Progress 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 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 MoreSmall Victories
The story behind every start up runs along two chapters. The first is the search for a sustainable business model and the second is the search for an operational model which is sustainable in the business you are looking to operate. '7-days a week' is a concept that is at the core of the start up folklore and it goes something on the lines of “if you are not killing yourself (and your team in the process), you are not worthy enough to call yourself a start up”.
The vast quantities of bullshit floating around that concept needs to be tackled in a different post, but what I want to focus on is a tangential aspect of it. When you are a freshly-minted start up, it is almost always the case that you have juggle multiple things. On any given day you may find yourself making the draft of a new pitch, fending off customer queries and even fighting with the utilities guy as to why the power is intermittent in your office. There is almost always n+1 on the horizon when it comes to things that you want to tackle, where 'n' is far beyond what your available bandwidth can tackle with comfort.
In such a scenario, it is very easy to get lured into the trap of going after the big targets (alpa, beta, public release etc) as the only worthwhile milestones, but what also needs be kept in mind is that, in start ups, team members are almost always likely to be stretched to the point of breaking. While a the big goal might be a great target to gun for, it is also important to have smaller targets in place that breaks the monotony, brings in a feeling of being rewarded and keeps the perception/sensation of motion in place.
In the long road towards achieving sustainability, it is important to recognize smaller achievements. The key thing to remember in a start up is that you are working with a concept that is yet to be proven. Thus, that concept in itself cannot be the final reward for people who are part of your team. More importantly, it cannot be the only reward for yourself. It is important to break that big huge task into simpler and smaller parts, put timelines on it and go about attacking it.
And when you do finish those tasks, take a moment to savour and celebrate it. This is one place where it is really important to enjoy the journey as much as you would enjoy the eventual destination.
Read MoreStarting Up: How Hard Is It Really?
After being out of a regular job for well over a year now and now slowly moving into what can be called doing a start-up, I have to say the feeling is very similar to the year 2000 when I started working for the first time in my life. It was the fag end of the dot com boom and the onset of the bubble being burst at that time. The feeling was eerily similar — high potential, high paying domain having had the rug pulled from underneath its feet. The digital domain in India feels no different at the moment. There is paucity of ideas, there are a handful of winners and there is an overwhelming stench of defeat and listlessness. A lot of the feeling is quite justified — we needed a significant course correction, one that was brought about by the unintended consequence of the global financial crisis — but a lot of it is not justified either.
In the midst of multi-million dollar valuations, payouts that dreams are made of and other assorted vanities of the charmed world we inhabit, it is quite often easy to lose perspective of the larger picture in life. A lot of the thoughts behind this post were triggered after reading this post, on how difficult it is to do a start-up. For people accustomed to a particular lifestyle, going from a regular salaried life to doing something on your own can be a difficult proposition. Then again, how difficult are the things mentioned in that list? A vast majority of the world's population live without even the downgraded lifestyle mentioned in the post. For that matter, most can't even dream to have that downgraded lifestyle. It is as simple as that.
See, I am not someone whose heart bleeds for every poor person in this world, but I don't also have the illusion that what we are doing in terms of start-up is some epic struggle. A lot of people in the world work 13-14 hours a day under the most trying conditions without even knowing the words IPO or what an exit would mean. Yes, most of them are not creating the next Twitter, Yahoo! or Google, but if sacrifices were all it took to do a start up the world would be teeming with success stories. Yes, there is a lot of risk associated with doing a start up, but it is not the end of the world, nor is it earth-shattering. For most parts, it is like everything else in life with an associated risk factor that you try to negate to the extent you can negate.
The larger point to the post is the sense of gloom out there because funding has dried up, VCs are not spending a great deal of money in the digital sphere and there are a lesser number of people looking to break out on their own right now, compared to two years ago. It is not that the opportunity has gone away with the disappearance of the gung-ho sound bites. The opportunity is still there, but the opportunity to make a quick buck is certainly not there anymore. The joyride is over for most, but India has never been a nation of joyrides. It has taken a lot of balls to make things happen here, having not had it easy has not stopped many so far.
Think about it – someone like me, who belongs to a strictly middle class upbringing is the son of parents who earned much less all of their lives than I did in my last job. Yet, they managed to 'innovate' enough, even with limited cash flow, to buy land, build a house, a cycle, scooter and a car (yes, the Maruti 800!) educate two kids and still have something left to take care of themselves in their old age. If going lean for months on end is what a start-up is like, there is a whole generation of middle class parents who are successful entrepreneurs. And better still, they did it in an environment where opportunities were scarce and the going was tough. But you don't hear much about their supreme lifestyle sacrifice.
Then there are the entrepreneurs — ranging from the millionaire panwallah next door to the numerous businessmen out there. They have lived thorough the license raj and lot of them have prospered, as many as those who have burnt. You don't hear them speaking much about the tough times either. Risk is a part of living. There is risk in getting out of bed too, for, as the Gauls would tell you, the sky may fall on your heads. Everyday people invest, innovate, transact and follow the entrepreneurial spirit in the normal world in different ways. The chap who collects garbage from my house makes 3000 rupees a day reselling all that he collects. A local money lender I know gets returns on his principal that most investors cannot even dream of.
They all have risks associated with what they do, but we seldom hear about them in blogs or tweets. As I am writing this, it has been a constant struggle to not attack the start up ecosystem for all its flaws. But what I will say is that the opportunity is still out there. Yes, the way we have gone about it so far has largely been shown as a dead end, but that is where you need to correct our course and move in a different direction. Do not give up. We are a country that has come this far because of our ability to persist and do 'jugaad'. We are the nation of the imperfects and the chaotic. It is tough going at the moment, but ignore the easily trotted out stories of gloom or delight. It is time to do what we do best – put our heads down and work quietly away.
Read More