Forbes has published a list of 6 YC companies that may be worth billion dollars and Interview Street is on that list. Everyone in the morpheus gang is very proud of IS team and what they have accomplished. Now that IS may become the first startup from the morpheus gang to hit the billion dollar mark, we are very confident that many more will emerge, reach the billion dollar and go far beyond that.

Interviewstreet An online marketplace for hackers timed perfectly for Silicon Valley’s escalating Nuclear War for Talent. Interviewstreet challenges engineers to programming puzzles and real world problems. At the end of these challenges, engineers are asked which companies they want to work for. Should those companies hire them, Interviewstreet gets a nice $10,000 referral bonus. Facebook, Amazon and Zynga are already using the service and some 200 other tech companies are waiting to sign up. Interviewstreet claims it is already profitable and doubling revenues each month.

I just read this post by Mark Birch, Avoid the middlemen & it reminded me of a few Indian startup stories on the same topic.

Story 1

Couple of weeks back one of our portfolio founders told me that after presenting at Startup Saturday Delh he received a call from a certain middleman who was also at the event & the conversation went like this.

Middleman: I saw your presentation at Startup Saturday, it was very impressive. You guys are onto something big.

Founder: Thanks.

Middleman: You could easily raise some good money.

Founder: Maybe, but we are not looking to raise money right now, we are focusing on building our sales channels.

Middleman: You really should raise money right now. There is so much money available in the market, investors are investing like crazy. I run a financial advisory firm, we help startups raise money.  We can help you as well. How much would you like to raise?

Founder (getting impatient) : Well, as I said we are not looking to raise. Maybe we will get in touch with you later.

Middleman (not giving up): I know some folks who will be really interested, I can talk to them. Why don't you send me your business plan?

Founder (cuts him off) : I have to get into another call, will talk to you later. Bye.

Most founders get tempted to go after opportunities to raise money, even if the opportunities don't look so real. So even in this case the founder was a bit tempted and discussed the same with me. I happened to know the middleman who had approached him & was also aware that all these promises of "I can help you raise funding" are totally fraudulent. Good investors do not invest via middlemen, they look for deals themselves & good founders raise money by themsleves. I advised the founder to stay away from this guy & other similar characters. I asked him to continue his focus towards building a great business. Funding (growth capital) is a by-product of building a high potential business.

Two weeks later, the founder received another call:

Middleman: Can you come to mumbai next week? I have arranged for an investor meeting.

Founder (who is based in Delhi): But I never asked you to talk to any investor.

Middleman (ignoring the founder): But I already talked to them & they are really interested to meet you. There is a cocktail party with the investors, you can have a few drinks.

Founder (a bit angry): I don't drink

Middleman (trying his best): You must come, I have talked to them about you & they want to meet you. These guys are top angel (devil) investors in the country.

Founder (cuts the call) : Don't think I can come. Will talk to you later.

Story 2

Couple of years ago I was invited as a speaker to a startup event in Noida. I ran into a gentleman who is member of a well know angel network & had given a very cold response to the pitch for investing in my first startup madhouse. He faintly recognized me & asked what I am up-to these days, I told him about Morpheus. He suddenly got very warm & told me that he has recently invested in a company which could have synergies with Morpheus. Before I could say anything, he took me to meet someone from that company, who was also attending the event.

This new gentleman started explaining me about their business & what I heard was shocking, I had never heard about anything like this. They were running a company which sold investor meetings to founders & charged 15-25 k rupees for setting up a single meeting. Can you imagine paying 25 k to meet someone at a VC firm or some angel investor?

I was thinking in my mind that this totally sucks, these guys are making fools out of ignorant founders. And you know what he said about synergies to me, "Why dont you send startups that are rejected by The Morpheus to us as leads?". Oh man I was so fucking angry, I could have slapped the guy on the spot. But I controlled myself, told him I don't think I am interested & walked away. The guy even had the nerve to send me a followup email (which I deleted).

Later I learned that this new guy was just the front face. Actually this company belongs to the so-called angel (devil) investor. He uses the tag of an angel investor to meet new entrepreneurs & then refers them to his company which will sell them "investor meetings". He did the same thing at various startup events, where he would claim on stage that he is an angel investor, desperate founders will come talk to him & they would be sent to the company as 'leads'. The society thrives on someone else's need, but this is out right dacoity! Isn't it disgusting?

These are just two stories, I could go on but I guess I have made the point.

Taking advantage of the startup trend

In last few years startups have become a trend, loads of people (young & old) are starting companies. Across all startups, the thing which is in most demand is "funding". Almost all founders want to raise funding desperately & if they come across a person who says "I can get you funded" they are ready to do whatever it takes.

There are two things at play here:

• One, the demand of 'funding' is much higher than the 'supply'. 
• Two, the whole fund process is totally opaque, there is very little credible information about how the 'black magic' of funding actually works.

Almost none of the investors in India maintain a blog via which they can create transparency around the whole process and what they really think. They only appear once in a while on the stages of "startup events", as part of a panel or as a speaker and after they are done, they get swarmed by crowds of foudners who have bought expensive tickets to such events just to meet with "the money guys". Soon after that they leave the venue to catch a flight to the next destination or to attend another meeting.

This maddness for funding has given birth to many business models.

 Financial advisory firms / Individual deal brokers

• These firms are almost always run by folks who never did a startup in their life
• They all tell the same story in different words
  • We have done research on your startup & the market you are in
  • You have a lot of potential and you are the next facebook / twitter / groupon / apple / cisco etc
  • All you need is someone who can help you raise a "ton of money" 
  • We understand the startup investments very well and have partnerships with "leading VCs"
  • We already know some really good "strategic investors" who may be interested
  • Strategic investors is really a label for some names they will talk about and claim would be most amazing investors in the world for you, even though you may have never heard of them and can not find them anywhere on google / linkedin etc
• What will they claim to do for you?
  • We will help you create a business plan if you dont have one and if you do we will help you make it fundable
  • We will create financial projections for next 5-10 years and do discounted cash flows to derive a valuation
  • We will take the deal to the "investors" and help you thru the process
  • We will help you get the best valuation since we are the experts here and you the founder can focus on the business
• What do they want from you?
  • Depending on whom they are talking to they will ask for a combination of
    • 2-10% of the amount raised
    • Upfront fee between 50 k to 2 L which will be adjusted against the % of the amount raised
    • Monthly retainer
    • 2-10% equity in the startup
    • In some cases they will agree to waive of the upfront fee and only charge a % of a the amount raised
• What can they actually do for you?
  • Practically nothing, except wasting your very precious time and money. 
  • You & your team will have false hopes of getting funded
  • You will end up having some useless discussions / meetings which wont go anywhere
  • If by chance there is an interested investor, the terms would be totally "anti entrepreneur"
  • As a founder you need to take charge of something as important as raising money from the right investors
  • I know most of the real VCs & individual investors in India, plus I have first hand information of minimum of 50-70 startup investment deals in morpheus portfolio and outside (not counting our own investments)
  • Never in my life I have known of a startup investment deal where either the entereprneur or investor worked with a "middleman"
  • This just does not happen - so stay away from these guys
  • Do it on your own, when the time comes - you can get the knowledge about the process from so many excellent blogs and by talking to some helpful founders who have done it before

These financial advisory firms may work well in the world of mid size / large companies where most of the work is done based on numbers but in the world of startups this kind of stuff is an utter waste of time for founders. 

PS: Warren buffet never uses middlemen to buy any companies

Indirect middlemen

There are also set of indirect middlemen which are trying to take advantage of the startup trend and want to profit from it without really creating value for the other side.

Advice for founders

Guys - do you really think, some random financial advisor can go pitch your company to a top VC firm & get a cheque which you can deposit next week in your bank account. These are just fantacies so just stay far far away from these "financial middlemen"

As  founders you should just focus on building the best business possible within the financial & human resources available to you. Use capital efficiently & most importantly focus on building a good product & adding value to the life of your customer. If you can do that repeatedly, you are on the path to building a great business and if you are worth funding, money will show up. 

Even if you want to go out and proactively raise money from VCs or individuals, you should reach out to them directly. Do not send mails to the generic email IDs given on the websites, but get a warm introduction to the investor via someone with whom they have worked before and have respect for. If you can not manage that - you may be missing on the vital skill of networking that is needed to build any business.

The fundamental reason to become entreprenuer is to do each and everything yourself, learn from it and do it better the next time - so go do the fund raising yourself.

Advice for good investors

Kill the opacity, share more information so that we can have a more efficient industry. Here are some ideas to become more transparent and more available to founders:

• Write regularly on a personal blog
• Comment on other blogs
• Join twitter & be active on twitter
• Join quora & answer stuff
• Once in every 1-2 months, conduct open events / open hours where people can just come and meet you
• Answer more emails
• Partners of the VC firms should attend startup events along with the junior guys & stay longer to interact with founders in an informal setting

Has the blog helped your  investing?

Absolutely. I’m not sure I could be a VC without the blog. You have to be out there in the hearts and minds of the entrepreneurs, and that’s the scarce resource with what we have as investors; it’s certainly not the money.

Advice for 'middlemen'

Guys - startups really do not have anything for you. They need to do things on their own. So please leave them alone and change your focus to some other customer segment or better yet do a real startup yourself. Do not take my post personally, this is just an indiviudal prespective. 

Back in 1999, I had a cushy software engineer, job at Digital Equipment Corporation (DEC), Bangalore (a MNC) but I was getting super bored. I was looking after few components of  an old product, no new development was in pipeline, purely maintenance work.  On a working day, I spent 7-8 hrs in office & out of that nearly 5-6 hrs were spent talking to friends / drinking coffee/ checking mails / downloading songs & repeating some of these things, work only took 1-1.5 hrs of time every day. For a while it seemed like fun but then it hit me hard, "What the heck am I doing with my career? I am wasting day after day & not learning anything."  I was young (22 yrs) & I realy wanted to face some challenges & to learn from them. During those days someone said to me "If you want to learn you should work for a startup. A startup is a new company with small number of people who are creating something for the future ".

Honestly, I didn't fully understand what a startup is, but it resonated with me & I decided to give it a shot. I started looking for openings & fairly quickly landed an offer from a startup (Sonim) but in parallel I also got an offer from an established company (Celstream).  Now I had to decide. Like regular people I had my fears about working for a startup - will they pay me regularly, what if they shutdown in few months, there is no brand value etc. But there was something about the startup that was attracting me. In particular it was what one of the founders (Jai) said to me in the final interview.  

Think carefully before joining a startup, startups are not for the weak hearted. Your offer letter will off course say 40 hrs work week, but we will expect you to be around day & night

Actually with that line he was throwing a challenge my way. I decided to accept that challenge & took the offer. And, believe me, that was the best career decision I have ever made. I had the time of my life at Sonim. They were not offering me a higher salary than the established firm, but they were offering an adventure / a chance to create a part of the future / a chance to work with super smart people / a chance to fully immerse & do some crazy learning / a chance to work at a fun place - where they don't look at what you wear & what time you come to office, they only care about performance. I joined at a lower salary as compared to the other (established) job offer, but within a year when they did annual appraisals - I got a 100% raise, the best in the company.

The transformation was amazing:

• From a guy who used to work 1.5 hrs a day only on weekdays I went on to work 18 hrs a day, all days of the week (same with all my super smart colleagues)
• From working on a ancient, soon to die, product I went to work on cutting edge solutions for the future (we were creating applications for GPRS  networks & GPRS was only available in Labs at that point)
• I joined the server team as a software engineer but within 3 months one of the founders (sudu) told me he is creating a new team to work on handset /device side of things & he would like me to lead that team. I was unsure. I said that I don't how to lead a team & I only have 2.5 yrs of experience. He said don't worry about it I know you can do it, I will help you.
• That's the beauty about joining a startup in early days. You get to work with super smart founders and these guys can really airlift you. I mean this guy was a top hacker from Netscape - really awesome & he took me under his wing. After my parents, I consider him one my first real gurus along with another founder Jai
• I ended up leading the devices team for the next 3 years, travelled across the world, worked with all leading handset & chipset companies of the world - Sony Ericsson, Motorola, Samsung, Siemens, LG, TI, Infineon & many more.

I can go on & on about my amazing time at Sonim but I will stop here.  I had done 3 jobs before Sonim &  ran from each one in 7-8 months, but I stayed with Sonim for 3.5 years. I left after they raised too much money and the founders moved on other projects, but again I went to work for another startup (Telephia - acquired by Nielson). At sonim, I joined as employee number 19, I had loads of fun / amazing amount of learning / did lots of biz travel / made a habit to take on the giants in my industry / learnt a lot about startups & one day it lead to me doing my own startup (Madhouse) & now to The Morpheus.

Working for a startup is not for everyone, it is not a regular job, it is a lifestyle choice. Do you want to choose challenges, learning, creation, responsibility, adventure, chance of getting rich on equity over the "safe, cushy job". If yes, then start looking now (shameless plug: many of the Morpheus portfolio companies are hiring).

Once you work for a startup & you enjoy it, you can never go back to work for a regular company. You will either work for another startup or you will start your own startup.

But if you are the weak hearted type, stay with your job, go visit naukri.com, send your resume to a consultant or apply to an MNC.

Note: I am really thankful to the founders of Sonim & my amazing friends who worked with me at Sonim for the wonderful time. All of them are really smart & many of them are my best friends now.

Couple of weeks ago I went out to have breakfast at Backpackers Cafe (Chandigarh) with Nandini & our daughter Sanaa. Backpackers is a fabulous place, we love going there to have a relaxed slow paced breakfast. So while I was enjoying my breakfast & generally relaxing, few thoughts walked into my head & have stayed with me long enough that I decided to blog them.

We visit Backpackers 3-4 times every month / bring many friends & recommend the place to everyone. We never notice how much we pay for the food. When we are done, we just ask for the bill / hand over the credit card / sign the slip / put in a nice tip & walk out. We always spend around 3 hrs at Backpackers & even after 3 hrs when we leave we are sad we are not staying longer. There are always a lot of happy customers sitting on other tables.

While thinking about all this, some questions came to my mind :

• Why do I like this place so much?
• Why can't all cafes / restaurants be this good?
• What is so special about this place?
• What are they doing differently?

Answers that popped up :

• The place is just perfect : great breakfast (eggs, sausages, pan cakes, black coffee) /great ambiance / good service (cld be great) / great location / nice crowd
• In my crazily busy life, backpackers allows me to spend 2-3 hrs in a relaxed mood,  I am refreshed after every visit & I value that a lot
• The food is way better than the other breakfast places in Chandigarh
• Sanaa also loves hanging out at backpackers. She likes to eat the potato fries & the whipped cream that comes with pan cakes

Graudually, my thoughts moved to other brands I am in love with : Apple, Indigo airlines, Books & Brew (free wifi cafe near my home), Levis jeans, Cuban cigars, Jack Daniels, Live Saloon (Grt saloon near my home), Gmail, Flipboard, Radbox & many more.

Why am so crazy about these brands? What do all of them do differently?

1. All these brands add a lot of value to my life
2. The quantity & quality of value they add is way higher than available alternatives (not just incremental)
3. Basically, these brands are "Hitting the ball out of the park"

The Test

The message was clear. Every brand / company / startup that ever became successful / is successful today or wants to succeed in future has to pass this test.

Are you continuously hitting the ball out of the park when it comes to adding value to your customer's life?

It looks simple & obvious on paper but is very difficult to achieve in practice, where it is all about cold, hard execution. That is why out of hundreds & thousands of ventures that get started there are only few who manage to pass this crucial test.

Here is the fundamental secret of founders who have built & will build businesses that are valued by customers :

• They are good at spotting important need gaps or problems in the lives of customers (even before customers themselves notice them)
• In most cases they are looking to address a personal itch that bothers them or a problem they personally care about
• They intuitively know that the first & the most important thing they need to figure out is "How to start adding loads of value to the customers life?"
• More importantly they manage to stay focused on adding that value
• Everything else can pretty much wait : b-plan / scaling / costing / hiring / fund raising / roadmaps / financial models / events / awards & other blah

Understanding value creation

It is not possible to define 'value' because it is different for every startup depending on the problem they are solving / the customer they are targeting & many other factors.

Here are some broad guidelines :

• Start by identifying an important need gap or a problem that is unsolved or a problem that has not been solved well
  • Google founders identified that none of the search engines provided accurate search results, as they went deeper they realized the results were grossly wrong and they had some good ideas to try & fix it
  • After the success if iPod + iTunes apple guys said to themselves "What should we change next?" and after some looking around they realized that all of them hated their phones
• Before starting the work on the solution, do a 1-2 week deep dive into the specific domain of the problem. You should know whatever there is to know about the domain inside out
• Do not do any market research activities, surveys & stuff, those are useless. Build real on the ground learning
• Various things you should learn :
  • What are the various solutions / products that are currently used to address this problem?
  • What are the alternatives & options that customers are using?
    • Before Tata Sky the option was local cable guy or before Tanishq the option were non-branded family run jewelry shops
  • Which players are selling & making these solutions ?
  • What do people like & hate about the available solutions ?
  • How well are the current solutions addressing the problem ?
  • Who are the thought leaders in this domain? What are they upto?
    
  • Are there any new startups trying to disrupt this domain? What approach are they taking ?
  • How large is the addressable market?
    
  • Is there really is a need for a new player?
    
    • If the answer to this last question is NO - be quick to drop the current idea and move on to something else
      
• While designing your solution do not look at just making something 'incrementally better' or 'artificially different' than the currently available options
  • Do you think there is any significant difference between Coffee day & Barista (I don't).
  • Cafe Mocha was launched with a totally different experience & that is why it has a unique identity / loyal audience.
• If you want to create long term value & get a real edge, you need to change the game & do something completely different.
  
• Create something that is light years ahead of other alternatives
  • 37signals completely changed the paradigm of project management / salesforce.com turned CRM market on its head
  • Players like LG/ Samsung/ HTC kept doing phones which were incrementally better than Nokia one way or other
  • Where as the first generation iPhone's were light years ahead of 'most advanced' nokia phones
• If you manage to change the game, you also get to make the rules of the new game. Which is strongest 'entry barrier' anyone can create. This barrier can not be overcome by muscle or money
• Suddenly the current market leaders do not know, how to play the game & are found struggling
  • Yahoo or Microsoft could never catch up with google in web search or email
  • Nokia / Blackberry are looking at extinction in two years unless a miracle happens

Summary:

If you are doing a startup (or planning to), stay away from the zillion distractions. Just focus on the below mentioned basics & do them really well.

1. Figure out a sure shot way to add lot of value to your customer's life & continuously keep hitting the ball out of the park  
2. Figure out a way to monetize the value (right pricing takes some experimentation) 
3. Build & deliver the value in less money than what the customer will pay you 
4. Be in a market which has large / growing number of such customers whose lives you can improve

Notes:

1. Thanks to Nandini, Praveen Singh, Siddharth & Niraj for reviewing & providing inputs. Thanks rest of the morpheus gang for reviewing it
2. The post is written mainly in context of startups but most of the concepts also apply to established businesses
3. This article assumes free market forces & does not apply to conditions like monopolies / unfair govt. regulations etc.

I just finished going through my copy of The SaaS Edge - a fabulous book on SaaS by Sahil Parikh/ Founder / Deskaway, a portfolio company of The Morpheus. Sahil sent me signed copy of the book couple of months ago with a personal note, I read it in parts in between my travels & other things that kept my busy - it was never easy to keep it down.

I have known Sahil for over 2 years & one thing that stands out about him is that he has extremely clear thoughts about things that he cares about . This includes his startup Deskaway / colleagues / family / friends / vacations / work life balance etc. His thoughts on all these subjects are very clear - no confusion what so ever. And to the delight of all the readers - he has brought the same clarity to the book, that is what makes it "Simple but very powerful". The book starts with basics and it really holds the hand of the reader while taking the him through the fascinating world of Web 2.0 and SaaS. It does not let the reader get scared or over whelmed by the jargons. Every concept is introduced using simple but relavent examples / qoutes / diagrams. After learning the basics reader will effortlessely move into the more advanced levels.

• SaaS for you
  
  • One part of the book talks about tools and platforms available for an individual
  • It gives an intro of web 2.0, covers things like blogging / twitter / FB / LinkedIn in a very practical manner
  • If you are already using these tools - the book can help you get more out of them
  • If you are someone who knows browsing but has never used these tools - get the book, you can get started & starting benefititing in no time
  • I have recommended the book to my dad. He uses his laptop regularly for reading news and doing email. He does have accounts with FB / twiiter /linkedin but does not know how to really use them - I am sure the book will help him
• SaaS for your business
  • Again in a very simple manner concept of SaaS is introduced as "renting software via the internet"
  • It talks about the common tasks that your business accomplish using different SaaS applications like blogs / wikis / google apps / sales force / get satisfaction etc
  • It talks about Myths around SaaS / advantages of SaaS and leaves you with a sense of power of SaaS
  • Armed with this book and a willingness to change any business owner can transform his business

I was an early adopter of SaaS & for last 3+ years I have hardly used any desktop application. Every thing that I use is either a SaaS app or an iOS app - mails / social networking / video / productivity apps / music / contacts / calender / blogging - abosultely everything. Not using desktop applicitons is very librating, becasue you are no longer tied to a particulat laptop or desktop. I purchased an iPad a month ago , before that I spent almost 6 months without a laptop. Most of my things I did on my iPhone and if needed I could use the browser on any laptop / desktop around me.

For Morpheus, right from beginning we have used SaaS for everything - mails, docs, CRM, blogging, managing portfolio. It allows us to be wagabond & bootstrapped, while we use high quality products.

I find SaaS so practical and good that I think this is only way software should be build or used. So if you want to start your journey or get better at harnessing the power of SaaS go right ahead and place your order with Jumadi.  Jumadi is an online bookstore (morpheus portfolio company) you will get 25% discount on the book & if you mention discount code SAHIL you will get another 5% off.

Everyone in the Morpheus Gang (partners & portflio founders) is very proud of Sahil for writting such an amazing first book and believes that he will keep producing high quality work well into the future.

One day I was taking my daughter for a walk near home, in Chandigarh, and I noticed a person on the other side of road, as soon as I recognized him my mind was flooded with unpleasant memories. I looked away to avoid eye contact. I didn't even want to acknowledge him. My memories of this guy & his family go back 20 yrs, when I was a 13-14 yr old kid. They ran a small grocery store near my house. They lives in a corner house which had a small playground next to it. The shop was in the backyard and its gate opened into the playground. Although their shop was within 150 meters of our house, we would always walk 500 meters to other shops even to buy small stuff. These guys were not nice to the customers. They always picked arguments with customers on small things like non-availability of change or exchange of goods. The only customers who bought from them were people who were either new to the shop or had credit accounts with them. Even though the business was not doing well, these guys never learnt the lesson.

I strongly disliked them because they really mistreated the group of children who played at the ground near the shop. This group included me, my brother and around 10 other kids. Their contention was children playing near thee shop effects the business in a negative manner. Everyday they shouted at us / confesicated the cricket ball or other play things etc. They went to the extent of loudly arguging with 5 yrs old kids & I used to get into many heated arguments with them.

After some time these guys raised debt & moved their business to a big shop in a nearby commercial area. They made it a point to tell us mutiple times that now that the shop is moving away from the playground their business would do really well, as there will be no kids interrupting business. But as can guess, they never learnt to be nice to their customers & soon went bankrupt due to the heavy debt and high costs of the big shop. They closed the new shop, left the house in our locality & went underground.

As my thoughts settled down, I saw an important lesson in this story. If you are not nice to your customers your business will fail. It doesn't matter who you are / which angel or VC has invested in your business / how much money you have raised / what your idea is - it's all immaterial. Being nice to the customers has to be the number one thing on the agenda of founders / promoters / management, not only at the startup stage but during all stages of the business. Even though it sounds like an obvious thing for a business to do, almost 90% of them don't get it.

The question I am trying to answer is why does this happen?

Starting with wrong mindset

Many businesses are started by promoters / founders who do not have the mindset of being nice to customers. They identify a seemingly attractive market / create or get a product that they believe can fulfill the customer needs and assume customers will come to them.

a) Curse of capital

If the wrong mindset is accompanied by the business getting access to a lot of capital too early in its life, (via venture funding or via a parent company / group) the capital become a curse. The money plays role of a shock absorber between customers & founders. The business can continue to pay salaries & rent for months even if it they are loosing money in the name of growth. They don't feel the need for loyal customers who would regularly buy from them and be happy enough to refer other customers.  In most cases (specially in case of VC funded companies) this doesnt last forever. Eventually either the money runs out or the investors wake up & pull the plug.

b) Blessing of bootstrapping

If the same founders don't get access to capital and have to bootstrap the business, there is high probability they will change their mindset early on. Simply because the only way for the business to survive is by becoming cash flow positive before running out of money. The only potential source of capital is customers, they need to become a customer funded business. This brings a sharp focus on the customers / their needs & wants and leads to a customer centric culture. You first start by becoming nice to potential customers, which encourages them  to try your product / service. You make sure they get the highest quality product with mind blowing service. This makes the customer come back to buy more & say nice things about the brand to their friends, some of them also start buying. This leads to a postive feedback loop and in time you would have more customers than you can handle.

Starting with the right mindset

There are some founders / promoters (less in number) who know it right at the start that the only way to surive, grow & eventually build a large business is by being nice to the customers. They always keep customers at the center of all decisions & they inclucate the same love for the customers in all people who work for them.

a) The success trap

Whenever I see a good business which had been doing the right things, stray from the path of quality and being nice to customers, it bothers me. If only I can do something about it. Basically people start with the right mindset, as underdogs they take the right path / do all the hard work / build the right culture / get the intial fan club of loyal customers in place. All this leads them to be successful, they are no longer the underdogs but one of the leaders.

Precisely at this juncture the probability of falling into the success trap is the highest. They tend to forget the original mindset & hardwork that made everything possible, and begin straying from the path. As underdogs they worked extremely hard/ cared about quality / paid attention to detail and built things brick by brick. Once they reach a certain level they forget the same principals & start thinking of themselves as a brand under which they can sell what they want, they don't focus on quality anymore. But as we all know, customers are the smartest breed, the moment they notice drop in quality they start leaving the business. Some of the really loyal ones may come up with feedback but if things don't change - eventually they move on as well. Once customers start leaving and the company still pretty much the same cost structures, it results in a negative cash flow situation & eventually business runs out of cash. Few years back Statbucks fell into the success trap & they are still struggling to find their way out, hopefully they will. Some of the household names in US, like Blockbuster / Barnes & Nobles have gone bankrupt . Google is struggling as we speak.

b) Staying successful

Accomplishing this is extremely tough and takes continued dedication. Companies or people who stay succesful in the long-term are the ones who did not fall into the succes trap or if at they fell they were able claw their way out. They continued to care about customers & to obssess with quality. McDonalds, Amazon, Apple are examples of such companies. They continue to create value for their customers and their shareholders. Interestingly many of these companies have founders still at the center of the action / making or influencing key decisions.

Final word

• You need to start your business with a focus on being nice to your customers
• This is the most important aspect that will decide if your venture would fail or succeed
• Even if you achieve success by following this principal at no point you can move away from it
• The day you move away, you fall into the success trap, the decline of your business starts

Thanks to Nandini for reviewing the post and providing inputs

Quite some years ago someone told me that you can only make good friends during school / college / university. Once you start working you would only make acquaintances or casual friends. Later I found that most people believe this theory. I never believed it - mainly because I have been able to make good friends at all places I have worked as well as during my entrepreneurial journey.

The argument in favor of the theory is that during education days most people are more open, quite friendly & not very selfish. They have not been exposed to world of working people which is full of politics / competition / behind the back tactics etc. I could not spot the fault in the logic but my personal experience was totally different, so I kept looking for a way to explain my experience.

Over the last year I developed a theory about a very fundamental aspect of human nature - giving & taking. Of course, there have been many others who have written about this aspect.

Giving is an act where you willingly give something of value to another person or an organization. One way is to give things that have clear monetary value, like a book, or a ride home. The other way is to share insights, give advice or make introductions. The opposite of "giving" is "taking", and the two always occur together.

While each person gets involved in giving & taking many times every day, my theory is that in most cases one of the trait dominates - so a person is either a natural giver or a taker.

• A natural giver is someone who is happy to give first without worrying about what he can take back from the other person
• A taker is someone who only gives to people from whom he expects to get something

After we started madhouse, the first major conference I attended was TiECON Delhi. I was an entry level entrepreneur & wanted to interact with folks who are experienced, so that I can learn from them. I didn't have anything to give in return. I only wanted to take & assumed that all the experienced folks whom I would meet would be happy to share their experience & give me advice. Well, it didn't quite turn out like that. A majority of the guys I met turned out to be takers, (I evolved the theory many years later) as soon as they learnt I am an entry level guy, they would make an excuse & move on to someone else  They only wanted to talk to folks who were above their own level. But I was also fortunate to meet some folks who were natural givers & didn't treat an entry level guy like me like an untouchable. They were happy to hear me out / share their experiences / offer me some contacts / give insights. A lot of what I am today an entrepreneur is due to these helpful people, whom I kept meeting thru the years.Whenever I get an opportunity to give back to some of these folks, I go out of the way to help.

This much of the concept I have had in mind for 6 months now but recently I had a major new insight, which led me to write this post.

"Over the long run, progress in the world happens only with the efforts between two (or more) givers. Even if one person in the equation is a taker, at best there would be some short term progress."

Life of a taker

• When a taker meets a person who is at a better level in a particular aspect he wants to take some benefit
• He starts by behaving as a giver so that he can create a good impression but his eventual goal is to take
• If the other person is a giver, it works for sometime but sooner or later, the relationship goes downhill when the taker’s true intent is revealed 
• If the second person is also a taker the whole thing will anyway be a non-starter
• If a taker meets a person who is lower level than him he would take no interest in this person

Giver meets giver

A good friend of mine one day bumped into a popular & accomplished author at a Crossword book store near his home. They had an interesting conversation & decided to meet for coffee. During the coffee my friend mentioned that he too had plans to write books but didn’t know where to start. The author asked him about the ideas he had for writing a book / dismissed his first idea / probed more into his life & helped him pick a topic which was far more suited to make a good book. Once the topic was finalized he told my friend "If you decide to write the book now, I will edit it for you & will help you write it". My friend could hardly believe what he heard, such an accomplished author is offering to edit my book & help me write, I must be dreaming. But he had heard it right. "If you want me to help, you will need to commit to writing one chapter every week", the author added. That sounded almost impossible to my friend, but it seemed too good an opportunity to miss and  my friend signed up for it. Last time I spoke to him, he had already finished 6 chapters & learnt an awful lot about writing a book.

Sometime during this interaction it turned out that the author wants to learn Sanskrit & my friend is quite good with Sanskrit. He started teaching Sanskrit to the author & a good amount of progress has made on that front as well. As the author is getting something of value to him, he is even more willing to help my friend with the book. And the story goes on.

This is a story in which two givers meet, give to each other in a selfless manner. The world now has one new author & one more guy who is learning Sanskrit. Whereas if the author was a taker there would have been no value creation / if my friend was only interested in taking the friendship would have fizzled out after a point / if both were takers the outcome would be zero as well. They are both benefitting because they are both givers.

The giver-taker theory has helped me properly explain why I was able to make good friends even after school / college / university. Basically these people who became my good friends are all givers & I’m a giver by nature as well. So whenever we connected the process of selfless giving took place & became foundation of our friendship.

The final word

In the long run, for your personal benefit and benefit of the world around you, you should be a giver. Just give it a shot - I am sure you will love the change. A nice side effect of folks who are givers is that people around them become more inclined to become givers and make the world a better place. If you are a part giver / part taker switchover totally to giving. If you are already a giver - stay as it is and keep contributing to the world.

Notes

1. This is my birthday post and a token thanks to all the givers of my life

2. Thanks to Shashank, Aditya, Ankur, Dhammo, Nandini and Jay for reviewing the draft and giving inputs

You run a startup that is solving a tough problem and the market potential is large. You never had enough money, so the only way to survive was to practice super bootstrapping and to actually make something which customers will pay for. You also had to make sure that your customers are happy with your product / service so that they keep coming back and refer more customers. After some near death experiences you finally managed to become cash flow positive. You had to create stuff in near zero cost, innovate, try a lot of different things and approach the market from a completely fresh perspective. You understand the market now, you have handle on things, sales are growing at a healthy pace, product seems to have reached a certain maturity, hiring is no longer that difficult and your startup is getting good visibility. There may be interest from investors to give you the first Rs.1-2 crore (200K USD) of investment. Overall things are looking up, team is looking forward to next phase of growth and next set of problems that will come with it. 

Sometime now you come in contact with a large company. Reason could be any: they have just entered this market or are planning to enter, they have some offering in this space and you can fit in. Because of what you have accomplished so far they are very keen to speak to you and figure out what can be done together. Isn't that exciting? It seems too good to be true. But you tell yourself - maybe we are really that good.

That is how we felt before the first meeting with a senior guy at one of India's largest companies, they were planning on entering the same market as madhouse. "Wow - this is our first startup and one of India's largest company is interesting in talking to us. If we can crack a deal, we will be golden". There was nothing on the table - no deal / no partnership nothing - it was just a meeting. But we were quite excited, guess it was natural. We had gone thru 2-2.5 yrs of extreme hard work to bring madhouse to that stage, we could bring a lot of value to the large company. If we get acquired for a good price or figure out a good way to partner with them, we can really scale the business. With their size they will bring the money / the network / the leverage and loads of other advantages.

With this mindset we did the first meeting and many meetings after that. They only asked questions / never answered any of our questions. They wanted to know everything about our business and in detail. How do we get customers? How do we manage operations / specially the hard parts? Can we walk them thru our financial model? Who is our SW vendor? Can they get a photocopy of our packaging?

Looking back it is pretty obvious to me that they probably never wanted to do anything with us. But back then they made us believe that they are interested in acquiring / investing and hence want more info. We made a consious decision to open our kimono. Which was a bad decision because the whole thing it was a farce - till the time they wanted to learn from us the relation was warm and after that it just started dragging. They stopped answering calls / wouldn't reply to emails for days. And the offer to acquire did not come. At a very crucial time for our business we wasted a lot of effort in talking to them - same effort which could have been used constructively to take our business further.  They learnt all they could, took all the contacts. They even got our SW vendor to build their website and backend, I learnt this a few years later. So the moral of the story is that the big company just used us and moved on.

What is really happening?

With time I learnt that this is a pretty standard way most of the big (even medium) Indian companies to deal with young / promising startups or smaller organizations

• These guys know that founders have run hard for quite some time without much resources and a possibility of good returns / large sales channel or a large client would be attractive to startups 
• They use their big company charm to lure the startups towards them, take whatever advantage they can
• These guys just do not care if the startup lives or dies as long as they can get their stuff dont 
• If the discussion is about acquisition - they will just go cold after few calls / meetings
• If the discussion is about partnering - they will make some really unreasonable demands of you just to partner with you (e.g.: we will help you sell if you give us 60% margin on product sales and you own the inventory)
• If the discussion is about them being your client - they will take forever and if they decide to buy from you they will want to negotiate really low prices and make the payments 90 days after acceptance of goods / services (in many such cases they will not sign any contracts and then terminate contracts whenever they feel like)
• If it is about investing - they will want 60% of your company for 20 Lacs

Why I hate such practices?

• I hate these practices not only because they are unfair / unethical
• But mainly because this is one of the major reasons Indian startups have not taken off
• Startups have to co-exist with big/medium companies in the  economic eco-system
• They have to deal with big companies at various times in different circumstances
• If big companies continue to follow these practices / they are essentially hampering growth of startups and the overall economy
• The motivations behind such practices are very short term and in most cases such things happen because of the incompetent middle managers / senior managers in these companies who only care about making their bosses happy and their monthly paychecks
• Because in long term partnering with or acquiring a startup with talented resources can bring big benefits to big / medium companies
• Smart companies in US have created lot of value for their shareholders by partnering with or acquiring good startups - but such practice is not common in India
• In India the standard thought process is - we can do a better job than the upstarts, we have lot of money and leverage. Startups do have some head start  - but we just have to make one call and these guys will come running and do whatever we ask them for 

Make your own rules. Dont follow what BIG companies tell you

• Startups should not stop dealing with big / medium companies (that would be suicidal) but they need to change their ways so that these interactions create long term value for the startup, the big company and the consumers
• Founders need to realize that the big guys need you more than you need them - you are doing something unique that not too many companies can do (including the big company)
• Donts
  • Don't jump on the offers to talk. Show some attitude - take your time in responding
  • Don't get blinded by the excitement
  • Don't bend over backwards to make them happy
  • Don't accept unreasonable payment terms
  • Don't take loans to full fill big company orders
  • Don't take the next day full price flight to go and meet them
  • Don't be desperate
  • Even if you are desperate - don't show the desperation. They just need one signal to take you out
  • Don't believe the rosy pictures they paint or the big promises they make
  • Don't bend or be extra humble and use terms like "Sir / Kindly / Please / Mr / Honored " - while communicating with them
  • [Updated] Never agree to pay comission / bribe. You will run into folks who will say they can get you the order, if you can give them a kickback - this may work once wont help you in the long run

• Dos
  • Be confident / believe in yourself / your product / your team
  • Stand your ground / stick to your guns
  • Ask for fair terms. Say that you will deliver the best quality product on time and on cost
  • Deliver on promises of time lines & quality standard ( always try to under promise and over deliver)
  • If you are making something worthwhile they will deal with you on fair terms if not its better you move on to something else
  • Be open to reasonable negotiations / concessions / free trials / prototypes to get in - but do not let it become a norm 
  • Treat the CEO / Directors / VPs of large companies as your peers and be on first name basis
  • Across all the communication with them (meeting / calls / emails etc) - be confident,  be cool, be yourself   
  • Do not start any major work without formal agreements / purchase orders
• Basically big companies have slow / long processes, lots of gatekeepers and very few people who can give the final GO
• The way to get around is first of all stop expecting/ pushing them to make a big decision in your favor within few meetings
• Instead propose a trial engagement which leads to something valuable for them.
• Trial should come at low / no cost to them and it should not have a lot effort on their side
• Do all the work yourself, invest a bit of cash if required and deliver exceptional results
• These results will get them interested in taking the next step, which could be a limited pilot.
• Deliver exceptional results again
• That would lead to bigger engagement and slowly you can have them as a regular client or even get them interested in acquiring you

Finally, I would like to clarify that not all large companies are bad or filled with bad guys, there are loads of good ones. I have had lots of good experiences as well. Sometime since they are big they may look bad but if you follow the process things will work out. But as a startup you need to watch out, do not let over dependence on a big company become reason for the death of your startup.

Thanks to Ankur, Nandini, Ankit, Pankaj, Shashank, Sid and others for reviewing the article

The Indian startup eco-system is around 10 years old and the two main constituents of this eco-system are - professional entrepreneurs (*1) and investors (angels / VCs). The growth in numbers in both these groups has been quite phenomenal; specially in the last 2 years. But despite the rise in numbers, we have not seen enough number of successful startups, that either have achieved high revenue numbers or have achieved attractive exits.

This issue of creating successful startups is very closely related to the business model of my current venture - The Morpheus, so I think about it a lot. While there are a number of important issues that need to be addressed, one key issue is the dynamics between Investors & Entrepreneurs. And there is a big fallacy in the way the two parties view each other.

• Fallacy: Investors are the horses and Entrepreneurs are the carts 
• Truth: Entrepreneurs are the horses and Investors are the carts

For real progress to happen the horse should come in front of the the cart and pull it forward. If by mistake the cart comes before the horse - there wont be any significant movement, as the horse will be pushing from behind. This fallacy is today plaguing most entrepreneurial ventures - funded and non-funded and hence little success has been achieved in last 10 years.

Majority of the folks believe that the Investor is the horse and the entrepreneur is the cart. Why? Because the investor is the source of  money - which is believed to be the starting point. And actually it looks pretty logical - you do need money to get started. But if you look carefully you can see that this thought process is entirely wrong. In reality its the entrepreneur who is the prime mover in a startup - he is the horse. Everyone else - angels / VCs / accelerators/ incubators are the various forms of carts and the carts need the horses to pull them and not the other way around.

This fallacy is leading to a bunch of  problems in the Indian eco-system and hence we have not made much progress in creating real start-ups that execute the classical path of - bootstrap / build great stuff / raise money / keep growing / raise more money and reach the finish line with an exit or start making serious revenues. If you look closely at the 10 odd year history of start-up investments in India - there are no profitable exits to show - except Makemytrip. (I am of course not counting the PE stage investments done by some venture capital firms). I believe the main reason "lack of startup performence" is the same fallacy.

"Cart" type Entrepreneurs  

• 90-95% of folks who plan to do start-ups believe that they are the cart and so they need horses (Investors) to get them started and unless they get an Investor pretty early (or even before starting) they really cannot make much progress
• These people spend a lot effort looking for funding during the initial days of the start-up
• Which essentially means they are not putting all the effort into building the product or doing sales
• As a result most of these start-ups make poor progress on two most important aspects - product and sales and eventually die 
• Some of them actually do manage to raise money because of their Miss India type backgrounds 
  • Ex-CEO of so & so company
  • Worked at top tier consulting firm
  • Alumni of certain institute
  • And other such reasons 
• Since these guys haven't build anything great before they raised money, and now they believe have found the horse which will pull them - they become complacent. Such investments don't really pay off the investor or the entrepreneur.

Me and my co-founder, Nandini, were in the same category of “cart” entrepreneurs when we were starting madhouse. We spent the initial months creating B-plans / spreadsheets / projections / market study and all that jazz, spent couple of months meeting the investors. We would have died in that Chakraviuh. But were extremely lucky to have a great mentor who helped us see truth - which is "If you build something great, money will find you". That is when we realized that we come first - we are horses. The investors come later.

“Horse” type Investors

• These are investors who believe they are the horses and whomever they fund is only a cart
• So who they invest in does not matter that much since they believe can pull the cart to the finish line
• In this mindset they end up funding all kind of wrong folks who also believed they are carts
• So you have a cart (investor) who thinks its a horse and tries to do a lot of pulling - of course with no visible results and a potential horse (entreprenuer) who thinks its a cart and hence doesn’t pull - and the result is disastrous anyways
• We see many such deals happen around us and often wonder "How come these guys raised money?"
• Just after the deal happens there are celebrations and the founders feel they have arrived and get on with the job of burning the cash. For a while no one notices and some time later the companies die because of lack of progres
• Many investors get fascinated by trends and start believing this is where the next big company will come from. And following the horse mentality they look for start-ups in that domain and even tell entrepreneurs whom they meet to change their business & go after this trend
• Now when these guys meet the real entrepreneur - who knows he is a horse - they fail to recognize the opportunity and pass on the deal

All through my madhouse days we were being told by would be investors with a lot of authority about how we should build our business. Just before I started Morpheus I was asked by a couple of guys to "start something like mGinger" which was a heavily contested deal at that time - but has been long forgotten

Who can fix things? 

“Horse” type entrepreneurs

• We need more entrepreneurs who know that they are the horses and hence take the ownership of pulling the cart - which includes the business and the investors
• They start their journey as a young horse, gain strength and speed along the way - they become strong horses
• Irrespective of whether they have  cartsc(investors) or not they win their races

“Cart” type investors

• We also need more investors who clearly understand that entrepreneur is the horse / the prime mover / the creator
• They respect the entrepreneurs and look for horses that have the potential to run a long race and win
• They look for horses that have shown promise in the race so far
• They do not try to manage the show but provide the right kind of support

We already have a few folks in both of the above categories. They are doing their respective jobs silently & do not really make much noise. The real trend is on their side. Eventually their successes will correct the fallacy and I am sure India will produce a great percentage of good quality, successful start-ups and good quality investors who invest in those start-ups!

Notes:

1. Professional entrepreneur is someone who has gained knowledge & experience through education / work and he combines that with his intelligence, passion, hard work to create a venture.