Anti fund raising advice

Out of all the meeting requests that I receive from founders outside of morpheus gang, a large percentage of the founders want advice & help on fund raising, intros to VCs / angels etc

In most such conversations I end up repeating what I have already shared in other similar conversations. I figured it would be a good time-saver to just write a post on this topic, some folks would hopefully read it before sending me the request & for others, I can forward the post.

What I end up giving is not “Fund raising advice” but “Anti fund raising advice”. I always start off by saying, “I am not sure I am a good person to talk to for advice on fund raising”. I say this because one of the core beliefs that we preach, to startups at TM, is to completely de-focus fund raising from the process of building a business.  None of the great businesses were built in such a way, where the founders first focused on raising funds & after they completed fund raising, they came back to focus on building the business.

Instead the right way is to just keep building the business in best possible manner with the resources available to you. Just keep moving, keep hiting the milestones, get the prototype out, launch V 1.0 / 2.0 , get initial customers, collect feedback, keep itrating, use organic channels to acquire customers, be super capital efficient, get coverage, start making money, become profitable, understand your numbers, understand the industry.  Do all this with a belief that you will never raise money, but will still build the best company even in this space – if it takes time, hard work & lot of effort, so be it. Customers are the best & most loyal investors. As long as you keep adding value to their lives, they wont leave you.

The magic here is that once you gain the ‘supreme self belief’ that you can & you will do this without help or money from the money guys, the money guys automatically start becoming interested. You start receiving geninune incoming interest, where the conversations are much more constructive & friendly, You do not need to make long presentations, imaginary business plans or 5 year financial projections. Your business has traction, you have created real value & good investors can see that. Things move fast, negotiations are easy, you can continue your focus on your business & the fund raising activity just happens on the side. If at all you are dealing with someone who is acting too tough to your liking or taking too much time, you have the power to walk away from the deal, which is the supreme power in any negotiation. And you can do that because you are not dependent, you do not need their money to build or continue your business. The equation is now reversed – they need you more than you need them.

Good investors & external capital can play an important role in the growth & success of a company but only if it comes at the right time, in the right manner, at the right terms & from the right source.

So as I am fond of saying: “Stop all fund raising activties, do not look for money. Build a great business & the money will find you.”

Here are couple of detailed articles I have written on this topic:

 

Why it is a good idea to invest in “Unsexy Startups” & a bad idea to invest in “Trends”?

This article was first published on Yourstory.in. The original article can be found here

Over the last year or so, one interesting philosophy evolved at TM:

  • Almost everyone around was busy either in investing in e-commerce / group deals (ECGD) or starting an ECGD venture themselves (Bollywood celebrities included)
  • Specially e-commerce ventures where you setup a website to sell stuff which is easily available from offline shops (commodity e-commerce services)
  • We have an investment in Jumadi (commodity e-commerce) & have closely looked at a quite a few companies in ECGD domain
  • The topic of ECGD has been beaten to death at a number of heated discussions at TM-gang meet-ups
  • Based on our experiences we formed a strong hypothesis that lead us to believe that very few of these will turn out be real winners & most of these deals will end up losing money
  • We could also see that it will take 2-3 years before people involved will realise & accept this hypothesis
  • This rush towards a couple of sectors meant that most other sectors will get very little attention & money from investors
  • But still a number of good founders will start companies to solve problems they are passionate about without bothering about the ECGD madness
  • For TM the philosophy was, “While everyone & there mom is busy doing ECGD, we would like to aggressively go out, find teams of good founders working on so called ‘un-trendy / unsexy problems’, & capture all of that”
  • Following this philosophy, we did 24 deals in last two batches: Batch 6 & 7, as compared to 11 which we did in two batches before : Batch 4 & 5
  • None of these companies conformed to ongoing trends of their time
  • In Batch 6 we have two companies in e-commerce domain but they are far away from the general trend (www.engrave.inwww.zepo.in)

 

This was not a philosophy that we created by sitting around a table & nor did we make a conscious decision to follow it. As a team we always pay attention to our subconscious instincts & act on them. This was also one of those things that happened as we followed our instincts. Even we were not completely aware of the reasons behind our actions.  The questions we wanted to find answers for:

 

  • Why is everyone doing this?
  • Why are we not doing this same thing?

In last couple of months, we got the time to reflect on our decisions & have been able to understand them better. This post is an attempt to share what we have found & understood. Would love to get contributions from readers, please do share your thoughts.

 

Best investors “invest” in “highly undervalued” assets 

  • There is one common theme in the investments of great investors like Ben Graham, Warren Buffet, Charlie Munger, George Soros, Peter Theil, Paul Graham, Vinod Khosla & many more such folks
  • They were able to identify assets which were highly undervalued by the market in the prevailing market conditions
  • But as per their judgement & assessment, once unlocked, the real value of these assets would be much higher than the current market value
  • They reached these conclusions very early on without availability of a lot of data or market proof etc
  • Most of these realisations were very subconscious in nature, just based on their judgement of people, life experiences or unique theories etc
  • On top of the ability to spot these assets they also had the chutzpah to “pull the trigger” & make investments in these assets
  • Also, while investing in these assets, they were either able to spot some underlying trends which would lead to markets realising the real value of these assets (George Soros belongs to this category)
  • Or they themselves played a critical role in “unlocking” the value of these assets  (Warren Buffet & Paul Graham belong to this category)
  • After making the investments they either worked with people who managed these assets (exec management of the companies) or just waited for markets to correct themselves based on the underlying trends
  • In most cases, over time the value of these undervalued assets got unlocked & they ended up creating a lot of value for their shareholders & for themselves

Most investors invest in trends 

As we know most investors invest in trends (ECGD has been the recent trend among startup investors in India). For any sector to become a “trend” amongst the “startup investors of India” some or all of the following should happen:

  • There is initial activity in an undervalued sector, a set of founders take the initiative, work hard to build a business
  • A set of investors who spot them & take bets on these undervalued assets
  • This also happens to be the sector that has generated a lot of investor wealth / investment activities in bigger economies like US & China
  • Lots of folks start watching the developments closely
  • There are visible signs of success & activity starts to pick up (most of these are false signs like GroupOn going IPO or some company valuation going thru the roof)
  • More founders start companies in this sector & more investors starting actively scouting for deals
  • Startup media takes notice & starts writing actively about this sector, which is soon followed by the traditional media
  • The deal tracking firms start highlighting these sectors in the private reports they send to investors
  • Investment firms now have dedicated analysts tracking these sectors & sending their finding on daily basis to the Partners
  • Media continues to write about these sectors
  • As a result of all this, partners at firms hear the same thing from every direction : Media / Deal reports / Internal analysts / Partners at other firms / Founders pitching to them & more
  • Soon it becomes a self full filling prophecy
  • Now investors start believing that this is a huge market opportunity which is backed by “data / trends / media reports & many more things” & they should catch this wave at any cost
  • Same data & hype now leads to formation of founder teams with impressive back grounds on paper (name of colleges, names of companies they were at etc)
  • These are exactly the wrong type of founders who would only start a company when there is a lot of data to back their decision & as per them the chances of getting funded are more than 100%
  • Many such founding teams are formed
  • All these teams will start talking to angels / VCs , who have also seen the same data backing a huge market opportunity
  • A certain percentage of these founders get funded by investors eager to jump into the trend
  • This reinforces the same trend & leads to more activity of similar kind
  • The “hotness” factor of the sector continues to increase, the valuations surge across the board
  • New firms jump into the market & start investing aggressively into these sectors
  • Series B / C rounds are now 20-40 million / couple of companies are valued at Billion dollars
  • Seed rounds are ranging between 1 – 5 million

If you take off your 3D glasses, you can see the real picture behind any “hot investment trend” 

  • Valuations are sky high
  • Founder type is grossly wrong
  • At the peak of the trend lots of money gets invested at super high valuations in “low quality, opportunist teams”
  • The sector is over heated with competition & lot of excess money
  • No one cares about being capital efficient.
  • Rents paid are insanely high / salaries go thru the roof / selling prices are dropped to unviable levels in the name of building customer base
  • There is a mad rush to acquire customers & loads of money is pumped into marketing across media : Social Media / Searching Engines / TV Spots
  • The super capital inefficient scenario is surely bad for almost everyone who jumped in after this became a trend
  • Only folks who may end up benefiting are those who were in the game before it became a trend
  • Even they could get wiped out if they start thinking too much of this trend status of the sector & it goes to their heads
  • This could even lead to the whole sector getting wiped out, where none of the players succeed in building a long lasting business
  • As the founder of madhouse, I was part of a similar trend like this in the “DVD Rental” days (which was way smaller than what we are seeing today)
  • The players who survived had 20 million+ funding & today no one is doing the “DVD rental” business in India
  • The whole thing got wiped out, not because there was no demand – there are still so many customers with real need of watching good movies
  • These trends have nothing to do any particular sector (e-commerce / group deal / travel or DVD rentals) nor are these caused by fault of some particular individuals / firms
  • These things are part of how the human minds get affected by events happening around & the urge to do what others seem to be succeeding so easily at. Why should I miss it?
  • But each time a trend booms &  busts, the sequence of events is striking similar & results are also similar
  • Even if you invest in a company as part of a trend & that company achieves certain success, no big deal – you just rode the trend
  • And the returns certainly will be lower as compared to an well executed investment in an undervalued asset
  • The risks involved in trend investments are way higher even thought it feels other way around – it becomes kind of a lottery game
  • We used to get really puzzled when we saw some of the excellent investment minds in India investing in trends (or skipping good undervalued assets)
  • I am sure is that at the subconscious level they do realise the truth but they  are making these investments because the LPs (investors in funds) or the Senior US Partners who made money in the same sectors in US / China want them to do so
  • It is a combination of
    • Lack of complete self belief
    • Lack of authority

Who can be a good investor? 

  • Someone who has gained intense real life experience in startups
  • In the order of priority the following are the ways people get the intense experiences:
  • By starting & running their own startup once or more & going thru the whole cycle end to end
  • By working at one or more startups in the early stage, where they were close to real action, spent countless hours / days working & absorbed the whole thing
  • By investing in startups & working closely with them
  • Folks who go thru these intense experiences develop a certain level of subconscious capability to intuitively understand & analyse investment opportunities in startups
  • This allows them to recognise “investment opportunities in undervalued assets” which are away from current trends of the market
  • Alongside they also have complete self belief / chutzpah to pull the triggers & make the investments in undervalued assets which they believe will eventually rise in value
  • Startup investments are all about founders, they are only assets that one bets on
  • It requires a lot of courage to invest in just founders since the success might be huge (if it happens) but the probability of failure is higher – unproven entrepreneur treading on an unproven path
  • The hallmark of  a good startup investor is the amazing amount of trust they have in the founders’ ability
  • There is ZERO focus on ideas. They back the “founders” from whom the idea came out & not the founders working on the right idea
  • Also these investors need a lot of patience since these investments will typically have long gestation periods
  • And through this period they will need to put tremendous efforts in helping these companies stay course & overcome a slew of tough obstacles
  • Over time as these investors succeed with certain strategies, others will start to notice & start to follow a similar path without having the right reasons (for example even if there is a rumour that Warren Buffet is going to invest in a particular sector the stock prices shoot up)
  • Which would mean the buying price of assets which they were investing will no longer be “cheap”
  • At which point they need to have the ability to move on & find a new “class of undervalued assets” to invest in
  • Also, at this point a new cycle starts afresh again

 

InterviewStreet : 1st Morpheus gang company that may be worth billion dollars

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.

Here is what the forbes article says about IS:
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.

 

Stay away from financial middlemen

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.

  • Startup events / awards / showcases
    • Most (not all) of these use “here is your chance to get funded” as USP to lure ignorant, desperate founders to attend these events
      • They claim that the event will be attended by 40-50 VCs & angels
      • Speaker list will be filled with names of startup celebrities: VCs / angels / recently funded companies
      • You will get opportunity (speed dating, lounging, whatever) to pitch to investors one-on-one, exchange cards with them and have drinks with them
      • Most times VC firms send junior guys to these events (if at all they attend)
    • Important disclaimer: As mentioned, my comment above is not applicable to all startup events, infact in the last 2-3 quaters the quality of startup events have really improved a lot. But some of them really suck
  • Startup Magazines
    • For many (not all) of these mags the only technique to get sales is to put big catchy funding related headlines on the the cover page:
      • 10 things a startup should do get funded 
      • Funding tips from “Mr angel investor”
      • How did company ABC raise 20 Crore in 16.5 months?
      • and more such stuff
    • Startup founders should stop reading such mags which are spreading this propaganda of funding and spoiling the bloody eco-system


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
The good investors are already doing some / all of these and that is what will make them “stand out” in the coming years. I love Fred wilson’s answer in the the NYtimes interview

 

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. 

 

Great interview by Phani of Redbus

I just stumbled upon this amazing interview RedBus Sells 3 Million Bus Tickets Online: Says CEO Phanindra Sama & almost immedialety wanted to share with the readers of this blog.

It was great reading his answers. Based my experience I could figure out the answers are true & honest. He is not trying to create an “image” for the company or “hide” things like revenue breakup, which most folks would consider proprietary information. Knowing Phani it was not a big surprise to me, but believe me this is a very rare quality to find in a founder of his level.

Sadly a large majority of funded startup founders / CEOs,  raise money on fancy stories & fancy pedigrees & they seldom focus on true quality of execution because their only focus is raising more money & getting to an exit asap. In most such cases things are not great inside the company, but instead of accepting the truth and fixing things, they keep lying to everyone including themselves & only paint a rosy picture in media, for the outside world.

Note: The topic of practicing honesty while building a business deserves a longer post, I plan to do it sometime over the next couple of weeks.

 

Startup jobs are not for the weak hearted

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.

Are you hitting the ball out of the park?

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.

 

Simple but very powerful – The SaaS Edge

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.

Be nice to your customers

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

Givers & Takers

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