Greek Complexity

VC vs a Strategic Partner – how do you decide?

I assume that “strategic partner” refers to a VC fund (or something similar) backed by a large corporation.

First figure out what you want from your investor. For some pointers, see my previous answer.

Next, be careful not to fall into the trap of dressing your company up specifically for one particular strategic investor. Some strategic investors can offer attractive business development or technology cooperation benefits. You should definitely take advantage of these benefits (which a VC can’t provide) — but don’t build your company only around this particular investor. Large companies start investment arms not only to make profitable investments but also to support their usually much larger main business. The main business is usually orders of magnitude more important to them than an investment in one start-up. If your company’s ultimate purpose happens to align with that larger purpose, it could be a happy ending all around. If not, make a Plan B (and C and D…).

Finally, realise that, if you intend to build your company to exit via a sale in future, having (only) a strategic investor could potentially complicate your exit. Your strategic investor’s competitors may perceive you as being part of a “rival family”. If they are approached in a sale situation, they may either shy away from taking a look at a “rival” or have a perception that your investor has washed his hands off your company. Your own investor may feel little compulsion to acquire your company outright.

None of this means that you should never accept money from strategic investors. My advice is that once you have decided to accept money from a particular strategic investor, you should balance out their influence by also raising money from at least one more financial investor, who will have a strong incentive to achieve a good outcome for the company that isn’t tied to a large company’s corporate priorities.

---

This is a cross-post of my latest column answering entrepreneurs' questions for Yourstory.com.

VC vs an Angel Investor – how do you decide?

Taking money from VCs and angel investors isn’t an either-or proposition. Broadly speaking, angel investors can’t write large cheques whereas VCs prefer to. This means that you are more likely to receive angel interest early in your company’s development and VCs later in the game.

But back to this not being an either-or proposition: when I work with start-ups as an advisor, I strongly encourage them to evaluate their prospective investor from several viewpoints just as the investor evaluates start-ups from several viewpoints. Some things to keep in mind:

• Do you and the prospective investor share a common vision? Can you see this investor sticking by you in good times and bad? Do you have a strong personal relationship?

• Does this investor understand your business and industry?

• Does the investor’s expected level of involvement in the business coincide with your own? Some entrepreneurs want an investor to be closely involved with them, others just want a silent backer. Just make sure both your expectations are aligned.

• Does the investor’s exit timeline expectation align with your own?

• If you will most likely require more capital down the road, does having this investor on board help with that? Possibly the investor could keep funding you to profitability or they will bring other investors into that game. Of course, the likelihood of future fund-raising is ultimately linked to how well the company performs, not just having a strong backer.

You can come up with other points specific to your situation. Note that I leave valuation out of the list above. As long as you’re receiving a fair valuation, the above points are actually more important to early-stage companies.

---

This is a cross-post of my latest column answering entrepreneurs' questions for Yourstory.com.

The paradoxes facing Australian tech start-ups

"Could Australia’s tech stock frenzy ignite the next Silicon Valley?" asks this piece in the AFR.

Australian start-ups face both considerable obstacles and opportunities. Consider this quote:

“I have seen businesses that give up equity and head over too early to the US, but then had difficulty managing their growth,” said Ms LoRusso. “There is a skills shortage and funding shortage holding back tech entrepreneurs in Australia, which forces them to accept the money more easily available in the US. You can have a great idea but the ability to nurture that through its growth stage is very limited, largely because of that funding gap of $1 million to $10 million and a skills shortage. So picking the time to expand is critical.”

For some growing start-ups, certain Asian countries might actually offer better scope for expansion than the US. My experience has been that many Australian entrepreneurs either don't realise this or don't know how to tackle the opportunity, because few role models are available to them and because Asia doesn't have as much mind share in Australia as one might expect.

How often do employees of VC-backed startups get stock options?

A start-up employee (or perhaps an entrepreneur) asks this question:

How often do employees of VC-backed startups get stock options?

In India, this varies a fair bit. My usual suggestion to entrepreneurs I have worked with is to give options to all employees but I recognize that this may not always be feasible or even desirable. A few things to note about Indian startups:

• Indian startups tend to have a lot of employees. I have invested in companies based in India, Singapore, the US and Australia. For a given stage of development, Indian startups have much larger teams than companies in most other countries. So the likelihood that a given employee, especially a junior one, will receive a good-sized option grant is quite low.
• Even in companies where options are awarded to many or all employees, they are not always valued by staff, and often not even understood properly. I’ve been on the board of a company where employees complained that they “received only 10,000 options” whereas their friend in company XYZ received 10 times as many options, not realizing that this isn’t an apples-to-apples comparison. I have sometimes taken the effort to explain what stock options are and how they work, but it clearly remains a poorly understood topic.
• Some founders can be very frugal with dilution. “I’m paying them a salary so what more do they want?” is a common attitude and I often wouldn’t even consider it an unreasonable view. I have heard good arguments in favor of giving options only to senior staff.

If you’re an employee of a VC-backed startup and you do want stock options as part of your package, good for you. I would recommend you bring this up with your startup’s founders. A long-term-oriented founder should find your attitude refreshing and positive.

From my latest column at Yourstory.

Are services start-ups the poor cousins of the start-up/VC world?

An entrepreneur asks this question, which not so long ago would have been quite an absurd thing to contemplate:

Why do we see more product companies than services companies? When investing, do VCs also tend to have a bias?

Actually, if you ask any tech-focused investor in India, they will lament that there aren’t enough product companies in India. Even some of the companies that claim to be product companies actually have a strong services orientation.

In contrast, VC-funded startups in Silicon Valley are predominantly product or market-place startups, and rarely services companies.

The reason for favoring product companies is because they have high gross margins and high operating leverage. Generally speaking, services companies have low fixed costs and high variable costs, which means that the cost of servicing customers (usually manpower) moves in tandem with revenue growth, necessitating constant investment back in the business. In contrast, product companies don’t have particularly high growth in variable costs as sales grow.

Note that this doesn’t mean that product companies are ‘better’ than services companies. For example, a services company may be able to more quickly respond to changes in customer needs, whereas a product company may need to go back to the drawing board. The first big development of the Indian IT industry in the 90s was clearly based on a services model and several entrepreneurs and their employees and investors made a lot of money.

Note also that the distinction between a product and a services company isn’t always cut and dried.

From my latest column at Yourstory.

Revolutionary vs evolutionary. What wins?

An entrepreneur asks:

How important is traction vs a potentially revolutionary idea that is yet to gain traction? How do you decide to invest in a company that has great traction but no revenue model?

‘Potentially revolutionary’ seems to imply very little traction so far. It also implies expectations of explosive growth. That’s the key to thinking about this: if revolutionary, not evolutionary, is your game, then showing traction in the form of revenues and cash flows isn’t as important as sign-ups, usage, going viral and other non-financial metrics. Then your job becomes one of convincing investors on how you will achieve these metrics.

Now, does this mean that pitching non-financial metrics will always work? Not necessarily. Investors in India and other parts of Asia do care a lot about monetization and for good reason. Broadly speaking, non-financial measures of traction are not sufficient to attract large cheques. There is absolutely nothing wrong with working on an evolutionary business instead of a revolutionary one — and this often results in a better outcome.

From my latest column at Yourstory.

When start-ups get acquired

"One of the biggest concerns while deciding on an acquisition for the founder is the freedom factor. Does he or she become like any other employee?" writes Yourstory. For answers to this and other questions, and a list of Indian tech start-up acquistions in 2013, go here.

How to get introduced to your next investor

Highly actionable and well thought through suggestions here. Remember that "a good fundraising process will involve 40 to 60 meetings", which means that you need to follow a well thought through, organised process, similar to that involved in making a big sale to a large enterprise.

Somewhat similar thinking also applies when you're out searching for your next advisor or independent director.

The future of online marketing

We all know that Marc Andreessen has a huge following. Somewhat less known is that he also gets on lots of people's nerves. Reasons for that are varied. One of the several reasons is that he has strong opinions and expresses them in a way that is sometimes discomfiting. Here's one great quote:

The consumer Internet industry, really the consumer Internet media industry, has done a terrible job over the last 20 years at giving brands the marketing solutions that they need. Solutions that provide the level of trust—the provable metrics, audience segmentation, and targeting—and the assurance that if something goes wrong it'll be made good: all the things that traditional advertising companies have been very good at providing. In our world too many companies try to just put all this stuff online and just make it a free-for-all. What that gets you are these online marketing auctions, these rock-bottom CPMs, and these just terrible, useless metrics. And it's just kind of been a sort of a race-to-the-bottom disaster.

I couldn't agree with this more. I am starting to work with a few companies who're out to tackle this very problem -- from the perspective of marketers and advertisers.

Plenty of other great soundbites on other topics here: http://management.fortune.cnn.com/2013/11/21/marc-andreessen/

Travel for the truly lazy

Ok, you know I'm just kidding. Sort of.

The NYT reported some weeks ago an airport innovation: the winter coat-check. Quote:

With passengers stowing all those coats on jam-packed airplanes, it’s more difficult than ever to claim space in the overhead bins for carry-on bags. But one international airport has come up with an idea that in a small way addresses the question of what to do with that bulky coat. Check it, just as in a restaurant.

Meh. We can do better than that, thought the guys who started Singapore-based company Packnada. As they say in this Vulcanpost article:

The idea was born in a long queue at the end of a business trip at the Hong Kong airport. Packing, queues, and laundry were the last thing Jonathan (my co-founder) and I wanted to deal with during a trip that was focused on work. I thought about cloud storage and how we had our files available to us wherever we went, and I imagined how much simpler travel would be if clothes and essentials were always waiting at our destination. We’re both passionate about efficiency and productivity, so Packnada’s goal was really to simplify business travel by taking clothes out of the equation.

Amazingly, astoundingly, that actually makes sense somehow. At least for the lazy+productivity-obsessed among us (UPDATE: I should have added, "i.e., people like me") . How Packnada executes its service is going to be the crux of its success or failure.

Funnily enough, the NYT article about the airport winter coat-check service ends with the words:

Will it spread? “Well, it’s an interesting thought, but a very limited market,” said Michael Sommer, a technology consultant who travels frequently. But like any seasoned traveler, he also saw some potential bumps in the road. “What if you’re leaving from Frankfurt to Miami in February, but you get diverted to Boston?” he asked. “Or Moscow?” Still, he agreed that it showed the value of innovation at airports. And he had an idea, too: “Why can’t they also offer you dry-cleaning service at the coat check?”

Mr. Sommer, you need to sign up to the Packnada beta user program.