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.
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.
Many times, start up entrepreneurs seem focused on education and experience when recruiting. IIT, IIM, Tata, Reliance, ICICI, Hindustan Lever, Mckinsey, etc are some of the that I keep hearing in discussions about recruiting. No doubt, some of these people who studied or worked at these hallowed institutions are very smart. But that doesn't necessarily translate into being able to succeed in a start up environment. What you need in a start up environment is what I like to succincitly call "edgy", especially in a business role - someone who is willing to challenge status quo, try and not take "no" for an answer, not be afraid to make cold calls to potential customers if needed, finds ways to get things done, think out of the box, make decisions quick, adapt plans quickly if needed. Most of this cannot be gauged by a resume. So spending time with the person to judge these inherent traits is critical. Asking open ended questions and listening not only for what the person is saying but what the person is the motivation, aspiration, intention behind what the person is saying and extrapolating competence and execution ability from that is critical. It is part art, part science. But worth spending the extra hours doing that, rather than hire for education and experience solely and later learn that this person is unable to adapt to a start up situation.
Let me give an example. An entrepreneur in one of the startups I am associated with wanted to hire a senior CXO level candidate. He hired an IIT/IIM topper who had worked as a CXO in another MNC for a decade. This person was rated very high by the MNC. This entrepreneur spent most of his time convincing this person to join him and very little time gauging whether this person would be the right fit. When this person finally joined the start up, he was ineffective from Day 1. He didnt have an army of people to execute below him and didnt have a brand platform to recruit top talent like he did in his earlier job. This startup was venturing into a new service never been offered before in the country and he didnt have the "gut" judgment to really know how to position and price the service. He was not used to rolling up his sleeves to talk to potential customers to really figure out the pain points. He was not willing to risk his reputation by trying to convince customers to buy this service. His concern was what if the company couldnt deliver? He was used to selling a service that existing for years at his previous job and had good foot soldiers below him to execute. He was basically managing a set of strong resources earlier where the brand was the calling card and not himself to open customer doors. Needless to say, this person soon parted ways with the startup.
Moral of the story - Look Beyond the Resume! Spend a lot of time "understanding" the person being hired. Remember some of the best entrepreneurs in the world didnt go to college and didn't work at blue chip companies either.
Have idea? Will seek venture capital. This seems to be the mindset of many Indian entrepreneurs seeking venture capital in India today. Over the last few years, we have seen plans from entrepreneurs looking to start a restaurant, a coaching class, a web 2.0 project, a power plant, a budget hotel, a boating company, a travel agency, a pre school, a real estate brokerage, a jewellery shop, a nursing home, a dental clinic, etc. Many of these ideas can translate into successful businesses. However, they may not be suitable for venture capital.
What many entrepreneurs haven't understood is that Venture Capital is also a business at the end of the day. Venture Capital funds have a responsibility to its investors to maximize the returns on capital invested. The investors in the venture capital fund have chosen to invest in this asset class vis-a-vis other asset classes like public stocks, later stage private equity, with the expectation that it is a high risk righ reward asset class. Given the inordinate risk that a venture capital fund takes when backing an entrepreneur with a new idea, it is only fair that the fund expects a disproportionate return on that investment. Chances are that several of the investments may not yield the returns expected, so therefore it is even more important to be disciplined about the return expectation as the investments that do provide the expected returns need to make up for the ones that don't in order to be able to generate expected high returns for the investors on this high risk asset class.
Therefore when a venture capital fund evaluates a new business idea, it is looking for the possibilty of a "super normal" return. Many businesses don't pass that filter as they are typical linear growth cash generating businesses that most entrepreneurs think of. And therefore they have to turn down an investment proposal of an entrepreneur who has a perfectly viable business plan.
As an ex-entrepreneur, I empathise with these entrepreneurs as they have entrepreneurial dreams and are seeking start up capital to get their venture off the ground. What India needs is more angel/seed investors that are investing their own monies and are willing to help these entrepreneurs get started without the expectation of a super normal return. Typically in India, a family member or relative would provide the start up capital to another member in the family to start a business. What is important that is that start up capital is available beyond the family so that first generation entrepreneurs who could otherwise not dream of starting a company can now do so with this seed investment available.
Every entrepreneur I meet in the pre school and vocational training space include k-12 schools in their future business plan. One also keeps hearing of business families opening schools and universities across the country. When I recently heard that an entrepreneur who was selling sweets in North India decided to open a university with the spare cash and land available, I asked myself the question "Is this a bubble?"
While there is no argument that education is a big need in the country, I am not sure if there is really an opportunity for a venture capital firm to invest in this sector. The reasons are the following :
1. Teacher dependency. Attracting and retaining talented teaching faculty is not a trivial task. Scaling faculty across locations is even more of a challenge. I remember when I went to school, not evey faculty member was top notch. If a single school cannot maintain quality across faculty, how do you scale this to different classes and geographies?
2. Capital intensity - Purchase of land and/or building/leasing of property can be suck up capital. If the amount of capital is high at the outset, then it defeats the venture capital model of low capital-high return.
3. Regulatory environment - Certain laws prevent investors from investing in the educational institutes. Investors try and work around this by investing in a management company. There is inherent risk in that model as the school that gives the teaching contract to the management company could potentially reneg on that.
4. Lack of gauranteed jobs - Given the plethora of universities and vocational institutes cropping up, there is pressure to fill seats which sometimes dilutes the quality of candidates admitted. Many of these students who graduate cannot get placed as they don't meet the quality criteria of the employer. In the vocational training sector, many jobs don't require formal education/diplomas unlike the western world (ie. plumber, carpenter, courier, etc) and hence make these institutes less viable.
Many times, I have heard VCs in the US talk about investing in a great product or concept without a strong CEO. Typically a bunch of engineers build a great product that can change the world, but there is no management leadership within the founding team to build a business around the product. In such a situation, a VC invests in the company and brings on an entrepreneurial CEO who can run a very young company.
Given the risk taking psyche and the robust entrepreneurial ecosystem in the US, hiring a professional management that can successfully lead a startup is possible. However, this is not as easily done in India for several reasons :
1. The risk taking ability amongst these managers is low. What if the company fails? The lack of a safety net in case of failure scares many potential managers from joining startups.
2. Parents, family and friends have a big influence on career decisions. Leading unknown companies are not widely accepted as a mark of success. Joining a Mckinsey or Citibank is looked more more favorably than joining an unknown small company.
3. Cash is more important than stock to many of these managers as they have to look after not only the spouse (who typically doesn't work) and children but also the parents and in many cases siblings as well. Typically startups don't offer the renumeration that can sustain these obligations.
4. Many of the managers are not trained as entrepreneurs. They may be bright, but they are not comfortable with selling unproven concepts to customers, hiring top talent to an unknown company, thinking out of the box on pricing, promotion, processes, etc. So even if you are able to convince a professional manager to join the startup, the chances of being able to successfully execute during the early days of the company is low.
As the entrepreneurial ecosystem builds over the next several years as more and more startups get funded, hiring strong entrepreneurial leadership into a start up will become easier. However, for now, I would caution any investor that is looking to invest early stage with no strong leader who can run the company in its early years to think twice before investing.
India is a nation of shopkeepers. In a growing consumption led economy, it would seem very logical for a venture capital fund to look at investing in the retail sector. I hear a lot of VCs talk about how they would like to invest in businesses that are consumer focused and retail in particular. There are many good entrepreneurs selling services and products via retail in India and it is very tempting to believe that if they could only replicate thier initial success across a few stores nationwide, a large enterprise can be created. I believe there are several challenges in the sector, especially in India, that raises questions on whether extraordinary returns are possible in a 5-7 year timeframe for a Venture Capital investor.
Some of the salient challenges for a VC are :
1. Capital Intensity - Rentals in tier 1 towns in the best locations are still relatively expensive compared to most parts of the world. Annual rental deposits, inventory, marketing are all costs that can multiply as you scale. The company may need to raise working capital debt which further burdens the companies cash flows.
3. Lack of Brand Loyalty - The Indian consumer is very value oriented. He or she will shop where there is better value. Brand loyalty is limited.
4. Heterogenous Markets - India is a conglomeration of states with different laws, languages, cultures. To be able to scale across states requires local market knowledge and relationships which can take time to build. There are many cases where a product or service has been successful in one city but it has taken years to crack another location within the country.
5. Inefficient Labor - While labor maybe cost effective, there can be a challenge in finding productive, honest pool of self starters (executives and managers) that can help the company scale across the country.
While I am sure that there could be some unique opportunites that could counter the challenges above, one needs to be cautious about investing in early stage retail ventures if you are expecting rapid growth in a relatively shorter time frame (5-7 years). If an investor has a longer time horizon ( 8-10 years at least), then it may be more attractive.