Greek Complexity

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.

When should start-ups think about going global?

An entrepreneur asked me: "Should you 1.) start efforts simultaneously, 2.) wait to establish yourself completely in the domestic market or 3.) get some domestic traction and then launch global efforts as well?"

Definitely not start both simultaneously. Now, whether one should follow option 2 or option 3 depends on a lot of factors. Instead of giving you an answer, let me give you some questions to think about:

1. How do you acquire customers? Do customers sign up through your website on their own or perhaps via your partners? Or do you need to invest in selling to customers?
2. How do you service your customers? Once a customer pays you for your product or service, do they need hand-holding?
3. How much does local knowledge matter in your business? Do you and your team have experience in your markets of interest?
4. Are you sure you know what "global" really means? Even some of the best known companies don't go global immediately and when they have tried, they have failed in some markets. Amazon, Google, eBay and many others have failed to crack some major markets they were interested in (some examples for those companies I just named: China, Japan, Korea). The only example I can think of in recent memory where a start-up went truly global in a very short time is Groupon -- and we all know how that story ended.

Also look at a recent comment by Phani of Redbus here. He was asked whether he saw Redbus expanding globally since they now have a big backer in Naspers. His answer makes a lot of sense:

We want to continue to do what we are doing until the market is saturated. There are a lot of infrastructure problems that need to be fixed. For instance, the road transport corporations can’t take our load. The technology needs to be robust and someone needs to solve it. The return on our time is higher if we are working in a known market especially when there are fundamental issues to be solved.

My start-up competes with another start-up in my investor's portfolio: what now?

Here's today's instalment of my Ask The VC series on Yourstory.com:

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What happens in a situation where two companies in a VC’s portfolio start off as being indirect competitors, but in the future show potential to becoming direct competitors?

Here are a couple of scenarios of what can happen next:

1. Nothing. Both companies continue to operate as they always have and don’t have any formal connection apart from the shared shareholder. This is not a super-common situation but it’s not rare either. In this situation, you want to ensure that you have a commitment from your shareholder that you are not going to be put in a disadvantageous situation (e.g., one company’s information being shared with the other). You should realize that your VC most likely cares a lot about his reputation for professionalism and ethics, and would not want to shred his future prospects for a low-likelihood short-term profit.
2. The companies decide to join forces, either purely as business partners or going the whole hog and merging the two companies. This could be a great way forward but can also be difficult to execute if you have two sets of strong-willed founders or two different sets of shareholders who don’t share the same aspirations.

Or perhaps you’re asking what happens if you pitch your company to a VC and learn that they have a potential competitor in their portfolio already. In that case, as I said on my blog some time back:

…on the few occasions when someone has made a pitch to me similar to one of our existing investments, I have either said no straight off the bat or introduced the two companies/teams to see if they can collaborate or, rarely, pursued the new opportunity with the team’s full knowledge that we have another similar investment (overseen by some other investment professional). Other VC firms may have different (not necessarily better or worse) portfolio management strategies, including deliberately making several investments in similar/overlapping areas of interest.

Just as I or any other investor may think about whether it’s okay to invest in more than one company in the same sector, you too can make a decision whether to take money from someone who already has an investment in a competing company.

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What are the pros and cons of startups meeting with VCs early for feedback?

The following is for companies only seeking feedback and not a commitment to invest now or in the future and for companies that are at a very early stage of development, not yet ready for a VC round.

Pros:

1. You get feedback! I’m of the school of thought that more feedback is always better than less. Whether one should bestow all feedback with an aura of omniscience is an entirely different question (I don’t recommend it) but learning what the outside world thinks is always a good thing even if you don’t agree with the speaker.
2. If you think your company is likely to need VC funding in future, obviously getting feedback from a VC is a good idea.

Cons:

1. Depending on who you speak to, speaking to a VC well before you and they are ready for a formal relationship, may colour your chances of actually closing a funding round in future. Shared your plans to be a 20 crore company in two years and eventually achieved 20 lakhs? Oops.
2. At a very early stage of development, not everyone will understand your business. The VC you approach may be the smartest person on the planet but they still may come up with feedback that’s not quite appropriate for you. This isn’t really a “con”, to be honest. It just tests your ability to accept or ignore feedback based on whether it makes sense for you. It also gives you the opportunity to assess whether the particular VC you’ve approached is the right partner for you in future.

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What is considered as the perfect time for a startup to start looking for venture capital?

There is no perfect time and there are no formulae. If you’ve done your homework and decide that you need capital, then that is the time. For example, Atlassian raised its first round of funding 8 years after inception, raising a whopping $60 million even though they were already profitable at the time.

Nonetheless, reading between the lines, I suspect your real question is “When and how can I present my company as a credible investment opportunity?”

To answer that, I direct you to this great TED video on how to pitch effectively to VCs.

The rediscovery of India

Snip: "Is India even a country? It’s not an outlandish question. 'India is merely a geographical expression,' Winston Churchill said in exasperation. 'It is no more a single country than the Equator.'"

More: http://www.mckinsey.com/insights/asia-pacific/the_rediscovery_of_india

This is an auto-generated post from my reading list.

 

One by two

"One by two" is a quintessentially Indian term. Every Indian understands it and I would guess that no non-Indian does. It's a phrase heard frequently at one's local "chai-wallah" or tea-shop. What does this cryptic phrase mean?

Indians in most parts of the country like their tea and often drink it several times a day. The first thing you're offered when you enter a meeting or someone's home, no matter what time of day it is, is a cup of tea. Those not familiar with Indian tea should be forewarned that it may not be the kind of tea you'd expect to find in China, Japan, the US or other parts of the world. Indian tea is made with black tea leaves and is usually quite milky and very sweet.

Even growing up drinking this kind of tea, you wouldn't be expected to drink large quantities of it in each sitting.

Combine that with Indians' famous tendency towards frugality and resource optimisation, and you come up with "one by two". Which means, when you order tea at the local tea-shop, "split a cup of tea into two halves, please" for yourself and a friend.

Photo credit: Michal Svec

As you can see the standard tea cup isn't very big to begin with. Two or three gulps and it's gone. Yet, "one by two" is by no means an absurd request, and definitely a quite common one at roadside tea stalls.

Why am I blogging about tea all of a sudden? Because the other day I heard the phrase "three by five"! That really made me do a double-take. Most interestingly (and here, I shall resort to bullets):

• I overheard this in a fairly high-end food court. The question of affordability does not even arise.
• The food court is in Singapore. Language export!
• How did the busy server quickly divide three cups into five with a minimum of wasted time? Does he get similar requests all the time?

The other thing that struck me recently in similar vein was India's recent launch of a Mars-bound spacecraft called Mangalyaan. As this piece in the New Yorker points out,

Mangalyaan’s mission to Mars cost India seventy-three million dollars. For comparison, Boeing prices its least expensive commercial airplane at seventy-six million dollars. ...

The I.S.R.O. has a reputation for austerity, exemplified in a famous photograph from 1981 of India’s APPLE satellite being transported on a bullock cart. The agency’s scientists are paid between twelve hundred and two thousand dollars a month, and, unusual for space programs, its equipment is endlessly tweaked and recycled: the rocket that carried the Mars orbiter into space was adapted from a launch vehicle that first flew in 1993. Only one physical model of Mangalyaan was ever produced. (The I.S.R.O. relied extensively on software for testing.)

Photo credit: The New Yorker

All of which should interest and inform India-watchers and those who do business there. Remember that many (but not all) people and institutions see strength in frugality. It's not a "right" or "wrong" way of doing things; just a different way of doing things compared to many other parts of the world. Don't let yourself be surprised.

Also watch out: sometimes, the philosophy of frugality gets abused and taken to an extreme.

Here's why South-East Asia is increasingly attractive to start-ups -- and what still remains untapped

A few days ago, I spoke to Connie Loizos, a San Francisco-based ex-Thomson Reuters editor, who's now set up StrictlyVC. I highly recommend StrictlyVC's daily email newsletter for its brevity, breadth of coverage and lack of nonsense news.

This is a re-post of the somewhat abridged interview from her website.

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Singapore Sling: Entrepreneurs Head In – and Out – of Tiny Island Nation

 

Murli Ravi is the head of South Asia investments for JAFCO Asia, and from his perch in Singapore, he’s never seen so much cross-border activity as in the last 12 months. “Let’s just say I’ve made three trips the U.S. in 2013. I made zero trips to the U.S. in the four years prior,” he observes.

Late yesterday, I Skyped with Ravi to learn more.

Globalization is an ongoing trend. What are you seeing?

I cover a lot of territory – Southeast Asia, India, Australia – and I’m seeing a preponderance of people not just coming to Singapore and staying here, including U.S. companies, but I’m seeing startups in Singapore whose attitude is to quickly expand. I see many more of them looking to enter China and India, which are both about five hours away [from Singapore] by plane, and even sometimes Japan and Europe and the U.S.

What’s changed in the last 12 months?

I think Southeast Asia as a whole just has a much larger pool of talent coming online now for startups to harness. Also, historically, broadband penetration wasn’t high. Incomes were low. The smart guys would typically leave. All of those patterns are reversing.

What types of companies are coming to Singapore from the U.S.?

Broadly, you have a lot of small U.S companies and Australian companies and even Japanese companies that are realizing that Southeast Asia is an interesting market. If you just look at the English-speaking countries across the region – India, Australia, Singapore, Malaysia, the Philippines, and almost all the others have some English in a business context – that’s close to two billion people, or roughly 30 percent of humanity.

You also see companies move here because [their product is better suited to the market in Asia]. I sit on the board of a company called Bubbly, formerly Bubble Motion, that was founded in the Valley but moved to Singapore.

I remember reading about that move and thinking that it boiled down to lower costs for the company.

Well, Bubbly is a social messaging service like Twitter, except that instead of read and tweet, you speak and listen, which also appeals to the markets here. Unlike on Twitter, where you’re talking to the world and hoping someone will talk back, with Bubbly, it feels like someone is talking to you because you hear them in your ear, whether it’s a friend or a celebrity who has recorded a message about picking up her kids or an upcoming show. Unlike on Twitter, by the way, consumers here are also willing to pay to listen to celebrities. Right now, the biggest markets for Bubbly are India, Japan, Indonesia, Philippines – all of which have their own celebrities.

Do other recent transplants jump to mind?

A couple of other companies that have taken the same route are Vuclip — which hasn’t quite moved its headquarters to Asia, but does focus mostly on Asian and especially Indian audiences — and Mig33 — which did move and has seen success in Indonesia in particular.

You also have companies like Line and Kakaotalk that didn’t originate in Southeast Asia but now have a huge user base in this region. Coincidentally or otherwise, these messaging companies have a lot of similarities with Bubbly.

What about enterprise companies?

It’s so far been a little less common for enterprise companies to move here, and I see that as a major untapped opportunity. There are lots of inefficiencies in the way big business is done in some of the countries here, which gives more competitive firms from elsewhere a potential advantage if they choose to come here. Equally, some startups from this region who are able to thrive here have shown that they are quite capable of stepping onto the world stage, because the historical lack of resources available to small companies is a sort of trial by fire.

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For another perspective on the same topic, see this piece from Techinasia, which ends on a surprisingly downbeat note: No surprise, Asia tops the charts for internet and mobile growth, but are Asian startups ready?

Making decisions on start-up founders

Here's the next installment of the Ask Your VC feature I'm collaborating on with Yourstory.com. Leave questions here.

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What are some key criteria one should consider while seeking a co-founder?

Think complementary.

This is necessary but by no means sufficient.

It’s obvious why you want your co-founders to bring complementary things to the table. If you’re an engineer who loves building products, you need someone else to sell those products, someone else to support customers, and so on.

At the same time, be mindful that simply having the skills needed is not enough to make someone the ideal co-founder. Consider also aspects like:

• Do we have a shared vision?
• Can I see myself working with this person through good times and bad?
• How committed is this person? Should this person be a founder or an employee?

A certain amount of alignment among founders can be engineered by having a vesting schedule for founder shares.

 

Can a non-technical founder launch a successful tech start-up?

Sure, though it is not common, especially if technology is supposed to be a core strength of the startup. Look at Zynga and Ali Baba, among others.

 

How do you decide the ideal size of a startup team?

This varies so widely that I hate to give a one-size-fits-all answer. Some questions to think about are:

• What stage is my startup at? If you are at day zero today, perhaps all you need is a team that will get you to MVP.
• What industry am I working in? A startup that plans to develop a mobile calendar app doesn’t need as many people as one that is working on the next generation of electric cars.

 

What are the implications of premature scaling?

The most obvious implication is running out of cash. Ramping up your team prematurely can result in straitened circumstances or even an untimely end to your business. Even if money is not an issue, increasing the size of your company too quickly can rip apart your company’s culture or dilute your focus on your important early customers.

What is “too quickly”? Ah, I wish I could provide another nice formula to define that for you. The best I can really do is to provide a circular, self-referential definition, which is that you know you’re growing too quickly when you see problems like the ones above coming up.

Startup culture, stolen ideas and whether you really need funding

Yourstory.com and I are collaborating on a new series called "Ask Your VC". Think of it as an agony aunt column for entrepreneurs. This was born out of my observation that entrepreneurs often want an external perspective on their businesses from someone who can offer an informed opinion yet doesn't have an axe to grind. I already work with a few entrepreneurs on a one-on-one basis, where I'm not an investor in the company, simply a well-wisher of the entrepreneur. These are personal relationships where we both have a high degree of mutual trust and respect, and learn a lot from each other. While these are very fulfilling conversations, I saw that this could also be generalised to benefit others who often have very similar questions and experiences. Hence, "Ask Your VC".

You can tweet any questions you may have for me @murli184 or post them here. You can also -- and I cannot emphasise this enough -- teach me about things you know better than me, tell me where you have a different opinion from my own and generally give me feedback. As Yourstory says about me, I'm not going to be the wise man with a long white beard who sits on a mountain top talking down to lesser mortals!

Here's the first in the series reproduced below. Please leave comments and feedback on the Yourstory website.

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Can’t wait to chat with a VC?

YourStory presents ‘Ask Your VC’ – an opportunity for you to connect with a VC virtually, through a forum of questions and answers. You ask the question, we ‘connect’ you with the expert to get meaningful and relevant insights pertaining to the entrepreneurial eco-system.

And to kickstart…. introducing Murli Ravi – Head of JAFCO Investment, Singapore

Here’s where you can post your questions : YSBuzz

How do you define and create your startup culture in the initial days of your journey? How imperative it is to the success of the venture?

Lead from the front.

I used to pooh-pooh warm and fuzzy words like culture and vision early in my career. People come to work because they get paid to do their job. That’s it, right? Maybe that’s somewhat true for large companies but I realised soon after starting to work with startups that startups live and die by their culture.

People join startups for various reasons, whether to learn new things quickly, do something fun, make a difference to the world, or whatever else. Defining what the ‘something’ is that you the founders care about; and living that ‘something’ as a core value every day will help the right employees self-select to join you and keep your company moving in the direction you want it to move. This is true especially in tough times, when you want to be sure that everyone on the team is pulling in the same direction.

Take Amazon.com, for example. Early in the company’s life, Jeff Bezos used to say to potential new hires, “You can work long, hard, or smart, but at Amazon.com you can’t choose two out of three.” He couldn’t have been any clearer than that. Anyone who then agreed to join the company would do so with eyes wide open, knowing exactly the kind of culture Bezos had put in place. Anyone who didn’t agree with that wouldn’t be on the team to begin with.

This is not to say that you should adopt Bezos’s values for your own business. You decide what you want for your company, articulate it clearly, and live those values yourself. You might decide that your company’s culture needs to be built on employee autonomy (Netflix is a good example), innovation (Google), customer happiness (Zappos), rigid but clear top-down control (Foxconn), fierce but healthy internal competition, or a whole bunch of other values. I highly recommend reading this Netflix internal document, which does a great job of explaining how Netflix defines its company culture.

Culture from Reed Hastings

How do I share ideas for my startup without the fear of it being stolen?

Stop worrying.

This is a question that comes up way more often than it should. Let me quote a piece I wrote on my blog which answered this question:

Every now and then, I get asked how to get started as an entrepreneur, yet protect one’s business idea from being copied or stolen. This is an irrelevant question. Or, at least, there are bigger fish to fry.

Here’s what I said on Quora to someone who asked me to answer a variant of this question:

I’ve seen over and over that ideas are pretty much useless. Execution is where it’s at. There are several businesses that are considered successes today, which originally started out doing something quite different. So it’s about execution and adaptability.

via #entrepreneurfail

There are also several successful businesses that were followers not leaders, yet today they are more successful than the pioneer (e.g., Netscape->Firefox/Chrome, Altavista->Google, Friendster->Facebook, etc.)

How do companies protect themselves? Technology is patentable but not business ideas. Even if you do have a patent, that doesn’t mean the patent is valid (because patent offices generally don’t have the resources to validate whether every single patent application is for something novel) or that you will have the financial muscle to enforce a valid patent in a court of law. So one can protect one’s business by doing one or more of the following:

• Constantly innovating to keep ahead of the market — Google? Apple?

• Devising a business model that makes it hard for your customers to leave — MS, FB?

• Devising a business model that allows you to control your suppliers — Apple? Walmart?

• Expanding quickly across your desired regions — Groupon?

• Obtaining special rights and concessions that protect you — defence companies, banks, utilities…

• Offering the best value — Amazon?

• Providing the best service in your specific region or location

• Building a good brand over time — Coke is Coke, Singapore Airlines is Singapore Airlines, no one can copy this

All of the above have risks, of course. (And, not all the companies named above are successful at every single thing they do. I’m no fan of Groupon, for instance.)

Plus there’s inertia — just because someone hears your idea doesn’t mean he’s going to start doing it. People…

…are lazy.

…have other priorities.

…are risk-averse.

…may not share your dream or be imaginative about the problem you’re seeking to solve in the same way as you.

…are sceptical.

All of this is a form of in-built protection for you.

So, the short answer to your question is: have an idea? Who cares? First step: get started. Next step: keep moving.

None of this means you should disclose every last detail of your business idea to someone else. This is usually not necessary anyway.

If you’re specifically worried about venture capitalists stealing your ideas, read this post as well.

 

When is the right time to raise funding?

Ideally, never!

The slightly longer answer is, if you know you will need expansion capital at some point, raise the money before you actually need it. That is to say, raise from a position of strength, not when your sales are tanking and you’re desperately trying to pay overdue salaries.

The next point about raising money is that you need to be able to articulate what you need the money for and when. Articulating your plans is a way to use the fund-raising exercise as a form of self-discipline. You can set ambitious goals that are just slightly out of reach and measure your progress towards achieving those goals over time. If you can’t articulate your plans, don’t raise money. Fund-raising isn’t the reason for your company’s existence.

Somewhat related to the previous points is that you shouldn’t raise too much money too soon. What is too much? Once you’ve defined how much cash you need for your current needs, add a buffer for contingencies — faster than planned expansion, slower collections than anticipated or anything else — of say, 15%-20% of your round size. Anything dramatically more could result in one of three problems.

The most obvious problem of raising too much money is excessive dilution. I haven’t met an entrepreneur yet who hasn’t been concerned about dilution, so let me not spend too much time on this.

The next problem is complacency. If you have a teenaged child, neighbour or a sibling, give them your credit card for a month and see what happens. Don’t let that happen to your company.

One less recognised problem is that, having accepted more money than is really needed at the current stage of one’s business, the entrepreneur and investor agree to set a high valuation so as to minimise founder dilution. Sounds great, right?

The trouble then is that, having set a very high bar, the entrepreneur is now under tremendous pressure to match up to his own and his investor’s sky-high expectations. Worse, when the next financing round needs to happen, your potential new investors may balk at paying an even higher price and your previous investors (and you yourself) may not be willing to accept fair terms. This may jeopardise the fund-raising itself and potentially harm an otherwise sound company.

This situation of raising money at too high a valuation doesn’t happen very commonly but when it does, it seems more common at very early stages, when neither the entrepreneur nor the investor may know what the “correct” price is.

My general advice is to err on the conservative side: don’t raise too much money too early and don’t push for too high a valuation at a very early stage. Leaving a little money on the table in the short term can help you build a long-term partnership with your earliest, most dedicated supporters and lead to a happy, productive relationship.

A final thought: I can think of one exception to the approach of raising cash based on the company’s intrinsic needs. I call this the “valuation ladder” reason. Let’s say your company raised money three years ago, is growing fast and has plenty of cash in the bank today. You’re in the enviable position of not really needing to raise any more money. At the same time, you’re still a year or two away from thinking about an IPO or sale of the company (or maybe you’re not even thinking about an exit, which is a perfectly valid choice). In this situation, you may consider raising a small round so that an external investor can put a more recent price on the company, which shows a nice bump up on your last valuation and can act as a guide for your exit valuation. Doing this more than once shows the market, your existing investors and your employees that you’re climbing the valuation ladder. You don’t have to raise money for this; you can also achieve pretty much the same climb up the valuation ladder if a new investor agrees to buy shares from an existing shareholder.