NextBigWhatSelect

[Editorial Notes: Entrepreneurship is tough, but very few share* the real side of the story. Read on, a guest piece by Aditya Gupta. Aditya, cofounder of SocialSamosa (and earlier started iGenero) shares a few lessons building a ‘small company’.]

Bootstrapping is fun but not always and is a challenge but not always! In 5 years, what we at iGenero realized is not something new, not something that other startup founders didn’t. The journey, from getting a new client to setting up your first office to getting the “big” client, is intense and filled with unmatchable highs. The lows, well, while not forgotten, are not usually dwelled upon. However, let’s talk about the lows for a change.

When we started the journey at iGenero, we always believed in being transparent, playing fair & being true to our clients and ourselves. We were very clear that we were here to do some good work and the money would follow. Today, we have worked with over 100 clients across the globe and produced quality stuff. Not a lot to complain about, right? However, I can’t help but comment about how unprofessional most companies in India are.

Yes, I’m talking about both the companies with as many employees as the capacity of Eden Gardens as well as companies which have less than ten employees and all those who fall somewhere in the middle.

Couple of years down our own startup journey, a few opportunities to get funded or acquired came our way. We didn’t jump at these, because we felt we had to first figure out the space and the opportunities that lay before us. An advertising company offered to acquire us during our very first meeting.

Their reasoning for the offer was “You guys are too small a brand for my company, but we like your work & hence the only way we can work together is when you work for our company directly.” Back then, we did not take such offers seriously. We missed that boat and even today, we don’t know if we did the right thing or not. Later, a couple of clients who also happen to angel investors brought up the funding topic which seemed insincere and a way for them to convince us to bring down our pricing.

The client side is always been painful. We were approached by one of the biggest ecomm companies in India and they made us chase them for over six months. After six months of mails, calls and meetings, the dude higher up decided that they would only work with a company based in same city they were in. The parochial attitude of an e comm company -the irony was priceless!

Another memorably ironic experience was when we were told by one of the top b-schools in India that we were too young to work on a top b-school project! The reality was the other company competing for the project told the client that they needed a 40 member team to work on the project and iGenero wouldn’t be able to do that since our team size was 12 back then.

The irony? That a top business school didn’t support entrepreneurship and lean business practices.

The industry folks have, every now and then, dismissed us as just another company. Maybe we are just another company when it comes to the scope of services that we offer but we definitely aren’t like the others when it come to quality of our work, our ethics, morality & purpose in life. There have been many occasions where people told us that we needed to do whatever it took to get the ball rolling – “wink, wink”.

Obviously, it majorly meant lying & cheating in all aspects of business. From the team size to revenue to the duration of project to cut-copy-paste to probably your gender too, they covered it all and how! Not just that, we were also told if we want to survive in the startup scenario in India, the earlier mentioned tactics were the only way to go!

I’m reading about India becoming a product nation. There’s a lot happening already. I hope it happens. More than anything else, I hope professionalism seeps into companies & individuals quickly. The startup community is booming in India right now and while we are all hopeful it will only get better, I’m also skeptical about how it’ll all pan out in the coming years. At the end of the day, only we will be responsible for making it or breaking it.

Professionalism, ethical practices, good faith, recognition of quality – these are the cornerstones of a good, robust business economy. Sadly, at the moment, our experience has shown us that these cornerstones are missing. A nurturing environment, where start ups and young entrepreneurs are nourished and cultivated, where ethical practices are not optional, but mandatory, where cheating someone is not considered an accomplishment but an offence – this is what India needs. Only then, we will see long term sustainable growth and progress.

And now, I need to go chase a Social Samosa client for payment that’s been over due for a over a year!

[*Note: If you want to share your experience/insights as a guest author, simply drop us an email : editors@nextbigwhat.com]

[Editorial Notes : Recently, a few folks have suggested the government to launch a fund to invest in startups. At NextBigWhat, we certainly don’t believe that this will help solve a problem (read : What’s the role of government in startup ecosystem? Stay Away!). Here is a neutral piece written by Sumanth Raghavendra (Founder, Deck) with inputs from Ashish Sinha (NextBigWhat).

In the wake of the upcoming union budget, some of India’s “Startup Gods” are urging the government to follow the footsteps of the Singapore government and launch a fund that will invest money directly into our startups.

This is the actual statement – “the group recommended to the government the establishment of a fund of Rs 5,000 crore that it should use to invest along with other VCs. So, if a VC does a due diligence and decides to fund a startup, the government could come with matching resources from its own fund.”

In our opinion, this is a hair-brained suggestion and one that we hope the government will not focus on especially in lieu of other initiatives that are much more deserving of their attention.

Here is why: 

“Show me the money”: Is there a capital availability problem?

The short answer is NO.

There is a meaningful number of active VC firms operating in the country and each of these firms has substantial funds at play for investing in Indian firms. Also, capital is increasingly becoming global and there are many Indian startups raising money from investors outside India especially so as they increasingly straddle and target global markets.

What about early-stage funding? Isn’t there a shortage here?

Most folks would agree that the availability of early stage funding is better than it has ever been in the past. According to data from audit and advisory firm E&Y, investments in early-stage startups rose nearly 40% to 121 deals with the transaction value jumping 66% to $605 million (Rs 3,630 crore), compared with the same period in 2013. There are a number of micro-funds such as Blume Ventures and Kae Capital that have emerged in the recent past that only invest in early stage companies. Besides this, almost every top-tier VC firm has dedicated seed programs to fund early stage companies.

Does this mean that every startup that is looking for early stage funding is able to get it?

Not at all, it is still a competitive market and that is the way it should be – the fact that there is a set of criteria that one needs to fulfill to be able to raise early stage funding essentially means that there is a system in place and it is working. If a startup is not able to raise funding today, it is not because there is a problem with capital availability but rather because it hasn’t measured up the benchmarks expected by investors.

One point that might be worth putting in focus here is the sense of entitlement that many startups seem to be having of late. There is a deluded view that I have a startup that is in my opinion “innovative” and/or “disruptive” and therefore I am entitled to get funding just as say a startup operating in Silicon Valley would. This is a sad commentary on how our entrepreneurs are picking up the wrong lessons from their peers in SV – funding is always a privilege that needs to be earned and not an entitlement that one is born with.

Beyond capital availability, what are the issues with the government funding startups directly?

“Who is your daddy?” – Why should the government invest alongside VCs?

One rather bizarre aspect of this recommendation by our Startup Gods was that the government should “invest alongside VCs who have done the due diligence and have decided to invest in a startup.

If the idea behind this suggestion was that the government should bother itself with doing due diligence and “outsource” that to VCs, it is a badly thought-out one.

So, if a startup has already secured an investment mandate, why would it need to take money from the government?

The only party that this arrangement would benefit is the VC as this would ostensibly spread the investment risk as it would require the investor to put in a smaller amount of capital than she would have normally done as the rest is filled in by the government.

The truth of the matter is that this would not really benefit the VC either.

An investment call is a binary one – the VC puts in money in the expectation that the company is one worth backing and will eventually give her a multi-bagger return or she decides to pass on the investment if she doesn’t have this confidence on the team and their market. The only event in which a VC would want to take in “dumb capital” from the government or any other agency is she feels that there is a capital risk that she doesn’t want to take herself irrespective of all the other things about the company.

No good VC would ever make a “go” call when such a doubt exists – the result of this would be a race to the bottom where the government money is seen as “cheap money” that can subsidize the investor’s own risk and the only VCs who would take advantage of this type of scheme would be ones who probably shouldn’t be in the high-risk technology investment space in the first place. So there is an adverse selection problem that comes into play when the government invests alongside VCs. 

“The road to hell is paved with good intentions”– The moral hazard problems with the government owning a piece of a company

Another reason why the government should not take a direct equity position in a company is that it opens up several moral hazards both for the company and for the system, in general.

The most prominent one that comes to mind is the “agency problem” – when the government underwrites the cost of running a company, it leads to skewed incentives and risk-taking behavior both on the part of the entrepreneur and on that of the “professional VC” who has invested alongside. The problem with such a situation is that when one party in a transaction is insulated from risk, he or she may behave differently (and more carelessly) than expected.

The other side of the coin is what the government and its nominated representatives will expect out of a company which has a fiduciary obligation towards it – look no further than the vast array of struggling PSUs to ascertain why this mutant socialist form of capitalism has been largely debunked.

“Startups need help not hand-outs” – Money is not the answer

As an entrepreneur running a business in India, the influence of the government on my company’s operations is significant. But the one thing that I am clear about is that my expectations from the government don’t extend to expecting them to put money into my company for funding my ambitions.

I was appalled when I saw this statement from an Indian entrepreneur – “If the government can provide us with funding, it will go a long way in establishing the country’s startup ecosystem,” – what was most appalling about this statement was that it was made by a person who has already raised more than Rs. 25 crores from a top-tier VC! If you need the government to bail you out after having this kind of resources behind you, you should seriously reconsider your career options.

My expectations from the government are more along the lines of hygiene factors – clear-cut policies that cut out rent-seeking behavior, simple procedures for determining and filing taxes and fees and straightforward processes for filings. It would be nice to have reliable infrastructure in terms of roads and utilities but in a land beset with a million grave issues, it would be churlish to demand such things especially so as a pre-condition to creating world-class products, which I would like to believe is something that we will have to do despite of rather than because of living in a third-world country. 

Epilogue

So if the government shouldn’t invest directly into startups, what kind of role should it play vis à vis startup funding and encouraging entrepreneurial behavior?

As far as capital availability goes, the government should focus on non-equity financial instruments to foster innovation. This could be on two fronts:

Venture debt: Investing money into a startup as debt instead of equity takes the incidental moral hazards out of the equation as the entrepreneur is accountable for paying the money back. Actually, India scores pretty high on credit availability already – the government operates a scheme called CGTMSE – www.cgtsi.org.in/ – for venture debt up to one crore for startups without requiring any collateral.

Grants: Rather than invest alongside VCs, the government should come in to fill the gap in areas where VCs are loath to invest. These should be restricted to domains that don’t fit a traditional VC’s investment thesis – for instance, research-heavy initiatives, defense and security areas and ventures that can potentially have a ameliorating impact on macro issues faced by the country such as health hygiene and education. Ideally, these investments should also be in the form of debt but if that is not feasible, then the government should consider grants.

Finally, as far as the “Startup Gods” go, you are in a position where you have the ear of the government in some meaningful form or manner, please use this opportunity to present cogent suggestions that have the force of informed opinion behind them. Offering silver-bullet prescriptions that are blindly lifted from the playbook of countries like Singapore is a wasted opportunity and a pointless exercise akin to jerking off in the dark and convincing yourself that you have scored!

NB: Stylistic punctiliousness should not get precedence over what needs to be articulated with uncompromised honesty.

[Image credit : shutterstock]

As a founder-CEO, most of my time today is spent dealing with management tasks: hiring, fundraising, setting priorities etc. However, before I “moved to the dark side” and got an MBA, I was neck deep into technology and engineering (and loving it). This article uses the programming metaphor to glean out some startup best practices.

Entrepreneurs will know that most startups are not successful most of the time. Our hiring isn’t quite right, our funds are often running out, we don’t know if we have achieved a good product-market fit, or if the pricing we decided is optimal! On an average day, an entrepreneur has his/her hands full with more than one such challenge. In a sense a startup’s job is to deal with failure… and systematically eliminate it so we can scale up a roughly error-free business model.

Making a complex program is in many ways like building a successful startup, and “debugging” is the equivalent to changes and corrections that startups make to achieve success. The metaphor can be used to highlight 3 principles that I think entrepreneurs can learn from and apply to their business model evolution process:

# 1: “Comment your startup”: Good coders write programs that are commented well. Commenting is the documentation of a program- it describes what every block of code does, and how it achieves its outcomes. Similarly, one should document a startup in as much detail as possible. Documentation is important because it allows you to scale effectively.

Every good piece of documentation is an artifact that removes a dependency on you- the most scarce resource in your business. Like code commenting, documentation allows others to look at your business and understand its moving pieces easily, thereby making them effective contributors quickly. In our startup, we use tools like dropbox and Google Docs extensively for shared access, and document all business processes as much as possible.

# 2: Focus on performance, not only functionality: Making a program work is generally the easy part. What’s challenging is to do so with minimum resources (e.g. memory, CPU cycles). Similarly, good startups not only achieve business results, but achieve them efficiently, with minimum resources (capital, people, office space). Don’t just ship that product; ship it efficiently!

Even if you have VC funding, it’s important to remember that resources determine the bottomline of your business- if you build a large, bloated organization with low levels of productivity, sooner or later your system is going to crash due to a resource crunch!

# 3 Hunt for errors systematically: When you deal with failure, you have to tweak different factors and levers- the way you hire, the amount of money you spend, what business priorities you set, how you manage work… and any of these, if not done right, can lead to failure.

In contrast with these multitude of critical success factors, “failure” is often visible in only one dimension: all you notice at the high level is that sales are not happening, or that suddenly all your key people start to leave.

To handle such challenges, it’s critical to measure, and to do systematic root cause analysis on your successes and failures. Like in programming, it’s a good idea to execute smaller and manageable pieces first, and then build complexity incrementally on top of that.

What other lessons do you think startups can learn from software engineering /programming space?

Also Read : The Lottery of Scale And Avoiding The Revenue Trap

[About the author: Amit Sharma is the Founder/CEO of Genesis Online Commerce, which runs specialized lifestyle eCommerce destinations driven by proprietary private labels. He has 10+ years of experience in technology and general management, and an MBA from the University of California, Los Angeles.]

[Editorial Notes: Guest article contributed by Mayank Khanduja of SAIF Partners. In this article, Mayank covers a very important part of fund raising : “Why VCs/Investors take time to evaluate the deal? Why is it slow or fast?”].

Don’t worry, this is not about a fitness wearable device. Instead I want to share my perspective on the deal evaluation process at a VC. This post has been inspired by a conversation I recently had with founders of a company we really liked. Our discussions with them were progressing at a rapid pace when they asked, “Why are you moving so fast on this deal?” I think it is one of the smartest queries relating to a VC’s evaluation process– entrepreneurs should ask questions not only when a VC is moving too slow but also when they are moving too fast!

We all know of instances where funds move quickly to extend a term sheet, only to see it fall through at later stage, as some part of the due-diligence on areas like market, competition etc. was completed only later. While one cannot entirely fault the VC from backing out, it is definitely unfair on their part to extend a term sheet before completing these elements of the business due diligence, as the entrepreneur would have stopped all other fund raise conversations.

Therefore, the entrepreneur in the case sighted above was well within his right to raise the question he did. We were able to give him comfort by sharing the database of 100+ companies we had met in their space and other such detailed groundwork we had been doing.

An oft-asked question by entrepreneurs is “How long does the deal evaluation process take?” Answering this with a definitive number is almost impossible given the multitude of factors that go into the decision-making, and thus most VCs acquire notoriety for not having a set time frame.

I have seen many deals at our fund go from first meeting to term sheet in a matter of days, while others can take a few months of knowing the entrepreneur and company before extending the term sheet. Few important factors that determine this time frame are:

Hypothesis on the market

I am a believer in the hypothesis-driven approach as it allows me to narrow down my focus areas and build in-depth knowledge in them. The hypothesis can be extended to not just sectors but specific business models that could succeed. So, if a company fits well into the hypothesis and has been executing well, the process can move fast.

But every once in a while, an interesting company comes along bringing together a combination of a great team and a potentially large market, which piques my interest in a new sector. In such cases, the groundwork begins only post meeting the company and thus the process may take longer.

Scan of the current players

In either of the two cases mentioned above, an exhaustive scan of the players in the market is done. This not only covers direct competitors but also players whose business model could converge with that of the company we are evaluating. In early stages of a startup, it is often difficult to be 100% sure of the path the business is likely to take and therefore we need to build a view on who all could be the potential competitors over the next 4-5 year horizon.

Strong reference on the founding team

A large part of evaluating an investment at seed stage is focused on the team. Its always more comforting if a team is recommended from one of our portfolio founders or people in the startup eco-system that we respect. It just does a great first level filtering for us and helps move the process along faster.

All in all, a deal evaluation process is like a courtship – sometimes the magic just happens, or on other occasions love can take time to grow on you… but both could lead to long and happy relationships.

[Image credit : shutterstock]

Right from VCs to gurus will tell you that as a startup, you should be solving a problem. Solve a pain point.

Yes. You should be.

Eat this:

redBus was acquired for ~INR 800 crores (i.e. $138mn).

Bash Gaming got acquired for $160mn!

Who was solving the real pain?

Bash Gaming?

redBus? Yes. The team integrated offline-online world and took a while to build the industry, got bus operators onboard. They were solving a serious problem statement that nobody in the industry dared to. The team put in a lot of effort to get here.

And yeah, WhatsApp for $19Bn and Nokia for ~$7.5 Bn ? And Blackberry for..?

Why is Box.net valued at $2Bn and Dropbox at $10Bn? That too, when Dropbox took so many years to enter the Enterprise segment, while Box was enterprise from day one (the hypothesis is that enterprise focus bring better valuation)?

Who was selling Vitamin and who was selling Painkiller?

 Welcome to The New Digital Economy

What problem did WhatsApp solve? Think about it – $19Bn valuation = GDP of 100 countries!

 The Characteristics of New Economy

1. People have time (though we think we don’t have enough, but we ensure that we update our ‘close friends’ in social media that we just don’t have time).

2. People have money (yes!).

3. People are bored (immensely! Plus, we all are going thru’ FOMO syndrome, i.e. Fear of Missing Out).

4. People want to believe that they are happy (and update Facebook when they want to be!).

5. People don’t want to think.

Take a look at top 100 sites in the world – except Wikipedia (and Google search), how many of them are actually solving a pain point?

What about Youtube? Yes, there are educational content – but that’s not what Youtube actually is.

“The internet makes human desires more easily attainable. In other words, it offers convenience. Convenience on the internet is basically achieved by two things: speed, and cognitive ease.” In other words, people don’t want to wait, and they don’t want to think — and the internet should respond to that. “If you study what the really big things on the internet are, you realize they are masters at making things fast and not making people think.” [Evan Williams, Twitter/Blogger/Medium Founder/via]

#Note : Convenience. ‘Not Make People Think’. ‘Don’t Want to Wait’.

Think about it : How do most of us use free time (10-15 minutes) during the day? We call up friends/family or logon to social network. It’s not that we want to stay connected, but we just want to avoid thinking. A few minutes of *doing nothing* actually leads to boredom (and fiddling with smartphone is the best way out).

 And that’s where the money is : In keeping everybody busy. And NOT letting them think.

Is there a pain point you are solving? Actually not. Nobody wakes up saying ‘I will not think today. Give me tools’. Some of the greatest successful companies are solving your latent needs which are not necessarily pain points (and apparenly, those solving latent needs are getting higher valuation/exits).

The new economy is about convenience, latent needs and hitting the higher levels in Maslow’s Hierarchy of Needs.

“Take a human desire, preferably one that has been around for a really long time…Identify that desire and use modern technology to take out steps.”

And how can one justify the crazy valuation?

Remember, the valuation in new economy is not defined by value you are creating, but a LOT from the threat, you pose to market leaders.

Whose Lunch Are You Going to Eat Today, Defines Who You Are!

Back to the question : Do you really need to solve a pain point to do all of this? Aren’t we getting used to paying more (and frequently) for vitamins than pain killers?

Of course, why not? But then is that the best option? Who knows.

Here is how it may sound from both sides:

Let me try dipping my toes first, if it feels right, I will jump right in. Let me take an easy corporate job and ‘moonlight’ till I gather enough momentum and confidence and then I will jump in. Let the monthly salary keep coming in till I find a revenue stream.

If you belong to this camp, you are arguing from your brain and may very well be right rationally. The second:

I cannot do justice to either my job or my start up when I am trying both at the same time. Without focus I cannot be successful in my venture. I need to focus. My take off will get delayed as my big company job will drag my start up.

If this sounds like you, you may be more emotional in your argument driven by your heart.

Is there a happy middle? I have not found one. Please share if you do. The thin line between spending time doing research before taking the plunge and buying time to make up mind to get ready for risk is really thin and could take forever to figure out.

Consider these as you figure it out:

1. Barely has success been achieved without full passion and involvement with the task at hand
2. Multiple failures are but to be expected so the time to think through alternates is needed
3. I am not aware of a single new business where 24 hour days have been sufficient… a 25^th and a 26^th hour have always been added to a day to do everything that needs to get done
4. While Spiderman can be a photographer by the day and himself at night, the same cannot be replicated by everyone… imagine a world full of Spidermen.
5. Cash is king but then it is never really sufficient. Brothers with thousands of crores in net worth end up fighting for the next hundred. Can you learn to live with what you have till you get more than what you can spend?
6. Confidence is overrated, optimism is important. You’ll never get “enough” confidence; entrepreneurs anyways are unreasonably optimistic and probably need to be that way to keep their sanity. 
7. How can you hire a good team and get their trust if you are moon lighting and expect them to come on board? If you yourself are not confident enough about your own business, don’t expect others to be.

Here is how I would conclude. Let your head and heart fight it out till your heart is able to convince your head. Remember playing safe is risky here, if you are playing it too safe there is huge risk to your ambitions.

For now pack your laptop, lunch box, and your grumpy corporate face and get going to the office every unhappy Monday morning.

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[About the Author(s): This article, second in the series on “The Science of Entrepreneurship”, has been written by the faculty of Sunstone Business School, who are part of NextBigWhatSelect, a curated set of regular contributors to NextBigWhat. 

Sunstone provides a one year part-time online PGPM program for mid-career Technology professionals, helping them transition to entrepreneurial & business roles. Click here to know more about Sunstone’s PGPM program. Contact id: tapan@sunstone.in]

Firstly, if as an entrepreneur, if you have gotten far enough in your business to seek financing and you have received or are about to get a termsheet, I must congratulate you already, you are in a select group.

If you don’t belong to the above category and a have a more academic interest at the moment, then I must quickly describe a termsheet for you. When companies seek equity financing from professional investors, once investors have made up their mind about investing in your company, they give you a legal document detailing the business terms of the financing. This document is called the termsheet.

It lays down valuation, amount of investment, and the key terms of investment. This is usually followed by a due diligence process which is then followed by full fledged agreements before the investments come in. The time from termsheet to investment can be anywhere from 2 to 4 months.

A large majority of deals do happen once they reach the term sheet stage; hence it’s a serious milestone. Its usually a 3-4 page document that founders can Google and decipher on their own and with a little bit help.

In spirit, investors seek 3 things:

1. Information and Control rights: They want to know what’s going on. This can happen by them taking Board positions, veto rights on certain issues (like key person hiring, taking a loan etc.) and rights to obtain financials of the company etc. Since investors are minority shareholders, they need these rights explicitly.

2. Upside rights: It’s important for investors that if the company is doing well, they are able to stay with the company and continue to maintain their stake by investing more. This is fundamental to early stage investing since there are only a few big winners.

3. Downside rights: These are all kinds of scenarios where bad things may happen. 1 or more founders may lose interest, company may not do well and may have to raise money at a lower valuation in future and so on and so forth. Early stage investors want to protect themselves by taking what is called liquidation preferences. Very simply, they get their principal and return first before entrepreneurs. Sometimes, depending on the market situation etc. these preferences can be very draconian especially in a downside situation.

As an early stage entrepreneur, here are the things I would care about the most:

1. That the deal should happen quickly: An entrepreneur is in a precarious situation if the deal does not go through. Entrepreneurs being entrepreneurs, optimistic as they are start planning and even incurring spend once they feel confident that investment is coming. If it does not happen, then they may be in a really bad situation because they would have cut chords with other potential investors as well and will have to restart the cycle. So the entrepreneurs want to limit the term sheet to a small duration – I try not to do more than 60 days extensible by mutual agreement so that the pressure is on.

2. Complete transparency: If the company has skeletons in the cupboard, its best that they are brought before the termsheet and captured in the termsheet. You don’t want any surprises to come out in the diligence, it will unnecessarily delay things and even put the deal at risk. You should assume, expect and ensure that every things which is hairy is captured pre-termsheet.

3. Out of the category rights: I would care about the downside protection rights the most. Again entrepreneurs being the optimistic being think more about building billion dollar companies in which case nothing matters. In real life thought, there are lot mid-successes and in those cases, depending on how the preferences are stated, they can make a significant impact. This is not an article on liquidation preferences, but its important to understand that completely before you sign up. It’s the second most important after valuation.

In the bigger picture, getting a termsheet is a positive step forward with somebody validating your business and willing to invest capital. So enjoy the negotiation process and know that you are in a select group already!

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[About the Author(s): This article, first in the series on “The Science of Entrepreneurship”, has been written by the faculty of Sunstone Business School, who are part of NextBigWhatSelect, a curated set of regular contributors to NextBigWhat. 

Sunstone provides a one year part-time online PGPM program for mid-career Technology professionals, helping them transition to entrepreneurial & business roles. Click here to know more about Sunstone’s PGPM program. Contact id: tapan@sunstone.in]

Image credit: Shutterstock

[Editorial notes : Corporate governance is becoming an important aspect of running a business. Lately, technology sector (including startups) have been on the spot for negligence. This guest piece by Mayank Khanduja of SAIF partners throws some clear perspective from an investor’s point of view.]

As an early stage investor, I talk to at least 100 teams a month and almost all of these conversations involve going through data on traction. But given the sheer volume, my ingoing hypothesis is that the information shared is both accurate and represents a fair picture of the business.

In some cases though, while validating this data through due-diligence, one may find a jack-in-the-box spring a surprise that tells a different story altogether. Over time, I have built the below checklist of things that either give me comfort or raise questions on the quality of the given information.

1.    Use of standard analytics tools

For most consumer facing web or mobile products, there exist standard analytics and tracking tools that have gained global acceptance, e.g., Google Analytics, MixPanel, Google PlayStore Developer console etc. Sometimes custom dashboards may be required since such standardised solutions may not be able to capture all the metrics relevant for a business.

But my red flags are raised when I see a company use a custom dashboard, even when not necessary for basics like visits, downloads, installs, active users, click-through’s etc. I have come across examples where the difference in in-app CTRs has been to the tune of 2X between custom dashboard and Google Analytics. A deeper dive into the code of one such case revealed that the click event was being counted twice in the custom dashboard!!!

2.    Use of standard definitions

“Monthly active user” for an app is typically defined as the user who has used the app at least once in that month. Let me throw a couple of cases that forced me to challenge this definition of active user

Consider the below data for an app

• Installs at the beginning of the month – 20,000
• Monthly active users – 7000, i.e., 35%; not too bad one would think!
• Of these, 5000 are new users acquired in the month. All being counted as active users only because they opened the app as soon as they downloaded it and may not have used it since!
• Thus, only 2000 of the installed base came back to the app, which reflects a completely different picture of the business!!!

Another case involved users being counted as active even when not using the app! This happened because the app tracked the user location, and a user was “Active” just because the app interacted with the server sending across location information!!! A better metric to track here could be the number of home screen opens.

3. Coverage of all the important metrics for the business

When I come across dashboards that do not track a very important metric for the business, it gets me thinking – either the founder is not completely aware of what all is important to measure or there is some bad news lurking in those missing numbers. The first one could simply be a case of over-sight. But in some instances, the untracked metric showed the business in very poor light, which leads me to question the motivation.

Two important elements, which are more subjective in nature, are also a part of this process

4.    Consistency among team members on the causes for errors in data

As naive as it may sound, the easiest way to test if the data inconsistency is due to over-sight or intentional, is to ask the same set of questions separately to the different team members. Surprisingly, it is often tough for every team member to have the same cover up story when asked independently!!!

5.    Accepting errors upfront instead of trying to cover them

I have come across teams that seem to have an explanation, whether logical or otherwise for every inconsistency in data. I am then hard pressed to think if I would be able to trust this team on the monthly MIS they share with me post investment. It is an important question considering I am signing up for a relationship with the team for the next 8-10 years!!!

No one expects founders to be “Super-Humans”. In most cases, these errors/inconsistencies crop up inadvertently – smart and honest teams accept this early enough and take remedial action. Once the data is scrubbed and I get comfort on the qualitative elements as well, I revisit the opportunity to see if it is still exciting. And quite often it remains so!!!

[Reproduced from Mayank’s blog]

“You should sell on CPM/CPC”

Me: “..No. We only do fixed rates. No CPC/CPA or CPM.”

“But, that’s not how the industry works. You can’t charge fix rates. Nobody does. It just doesn’t make sense”.

Me: Really? Sure..so..what do you think of India’s performance in Sochi?

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That’s part of my conversation with a senior sales person whom I was interviewing for a sales role @NextBigWhat

I often meet entrepreneurs who are planning to hire a senior role and the usual suspects are the ones who have already been there and done that.

So far so good, except for the fact that the ones who have already been-there-done-that come with a fancy salary package, which is mostly unaffordable for early-to-mid stage startups.

In most of the cases, the salary is almost 3-4 X of what a startup is willing to pay for. Is that worth it? Maybe, but what about the baggage they bring along? My guess is no.

Here is why

Ever noticed that all it takes is a thin rope to control an elephant? And elephants never try to run away, though they easily can? Well, that’s because these elephants are mostly trained from childhood that the rope can hold them and never try to break free from the rope.

The truth is that it’s not about the rope. It’s about the mental block.

A lot of experienced professionals come with such mental blocks.

If you are a startup which is attempting to disrupt an existing business practice/workflow (for e.g. SAAS startups are disrupting the way software is purchased/used), you are often told that ‘this cannot be done’. You are, in all possibility fighting against those who have developed mental blocks, those who know from an industry ‘best practices’ point of view that ‘this cannot be done’.

Just the way, Steve Ballmer laughed at Apple iPhone launch:

“$500 full-subsidized with a plan! I said that is the most expensive phone in the world and it doesn’t appeal to business customers because it doesn’t have a keyboard which makes it not a very good email machine. Now, it may sell very well or not, I, you know. We have our strategy, we’ve got great Windows Mobile devices in the market today, we, you can get a Motorola Q phone now for $99, it’s a very capable machine, it’ll do music, it’ll do, uh, Internet, it’ll do email, it’ll do instant messaging. So, I, I kinda look at that and I say, well, I like our strategy. I like it a lot.”

Ofcourse, we know the story that followed!

Does your startup need such experienced professionals? Bringing them onboard also brings a baggage and eventually the mental block. Experience brings a certain ‘this cannot be done’ emotion all along. With experience, people can turn into a fine wine or well..a smelly beer!

“Wisdom doesn’t always come with age. But age always comes with experience!” [Stanley Victor Paskavich] Tweet this]

What’s With the Indian Market

Most of the industries that startups are trying to disrupt are fairly new (the business is not, approach is). Look at digital industry – there still aren’t more than 20 big digital media companies in the country.

How many of these 20 have scaled up? As a startup, if you are disrupting existing ones, do you really need their ‘mental blocks’?

Plus, the toughest question to all those who care about experience is whether the experienced folks have gone through atleast one disruption cycle or not? For example, if you were working with Digg.com in 2008-11, you’d know how difficult the disruption is!  Or working with Siebel during early 2000? Or with Sun Microsystems?

How many companies in India have gone through a success-to-survival phase (look at rediff – it still is making money!).

As a professional who hasn’t yet seen the tough side (discounting layoffs) and has never been part of pivoting journey, there probably is very little survival attitude left.

But that’s what early-mid stage startups need the most. On a daily basis.

A survivor who has eye of the tiger!