Britney Spears And Venture Capital
In my younger, considerably more rebellious days I used to be one of those really irritating people who could appreciate only one kind of music. At that time I was passionate about all forms of heavy metal, and later, the alternative/indie rock scene. As a connoisseur of a niche genre, it would bug me to no end that artists like Britney Spears (or name any other global pop sensation) get so much of fame and money while the kind of artists that I liked always seemed to struggle.
As I grew older and started having a bit more of a clue as to how the music industry worked, it became obvious to me that if it was not for the success of the many pop sensations and manufactured global stars, a large chunk of the smaller, niche artists would never have been allowed the luxury to record and be heard by a lot of people like me. The way venture capital works is in a similar manner. They need at least a couple of multi-platinum runaway hits on their hands to be able to afford to take their chances on smaller higher risk ventures.
For a product person, it is irksome to see some of the ideas/concepts that get funded. It makes no sense and it looks stupidly driven by hype. Oftentimes, the purist product person is the niche indie artist and can’t see anything beyond the purity of what she/he is doing. But the fact is that there is no single route to success. Some of the routes are fair, some are more unfair. Some who wind up being funded and (or) successful may not even deserve it. But every bit of success collectively adds up to open the doors for a few more outliers.
Read MoreProgress Report Q2, 2011 And Early Stage Adventures In India
It has been a while since I did a progress report, the last one was in February of this year and I guess this is a good time to get back into the habit and also add a few points on the general experience of trying to find my way in the early-stage ecosystem in India.
A quick reading of the report card would find that I have given myself a good grade in making a living on my own terms outside the confines of a big company. In making the model scale, it is a sub-par grade and in making worthwhile inroads into the early-stage ecosystem in India I’ll have to fail myself. The net result of the report card is that I have been forced to review everything that I do and make an attempt to find a different way of going about it. The key takeaways from these are that you can’t realize the big Indian opportunity without big spends and that big spends without a product experience that does not have an actual resonance with the masses won’t go too well here. On the investor’s front, you can’t make things work purely on effort (where I have failed), nor can you make things work by throwing only money at it (where most traditional investors seem to fail).
The early-stage ecosystem requires the investors to contribute in at least one of the following means:
1. Effort: Help a new set-up with code, administering technical infrastructure, increase the effectiveness of marketing efforts through your personal network. There are no limits to what all you can do for an early-stage company, but there is certainly a limit in terms of how much you can do.
2. Capital: It is the lifeblood of all companies and there is simply nothing out there that you can replace it with. Everything else is an add-on on top the capital you can deploy as an investor. Advice and mentoring is easy to do, but putting your money where your mouth is, is much harder.
3. Connections: Shorter lead time is a major competitive advantage for any early-stage company. Even if you can effectively brandish the other supreme weapons of an early-stage company — pricing and execution advantage — extended lead times can kill even the best priced and executed products.
Since cash-flow is king, every deal that closes sooner, than later, makes it that much easier for an early-stage company to survive. If, as an investor, you have the connections in place, conversations on a sale can start at middle management or at the senior management level than start from the board number listed on the company website.
4. Clarity: A lot of early-stage success is related to being able to see the larger opportunity and being able so say “no” to a lot of things. Larger, more established companies have the ability to absorb leakages and distractions due to failed projects a lot better, but for an early-stage company these are blows that are hard to recover from. When you are strapped for cash and are living on a month-to-month basis it is so very tempting to do side projects that bring in much-needed revenue. The ability to see through clearly in such circumstances is invaluable.
For me, the attempt at getting into the early-stage ecosystem from an investment/incubation point of view was always going to be a great learning experience. The contribution on effort was the greatest, capital was second best. Connections worked out a bit better, but it deserves a fail. But the most spectacular failure was on clarity. Probably, the most damning of the failures is something that can’t be addressed in the points laid out above, I will attempt to address that now.
When you do start engaging with an early-stage set-up you should be very clear about what exactly is the scope of your engagement. You can be in it as an investor/mentor or you can be a part of it as one of the founders, as a part of the core team. The two choices mean two distinctly different roles and in mixing them up I made what is the most fundamental of mistakes. You can be a doctor or you can be a patient, but you can’t be a good doctor to yourself when you are the patient.
The immediate plan is to fix the problem with the lack of bifurcation and try to become an enabler instead of a stumbling block. The difference between the two can be missed quite easily. The longer term plan requires capital to be raised. It is hard to operate in the Indian market without money if we are looking for scale since a lot of the work often involves creating a market in the first place. This means that what the valley leans on a lot, network effects, is almost impossible to taken as a factor here. Excellent products can die a quiet death due to this factor. It is unfortunate, but it is very true too.
Effort is also not a major factor in India. There is no oversupply of ideas or products and money is often seen chasing good ideas that are hard to find. Effort deployed as a filtering mechanism works well only when there is oversupply, thus creating a premium on filtering-driven efficiency. We just don’t have that in India.
That said, raising capital either for a venture or to invest is much easier said than done and more importantly, it requires you to be well connected in the right places, which is not exactly my forte. But, there seems to be no other way forward than to give some form of this a shot. Hopefully, before the year ends, I should have something in place in this direction.
Read MoreWhy The Y Combinator Model Does Not Work In India
Y Combinator exists in an entirely different environment from what we have in India. For any healthy VC/seed/angel funded start-up ecosystem to exist, it requires two things as must-haves. The first is the existence of reasonably sized exits at regular intervals via the IPO route or through the M&A route. The second is the existence of large enough markets to support at least two to three profitable players in any domain.
YC exists in an environment where the two conditions are well satisfied, leading to a situation where there is a considerable premium on a quicker access to funds (for the start-ups) and good talent/concepts (for the investors) where there is often an excess in supply on both sides of the table. India, on the other hand, has a real shortage on both fronts – good start-ups and good investors.
The main problem is that the Indian market for digital goods and services is tiny. In a non-existent market, neither product finesse nor pricing can make much of a difference. There is barely enough size in the digital domain to sustain large profitable companies. At best we see companies that are small and profitable or one market leader who is struggling to grow in its domain or diversify out of it.
In such a situation you can't get into the early-stage/start-up investment scene armed only with effort on your side. For the fight in underdeveloped markets the right gun is money and you need plenty of it. If you walk into it with effort and connections as the only weapons you won't go anywhere. Sustaining a first-mover disadvantage is a costly exercise in greenfield areas. If you don't have the money to sustain your portfolio companies, the effort alone won't save it. It is a finite non-scaleable factor.
In trying to sustain the number of portfolio companies mostly through effort than funding, the incubators/seed/angel investors won't be able to give the companies the time/effort required to grown them. Thus they actually reduce the ability/probability of the portfolio companies to succeed.
At the current market size I don't see the possibility of any of the smaller-scale funds being able to do a great deal of good. Their possible exits are so small that I can't imagine too many LPs being happy with the rate of return the GPs can bring to the table. If you invest in the region of ~10 lakh per company, the domain that you are investing into is also likely to be very small. Since we don't have well developed markets, it is not possible to start small into a big product.
That said, the parties who can play big in this – the VCs – are also increasingly moving away from their traditional roles and behaving more like PE funds. This is understandable since there are not enough big success stories in the market that can come close to the kind of rate of returns required by the VCs, thus they wind up investing in established companies than early stage companies or start-ups.
This is, obviously, not a healthy state of affairs. In fact it is quite regressive and it does not bode well for the country as a whole. Everyone can see the untapped opportunity, but the overall direction we are headed in is making it extremely unlikely that we will ever tap into it.
Read MoreThe Myth Of Zuck
I finally managed to watch The Social Network, the movie on Mark Zuckerberg. If this is what bad PR looks like, I would certainly love to buy some of it for myself. Yes, there are bad bits in the movie, but it portrays the man in question as an awkward hero going all out to realize his revolutionary vision. Everything else is collateral damage in that journey, if it did not work out well. I don't think a movie by Facebook itself could not have done a better job of creating the legend.
Apparently, CBS ran a 60-minutes segment on him last night and it was more of the puff piece specials that have been flowing from the media on Facebook (and other valley tech majors) for a while now. I do not know Zuck, I have no idea what is really the truth. But what is seen and available in public is so manufactured and manipulated. They are really taking a book from the Steve Jobs edition of 'Making of Legends' and putting a social layer on it.
Coming back to the movie, the image transformation of the protagonist could not have been more poignant. The first time you see him on the computer, he is using the terminal to download pictures of women for Facesmash, in the end he is using the terminal to work with Apache on some Debian-based distribution of Linux. Always alone, only with his magnificent vision (and bash) for company, but always forging ahead.
Read MoreGiving Back
This year I have supported three Open Source initiatives that I have probably used the most. Elgg, NeoOffice and Wikipedia have contributed greatly to my ability to earn a living, learn a lot more than what I would have otherwise ever known and build and express a lot of ideas and concepts. These are not major contributions and they have been made in a personal capacity, but I do intend to push it up a notch every year and once the company steadies itself I will institute a proper program that will identify more initiatives and contribute a lot more.
A lot of what we are able to do on the web these days is possible due to the work of a handful of people who have often worked for nothing in return. If some of the software that enables us were to be billed at the level that most shrink wrapped software is billed, the internet as we know it would not exist today. You can argue about the validity and feasibility of that model, but you can't argue that all of us have benefitted greatly from it. Even though most of the stalwarts who have put together these things have not demanded money as a must-have in return for what they have created, it is a good gesture to make any contribution that you can make.
If it is possible for you, do try to find one of those that you like and contribute in whatever capacity you can.
Read MoreAre Internet Portals In India A Case Of Death By A Million Cuts?
A curious aside from yesterday's post on In.com is that almost anyone who has a portal in India is not having a good time. There are not many who can claim to running one in India these days. I can only think of Rediff (Rediff.com), Times Internet Limited (Indiatimes.com), Web18 (In.com) and Sify Technologies Ltd (Sify.com) as the only players out there. The common thread between all these companies is that they are all in the red. It is a flaky to point out the portal angle as the only connection between these companies and their losses, but it is not without merit.
My reasonable guesstimate puts the top line for a company (it is a guesstimate, so do pardon me if the numbers are way off) close to Rs. 100 crore in revenue for a year. Most of these companies have a head count that is not lower than 150. With such a head count, compensation itself can easily be over Rs. 20 crore for the companies in a year. Servicing the facilities will add up another Rs. 5 crore a year to the bill. The technical infrastructure can add another Rs. 6 crore to the annual bill. Add another Rs. 15 crore in marketing expenses and it all adds up to a good Rs. 46 crore in a year.
The problem is that the head count is way over 150 in these companies (especially in those companies that are doing Rs. 100 crore in revenue) and the expenses I have listed are on the lower side. I have also not added other significant components like content licensing costs as they vary wildly from company to company. In the portal side of the business, advertising on content is more or less the only avenue for revenue and with the cost structures these companies have, it is impossible to scale those without a corresponding increase in costs. After a point, it is a case of chasing your own tail unless you can alter the fundamental variables in the equation.
The numbers mentioned above are not authoritative by any means and a lot of it can't be corroborated in any meaningful or public manner. But it demonstrates the point that doing more of the same that has been done so far will take you nowhere. This also represents a reasonable opportunity for a well-funded new operation that can be small and nimble. This also explains why the successful larger companies on the Internet India have been mostly transactional nature, which is only of limited relief since none of those have managed so far to diversify out of their core offerings.
What do you think?
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