Sharing…

One of my long-standing peeves with the startup ecosystem in India is that there is very little discourse and even less transparency – there are not many folks who are comfortable sharing insights and ideas, much less facts and figures.

There are two major problems with this opacity:

Firstly, there is no credible way to have a comprehensive overview of the ecosystem and draw any kind of meaningful inference from it. iSPIRIT’s index for software products is a good start but we still have a long way to go before we have a clear picture of the industry as a whole.

Secondly, this lack of sharing makes it difficult for other startups to learn from each other’s experiences.

Against this backdrop, it was refreshing to see one startup share their numbers in a wonderfully transparent manner – http://blog.frrole.com/post/102205887845/transparency – Kudos to Frrole for this.

While it is to be seen if Frrole achieves its objectives for sharing its numbers – build a great culture, create a respected brand, attract the best people etc – it feels like sharing these figures openly is an end in itself as it fosters more transparency and openness.

So in the interest of contributing our 2p towards this transparent ecosystem, I am sharing our startup’s specifics and further, annotating each point with a brief commentary that will hopefully add some context to how and why we did the things we did.

Seed Round
We raised our seed round about a year ago. In this, we raised $500K at a pre-money valuation of $2.3 million. We had previously secured a convertible note of $100k from Qualcomm by virtue of winning the Qualcomm QPrize and as per the conditions of that investment, it was converted to equity in this seed round at the same rate as the new investment.

How much to raise

When we started attempting to raise our seed round, we were originally planning to only raise $300,000.
The idea was to provision for a burn of $400k ($300k seed investment plus the previous $100k convertible note) over eighteen months at an average of $22k per month.

Why eighteen months?
Simply because that was the standard prescribed by most of the blogs that we had read.

As part of winning the Qualcomm QPrize, we had the ear of Karthee Madasamy who heads Qualcomm Ventures in India.

When we updated him on our fundraising plan, he gave us two pieces of advice that we are immensely grateful for.

Firstly, he told us that $300k is too low and asked us to bump it up to $500k.

Why?

We had arrived at the $22k monthly burn figure by projecting our expenses and revenue for the foreseeable future. Karthee pointed out that as entrepreneurs, we are genetically programmed to be optimistic but more often than not, things don’t pan out the way we want. Therefore it is always better to underestimate your revenue and overestimate your expenses before arriving at the figure you want to raise.

There are many startups in India who have raised seed rounds of $100k to $250k – the problem with this is that while it undoubtedly cheap to start a company and launch a product, it is far tougher to scale it and take it to a point where it is ready for a Series A investment. So companies who raise less are often forced to raise an intermediate round, usually at onerous terms, to bridge the gap.

Therefore, it made a lot of sense to attempt to raise $500k in one shot rather than have to do it in two different rounds with the attendant overheads and perception problems.

Secondly, Karthee shared from his experience with other portfolio companies that in India, it takes a lot more time to build a track record that can merit a Series A round.

So while eighteen months might be a reasonable number to provision for in Silicon Valley, in India one should provision for at least two years.

How much to value our company

Once we arrived at this $500k target, the question was to figure out how much to set the pre-money valuation for.

One rule of thumb that we know of is that companies usually dilute 15% to 25% of their equity in each round. We pinged our network to figure out what sort of numbers are in vogue in India and quickly discovered that aspiring for diluting only 15% (implying a pre-money valuation of ~$2.8m) was going to be tough given that most investors are extremely sensitive to the entry price.

So we decided to shoot for a $2.5m pre-money valuation so that we end up diluting 20% of the company post the fund raise.

The idea was to not price ourselves out of the market and simultaneously not under-sell ourselves by diluting a lot more than what we ought to.

From whom to raise your funding

When we set about raising our round, we that we already had a token investment from Qualcomm and Karthee was kind enough to offer to pick up 50% of our round. This is admittedly a luxury that most other startups wouldn’t get and we consider ourselves very fortunate to have had this privilege (and just one more reason to apply for the QPrize contest!).

We were planning to raise the remaining 50% of our seed round from angel investors and seed funds and started talking to a few folks.

The first thing we learnt as we started these conversations was that the average pre-money valuation in India is far lower than we had pegged it.

Angel networks were habituated to investing money at sub-$1m valuations.

Predictably enough, the seed funds that we pinged (Blume, Kae Capital) also had similar expectations around valuations (NB: “Predictably” because these funds are run by folks who were earlier angel investors and had since “graduated” to running small funds which invested other peoples’ money in addition to their own – so their worldview towards investments were largely similar to those of angel networks).

Karthee suggested that we talk to a few VCs to see if they might be interested and connected us to a few folks. We also managed to get some inbound interest from a few other firms and spoke to them as well.

Experiences with Indian VCs

As we started talking to the Indian VCs who showed some interest, we realized two things:

Most Indian VCs look for evidence of meaningful traction before they invest and given that at point of time, we were only a few months into full-time operations, we were far too early to have these conversations. (NB: This was more than a year ago – I understand that many VCs have since become far more bullish about investing early and are making far more seed bets than before…a development that augers well for Indian startups looking to raise funding today).

Secondly, raising an amount like $250k is neither here nor there – it is an amount that is not anywhere close to being a Series A round and more than the $100k type of seed investments that some VCs make.

So, as it turned out, we didn’t get a mandate from any Indian VC.

In the interest of transparency, I am sharing some specific experiences and impressions of the VCs that we interacted with (NB: Please note that this is not any kind of indictment of the VCs named…this is just our experience and your mileage may vary greatly!):

Sequoia Capital
Was invited to meet them (inbound interest). When we went there, we were told that the partner was busy with something else and wouldn’t be able to join, so we pitched to the associates. When we were almost done with the pitch, the partner walked in and asked us to restart.
We did so duly but the partner seemed more interested in his Blackberry than in our pitch (which in hindsight tells me that we didn’t do a particularly good job of pitching!).
Once we finished pitching, he asked us only one question – what does your cohort analysis look like?
While this might have been okay in other circumstances, the fact that he was asking this of a company that had only just started operations seemed somewhat incongruous and anachronistic.
Needless to say, I winged my way out of their office as fast as I possibly could and predictably never heard from them again.

Inventus Capital
Pitched to their full partnership. They got back after a few days saying that they weren’t comfortable enough to invest at that point of time and said that they might want to talk again once we reach an MRR of $50k.
Now one of the cardinal precepts of fund-raising is that you shouldn’t take rejection personally (after all, the nature of the game is such that you end up with far more folks rejecting you and just one or two investors actually giving you a positive mandate – so even in a successful fund raise, the number of folks who rejected you is likely to be far higher than the ones who backed you).
But in this case, I don’t mind confessing that I was very disappointed – simply because, I knew one of the partners personally and had worked with him professionally previously and would have thought that he would vouch for me (probably rather naively in hindsight).
The twist in this particular tale is that we hit the $50k MRR rather fairly quickly thereafter – I did inform them about this when we reached the milestone but didn’t ask them to follow up on their earlier “offer”.

One aspect of fund-raising that is often overlooked is that when you search for investors, you are searching for believers – kindred souls who share similar aspirations and folks you would enjoy going to battle with…if the investor’s decision to back you is built primarily on the traction that you can demonstrate, you are better off not having such partners. Not that such investors are bad folks per se but chemistry usually trumps arithmetic!

We also had conversations with Lightspeed, SAIF, Matrix and VentureEast – all of whom passed rather summarily.

Fortunately, we still had the support of a few US-based angel investors – most notably Sabeer Bhatia – who picked up most of the round.

We also got the backing of two angel investors in India – Amit Gupta, co-founder of InMobi, who invested in us after just one meeting and Neeraj Goenka, a Mumbai Angel, who decided to participate in the round without meeting or talking to us even once!

I guess there are truly some angels around even if they are fairly hard to find!

We ended up with meeting our target of $500k and had to decrease our pre-valuation ask only marginally from $2.5m to $2.3m.

Aftermath – post funding

It’s been a year since we closed our seed round. In this period, we have grown to a 30+ member team and have crossed the $50k MRR figure. Approximately half the funding is still in the bank and while we could be profitable if we wanted to, we are currently ticking along at a burn rate of around $10k per month which we are comfortable with.

I cannot say yet that we have reached product-market fit but we now have a well-informed hypothesis about how to crack the market we are targeting and the future looks brighter than ever before!

If any startup founder has any questions about any of the things that we did, please ping me at sumanth@deck.in or on Twitter at @sumanthr and I will help out as much as I can.

Footnote – NBC
Since this entire post is in the nature of trying to “pay it forward”, I thought that it might be pertinent to mention a somewhat orthogonal but related development here.

In the recent past, a number of “ecosystem enablers” have sprung up in India – these range from accelerators to incubators to bodies like Nasscom and iSpirit.

However, one big hole in the ecosystem is the absence of a completely “non-transactional” community of startup founders – a network of doers supporting one another without any vested interests or hidden agendas.

Fortunately, one such community has emerged here in Bangalore, almost serendipitously – we call it “NBC” short for “Nanda’s Boys Club” (NB: The use of the word, “Boys”, is incidental and in a genderless intent – no misogyny!) – a group of founders who meet monthly at a run-down restaurant in HSR Layout…there is no agenda and it mostly consists of shooting the breeze but when needed, we silently support one another with specific things – lend a ear to listen to a problem, make connections when possible.

There are no stars in this group and most of us are in a sense, struggling founders, but the sense of camaraderie and kinship strengthens each one of us imperceptibly but palpably!

It is great to be part of the NBC and I hope a hundred such NBCs bloom and grow in every Indian city where startups are titling against the windmills to make their dents in the universe!

Of Flipkart, Myntra and the ‘Unbearable Lightness of Being’ Mahesh Murthy

The recent announcement of Flipkart acquiring Myntra was greeted with a range of reactions and emotions within the Indian startup ecosystem – exultation from employees to guarded optimism from competitors to hallelujahs from industry observers.

In the midst of all there was one shrill voice that stood out starkly for its vitriol.  This voice belonged to Mahesh Murthy – part-time marketer, part-time investor and full-time resident gadfly.

Mahesh felt that this deal was much ado about nothing – just a case of “topi investors” (his favorite term of endearment for investors who don’t share his worldview) rearranging the chairs on the deck of the Titanic by merging two doomed entities in a meaningless transaction.

Short of shouting out his view from the rooftop, Mahesh peddled his view on every possible channel. He tweeted about it, posted it on Facebook and also appeared on TV. To top it, he wrote about it at length in Quartz, an online business news publication – qz.com/212775 – where it apparently became the most-read article ever. If all of this wasn’t enough, this was subsequently picked by mainstream publications as well – CNBC,   Business Standard et al.

Predictably no one from Flipkart or Myntra found it worthwhile to dignify this invective with a response. Now, I am in no way connected to Flipkart, short of being an occasional customer on their website. But even to my casual observer eyes, Mahesh’s arguments were  at best, misinformed and at worst,malicious half-truths. I have enumerated his points below with a brief retort – read ahead and judge for yourself if Mahesh has a case.

CLAIM 1:  Flipkart buying Myntra is just another episode of a long-running saga of acquiring other “wobbly” e-com companies that are funded by common investors

Mahesh quotes the instances of Flipkart previously acquiring companies like Chakpak and LetsBuy – struggling e-com companies with common investors – to present a case that the Myntra acquisition follows the same pattern.

Firstly, while it is true that  companies like Chakpak were distressed entities and their acquisitions could possibly have been engineered by common investors, there is hardly anything nefarious in this. The fact of the matter is that closing companies in India is a byzantine and thankless job – it takes years and requires folks to jump through countless procedural hoops to provide a burial for a failed company. One way to short-circuit this process is to merge the distressed entity into another company as a slump sale acquisition for a token consideration thus avoiding the bureaucratic hassles. This is a common practice that is followed by many investors and not restricted to “topi investors”. Don’t believe me? Ask Mahesh himself – in his own portfolio, a failed company, LifeBlob was acquired by Printo, another company backed by Mahesh.

So does the Myntra acquisition fall in the same category of distressed slump sales?

ABSOLUTELY NOT.

Unlike the previously-mentioned startups, Myntra was hardly a failed/failing company and Flipkart buying it was far from being affording it a burial. On the contrary, buying Mytra was an act of “buying strength”.

Here are the facts:

FACT 1 : Flipkart needs Myntra to compete in the fashion/apparel vertical

Hitherto,  none of Flipkart’s acquisitions have been strategic in any sense. However Myntra is different.

How so?

It is a well-known fact that fashion/apparel is the biggest e-com vertical – this is true all over the world and is true of India too where it is estimated to be a Rs. 17,000 crore market. It is also the fastest-growing category growing at over 100% year-on-year. So any company staking a claim to be the leader of e-commerce in India needs to win this category. Now, Flipkart has had a presence in this segment for the last year or so but despite investing a ton of effort and money into this, it is far from being the market leader. As things stand, this is largely a two-horse race between Myntra and Jabong who were hitherto running neck-to-neck with around 30% market share each. However after assimilating Myntra, Flipkart is now the market leader with a long lead – the combined entity now has reportedly 50% of the market to itself.

There is another reason why Myntra can be invaluable to Flipkart – while a lot of people are talking about the economies of scale that the combined entity will have, given the fact that the operations of the two entities are continuing in an independent fashion, these scale economies will be limited in the short term. However the fact that Flipkart caters primarily to the VFM segment while Myntra owns the premium category implies that there will be enormous “economies of scale” that will accrue to them. Between the two brands, the combined entity will cover all segments of the apparel category with each entity playing to its strength and even in the niches where there is an overlap, it affords them a wonderful one-two opportunity to capture a customer.

FACT 2: Myntra is a company with strong fundamentals and far from being a distressed one

Assessing the health of a company like Myntra requires evaluating two parameters – growth and cash.

So was Myntra growing?

Myntra was growing like a weed – ROC filings indicate that Myntra grew over 300% to Rs. 263cr in revenue in 2012-13 and based on the quarterly reports, was scheduled to close 2013-14 at nearly Rs. 900cr repeating the 300% growth.  All other important metrics – number of registered customers, GMV, number of daily shipments, average basket size, number of sellers in marketplace and number of brands – have all shown equally robust growth over the last three years.

Was Myntra in danger of running out of cash?

According to reports, Myntra was already profitable on a transaction basis with positive contribution margins (which accounts not only for the gross margin but also the cost of delivery, returns and other expenses related to order fulfillment). Obviously, it wasn’t profitable overall as it was investing in growth but the fact that its unit-economics are positive gives Myntra enormous strategic leverage.

Also it might be worthwhile to recognize that Myntra has plenty of dry powder in its arsenal as it had raised $50 million in new funding just a few months back.

So if things were so good for Myntra, why did they choose to get acquired by Flipkart at this stage?

There are two reasons that are fairly obvious . Firstly, combining forces puts them in a much stronger position to compete with Jabong, Snapdeal/ebay and Amazon than if they were to attempt it individually. Secondly, as business scales, Myntra can benefit from Flipkart’s legacy investments in technology, processes and infrastructure directly or at a minimum by learning best practices.

Beyond these, I believe that there are two other reasons why a merger made sense for Myntra (NB: I am speculating here).

Firstly, despite its recent fund-raise, there was a good chance that this wouldn’t have been Myntra’s  last round of funding and they would need to raise another round sooner or later to fuel growth and fully capture the growing market. Merging with Flipkart would mean that it frees up the Myntra management from the onerous tasks of setting out to raise yet another round and allow them to focus completely on running the business.  It was reported that Myntra took six months to close their latest round of financing which implies that getting funding wasn’t a shoo-in and required considerable time and effort. But now post the acquisition, the onus for further fund-raising for the combined entity would probably fall on the Flipkart founders, who all said and done, are past masters in raising funds – a oft-overlooked trait that top-quality CEOs possess. Flipkart has already announced that they will invest $100 million to grow Myntra – a figure that should take them to $1 billion GMV.

Secondly, now that Myntra is part of Flipkart, they get the undivided attention of their common investors like Tiger Global. Tiger Global is the leading e-commerce investor globally and has a finger in pretty much every major international e-commerce company – from JD.com in China to market leaders in Argentina, Africa, Brazil and Russia. They also back the hottest apparel e-commerce companies world-wide – from Vancl in China to NetShoes in Brazil. Given the relative positions of Flipkart and Myntra in Tiger’s portfolio, arguably Flipkart would have received preferential treatment in terms of access to these global leaders but now Myntra has the privilege of being on top of the totem.

Speaking of common investors, let’s move on to Mahesh’s second claim:

CLAIM 2: Common investors who own the bulk of the company were the ones who engineered this deal

Mahesh’s claim is that “investors owned more than 80% of each firm” and the merger was essentially a “Great Indian Roll-up” made by the investors to protect their narrow self-interest.

Now, there is a neat bit of sophistry at play here where Mahesh outlines this argument.

He starts off by talking about common investors and segues into making a point about investors owning the bulk of the company. The catch is this – while the investors in total might indeed own the majority of the company, not all the investors are common which means that the common investors are far from owning 80% of each company and there are several major investors who are not common and hold significant stakes. The non-common investors include names like IDG, Kalaari Capital, Azim Premji Investments, Dragoneer, Morgan Stanley and Naspers. These are reputed, high-quality investors who by no stretch of imagination fall under the “topi investor” category that Mahesh is so fond of bandying about.

So, while there might have been some common investors who might have encouraged the deal, it would nevertheless require the approval of the non-common investors and perforce would have gone through the mandatory due-diligence process to establish that all aspects of the deal were equitable. Also, it is worth keeping in mind that each and every one of the institutional investors would have a right to block the sale as part of their initial investment terms, both jointly as well as individually, so it is highly unlikely that this was a clandestine roll-up exercise cooked up by the common investors.

CLAIM 3:  The founders’  holding was “down to low single-digit shareholdings” which implies that they had no “entrepreneurial passion to hack it “ and had little say in the merger

I wonder if Mahesh Murthy knows how much stake Jack Ma owns in Alibaba?

Answer: 8.9%

How much does Aaron Levie own in Box?

Answer: 4.1%

Single-digit holdings…yet, these are some of the passionate founders that you will find on the planet.

The point is that if Mahesh believes that the passion that a founder has for his startup is directly proportional to his percentage holding in the company, then it makes for a sad commentary on Mahesh’s own worldview on founders and investments. If anything, Mahesh should know better as in his own portfolio company, Redbus, the founders each had single-digit holdings themselves but were yet lauded for their perseverance and tenacity in nurturing their startup from incubation to exit.

Also, Mahesh ought to have known better than talk about holdings in percentage rather than absolute terms. Given the size of Flipkart, even a 10% holding would translate in several hundreds of millions of dollars.

Beyond this, the Flipkart and Myntra investors have a reputation for being entrepreneur-friendly and not forcing their point of view on the founders that they back. Both Sachin Bansal and Mukesh Bansal have gone on record to state that the managements of the two companies were the ones who actively initiated the dialogue and took it to closure and that the common investors actually recused themselves from the negotiations to avoid conflicts-of-interest.

CLAIM 4: “Flipkart is on a timeline – it will likely run out of cash in a couple of years”

So, let’s examine Mahesh’s past statements on Flipkart:

2011: “This is just a bubble and that isn’t going to last much longer. My guess? Another six to 12 months” http://archive.tehelka.com/story_main50.asp?filename=Ws020811OPINION.asp

2012: Flipkart’s best option is to have a quick overseas IPO, cash out the investors, and then prepare for a long hard grind fighting Amazon and others on the ground.The longer it doesn’t do so, the riskier it gets for Flipkart. http://www.quora.com/Amazon/How-do-you-expect-Flipkart-to-fare-against-Amazon-in-India

2013: “Flipkart comes a little more from the iBanker/ topi school of “let’s do spreadsheets on India vs China vs US, continue to lose money forever, and hope like hell someone buys it some day, because it may never actually be a real business “ http://techcircle.vccircle.com/2013/10/22/i-dont-hate-flipkart-i-just-dont-think-its-the-right-way-to-build-a-business-mahesh-murthy/

So we can say at least one thing for sure about Mahesh Murthy – he has been extremely consistent with his views on Flipkart in the last few years – predicting that the company will run out of cash in a year or two each and every year! Of course the fact that he has been making the same prediction every year and in the same period, far from closing down, Flipkart has been going from strength to strength and the goalposts are ever-changing implies that Mahesh’s skepticism is unfounded.

And just to reinforce this point – in addition to the $340 million that they raised last year, Flipkart just announced another fund-raise this week for a further $200+ million (a round that could go up all the way to $500 million reportedly), so they have a deep warchest that will keep them in the game for much much longer than “a couple of years”. Also, it might be relevant to point out that the latest investor is DST Capital lead by the formidable Yuri Milner, one of the most reputed VCs in the world and hardly someone that Mahesh Murthy can classify as a “topi investor”!

CLAIM 5: “After raising almost $600 million, it’s still losing cash”

This is an oft-repeated argument of Mahesh’s – Flipkart is a bad way to build a business and proof of this is the fact that it is not profitable.

The frightening aspect of this line of reasoning is that it is purportedly from one of India’s finest investors who ought to have known better.

If your market is large and growing, profitability is not the holy grail it is made out to be!

Why? Because it means that you are optimizing on the wrong business metric. When there is as much head-room as this, you ought to focus on growth rather than on profitability. Of course, this is something that has been well documented around discussions pertaining to Amazon and other global e-commerce companies.

Also, keep in mind that India’s largest brick and mortart retail chain, Reliance Retail, a progeny of “the patron saint of profitability” has seen seven continuous years of losses before it turned a marginal profit last year.

Mahesh should also remember that even Redbus was a loss-making company almost throughout its entire life as a company and could only return a meaningful profit in the last year of its independent existence – it was not entirely a coincidence that the company was sold off almost immediately implying that the headroom for growth was fast-shrinking.

So this blind devotion to profitability is quite misplaced.

Let’s examine the other point that Mahesh loves making – that Flipkart is not a real business as it is built on a deep-discounting model funded by VC money that is doomed to failure.

There are three ways to parse this:

Firstly, let’s assume that Mahesh is right and that Flipkart is selling products below its cost price subsidizing the difference with VC funding. Now as long as the gross margins are positive, Flipkart will be fine even if the contribution margins are negative. The latter will be amortized away over time and scale as processes become more efficient and order sizes increase. Is this the case with Flipkart? That certainly seems to be the case.

Secondly, deep discounting is a bigger issue in an inventory-lead model rather than in a marketplace model where Flipkart is serving as a platform that charges the merchants a fixed or percentage fee for selling their goods. On top of this, the merchants also are customers of Flipkart for services such as the payment gateway and delivery which are professional services for Flipkart and are bound to have positive margins.

Finally, margins are highest in the apparels sector which as previously stated is the most important category for Flipkart and the imperative for the Myntra acquisition. Unlike books or electronics that afford 2 to 10% margins, apparel offers 15 to 50% margins. With the acquisition of Myntra and by virtue of being the company best positioned to capture the apparels market, the bottomline is therefore going to be automatically boosted.

CLAIM 6: “The Amazon of India is not Flipkart—it’s Amazon”

Mahesh points to the dominant positions of Google, Facebook and Twitter in India to extrapolate that Flipkart will lose to Amazon.

There are two problems with this theory.

Firstly, given the Indian government’s position of disallowing FDI in multi-brand retail, a position reiterated by the recently-elected central government, Amazon’s strategic options are perforce limited.

Secondly, e-commerce is not a winner-takes-all market. Unlike pure-play internet services and apps, there are hardly any network effects at play and there is no way that Amazon can “kill Flipkart”.

Is it conceivable that Amazon will one day go on to become the market leader in India by displacing Flipkart? Sure, that is definitely a possibility but that hardly means that Flipkart cannot become a behemoth that will have a meaningful position in the Indian ecommerce space. So, it doesn’t really matter if Flipkart is not the Amazon of India. Being the Flipkart of India is a pretty good darn place to be in and as a home-grown company stewarded by young, enterprising Indians, it deserves our full support  and backing!

As far as Mahesh Murthy goes, many people wonder why Mahesh has so much animosity towards Flipkart. There is a well-traveled story that Mahesh wanted to invest in Flipkart many years ago but was turned down by the founders because of the low-ball valuation and onerous terms offered.

While this story might well be apocryphal, there is no doubt that Mahesh feels strongly against Flipkart and feels that this is not the “right way to build a business”. In which case, I would humbly suggest that the best way for Mahesh to make his point is not through spewing venom on Flipkart and its investors but rather by beating Flipkart in the market.

After all, Mahesh is not some casual observer – he is an investor with multiple e-commerce investments and the best way for Mahesh to prove his point that there is a better way to build an e-commerce companies is by stewarding Fetise, Donebynone or one of his other e-commerce portfolio companies to a position of market leadership by competing against and defeating Flipkart.

Until then, I am afraid his missives come across as spiteful barbs from a spurned lover!

DISCLAIMERS: 

I have met Mahesh a couple of times many years back and had pitched my previous startup to him. Mahesh wasn’t too keen on investing but then given the $1 million post-money valuation and terms such as 2X liquidation preference, I probably wouldn’t have taken an investment from him in any case. I must confess that I found Mahesh to be a humble, diligent and approachable investor unlike several others of his ilk.

I don’t know the founders of Flipkart or Myntra – I have seen Sachin Bansal talk at events and feel that whether Flipkart becomes the Amazon of India or not, there is a good chance that Sachin will become the Jeff Bezos of India! He seemed to have the same drive and sense of destiny. I only hope that his acquisition of Myntra will improve his sartorial sense – the Flipkart-branded felt jacket does not have quite the same impact as a black turtleneck and jeans!

5 non-obvious lessons from the Redbus acquisition

The acquisition of Redbus was formally announced last week – it was a blockbuster deal by any metric and predictably sparked off reams of print singing hosannas to the founders (undoubtedly richly-deserved) and existentialist questions on “what this means for the ‘Indian startup ecosystem’”.

While all of this was great, a slightly-deeper dive into the deal contours reveal some fascinating facets. I reckon that it might be useful to parse through these and present them as a series of non-obvious lessons for other Indian entrepreneurs.

Lesson 1: Hire a lawyer during your fundraise

Five lessons from the Redbus acquisition

Redbus had raised $ 8 million dollars over three rounds of funding. While this is a fair amount of money especially so in the Indian context, it is by no means a large sum and is a fraction of the amounts raised by other Indian startups. Yet, the stake of the founders was very small at the time of the acquisition – less than 15% by some accounts.

While it might be fair to surmise that they diluted a lot of their stake by underselling the valuation at the time of the funding rounds, the real reason is elsewhere.

The real reason why the founders ended up with as low a stake as they did can be traced to the fact that their first round of funding had a “full ratchet anti-dilution” clause (Source – reference 1 below). Anti-dilution is a fairly standard investment term which essentially safeguards the investor if a subsequent round is done at a lower valuation. The standard way in which this clause is enforced is by following a mechanism called “weighted-average method” – this is a generally accepted way that is equitable to both the investor and the entrepreneur. However, the Redbus investor agreement had a “full ratchet” mechanism which is a death spiral to the entrepreneur. I am not going to go into the minutiae of these clauses (for those who are interested, this blog post provides an excellent, succinct summary – http://www.feld.com/wp/archives/2005/03/term-sheet-anti-dilution.html) but this avatar of the clause is widely regarded as something that no entrepreneur should accept as this article explains – http://venturehacks.com/articles/terms-that-hurt – as it has a severe dilution impact on the entrepreneur’s stake if a subsequent funding round happens at a lower valuation (which is exactly what happened when Redbus raised their second round).

I am not going to speculate on whether the Redbus founders understood and appreciated the nuances of this clause when they signed the original agreement but one thing is for sure – they didn’t use a lawyer for their transaction. The Redbus founder actually went on record to explain how they did this deal without a lawyer.

As entrepreneurs, while it is nice to trust investors and work with them on good faith, it is suicidal to do so without having a lawyer in your own corner to safeguard your interests. Any half-decent lawyer would have pointed out the obvious pitfall in accepting a clause like this.

Lesson 2: Understand your investor’s imperatives

One question that has popped up regularly as a reaction to the acquisition is “why now” – why did Redbus choose to sell out now when there was presumably an opportunity to build a much more valuable and meaningful company in the future.

Now, while there might be many reasons why the stakeholders decided that now was the opportune time for an exit, it would be an exercise in speculation to figure out the actual reasons…but we do have one clue.

Redbus raised their first round in circa 2006 – which means that their first set of investors have been with the company for seven years or thereabouts. Seven years is the average lifespan of most early stage funds – by the end of this period, the fund managers are typically required to provide a return to their investors (LP or Limited Partners in venture capital parlance) and while some funds do let winning horses ride further in the expectation that a significant payoff will come their way at some point of time in the future, as these are “unrealized gains”, it is a far cleaner option to simply exit the portfolio and provide a cash return to the LPs. While there is no way to know if this was the primary driver for accepting the Ibibo offer, there is every chance that the timing helped line up the stars, in which case the Redbus founders might have been prompted to take the offer to provide a realized return for their early investors.

As entrepreneurs, what we need to keep in mind is that investors are bound by a timeline too and we need to keep these imperatives in mind when we take the decisions that we do.

Lesson 3: India/Bharat is a tough market. Understand your market’s natural limits.

While providing a timely return to investors might be one reason why Redbus cashed out, there could potentially be one another.

There is a largely-held belief that India is still in the nascent stages of market penetration for e-commerce and specifically for bus travel too, there is a lot of headroom to grow (online is only around 5% of total transactions) but there are two points which seem to imply that perhaps at least some of this bullishness is unwarranted:

1. Slowdown in growth: Redbus had revenues of Rs. 12 crores ($2 million) in FY11 – this grew to Rs. 32 crores ($5.4 million) in FY12 implying 171% growth YoY.  In FY13, the revenue grew to Rs. 55 crores ($9.2 million) implying a growth of just 68% – a sharp fall from the comparable figure in the previous year. While one might justifiably argue that attempting to extrapolate a pattern from three data points is statistically risky, there is no denying the fact that in percentage terms, Redbus show a sharp decrease in revenue growth for FY 2013 compared to the previous year, arguably much more than what could be reasoned away due to the smaller base in the previous year.
2. Push, not pull: One of the points that has been bandied about a lot about the growth of Redbus is around how the company has not spent a dime on marketing and the growth has been entirely organic, driven by word of mouth boosted by achieving deeper engagement with existing customers. However, in the recent past, Redbus has started spending money on marketing and specifically on advertising on mass media vehicles including TV ads. This implies that Redbus felt that organic growth was no longer sufficient on its own and the numbers had to be bolstered by push marketing.

Both of these points, individually and together, tell us that customer acquisition was not just slowing, it was becoming increasingly harder and more expensive. While it might be nice to talk about the “enormous size and potential” of the Indian market, it is probably not a stretch to conclude that penetrating this market is by no means, an easy task and there is a good chance that the immediately addressable market is a sliver of the total market. Also, as echoed by the state of telcos in India today, it might not be too difficult to achieve early success in a category-defining market in India but it is quite difficult to keep this going on an ongoing basis over a period of time.

The other part of this is that as far as profitability goes, Redbus has just about gotten started – they had a bottomline of $100,000 in FY12 and less than $2 million in FY13. For a company that has 26 offices, over 500 employees and millions of dollars of funding, these results are certainly not anything to write home about especially so as it has been the market leader and has been in operations for over seven years. While they could have presumably sacrificed profitability in favor of growth, these numbers are still underwhelming. Again, this could point to the fact that India is a tough market in more ways than one.

For us entrepreneurs, it is a clarion call to assess/reassess if it makes sense to attempt an India-only play and if one continues to do, attempt to understand what the market’s natural limits are and ensure that our per-unit economics make sense within that canvas.

Lesson 4: Fundraising in India is hard, very hard

By all accounts, Redbus is a marquee Indian startup – the founders have done wonderfully well to establish a meaningful business and a well-known brand and the company has been lauded by everyone from the Indian and international press to MIT (which recognized Redbus as one of the most innovative companies in the world). Despite this, it boggles the mind that the company started its fundraising efforts for its Series D in November of last year and wasn’t able to actually close that round in the subsequent eight months.

One would have guessed that it would have been fairly trivial for a company of this stature to raise a new round if it so desired. The fact that it didn’t actually close a round in eight months from the time they started looking for it can give us an idea of how hard it is to raise funds in India.

Even though the company apparently got eight termsheets for this planned round, the fact that they chose to take the Ibibo offer instead of any of these options implies that the offers weren’t particularly attractive by themselves and empirically so, relative to the Ibibo offer.

The lesson is simple – if you get a chance to take money and if the terms are broadly equitable, take it, even if you feel that other things like valuation are sub-optimal! Also, keep in mind that if you are in the market to raise funds, it is a long and time-consuming process, so don’t get into it in an unprepared or half-hearted manner and don’t leave it for too late.

Lesson 5: If you are an investor, requiring traction to invest in a company carries the risk that you are already too late

While the early investors of Redbus were undoubtedly the big winners in the exit, probably recouping their entire fund corpus in this single deal, for the investors in the subsequent rounds, the returns weren’t quite as impactful.

Admittedly, this is at least partially a function of deal mechanics over multiple rounds but what is interesting is that the firms that did invest in the later rounds are not significantly different from the one that invested in the early rounds. All these firms are ostensibly early-stage firms that make seed stage bets in promising companies.

The difference, I guess, is that the first investor backed the company when it was still a fledgling entity on the promise and potential that it showed whereas the subsequent investors came in only after the company had already demonstrated traction and executed their plans. So perhaps, there is a lesson in this for Indian investors too – bigger returns mandate bigger risks – if all the ducks have already been lined up, you are already too late!

References:

1: http://www.nextbigwhat.com/redbus-story-297/ – “we had a term called full ratchet. Which means that if we raise capital at a lower valuation than the previous round, then we have to make it up to them.”

Does the StartupRoots event mark the coming of age of the Indian startup ecosystem?

For most of us, last weekend would have, most likely, been just like any other weekend – for “regular folks”, it would have meant a time to relax with family and friends, take a break, catch a movie or just chill and vegetate before the idiot box, for “startup folks”, it would have probably meant working around the clock as usual to finish that urgent item that was meant to be shipped last week!

But for the founders of four Indian startups, last  weekend was momentous – these folks pitched for funding at the StartupRoots event and not one, not two, not three but all four of them were successful in securing the funds that they were looking for!

While this would have been a great achievement in itself, what was particularly remarkable was that the event was in a “Shark Tank” format – in the space of 10-15 minutes, the startup has to make a pitch to a panel of angels and if the angels like the sound of what they hear, they revert with an offer (binding in nature) which the startup  has to accept or reject in real-time.

What’s more, in the case of the StartupRoots event, the angels apparently hadn’t interacted with the startups before the event and in most cases, had not even heard of them earlier. So basically this was a “first touch” to “signed cheque” loop in a space of 20 minutes! And considering that all four presenting startups got funded, this was a case of lightning striking the same place four times in succession!

Predictably, this sparked off a litany of opinions and responses from both ends of the spectrum within the “Indian startup ecosystem” – some people heralded this as an inflexion point, marking the beginning of a new chapter in the ecosystem while others were more cynical pointing out that one swallow doesn’t make a summer.

So, where is the truth?

Before attempting to answer this, allow me to take you back to another time and place:

Once upon a time, an angel investor meets a couple of student entrepreneurs on a college campus. The young ones have a product that they have developed that seems useful but has no semblance of a business plan or even a general idea on how it will make money. The angel has to run off to another meeting but before he leaves, decides that the entrepreneurs seem smart enough to back and signs out a cheque for $100,000 (allegedly in the university car park!). Unknown to the investors, the entrepreneurs didn’t have an actual company at that point of time – it would take a further two weeks for them to incorporate and they use the spelling specified by the angel on the cheque for the company name rather than the one that they had originally conceived!

In time, this investment would go on to be regarded as the “world’s greatest angel investment” as the value of that initial $100,000 would eventually rise to be worth nearly $ 2 billion! The name of the angel was Andy Bechtolsheim, a co-founder of Sun Microsystems and the name of the startup that he funded was Google!

So what has this got to do with StartupRoots? While this story might be an urban legend that gathered nuances with each retelling as it passed into folklore, the investment itself is an indisputable fact that epitomizes the “culture” of Silicon Valley. The original pioneers, who sparked off the emergence of Silicon Valley as the hub of technology, graduated into angel investors who were willing and hungry to “pay it forward”. They did this in various ways: helping out young entrepreneurs with connections, advice and most importantly, with seed capital.  Unlike traditional institutional investors, these angel investments represented massive “leaps of faith” where the primary rubric to determine if an investment needs to be made or not is based on gut or instinct rather than a checklist type of scoresheet.

Now in India too, there are angel investors today – both individuals as well as institutions such as Mumbai Angels and the Indian Angel Network. But hitherto, most, if not all, investments made by such entities follow a due process that is more akin to what a traditional institutional investor would put you through – multiple cycles of interviews and discussions with the startup, extensive background checks, demanding detailed, five-year projections that display your Excel skills and finally, requiring demonstrable traction in terms of revenues and even profit. One reason why this is so is that in India, there is a palpable “trust deficit” – the first reaction to any new idea is cynicism, if not outright criticism and every claim or contention is by default, rejected at face value unless it is backed by empirical evidence to the contrary.

The reason why the StartupRoots event was significant is that the angel investors who voted with their wallets did so in a manner that is closer to what Andy Bechtolsheim followed rather than what angel investors in India typically do! So in a way, the event basically marks the coming of age of the Indian Angel Investor! If the angel has had a grand total of twenty minutes to understand the entrepreneur, evaluate her pitch and make an investment decision, it implies that it was a decision that was made on gut rather than painstaking due diligence. For this alone, this event needs to be lauded and marked in red letters!

Now a cynic would be arguably justified to say that these investments were made because of the “spotlight effect” – that is to say that because this was a public forum where the actions of the angel were visible to all for scrutiny, they might have behaved in a way that is significantly different from what they might have otherwise done in the “real world”. While there might be a smidgen of truth in this, it would be uncharitable to say that this was the only reason why the investments were green-lighted. If one were to burrow a little deeper, it is easy to see that angels like Rajan Anandan have been putting their money where their mouth is for a while now and have been investing in a number of really early stage companies where the entrepreneur probably just has a prototype and is far away from generating revenues, much less profits.  Hopefully these angels will continue to invest in this manner and bridge the trust deficit that ails our ecosystem to the point where angels and potential investors hearing new pitches will provide feedback on what it will take for these ideas to succeed on a grand scale rather than why they will fail inevitably!

So, what does this mean for the Indian startup entrepreneur?

The first caveat is to not start believing that the “StartupRoots” event and its presumed sequels represent the startup equivalent of Willie Wonka’s “golden ticket”! While the opportunity to pitch at an event like this is definitely valuable because the format of the event is such that it gives the entrepreneur a better chance of getting funded than in the wild (in the worst case scenario,it exposes you to genuine angel investors). But just because all the four startups who pitched in the first edition managed to get funding does not mean that if you get a slot, you are guaranteed of getting a mandate yourself.

More importantly, don’t get fixated about the StartupRoots event itself but instead, use the success of the first edition to understand and appreciate the fact that there are now angel investors in India who are “angels” in a true sense – they will not only give you wings but will also be the wind beneath those wings!  Don’t take this as an invitation to spam the angels who were present at the event though! They probably already have more deals flowing in that they would care to evaluate! But keep in mind that there are others, hopefully many others, like these folks and find a way to connect with them.

And the best way to connect to such angels is to by going back to work and trying to deliver the best product that you can possible roll out – become so good that the angels themselves will find a reason to seek you out and connect with you rather than the other way round! If this means that you continue to work through weekends plugging away on your product in your dingy little garage rather than attend a startup event in an air-conditioned hall, so be it!

Best of luck!

Battling the “tyranny of traction”

A practical guide to getting an angel investment without getting caught up with notions of traction prematurely.

This is a follow-up to my previous post lamenting the tyranny of traction. It chronicles how we raised funding for our startup without once having to tout traction.

Before I get into it, I would like to clarify some points that some folks seem to have missed or misunderstood from the previous post:

1. I am not saying that traction is not important – what I am saying is that there is a time to focus on traction and that time is not at the time when you raise seed funding. If you already have traction at that point in time, that is great, but not having traction should not disqualify you from being able to raise an angel round (in your own eyes to start off with).
2. Having an idea about your business model, market and customers is not the same as having traction – you should have some sort of hypothesis around all of these aspects as early as possible in your startup’s lifecycle but there is a huge difference between having a theory and actually going out and proving it (the latter is traction, the former is not)
3.  The founder of the company that I referenced as an illustrative example seems to have taken offence at being called out (despite my not mentioning him by name) and has responded spitefully by calling me names without actually materially addressing the points that I made about conflating users with customers to project an image of being far bigger than you actually are. The irony in all of this is that the defence he puts up for showing that the company does indeed have traction is the exact same point that I had already mentioned (namely what matters is not false proxies like user/customer numbers but rather a meaningful proxy of the value that their customers are getting out of the solution – in this case, the fact that all the major travel and e-commerce companies are using the solution). Despite this petty diatribe, I am not offended in any way (one of the side-effects of being an entrepreneur for any length of time is that you develop a thick skin and a non-existent ego!) and I truly wish him well and hope that his company achieves great, and true, traction. We need more true startup successes in India and fewer media-manufactured ones.
4. Finally, I am not ticked off/pissed off/jealous/angry about the unnamed company that I referenced or indeed any other startup – I call myself an Average Joe Entrepreneur primarily because I have no delusions of grandeur or aspirations to be counted among the likes of this company. The post was intended primarily to provide a contrarian view to something that was increasingly being regarded as gospel in an uninformed manner.

Anyways, enough of that – lets move on to more constructive things.

Here is how we thought about and successfully raised angel investment for our startup:

Purpose, not Passion
The precursor to getting funded is to find a purpose for your company. What does this mean? Pretty much everyone that you meet in the startup environment advocates that you, the entrepreneur, needs to be passionate about something – problem, solution, market etc. Our view is that passion is actually a bad thing – it means that you deal with situations and goals emotionally rather than rationally. Passion is a drug…it seduces, hypnotizes and blinds you in a manner that is detrimental in many ways. Also, for many startups, it is incongruous to state that you are passionate about, say, customer support (if for instance, you are offering a helpdesk solution).

Instead, we advocate that you find the “purpose” of your startup. This means that you have identified an arena and set a goal for what you want to do for the next ten years of your life and step by step, you works towards achieving that, dispassionately and in a focused manner. How do you find a purpose? Well, it varies – you could for instance, identify a macrotrend, a market of the future, if you will, and work towards building a solution that fits into that thesis. Or you could come across a problem that stymies you and you figure out a sustainable solution that you and others like you will benefit from. Try to identify the purpose your startup as early as you possibly can – during the course of your startup journey, everything will change but if you have a meaningful purpose, nothing will deter you.

Find the believers
Finding a purpose often requires you to have a subjective, and usually strong, opinion about what you are attempting. Now, one of the intrinsic facets of having a subjective opinion is that it could potentially be wrong, and completely wrong at that – this is perfectly fine. You don’t need to convince the world at large that your opinion is the right one. What you need to do is “find the believers”.

Keep in mind that your startup is essentially an extension of you and your subjective biases – so,  find kindred souls who share the same broad opinions as you do. These are the folks who are most likely to back you. So how does one do this? There is no hard and fast rule but one thing that worked for us is seek out people who have strong opinions and try to discover if their views align with yours. In our case, we identified an NRI, a minor celebrity of sorts, as our kindred soul – we read his interviews and noticed that a lot of the things he spoke about resonated exactly with what we felt. So we decided to try to get him on board.

Build relationships
There is an aphorism that the first funding round usually involves F & F – friends and family. Why is this the case? Quite simply, because these folks have a relationship with you and for primarily this reason, good or bad, they are ready to back you. You need to emulate this with the believers that you have identified and you can do that by building a relationship with him. In our case, we managed to contact our “believer” after a lot of effort but we didn’t pitch anything to him when we met him for the first time. Instead, we engaged with him – we exchanged mails, met up often and even helped out in some of the other projects that he was involved with. All of this took nearly a year. Only then, did we actually pitch him to back us with his funds. At this point of time, we didn’t even have a PowerPoint, much less a working product or customers, but the decision to come on board was made on the spot by our investor.

Not only did he back us then, he has backed us in everything else that we have attempted since then – many of these attempts have been failures but he continues to back us nevertheless because we started off with a strong foundation based on a relationship of mutual trust and respect.

Leverage platforms for the fund-raising bookends
The advent of angel funding platforms like AngelList and closer home, the emergence of angel networks like Mumbai Angels and the Indian Angel Network has opened up great new vistas for getting your startup funded. But you need to use these in an intelligent manner. One strategy that looks like it works is using these platform for the “fund-raising bookends” of your process. AngelList for instance is a great place to get discovered – so if you wish to have visibility amongst an audience of investors looking to find new deals, go ahead and have a strong presence there.

But your best bet to leverage these platforms meaningfully is to use them at the tail-end of your funding process – once you have a believer aka a lead investor, it is far easier to use a platform like this to fill out your round. If you don’t have a lead a priori, it is far more difficult to traverse this path successfully as the dynamics of your interactions are completely different.

Use startup competitions opportunistically
This is something that has worked for us – there are a number of startup competitions that are organized periodically by the tech majors. Some of them have meaningful prize monies on offer for the winners – in the range of tens to hundreds of thousands of dollars. You have little to lose and a lot to gain by participating in such contests. I know of at least one company that used its competition victory to go forth and land millions of dollars in funding subsequently.

Do they practice what they preach?
Finally, don’t take it at face value when an investor insists in the public domain that “traction trumps everything” – if you dig a bit deeper, you might be surprised to find that many, if not, most of the companies that investors like these back have little more than working prototypes to show. For instance, I know of at least a couple of startups who hadn’t even launched their products but managed to get backed by the very same investors who ostensibly see traction as the most important facet.

So don’t get caught up with trying to prematurely show that you have traction – it is a hamster’s wheel that will take you nowhere very quickly. Instead, map out your funding process and tick off the items one after another to get to where you want to be – it won’t be easy and it will in all probability take far longer than you would have hoped for but if you believe in what you are doing, then it is worth fighting for. Best of luck!

The Tyranny of Traction – Part 1

The apparent “dumbing down” of seed investing…and how to fight it

An Indian enterprise startup recently announced that it has reached 6,000 customers. The company is listed in pretty much every “top Indian startups” list. Genuflecting blog posts have been penned venerating how this company is a master of marketing especially so when it has only five employees, all of whom are engineers and has achieved this traction without spending anything on sales and marketing.

There is just one catch though – the company is still not profitable.  If it boggles your mind as to how a company with just three employees (the other two are founders) and which spends nothing on marketing can be unprofitable despite several thousand customers, join the club!

The answer lies in the subtle sleight-of-hand: the plans offered by the company include a plan that is completely free, so the vast majority of “customers” are those who don’t pay a dime. They are therefore customers only in the loosest sense of the word.

So is the company lying or trying to deceive people by tom-tomming these numbers? Probably not – for all I know, they are perfectly decent people just trying to make an honest living.

The answer as far as I can see it is that this startup, like many others, is a victim of what can be called the “tyranny of traction”.

Everyone from angel investors to seed funds to accelerators are shouting from the rooftops that “traction trumps everything” or variants thereof – “lead with traction”, “traction is the only intellectual property you have”, so on an so forth. While there is no definitive definition of traction, what is essentially implies is that there is some market demand for your solution and this is ideally measurable and demonstrable.

There has always been a school of thought that traction is important when raising funds but traditionally, this lens has been applied for later-stage funding (typically Series-B and beyond). But now, it seems to have fashionable to talk of traction for all stages of investment including seed. What’s more, not only are they saying that traction is important, they are seemingly saying that if you want to raise seed funding,  traction is the most important ingredient. That this one facet “rules over” anything else that you can say or show while you present your case. This overriding emphasis on traction is what I refer to when I say “tyranny of traction”.

I have not heard a single voice declaiming against this school of thought and quite frankly, it astounds me that this aphorism that “traction trumps everything” has been taken as gospel by many.

Admittedly, it has been a while since I personally scouted for funds for my company and all of this makes me feel rather like Rip Van Winkle waking up after a longish siesta to a world that has completely changed around him.

So at the risk of being labeled an anachronistic dinosaur, I feel compelled to offer my 2 paise that traction is an entirely wrong aspect to focus on when you go about attempting to raise a seed investment for your startup.

What is wrong with focusing on traction at a seed stage?

A seed-level startup is not a miniaturized company. Just as a seed is not a miniature tree, a startup is rarely a miniature company. Funding at a seed stage is rarely intended to provide “scale-out capital” where you already have all the ingredients in place and it is just a matter of linearly executing on your preset plans.  Almost every startup is initially an experiment where there are far more unknowns than there are certainties. And at this point of time, the seed funds are required to fill out your team, experiment with business models, build out your solutions and initiate go-to-market efforts. Focusing on trying to show traction before doing any of these things essentially means that you have run of risk of missing the wood for the trees and prematurely setting your company along a path that is potentially sub-optimal in many ways.

Achieving true traction takes time…and money. I can see why at least some people have started using traction as a key metric – the cost to start a tech company and enter the market is lower than at any time in history. So there is a temptation to conclude that it follows that it is also easier to achieve traction. Unfortunately, in all but the rarest of cases, this is not true at all – while it might be indeed cheaper to develop a working prototype, it still takes time to fine-tune your offering to a meaningful point (typically 3+ full iterations), hire new members to your team, get into the market and make yourself heard above the din of a thousand other startups itching for their respective places under the sun. If you have managed to achieve true traction without requiring to raise seed investment and if you still need further capital, then I would argue that you could just as easily raise money from an institutional investor (or indeed a bank) rather than go to an angel investor or seed fund.

The lure of false proxies. Most of what startups claim as traction involve false proxies that are palatable to media imperatives – they are not true measures of the value that you bring to your customers. For instance, the use of “number of customers” by the company mentioned earlier is a false proxy – now the company probably has a few hundred rather than six thousand paying customers but within that set, they seem to have pretty much all the major Indian e-commerce and online travel companies, which is a fantastic achievement. I am quite sure that internally, the company sees this as a more meaningful metric for market traction rather than the number of customers (if they don’t, they ought to) but it is difficult to communicate this traction in a succinct, twitter-worthy manner to the media and world at large, it has chosen to tout false proxies to make for sensational headlines. The problem with this is that at some point of time, it is quite easy for you to believe in your own hype and mistake it for reality – you are then set on a doomed path of constantly having to up the ante in terms of touting increasingly inflated false proxies to show that you are ostensibly progressing and gathering momentum.

You cannot “hack” your way to true traction. Another unfortunate fall-out of this attempt to deify the notion of traction is the emergence of the idea that you can “hack” your way to get to where you want to be. Some of the means adopted are misguided, if not misplaced – for instance, hiring so-called “growth hackers”  (often even before the product has been launched) who will magically get you traction. Others include following supposedly sagacious advice on how  to demonstrate that you have traction (which includes gems like “compress the x-axis” and “change the y-axis”). But the most pernicious practice that I have seen is the attempt to “generate heat” by adopting unsustainable and often unethical, if not illegal, ways to rapidly grown your user base to show that you have momentum. These include things like “buying users” either through the media or by inducements and leveraging the social graph of your users to spread without actually taking their permission. As we have seen from the downfall of companies like Viddly, not only are these type of hacks unsustainable, they often have a tendency to boomerang on you in the long run.

‘Data-driven seed-investing’ is an oxymoron. One argument that is posited in favor of the emphasis on traction is that it indicates an evolution in early-stage investing where the numbers behind the traction let investors adopt a data-driven framework for their investing decisions. Please allow me to call BS on this claim – it is impossible to have data-driven investing stratagems at a seed-stage. Early stage investing has been and continues to be primarily based on gut and instinct – experienced angel investors (the ones who can actually add value to your company beyond just the capital) will inevitably have developed the ability to identify “winning attributes” patterns and will not need numbers to decide one way or the other. I would go as far as to say that angel investors who insist on traction to decide are lazy – lazy in the sense that they do not make the effort to do a deep dive to understand the team and their idea/vision and require you to prove yourself a priori. You are probably better off without investors like these because over time, traction will follow a sinusoidal path – there will be crests and troughs rather than a secular “up and to the right” curve and if your investors put more importance on data than on the entrepreneur, there is more than a decent chance that you will not get their support when you are in the troughs.

Now all of this is fine but how does one go about attempting to raise a seed investment if traction is what the investors insist on. That is coming up in Part 2 of this blog post!

Hello World!

These are the continuing voyages of an average joe entrepreneur.

His continuing mission: to develop world-class products, to seek out new solutions and new markets, to boldly go where no average entrepreneur has gone before.

 

Hi,

I am Sumanth, an Average Joe Entrepreneur running a small startup from “Beantown” Bangalore in India.

This blog will chronicle our experiences, aspirations and struggles as my team seeks to build a world-class “Made-in-India” software product…