Geeks on a Plane India 2013: Big Opportunities, Optimistic Investors, and a Government that’s Finally Waking Up

Gateway of IndiaThis post originally appeared on the 500 Startups blog

Geeks on a Plane is a 10-12 day trip to various parts of the world with 20-25 “Geeks” (entrepreneurs, techies, designers, angels, VCs, mentors). The trips are planned and run by 500 Startups and have been going on for a few years now. The first Geeks on a Plan (GOAP) to India was in December 2011. That’s when I first met Dave, Paul, Christen, George, Anu, Samir, and a bunch of other really awesome geeks. Fast forward 14 months and I got a chance to be a “geek” on the February 2013 GOAP India trip.

GOAP India 2013 also had some really awesome people on the trip as well as hosts across India. Here are some of the things that I learned from these people during our visit to Bangalore, Mumbai and Delhi with Geeks on a Plane.

India: A Land of Contradictions

The poor are all over India. It’s still one of the poorest countries in the world. However, the rich are obscenely rich. Driving a $200,000 car is no big deal in a city like Mumbai. On your way to a swanky hotel where you’ll pay $900 for a single malt, you may drive by open sewage, dirt piled up on the side of the road for impending construction, barking stray dogs in packs, etc. However, you will also pass by massive skyscrapers, gorgeous temples, educational institutes galore, and many people hustling to make a buck. You can feel the buzz in the air and the excitement of young people who see multiple opportunities all around them.

I didn’t witness these contradictions being any more pronounced than they have in the past. Instead, I saw young people that are hopeful and welcoming of bright future for their country, their families, and themselves. As risk averse as their parents are, more and more people are willing to take significant risks to enact change and get rich while trying. For example, at Startup Weekend Bangalore, we saw many ideas pitched, of which, two of which stood out in my mind.

  • Ghati, to enable safe and clear passage of ambulances.
  • Garbage-busters, which uses mobile phones to alert civil authorities of garbage that hasn’t been cleared.

Two years ago, very few people would have considered quitting their jobs to pursue ideas that will make life better for people while at the same time, having a real chance at making money. Instead, most of them wanted to build the “Twitter of India” or the “Facebook of India”. More and more Indians are cognizant of the problems surrounding them in their daily lives and they are taking the first steps at solving them.

Great Raw Entrepreneurial and Tech Talent

Flipkart
There’s no question that India is full of geeks with great raw entrepreneurial and tech talent. Look at the number of Indian engineers in the Valley, doctors and Wall Street quants that flourished in the US. In India, having their chidren go into the “IT” industry has been the hope of many middle class Indian parents since the 90’s. That usually meant working at Infosys, Wipro, TCS, HCL, etc. Then came along PWC, E&Y, Accenture, Goldman Sachs, JP Morgan, Dell, Microsoft, Google, etc. Today we have Facebook and LinkedIn as well as hundreds of other great US tech product companies. Most tech entrepreneurs in India prior to 2005 built their fabulous businesses selling services to companies big and small around the world. These successful tech entrepreneurs built businesses to be envied and made India the outsourcing capital of the world.

What they didn’t do was build an ecosystem that fostered entrepreneurship or creative thinking.

ZipDial

All that started changing sometime in 2010. Some amazing companies have been built in the last few years by incredible people (some of the companies go back to 2006/2007) – Druvaa, Slideshare, FusionCharts, InterviewStreet, ZipDial, Flipkart, SnapDeal, InMobi, Innoz, ZoHo, Freshdesk, Wigify and Komli Media.

Some of these companies have exited. Some are incredibly cash rich. Some are growing like a weed and continue to raise larger amounts of growth capital.

Beyond some of the marquee names above, quite a few amazing founders are building great companies. A few are InVenture, WebEngage, UberLabs (gazeMetrix), Ketto, InstaMojo, ChargeBee, and Practo.

Founders’ Communication & Confidence Need to Improve

Rajat, Kavin, Aloke at 91 Springboard
Most first time founders in India still lack confidence and it shows in their pitch and their communication style. Paul has mentioned this before in his Observations on India and he also talks about gaining confidence. I continue to see this being a problem and a tremendous opportunity for founders. The founders that can communicate the most effectively, will have a much better chance at selling to their customers, their investors, and prospective co-founders, employees, mentors/advisors and importantly, in India, to their families. The good news is that in the last 7 years I’ve been here, I’ve seen pitches and communication styles get better. Although the ecosystem is still nascent, it’s maturing and giving young entrepreneurs the shot in the arm they need.

Investors are Optimistic

The Bombay Stock Exchange (BSE)
Investors across India that I met during GOAP continue to remain bullish on the long-term opportunity. Ecommerce, education, travel, personal finance, Universal ID (UID), family tech, rural tech and, of course, tech built in India for a global market are some of the broader themes that investors expressed significant interest in. Sorry folks, “social media” just wasn’t at the top of anyone’s list.

However, as bullish as investors are, most of them still aren’t very founder friendly. Some of the deal terms being offered are still quite onerous. Doing an investment in tranches is another favorite past time of Indian investors. Most founders still complain of angels behaving like series A VCs and VCs behaving more like private equity shops.

The bright side is that a few founders I met with and spoke with during GOAP, mentioned two VCs by name who work more like startup founders than VCs. They make decisions quickly. They present terms that are fair. They tell founders when and how much they should raise to minimize dilution. They make themselves available by not hanging out in their ivory towers. You might say that two VC firms in a country of 1.2+ billion people is statistically insignificant. However, if you said that, you would be wrong. It’s quite significant. VCs running their funds like real startup founders is a massive mindshift and their success will only inspire more to do the same (or lose deal flow).

Investors are also Cautious

Geeks on a Plane at the BSE
During some of the investor events at GOAP, I spoke to investors about things that concerned them. Investors are a little bearish about the short-term. Macro-economic conditions, the lack of exits, corruption in the government, the bureaucracy, rising costs all play an important part in dampening the spirits of investors. However, these also present considerable opportunities for daring entrepreneurs. Investors realize this and continue to hunt for deal where they can deploy funds in India.

The Indian Government is Finally Waking Up

During our trip, the Indian Government announced its budget. Though, not a big deal in most western countries, in India, the budget makes or breaks economic sentiment for the year. No one was terribly excited or distraught over this year’s budget. However, there were a few things added that raised the hopes of startups and early stage investors.

  • Preferential tax treatment for angels when investing together or “pooling” their capital and registering with the government.
  • Corporations are required to spend 2% of their income on CSR (Corporate Social Responsibility) investments or donations. Incubators at government or recognized universities qualify for claiming the 2% spend.
  • Startups can potentially find some liquidity by listing on the SME exchange. The BSE (Bombay Stock Exchange) runs one and had 11 companies listed as of December 2012.

A much more detailed analysis of the budget and some opinions can be found on VCCircle.

For more information on Geeks on a Plane and when they are heading to your region, check out the website and also some of the videos from GOAP South America Summer 2011, GOAP Asia 2011 and GOAP India 2011.


Geeks on a Plane India 2013

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10 Things to Consider Before Approaching a VC

A lot of very very smart, experienced investors have put similar information out there over the last few years. If you’ve read it before, consider this a reminder. If you haven’t read it before then consider this a starting point. This post shouldn’t be seen as a comprehensive list. It’s more of a response to various pitches I’ve been getting from multiple sources over the last month.

“Understand the investor’s mandate, fund size, investment reqs. Pitch the right investors and build releationships with others” – TJ Sassani, Founder of Zozi.

  • Research

  • Before going out and trying to approach investors, take the time to create a spreadsheet of the various investors you want to approach. This will be your scrappy CRM for managing your investor pipeline. Some of the columns in your spreadsheet could be:

    1. Why you want them to be investors
    2. Can you get an intro to the investor from someone that the investor knows and trusts
    3. Have they invested in your market in the past
    4. At what stage do they typically make investments
    5. What is the fund size
    6. What is their typical check size
    7. What criteria do they use in determining if you’re a fit for them

    Once you’ve built this matrix (and customized it according to your needs), filter out the investors who don’t invest in your market or don’t invest at the stage you are at. Then look at the other criteria and keep filtering. Once you’re down to a list of investors that have an investment thesis that your company would fit into, begin your approach. You may want to consider speaking with the investor that is least likely to invest in your company first. Pitch them and get feedback. Incorporate that feedback into your pitch. Become awesome (if you aren’t already) at your pitch each time you pitch someone new and move up the ladder. The investor you want most to be in your current round should be the last one that you pitch to so that you’ve received enough feedback to make your pitch really awesome.

  • Connecting with Other Founders

  • This is something that you should consider doing as part of your research. Try to connect with founders that have raised money from some of the VCs in your pipeline. Connect with them, meet with them if possible and discuss very specific questions that will give you some insight into the VC and if there is a fit with you, your company, the stage at which your company is at, specifics that you would like the VC to help with and what the VC can help with. Finding what companies a VC has invested in is usually not that difficult. A good place to start for recent investments is AngelList.

  • Understanding a VCs Motivation and Economics

  • VCs typically invest in many many companies. Out of the investments they make, the majority don’t yield positive outcomes (check out this report by the Kauffman Foundation). Hence, most VCs need to invest in companies that are going after large opportunies, have balanced teams, focus on execution and have a higher probability of a large positive outcome to help offset some of their losses. There are many reports/blogs/articles and books that talk about the economics behind VC funds and I would urge founders to read as many of these as possible before approaching VCs. If you haven’t read this post by Mark Suster yet, you should.

  • Market Opportunity

  • One of the most important things that founders need to think about and understand is the fact that investors, generally, need founders to go after large markets. If the market you’re targeting is Rs. 500 Crore and it’s not growing rapidly, then opportunity isn’t large enough to go for venture funding. Even if your business winds up controlling 80-90% of a Rs. 500 Cr market, the market is still too small and wouldn’t yield a large enough return for the VC. For example, after dilution, if the investor winds up holding 10% of your company, in the best case, it would probably not be worth more than Rs. 100 Crore. Something like this would make a great lifestyle business, however. So think about your market carefully before deciding to raise venture funding.

  • Ideas Vs. Products with Traction

  • Ideas are a dime a dozen. They don’t matter. What matters is execution and traction. If you’re looking for funding at the idea stage, you had better have strong successes in the past. Most investors (VCs and angels) won’t invest in ideas. They want to see that you’ve built something and that you have some measurable traction and possibly, some defensible intellectual property that’s worth something. If you have a revenue stream, even a small one, already in place, it adds significantly to your chances of getting investors interested.

    If you’re at the idea stage, talk to as many people as will listen about your idea and get feedback. Learn as much as you possibly can during this time and don’t worry about someone stealing your idea. Chances are, people have thought of similar ideas, they just haven’t done anything with their ideas. Don’t be that guy. Go build your idea.

  • Investments in Your Vertical

  • It’s important that you spend time understanding if the VC you’re approaching has done investments in your vertical. For example, e-commerce is a very broad vertical. It may be sufficient to determine that VC X has invested in e-commerce companies in the past hence, your e-commerce business selling gourmet chocolate online fits in to their investment thesis. However, to be really prepared before approaching them, you may want to research if they have invested in online food ordering or other food and beverage related businesses before. It can only help if they have.

  • Investments at Your Stage

  • Making sure there is a fit in the life cycle of your startup and what VC X typically invests in is critical. For example, if you just launched your prototype, have 1000 users on board and are looking to raise 50 lakhs in funding, you probably shouldn’t approach a VC who does much later stage and larger deals. At your stage, you are probably better off approaching an accelerator program.

    At the same though, you shouldn’t shy away from connecting with and building relationships with investors that may be a better fit for later stages in the lifecycle of your startup. Everyone is busy so don’t despair if an investor declines to “have coffee” with you. Keep trying.

  • Get a Refferal

  • I can’t stress this enough and I’m sure you’ve heard and read about this multiple times. Read it again. Get a referral to the VC(s) that you’re targeting. What does this mean? Well, it means that you need to start thinking very early on about some of the VCs that you want to approach. Find out who do you know that knows them – founders, mentors and/or advisors in some of their portfolio companies, angel investors that co-invest with them, etc. Start building relationships with these folks early on. Don’t expect to meet someone once or twice and ask them to make an introduction to a busy VC. It doesn’t work like that. If you ask someone for a premature introduction, you will most likely turn that person off and they may be unwilling to help you in the future.

  • Your Pitch Deck

  • Assume all of the other items above have worked out well and you’re ready to start connecting with the VCs in your pipeline. Sending an email detailing what your business is and who your team is, etc. is not a good way to start the relationship. Remember, you’re not the only person the VC is speaking/meeting with. Most VCs are extremely strapped for time. After getting the introduction, send over a deck with some very simple but impactful slides. If you’re going to send over 20 or 30 slides, don’t expect it to get even a glance. Start with Guy Kawasaki’s 10/20/30 Rule and after that, take a look at The Triple Play of Presenting and Dave McClure’s 10 tips for the perfect investment pitch.

    I would make a slight modification to this. If you have any traction, e.g. number of users, number of downloads, revenue, etc., then you should start the first slide with this data. If I open a deck and I see some meaningful (though early) traction, I’m more inclined to go thru the rest of the deck to see what other pleasant surprises are contained in the deck. Move the “Problem” slide to the second slot and the “Solution” slide to the third position. Move the “Team” slide to the second to last, right before the “Money” slide. Rip out the projections slide for some early investors but keep it in for other later stage investors unless you have some traction on the revenue side and can make actual projections. Most early stage projections are completely useless so let’s not event waste time on them.

  • AngelList

  • If you aren’t using AngelList, you’re losing out on an incredibly valuable resource for connecting with investors. I’ve done a few talks in New Delhi/NCR about the importance of AngelList for Indian startups and I think many Indian founders are beginning to see the importance. Though it’s a chicken and the egg problem with regards to Indian founders and Indian investors on AngelList, the one thing that you can be certain of, is that many many US investors are on AngelList and they are watching India closely. The boundaries and borders are coming down. More and more US based investors are getting active in India (we’re one of them) and AngelList gives you a direct line to them. Long story short, before contacting an investor, make sure you have a properly filled out AngelList profile ready to go. Include your AngelList profile, Twitter and Facebook in investor communications. It helps them to get to know you and see what’s happening.

So what do you think about these tips? Any more to add?

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Lean Startup Presentation

This is a nice presentation on the need for startups to be lean and how agile development can help the process. It would have been nice to have audio to go along with the presentation by Steve Blank (Board Member) and Eric Ries (Co-founder and Board Observer) of IMVU.

IMVU was founded in 2004 and is doing roughly $1 million per month in revenue. IMVU is a 3D chat service where you can pick and choose your own avatar and much like SecondLife, you can purchase items in the virtual world, using real world currency to buy in-world credits. I haven’t used IMVU but users can create items in-world that can be sold to other users for credits.

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Skin in the Game

I was reading an interesting post on Gaurav’s blog about founders of startups taking significant paycuts when raising funding from VCs. i was going to post a comment but am having some trouble connecting to Gaurav’s blog.

VCs in India are applying what they’ve learned operating in the US and Europe to an economy and economic conditions which are very very different. This isn’t to say Gaurav is right and Sundar and Krish are wrong. However, there’s probably a medium that is a bit more amenable to both sides. VCs need the founders to be up to their eye balls in the business for many reasons. However, having a founder who is financially struggling, on top of all the other issues related to doing a startup increases the risks associated with the investment. It is conceivable for a founder with significant negative cash flow to throw in the towel and pack up her bags or worse, to stay on and throw themselves into a deeper and deeper grave, potentially filled with debt.

On the other hand, most entrepreneurs start a business because they are confident of their abilities and they are sure they can hit a home run ( or a century for all the cricketers out there ). Ideally, an entrepreneur will raise money from a VC when the business is moving in the right direction and there is revenue coming in. The founders might need the additional money to grow exponentially, diversify, or gain the valuable advice of an experienced team. Hence, it’s important that the founder takes a substantial pay cut in order to show the investor that they are “believers”. What “significant cut” means is relative. To a VC, a 75% cut is significant but to the entrepreneur, 25% is significant. At the end of the day, the entrepreneur must decide how much control she is willing to cede to investors and how costly the capital raised will be. A good negotiator might convince investors that it’s in ther interest to give the founders a 10% paycut from market rates.

Each founder has to evaluate their financial position and decide whether the delayed gratification is an economic reality and if they can afford to do it. If they can’t, perhaps it’s time for them to leave the bargaining table, or worse, leave the business.

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