Archive for August, 2009

Is Micro-Funding a New Trend to Come?

// August 26th, 2009 // 6 Comments » // Uncategorized

A lot of folks seem to be very curious as to what I am working on, since my stepping back from Proto.in. Well, quite a bit actually and on some rather serious stuff. Serious as cash, infact. One of the major concerns that has been on my mind is the scarcity of capital in this market.

I am absolutely with the camp that believes that if there are quality companies, then capital will find its way. But we also know as part of most of our risk mitigation strategies, making a leap into a market with no safety net or partners makes it a really serious gamble – even for some of the most well-versed entrepreneur to tread in. I strongly believe that unless we enable some capital to flow, we are not going to see much of a difference in the number of quality startups that spring up, and inevitably the number of startups that get funded/get recognized, and the number that make an exit. This cycle, as you know is recursive.

So What have I been obcessing about? I’m focusing on three aspects and I think all three aspects are crucial.

  1. The mechanisms for loans from banks to become accessible for startups/SMEs
  2. An effort to bring together the Angel Investment Community, educate them and help them engage in an effective manner
  3. An effort to fix the “broken VC Model”

The First and Second are fairly straightforward and I promise to come back to you with some better news soon. But this is primarily about the third one.

I think the third one warrants a closer look for a simple reason. People have been claiming as long as for the better part of the decade that the VC model is broken and there seems to be no heed to that warning. Whats worse is that given that India couldnt be farther away from whats happening in the Silicon Valley in terms of similarities, the model is a force-fit one (There are some better models in Israel, Singapore etc). If you’d understand how a VC firm works, its primarily a specialized bank which runs on a management fee and bonus paid with the return on the investment. The overheads of running such a team is so high, that the only viable way for most firms to operate is to increase the fund size, which sets the ball rolling on them getting into a soup not able to invest in early stage no more, and the next thing you know they are either full-fledged in growth stage, or are in growth stage and are disillusioned about being an early stage investment firm. Suddenly working for a VC firm or being one doesnt seem so glamorous, does it? :)

What we need in India is essentially a firm which is capable of dispensing funds as low as 50 Lakhs to a crore (I am consciously keeping figures in INR to make it a point that we arent in dollar land and the rules and requirements are different here) – which can operate at lower costs, and can also manage a sizeable portfolio.

  • Problem #1: Cost of Manpower.

Manpower seems to be the highest cost in a VC firm. if you want to make your investment sizes smaller and invest in a reasonable size of companies, the issue usually is the fact that you are put in a loop of having to hire more resources, which pushes the envelope further to want to raise a bigger round to cover the increase in operational cost.

Solution: The right leads to manage the firm, the right risk management frameworks and rating mechanisms, and with a process management team, will make this work. More on this later on.

  • Problem #2: Monitoring.

Every investment is usually tied with a board member, mostly to ensure that the investment is safe. A fund investing in 100 companies, becomes a nightmare for most of the partners to manage the number of boards they are in, and even the number of companies that they can constructively help build.

Solution: If this space has to become active, those who have had experience building a company or two cannot afford to stay in the sidelines. There is a need to build a portal which will enlist potential Advisors who can be engaged on a token fee +minority equity model should solve this problem.

  • Problem #3: Investment cycles:

Most companies in India simply take longer time to mature. 5 year cycles are bit of pressure on the firm and the companies to perform. You are lucky if you get the fund raised towards the earlier part of the cycle. The latter, the worse it gets.

Solution: Becomes easier if the funds are raised within India.

Building Indian companies needs the experience of Indian entrepreneurs who have built companies here in India to take calls. Fortunately there are a handful of such VCs in India and they clearly stand out.

Solution: Get hands on with a company or two. The rest will work itself out.

  • Problem #5: Hand in the Cookie Jar.

The VC industry isnt spared by the issue that most of the banks in the US are being accused of – the management teams making payments before the returns come home. Most of the compensations are primarily out of the management fee, in addition to the career interest generated from the returns on investment.

Solution: If the overheads have to go down, obviously the baseline salaries have to go down and the pendulum has to shift towards creating value and taking a pie out of that.

Is Micro-Finance Leading the way?

As I am understanding these issues better, there is a starking constrast to the operations of banks that becomes more vivid. Banks traditionally have the same problem. They cant issue small ticket loans because monitoring and recovery becomes an issue and logistics of the loan management are a night mare. Hence the the reason banks lend to Microfinance companies to handle this arduous task. Now most microfinance agencies have insights into the “individual equity” of a loaner to know the risk involved with lending with that individual and mitigate risks accordingly. We need a similar system like that.

Microfunds might very well be the trend to come. Why? There are 32 million SMEs in the country and the traditional way of investing is not going to work. They do not require huge quantities of money, and most of all there is a requirement for capital for expansion.

So How does this process scale? I came across a risk profiling tool built by an insurance company a few weeks ago, that allows field agents in rural areas to calculate the risk factors of an individual and household based on various parameters that they can understand from the individual. The tool is well built to the point that it can be used by an agent who doesnt have to qualified more than a 10th pass, and even better they are rolling out their next set of tools to enable these 10th pass graduates to manage the wealth of people in rural India.

Same criteria, same issues, but they’ve found a solution to it and are making money. That’s possibly a step that the funding models in India will have to take a look at and learn from. Its taken for granted that everything in India is grand – from railway stations to public toilets we have an issue of models having to scale up and dying by the lack of it. Funds are not going to be an exception to that rule. The right processes, definitely will play a crucial factor.

Ofcourse this is my understanding. Am counting on the wisdom of the audience here to continue this discussion – Whatever it takes to improve on things that already exist, but dont quite satisfy.

The Best of What You are.

// August 18th, 2009 // 3 Comments » // Entrepreneurship

Malcolm Gladwell in his book “Outliers” talks about a rather interesting theory to becoming an expert. 10,000 hours. The theory is that if you spend 10,000 hours in developing a skill, by the end of it, you’d be an expert in it.

There is common perception that startups are entities who are low on resources, are always constrained by talent and time, and have none of the perks that bigger companies enjoy. That statement couldn’t be more wrong. Startups are infact by definition, entities that are extremely good at what they do, can deliver the next generation of quality and experience at half the cost. If your startup doesnt live up to that promise, its a sure sign that something is seriously wrong.

Lets think about the Logic of this whole matter for a minute. There are bigger companies with loads of cash and resources, and the network to go after the same market that you are aiming for. The only standing chance that a startup has is if you are amazingly good at what you do.

Thats exactly where Malcolm’s theory comes in. Every business has certain crucial aspects. If its a technology company, you are going to need someone who has great R&D background, one who has solid understanding of business and the markets and someone who can manage finances and play complementary roles. You Have to be the absolute best in what you are. When starting up, its worth asking yourself that question, as the destiny of the company you start very much depends on it. If you dont have a skill, its time to sharpen it. 10,000 hours to go!

The Case for Startups – The Prelude.

// August 13th, 2009 // 5 Comments » // Business, Entrepreneurship, India, Politics

Over the past three years, it has been quite a journey interacting with startups, some of the key stakeholders and in a lot of ways understanding some of the constraints that we are facing in building up this landscape. There is undoubtedly a lot of enthusiasm, an unparalleled momentum within the community and daring spirits aspiring to build world-class companies. No doubt about it.

But we are not nearly where we’d like to be.

Lets also have a bit of background here. We must humbly acknowledge that certain things existed even before we all arrived at the scene. There is nothing new under the sun says Solomon who was apparently one of the wisest man to roam the earth and he possibly could have been true. A report by the committee on National Enterprises clocks the number of Small and Medium enterprises in India at 32 Million. Yep, you read that right, its 32 million! 40% of the gross manufacturing GDP is a contribution of this sector of the industry. One of every ten Indian is employed by an SME. If you thought startups became fashionable in the past three years, we would be very misguided. That said, there is a sudden trend and confidence emerging that India too can build world-class companies. That sentiment is a recent one.

Though it was the camp at Proto.in, that initiated some of the key initiatives to drive this change, its no doubt that today there are several entities – all very key elements who have started to play a role in shaping this landscape. The purpose of this series is hopefully to point out some of the obvious things that we are going to have to work towards – so that we dont contend ourselves thinking that we’ve arrived.

I’ve thought about it, mulled it, discussed, debated and fought over it, but simplistically it comes down to this. Startups need two very crucial elements that we need to build in order to nurture them.

a) Media Focus
b) Capital

I’d also add a third component of Mentorship/Networks, but I am going to presume for a second that that onus can be laid upon the entrepreneur as there are several means and ways to compensate for that (linkedin, included) for now.

Media Focus:
Let me be very very honest here. There are several attempts by everyone involved in this space trying to get some coverage in the media, but there is a serious issue with the focus here. ET’s Ideas competition included, the focus somehow seems very much on the initiative than on the entrepreneurs. This goes for the Proto.in camp as well – while sometimes its nice to rest on our laurels, we have to constantly remind ourselves that we are just a mere platform and our success is when the companies we help succeed. We have got to do better in this. I know we can.

There are shows on television which as of now seem to be doing a better job at this than what most of the “showcase” events have managed to do, and its quite sad that thats the level of comparison we are at. Rest assured that there are also going to be equally enough efforts from the media to want to sensationalize it, and even make an emotional outcry out of entrepreneurs, dreams, hopes and dreams smashed, and its sooner or later meant to happen, but one of the things seriously lacking is the media network and lack of focus for startups.

Things we ought to do in this space:

a) There is a serious need for a authoritative blog that covers startups, and the emerging verticals.

b) There is also a need for a firm to start analysing the emerging market, as the value chains shift, and to help companies position themselves based on that. Such a company could almost become “the” means to start categorizing and analysing, comparing startups systematically.

c) We need more journalists who could write about entrepreneurship and startups with a solid understanding. There are very few right now (like Snigdha Sengupta) who can do such analysis as of now.

d) Everyone has this question. Every platform, Bplan Competition, Entrepreneurship summit seems to showcase 10-15 companies. What really happens to these companies after that? Do they get funded, attract clients, sign on anyone significant, strike any key alliances? There is space for a “Startup Tracker” to be in place. This will be crucial for the Media to start reporting indepth stories, and also for raising funds in the future (More on that in the upcoming series)

e) Events such as TiECon, Proto.in, Headstart have to put their heads together and figure out how to a) Get the startups coverage on national media b) Get coverage on overseas media – For Example. When PlasticLogic launched at DEMO, The Hindu Chennai edition had a coverage of what they presented the next day. Needless to say that company received enough backorders for their product, including bagging the order from Amazon and Sony within the next three months. If these native platforms are not able to offer that level of coverage, make no mistake, DEMO/TC50 will make its way to India to deliver that value.

There are projected plans to bring the employment rate in India to below 2%. In a global economy where countries are struggling to stabilize their unemployment rates, we are actually talking about almost making it disappear. SMEs will piay a significant part in it, and since Employment is a key value proposition of any government and referring to my previous article on who really owns a company, You can rest assured that the government will get involved and play its part to help. But the initial organizing of this sector has to be driven by all those who are claiming credits already. And clearly there is lots of work to do. Its time to get to work – and not stop at empty promises.

Small is Beautiful?

// August 3rd, 2009 // 6 Comments » // Entrepreneurship

I am an entrepreneur. And the first thing you develop as part of being an entrepreneur is to start picking up patterns of directions people are moving in, and either do a mental math or just walk on the opposite direction of the flow and see whats it that people are totally missing. Usually there are interesting business propositions at the end of that rainbow.

There are two things that trouble me lately, and it connects to the subject of this post. Size.

We are in a rat race, and unfortunately so are most entrepreneurs. Working with entrepreneurs, the common chorus sung these days is to build a company, get it funded, scale, scale globally, make tons of money, go IPO or get acquired, and settle down. And this usually a 15-20 year plan (Anyone who does it in time less than that is either a genius or in sheer luck). The problem with this picture is that everyone thinks this is the de-facto route to go. But not everyone seems to be built for that.

Instead of getting into all the gory details, here’s the question: What’s really wrong about running a Sole Proprietorship firm, making perhaps about 3-5 crores in revenues, and being stable at that?

I met an audience of around 300 such entrepreneurs a month back, and the pace they live their lives by, not hazzled by competition, globalization, board pressure, missing out on family time etc seems almost non-existent – One even mentioned that its a better tax plan as well.

The reason I write this to this audience is cause, one of the biggest things that we worry about, especially with rural enterprises is scale. And at times you notice, sometimes with RTBI, and often outside that not every entrepreneur and entity is built for this. Small can be beautiful, if you know thats what your capability is, and can with content deliver on that consistently.

The second aspect of whats bothering me is something directly related to the first.

I am possibly fairly young, but even I miss the days when you call a company for customer service and you got someone that you spoke to the last time – makes for such a pleasant experience. I have an issue with my Airtel connection and I have called them 17 times so far over the past 18 months trying to get it fixed – so far no solution yet and I have given up on their system and started hoping for Number Portability to arrive.

One of the other side effects that I am lately noticing is the sheer amount of bills and receipts that I am hogging. You make a broadband payment, settle something here, there and you want to keep a copy of it all, because you really dont know when one of these companies will send you a note saying you owe them something and you have to make a case for yourself – and there is no one in the entity who can show you a friendly face.

Its almost unfortunate that with scale, customer experience has gone out of the window. Its said that when we were still bound by the day and age when we werent globally connected, most local businesses and entrepreneurs eventually “ran out” of a market to target, and their way of keeping themselves busy was to constantly improve upon what they offered to keep their customers engaged, happy, and conversing with them. Those days are really gone, arent they?

I think small is, was, and will always be beautiful. The sphere of success and what we really want – whether it be the size of the enterprise we are building, the mode of operation, or the values we want to be known for (even if its darn good customer support) are decisions we make. If anyone can make a decision agains the tide, its entrepreneurs. And with this day and age when trust is nowhere to be seen, and transaction costs inevitably will rise, small can be really beautiful – with a pleasant experience and happy customer.