Lessons From an Entrepreneur’s First Trip to the Bay Area

[Guest article contributed by Pranay Srinivasan, Founder of sourceasy]

I’ve been a businessman almost all of my working life.. I’ve been selling apparel in USA for close to 10 years, and have traveled here multiple times. But I’d never been to the Bay Area and had never interacted with startups before.Over the last year or so, I’ve had the good fortune of interacting and creating beautiful friendships within the Mumbai Startup Ecosystem. I’ve also had a very slow period of work at my Apparel company which I’ve been retooling for a while. Hence I haven’t traveled to the USA in the last 3 years or so – which is a very long time.

On my recent trip here, I had a rather different perspective than previous trips. Now that I’ve had a lot of exposure to startups in India, and am in the process of building out my own startups, launching 2 new businesses, and advising / consulting with other startups for fulfillment in India, my perspective was of a startup founder, not a small businessman. So this was my first trip to the Bay Area, which is like Hollywood for Startups (I’ve been staying in LA for the last 10 days so forgive the cliches / comparisons). And I noticed a lot of interesting factors here that may or may not completely resonate with most of the startup community either here or in the USA.Before I start on my rant, a few caveats:

These are my personal observations, and the evidence is extremely anecdotal in nature.
– I am referring to startups that rely on either transactions or subscriptions for revenue.
– I am not a big fan of advertising-based startups simply because they need tremendous scale to be profitable. Those are also the Outliers in the current scenario.
– I am not deriding anyone. I’m just pointing out some facts as I see them.
– I am not discouraging startups from following their gut / instinct / path / etc.1.

1. So the first point I want to make is that I dont understand the difference between a startup and a business. Dave McClure pointed out in his answer to this Quora post that the difference between a Business and a Startup is that a Startup is trying to find out what it’s product is, who it’s customers are and knows how to make money. That’s a beautiful explanation, but in my opinion, without these 3 things, Nobody should even start a business, let alone ask for other peoples’ money before testing their concepts.

2. The era of making mistakes with other peoples money (OPM) is dying fast. It’s still prevalent in the Valley, but only for great entrepreneurs and some kick ass teams who have the confidence of Seed Stage Investors / Angels. Debacles like Color are ensuring that even previously successful entrepreneurs don’t have a paved road to fundraise and “figure it out”.3. Raising money is harder than ever, even at the angel stage / seed stage where money seems to be “plentiful”. Startups are struggling to put together seed rounds 6-8 months after demo days. Everyone’s unduly worried about a Series A, but the fact on the ground is that Nobody seems to be able to raise the early stage / seed round they need without:
a) A clear cut revenue model
b) A road to profitability (if not cash flow positive yet)
c) Strong customer insights
d) A great execution capability and
e) Operational experience (to avoid crashes while scaling)

4. Distance matters. The surprising fact is that whether you are in L.A. or Bombay, it is all the same to VCs / Investors in the Valley. Angels and Investors will not invest in startups outside the Valley. As Mark Suster puts it in his blog post here, Investors are not inclined to invest in startups they cannot oversee. And the truth is raising successive rounds of capital is tougher even if you’ve raised your 1st round of capital, if you’re outside the Bay Area.

5. Investors don’t care about your company enough to save it. Investors are turning more and more “ruthless” about the funds they deploy. Don’t expect investors to put good money after (what they consider) a bad investment. Even if you can show them the promise of better execution, fewer errors and a road to EBITDA profitability, increasingly their stance is that if you haven’t figured it out with your Seed Stage funding yet, you probably won’t be able to figure it out down the road. They’d rather cut their losses and walk.

6. You need to be self-sustaining. Lifestyle businesses are not unsexy. In fact they show that you have the chops to run a business day to day without external help or funding. They are happy to see you slug it out for 8-12 months before they feel you can be funded for scale. They dont want to subsidise your losses. They want to double down on your ability to replicate a profitable business model. Angelpad’s latest lineup are all B2B cashflow businesses. The message is clear: Get profitable with your Seed Round or chances are, you will die. COGS (Cost of Goods / Services) is no longer an irritant. Operational Streamlining cannot be postponed. Increasingly a lot of startups who have learnt to stay lean and grow slowly are being liked by Investors. Maybe Indian investors asking for discipline with funds are not that bad after all.

7. Incubators and Accelerators are helpful. Not omnipresent. Incubators like 500Startups, yCombinator, Angelpad are not a Panacea for early stage companies. These incubators are very clear that they are rolling the dice in backing the companies. Their business model is structured that their incubator fees are paid and are unlinked to their investment objectives. Also, the funding is rarely more than 50,000 – 120,000 USD in equity funding. For a US based startup or a startup visiting USA, these funds are a 6 – 9 month runway. After that? Without a sustainable revenue base and a profitable transaction flow, most of these startups will struggle.

8. VC is changing, evolving. As this article that was retweeted by many VCs points out, LPs aren’t too enamoured by the consistent failure and inability to produce results from VC firms. VC Fund sizes are shrinking, and even though there are still a number of exits that are returning money to LPs, they are not converting into larger size funds that can support a Series A / B funding for a lot of the startups out there for the next few years. What these exits are doing is creating more early stage investors who are able to spread their risk by investing in a lot of startups in the hope that atleast 1 or 2 of them will go ALL the way. Is your startup that one?

There is a huge amount of opportunity in the USA (not just the Valley) and a lot of industries begging / crying out to be disrupted. eCommerce opportunities abound. But that’s only if you are looking to do business, not raise money and play the valuation game.

I have heard a number of Indian startups lament the fact that Indian investors don’t understand them and they’re dying because they’re stuck in the Indian ecosystem and that if they were in the Valley, they’d get funded because American Investors “get” what they’re doing. But, without a clear goal, and a strong emphasis on execution, it seems that even Valley startups are struggling to grow to the size and scale they dream of.

And if you did make the jump to the USA, and were unable to convert your “startup” into a credible, sustainable, self-perpetuating “business”, What would be your excuse then?

[Reproduced from Pranay Srinivasan’s blog]