Timing of exit is very important

Having run a venture firm for 5-6 years now, some of our portfolio companies are at interesting stages of the company life cycle - proven technology, early leadership, strong management with a lot of further room for growth. And not surprisingly, a few of these companies have recevied strategic interest from buyers globally. Potential buyers always want to catch a company early enough before it becomes too expensive for them to buy.

For first time founders in their late 20s and early 30s, a buyout offer where they can make a few million dollars can be very tempting. And this is even more tempting in India where the dollar or rupee goes a longer way. The risk of turning the millions down and continuing with the company can be daunting. Many founders feel that they are young, and it may be better to sell, build a cash cushion, and then start another company in the future.

I have tried to counsel many founders within my fund and outside, that building a successful enterprises is a non trivial task and just because they have been successful once, that is no gaurantee that will be able to pull it off again. In fact, the odds are low that they will be able to pull off another successful company which requires executing the right idea at the right time with the right team.

If a founder feels that there is a threat to the continuing the business independently and that a strategic can add value, then I think that selling the company may be the right thing to do. Or if the founder feels that the value being offered today is the value he or she can hope to create many years out, then financially it may be a good move to sell the company today. However if the founder feels that there is a lot more value could be created, and that they are in a strong leadership position, then I would suggest that the founder not sell even if they are getting a reasonable cash out, because creating similar value again may not happen and most likely will not happen.

Timing of exits is very critical. It can change the outcome of the company by many multiples if done right.

Ecommerce Entrepreneurs : Choose your investor wisely!

Everyone I meet today wants to start an ecommerce company - groceries, furniture, jewellery, mobiles, handicrafts, carpets, toys, food, diebetes monitors, stationary, and the list goes on and on.....And there are investors flying down from New York , San Francisco, Delhi, Mumbai and Bangalore, meeting many of these budding entrepreneurs with a blank cheque book asking "how much?".

There is no doubt that the internet has reached critical mass in India today. And ecommerce is very important for the country as it has the potential to leapfrog the inefficiencies of rolling out traditional retail in an infrastructurally challenged country like India. But creating an large ecommerce company is non trivial. For every Amazon created, there are thousands of boutique ecommerce companies that couldnt scale. This ratio is going to be very even more stark in India give the complex supply chain, cost and complexity of delivery, cost of Cash on Delivery (many shoppers dont use thier credit cards to shop), high marketing costs, cost and complexity of enabling returns, low switching costs, state taxes, which all add to the challenges of running a profitable ecommerce company.

I have no doubt that many ecommerce entrepreneurs will be able to raise thier initial financing due to the hype today. But if they are not able to continue to attract future financing/capital, there will be no choice but for them to scale back significantly or shut shop given the challenges articulated above. Early signs of this has already begun. I personally know of a few ecommerce companies that got funded in 2009/10 who are unable to raise further financing today primarily because they have not been able to demonstrate that they can scale on various dimensions and/or show a clear path to profitability and are now contemplating a fire sale. I predict that this trend is going to magnify in the coming years.

Word of caution to the ecommerce entrepreneur - don't take external institutional capital (bootstrap as long as you can), till you are convinced that you have understood the challenges of building an large ecommerce company and convinced that you will be able to build a large profitable company in the long run. If you cannot bootstrap initially, take money from friends and family or institutions whom you think will be able to help you address the challenges menitoned above to be able to build a large ecommerce company or will be open to you scaling back and continue running your company and not pressurise to shut shop if you cannot grow fast enough, show path to profitability and/or raise further financing.

Select your board member wisely

I think it is as important for a start up entrepreneur to be selective about his or her investor representative board members as it is for the investors to be selective about the entrepreneur. Often times, the entrepreneur is only focused on raising money at the early stage and forgets that they will have to deal with soemone from the investor side at the board level if they have given that investor that right.

Having been an entrepreneur who has dealt with investor board members and now an investor who participates on boards of companies we invest in, board members come in all shapes and sizes. Here are a few common examples :

1. The "friend" - Wants to look good and avoid conflict of any sort. Doesn't want to stir the pot in any way. Doesnt ask tough questoins at the board. Completely hands off.

2. The "operator" - Thinks he or she knows it all. Tries to tell the founders how to run their company at the granular level. Likes to get into the operations. Likes to interview candidates that the founders are hiring.

3. The "doubter" - Always questioning the market and execution of the founders? Do you really think you will meet your numbers? Why cannot you execute faster, better?

4. The "big picture guy" - Discusses the big picture only. The market size is so big, therefore we should enter this space. Somebody else executed an initiative, so we should also do it.

5. The "coach" - Likes to give advice on how the founder can do his job better. Constantly advising the founders how to improve at various levels.

6. The "shrink" - Is a sounding board for a founder when he or she is in distress. Helps the founders cope with the emotional rollercoater of a startup.

I personally think that a good board member of a startup has a blend of all of the above characteristics. I would strongly recommend that entrepreneurs do their homework on the board representative before signing on an investor at the early stage as it is a relationship that will last from inception to exit and be an important influence in shaping the direction of the company. I have seen many companies fail solely due to dsyfunctional or ineffective boards.

Avoid raising too less at the seed stage...

Seed investing in India is garnering a lot of interest. From angel networks to seed funds to individual investors, there is a lot of interest in funding entrepreneurs in India who are starting out. Professional Indians who have made money globally and in India over the last decade are now wanting to allocate some of that towards this high risk and potentially high reward asset class. While this is very good for entrepreneurs looking to do their own thing, one must really understand the capital needs of a company and understand what is the likelihood that there will be follow on capital available if needed once this capital runs out. Let me give you an example. A very solid technology entrepreneur who has build a strong product in the internet space had approached me for financing earlier and I mentioned to him that this space is very difficult to scale beyond a particular limited size due to market restrictions in India and therefore it is unlikely I would look at this company for financing unless he can demonstrate that he could expand the scope of this product offering to cover a larger market opportunity and that potential customers would be interested in that expanded scope. Since he was a really solid guy, there were many angels willing to write him a cheque. My opinion is most angels in India dont really pay attention to how big the opportunity could be and are happy to write a cheque hoping that they will make something if they like the entrpreneur/technology thinking that they will sell out to someone someday. So this entrepreneur raised usd 50-100k from a few angels. 6 months post the financing, he had a few paid customers and now decided that he would like to go for VC funding as his angel capital would be running out soon. When he approached VCs, he got the similar feedback I had given him - market is too small to build a large company and unless there is proof that he could build adjacent products that he can monetize or enter new markets, it will be tough to raise financing. A few months later, he ran out of cash, his angels didnt want to fund him anymore since they were scared they would lose money since the VCs were not interested, and so the entreprenuer had no choice but to close down the company. In this case, had the entrpreneur raised usd 500-700k, he may be in a different place today. Moral of the story - Raise enough cash to get to a milestone that will attract follow on capital or allow the company to be self-sufficient, assuming that you may not have the capital yourself to keep funding the venture yourself. If you are unable to raise enough cash at the seed level to get to the milestone, then may be better to rethink whether you want to start the venture with sub optimal cash. If you are rational about why you need a certain amount of cash to get to a milestone, most angels will understand this and fund the company so long as the cash requirements are not absurdly high.