & by whom. Team backgrounds Where is the company based. What does the company uniquely offer.

Section 2.0 Market Opportunity
What is the opportunity/need/problems in the market? Who is experiencing the need? How big is the opportunity? How fast is the opportunity growing?

Section 3.0 Offering
What is being offered to address the need in the market? What are the different components of the offering?

Section 4.0 Competition
Why/How is the offering unique? How will it successfully compete against competition? Why will people buy/use the offering as opposed to competition?

Section 5.0 Market
Who are the customers of this offering? How will they use it? How is the market segmented? How large are these segments? What is the value of this offering to them?

Section 6.0 Business Model
How will the offering be delivered to customers? What does the delivery chain look like? What is the value proposition across the chain including to partners? How will the support process work? How will revenue and costs flow across the chain?

Section 7.0 Sales/Marketing Plan
What will be the company and offering positioning? How will be the positioning be achieved? How will customers be acquired – what will you do to acquire customers both direct and indirect? What are the alliances/partnerships that will be established? What are the different modules/components to be sold? What are the price points?

Section 8.0 Product/Service Development Plan
What are the timelines and technologies? What is the strategy for product development?

Section 9.0 Road Map
Over the next 24 months what will be the sales/marketing objectives? What will be the company objectives? Product development objectives? What is the exit strategy?

Section 10.0 Current Situation
What stage is the offering/company in now? Are any customers testing/using the product? How much money has been invested? How many employees are there? What are the milestones ahead? How much money is required? For what purposes will the company use the money? How many employees will be hired?

Section 11.0 Financials
How much money do you need? When, how and at what levels will you break-even? What’s the monthly outlook for the next 12-18 months? In all of these, the most important is the cash-flow statement!

Easy?

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 03, 2008

Operating Plan or Business Plan? - By Sanjay Anandaram

Often times I meet entrepreneurs who submit a great looking business plan with all kinds of fancy colour pie-charts and trend lines. It is evident that a great deal of time and energy has been spent in creating the plan. The plan contains enormous amount of secondary data about the market, the performance of Indian and U.S. companies in the similar/allied space, their valuations and the like. But precious little in the business plan about the business that’s currently seeking funding!

On the other hand, I also meet entrepreneurs who submit a non-colour 10 page stapled-together document without any fancy pie-charts and trend lines. Even more of them simply send in a presentation which essentially talks in simple language of the following:
•What is the problem that is being solved and who is experiencing it
•How is the problem being currently solved and the problems with the current solutions
•How will the company deliver a strong competitive solution and why will it win
•How will the business make money?
•The people behind the venture

Of course, there is some data on the market. But the focus is on the business that’s seeking funding. The plan is meant to be a guiding light for the company. It is meant for the investors and the management. It is intended for employees and potential partners. It is not supposed to be a showcase for cut-and-paste marketing data.

The point here is that a plan is not an end in itself. A business plan captures, distills and details the knowledge, strategic and operational matters of the business. Each functional aspect of the company should be covered – sales, marketing, operations, development, human resources, finance. A clear articulation of the strategy and the tactics for each of the functional areas demonstrates clarity of thought and purpose. The plan is something the key management team signs off on and is used as a management and measurement tool. Else, various functions will tend to exhibit random Brownian motion i.e. will operate in a knee jerk manner, in fits and starts and with no real end goal in sight. And as we all know, the total displacement is zero in Brownian motion even while a lot of distance is traveled!

A plan is a guiding light. A plan is not something that is done once a year to develop a fancy report. And then forgotten. In fact, a plan is a very live document undergoing constant change and revision. In the early days of the startup, it is not unusual to find large gaps between the numbers in the plan and the actual performance. The reasons for the deviations need to be analysed and fedback to create a revised plan. It is a continuous process. For example, the pricing assumptions may undergo a change based on experience and market situations. So also, various cost assumptions. The business model may be refined. Revenue assumptions may need to be restated. Remember, we are talking of a startup here that’s struggling to find its place in the sun and carve out a unique position. It is losing money and has to find customers. Quickly. The strategic and the operational or tactical at times merge and the plan should reflect it. The plan should be a management tool. And should therefore be measurable. Abstractions and generic statements (“we will create value for our customers”) have no place in the plan. There should be details about how the service or product will be developed, priced, delivered, supported, financed. The resulting financials must be captured. Projections for the next few months must be made. Feedback from operations must be used to refine strategy, refine the medium term goals, and sharply focus on the immediate near term milestones. In short, the business plan and the operating plan should be the same!

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.