Monday, October 01, 2007

VC and Founder Compensation are so totally different

Sramana Mitra has an excellent post about how skewed compensation is at startups. (Emphasis mine)

As for the compensations, General Partners at Venture Firms make anywhere between $1 Million to $3 Million a year without counting performance incentives. The carry is all upside.

In contrast, the poor entrepreneur bootstraps a startup, takes enormous risks, and if (s)he raises venture money, the first thing a VC does is to restrict his/her salary to a minimum.

Only one out of 50 startups succeed (or may be one out of 100, I don’t know the exact ratio), so the equity component of the compensation package rarely pays off after the liquidation preferences, etc. are settled.

1) For the entrepreneur, the compensation as salary is kept absurdly low by the VCs. And their equity returns are kept even lower with liquidation preferences, drag-alongs and such. The argument usually starts with saying that the founder needs to have the hunger and then moves quickly to "the golden rule is that the man with the gold makes the rule".
2) VC managers on the other hand have "carry" as an unrequired bonus, and get fat paychecks thus ensuring that their success is not linked to the success of their investments.

Patently unfair you think? There are simply two different kinds of skills: Fund raising for further investment, and fund raising for a startup.

The attitude of the former is: "Listen, I have this deal for you. You give me [x] million bucks. I then take a fat paycheck out of that as a 'management fee'. I invest the rest into some 10 companies. One of ten investments might succeed. I say might, it's like saying the sun might rise from the west. If anyone does make it, I get a piece of the profit. If they all go down the drain, you lose all your money, and I still get my paycheck. No I don't know which companies or even the broad area I'm targeting, but I'll choose them, that's why you're giving me money. If we go down the drain, then it's your money, not mine.".

When it comes to the entrepreneur raising funds, it's like: "Listen, I have this great idea. It's not just an idea. I've got a prototype. And this fantastic team. We have to work on bare minimum salaries? No problem. All our equity goes back and vests over four years? Uhm, ok. And if we fail you get your money first and then us? Ah, ok. Then you can fire us and we lose unvested stock? Oh, fine. And you want a drag-along so if you feel like the roses didn't smell good that morning you will sell my company and I *have* to sell my shares too? ok. Do you want me to bend over and grease up as well?"

Isn't it ridiculous then that venture capitalists find entrepreneurs "arrogant"? No wonder successful founders always tend to go and set up funds of a very different variety or start really helping other founders (like VentureHacks).

But closer home, there are very few instances of founders crossing the chasm, one of them being Alok Mittal of Canaan Partners, who also runs VentureWoods. (Disclosure: I have posted there earlier). Another founder - Prashant Prakash of Netkraft - co-manages a seed level fund named Erasmic.

Unfortunately some "angel" funds in India seem to ask way too much of the founders. Questions like these, requested by a member of the Indian Angel Network, seem to demand a lot an angel level presentation: while questions about the team, competitors, market etc. seem to be on the line, needing analysis of stuff like SWOT, IP (which is a ludicrous thing in India, I feel), marketing innovations (which I could game easily), "are you getting good sales/adoption?" etc. are simply premature (and do not belong in a pitch, they should be in an exec summary or q&a on the pitc). This isn't angel investing, it's a more like an early stage VC.

Note: I've just started Moneyoga which is a stock market website (still being constructed) and we have been thinking a lot about whether to get institutional funding. The decisions we're making is going to sound astounding when we write about them and look positively arrogant, but I think that there's a position where a lot of things come together, and give us a good life and excellent returns. Will talk about it when our stuff pans out.

Friday, June 15, 2007

Starting a company in India: The regulatory issues

I'd like to talk about some of the things you need to do if you're starting a company, aiming to get funded and the like. Note that you can get professional help for most of the below; accountants will help you through the process for a fee.

1. The "Private Limited" entity

You could create a proprietorship or a partnership, but if you're looking at investors and venture capital you will want to have a private limited entity. This is a "firm" - a company registered with the Registrar of Companies (ROC), and while it provides limited liability there are much more regulatory issues to deal with. Let me assume you're going ahead with a private limited company.

The way this works:

  • The company is founded with a certain amount of startup capital (we'll talk about that later)
  • Each founder (and angel investors) get "shares" allocated to them for a price they pay
  • These shareholders (called "members") elect a board of directors to represent them at the company. For a startup, you will typically have all working founders and representatives of any outside investors on the board.

2. Getting a "DIN" - a Director Identification Number

Registering a private limited company requires that all directors get themselves registered at the ROC. You should apply for a Director Identification Number (DIN) - you can do so online - by filling out a PDF form and submitting it. A provisional DIN is allocated, after which you need to print the page, sign, get a notarisation from a practicing CA and send it to the MCA office. This costs nothing, except a small amount you may pay for the notarisation.

3. Digital Signatures

All applications for creating private limited companies now require online forms and digital signatures. Details are on the MCA web site - and a number of certifying authorities provide these signatures as USB tokens. The cost ranges from 500 to 2000 per year.

You need just one DIN and one digital signature, even if you are a director in 10 companies. Also note that for the purpose of starting a company, only one director's digital signature is needed.

4. Naming ceremonies

You need to get the name registered first - this is to ensure that your company does what your name indicates.

Download and fill Form 1A (all forms are downloadable ). You can upload this to the MCA site and pay Rs. 500 for the service online. The name then must be approved by the ROC, which is a discretionary and sometimes, unfathomably arbitrary process. Amit Ranjan has a post on his experience.

A good CA can get your name approved with a personal sit-down and explanation.

About these forms: each PDF form has a "Check Form", "Prescrutiny" and "Submit" button. At this point, none of the "submit" buttons work - you have to submit the form manually.

5. Incorporation - Memorandum and Articles of Assocation

You can then get your CA to create your Memorandum of Association (MoA) and Articles of Association. In simple terms - the MoA specifies WHAT your company wants to do. The AoA specifies the framework of organisation (who are the directors, what kind of voting, how will expenses be approved, how many people form a quorum for an AGM etc.) The articles are important in that they should not be one-sided towards specific shareholders (will tick off investors, who'll change them anyway). Most likely your CA will draft one from a standard set of terms that they have earlier passed through the ROC.

These need to be attached with Form 1 (again, downloadable), digitally signed by you and your CA. When you submit, you'll pay fees based on your "authorised capital". This is the amount of money you plan to convert into shares. So for an authorised capital of Rs. 100,000 you can issue 10,000 shares of Rs. 10 each (or 100,000 shares of Rs. 1 each and so on). The "paid up" capital is the money actually converted to shares - so for an authorised capital of one lakh, you can pay up just Rs. 10,000 and divide that 10,000 into shares to founders.

You will pay a certain stamp duty and registration fee for the "authorised capital" - it goes from 4,000 for a 100,000 authorised capital to 26,000 for about 10 lakhs and so on. People may advise you to go for a lower authorised capital to save on this registration cost, and keep any excess capital as a "loan" instead. But this structure may reduce your later compensation when you get investors in, as the loan may be returned and your shareholding moved to a vesting structure, giving you very little value for the money you've put in. Don't lose out on future value for a few thousands today.

Remember, you are both an investor and a "manager" - meaning you have both management and control interests in the company. A new investor can come in and choose to vest the ownership you get as a "manager" but that should not compromise on your holding as an investor. Split the two - in fact, at important points, think independently of decisions as a manager and an investor.

ALong with Form 1, there are two other forms - Form 18 and Form 32, that need to be signed and submitted to the ROC.

6. Opening a bank account

Once your company is "approved" you will get a piece of paper called the "incorporation certificate". When you have this, along with a "common seal" (your CA will get this done) and a printed copy of your MoA and AoA, is you can pop the champagne or the poison of your choice.

But to pay for the champagne, you may want to open a bank account. Banks will ask for the documents and your PAN/TAN number (mentioned below). Account opening can be upto four days and you will be required to fund the "current" account with about Rs. 10,000 or so.

7. Registration with other authorities

  • PAN/TAN number: This is for paying and deducting tax. Can be applied for online. Needs an address proof, for which a copy of the aforementioned Form 18 is ok. You need this to do any tax stuff, or to open a bank account.
  • Bank Account: For a bank account, you need to provide, at the very least, your MoA/AoA, incorporation certificate and PAN/TAN acknowledgement of application. Some banks will ask for more details. Also you can ensure that two signatures are needed for cheques, and get a netbanking ID so all investors can be made aware of the expenditure.

8. Do you need an office?

If you're planning to work from home, don't bother with a few registrations because they will want you to put a signboard with your company name on the outside. Most residential societies will not allow this. Yes you can perhaps get away with bribing the labour inspectors etc. but frankly that's not the "clean" way to do things; if you're in the business to get other investors or to sell the company, you need it as clean as possible.

But if you do need an office or want to hire employees etc. you should get the following registrations:

  • Shops and Establishment : Karnataka has this act where you need to register an office, but other states will have their version as well.
  • Professional tax: A state levied tax on salaries paid out. You need to pay Rs. 2500 in karnataka to register, and depending on salaries paid, pay a certain amount (max. 200 per person/month) to the Professional Tax office.
  • Service Tax and VAT: The Central Excise department wants you to pay tax on pretty much any revenue - VAT is if you sell a product and Service tax, if you render services. Registration is important. Service Tax registration can be delayed till revenues are above Rs. 7 lakh a year.
  • Provident Fund (PF) : For 20 employees or more, this is mandatory. Lots of documentation, but you can get someone to help for about Rs. 5,000 or so.
  • Employee State Insurance (ESI): Applies to Karnataka, but other states do their own number. This is for employees whose income is less than Rs. 7,500 per month, and again, only applies if you cross 20 employees. Get someone to help, it's cheaper.

9. Compliance and Accounting

Post registration, a private limited company needs to maintain records and be compliant with the laws. That would sort of be obvious, but honestly it requires some work on a regular basis.

  • ROC compliance: Involves Maintaining a big fat "statutory register" - no big deal really - ROC filing at key points and maintaining board minutes (using signed minutes is fine, once a quarter is legally required). You can do this yourself or use the services of a Company Secretary (typical charges: Rs. 3000 - 5000 per visit). You might need to revisit this process once a quarter if you are a small startup.
  • Professional Tax, PF/ESI, VAT/Service Tax : For these there are monthly, quarterly and/or annual returns.

    Get a person to help you out in this process - typical costs are about 3-10K per month.
  • Tax Deducted at source (TDS) and Fringe Benefit Tax (FBT): again, monthly and/or quarterly returns, could be done by the same person as above.
  • Accounting: You need someone to maintain books of accounts. If you choose to use an accounting software, you can bring someone in to enter vouchers etc. Typical costs are Rs. 1000 to Rs. 5000 per month. You might not need them every day - once a week might be ok.
  • Tax and Statutory Audits: At the end of the financial year, you will end up needing to file accounts in two places - the ROC and the Income Tax department. The actual numbers will vary because of the great Indian fight between these two departments on what constitutes "depreciation". You'll need a Chartered accountant to "audit" your accounts for the ROC, and someone to help you file the Income Tax returns. Typically the same CA will help with both, and charges vary from 10,000 to 10 lakhs depending on many things including your accent.
  • Inspections: Officers from various departments may visit your office for "inspections". Do not instantly hand them bribes or even meet them as a "CEO" or such hi-fi designations. Let the process run through and you can even negotiate bribes if demanded. Whatever happens, ensure there is paperwork to back it up (like an inspectors report or such).

The entire incorporation process can be done is as less as 15 days, unless you want to start a company named "Infosys Wipro TCS Congress BJP CPI Indian Government Private Limited" in which case the time required is: forever.

While all this may sound daunting, a good CA can help you do this fast. Remember that although a CA will help you through the process, you need to ensure that no corners are being cut, since it is something you will have to explain later when legal and other due diligence is performed. Keep yourself informed about what needs to be done, but outsource it to accountants. While you can delegate this task, you can't absolve yourself of the responsible.

What you want to do is get this done with the least amount of one-time and continuous pain, and get on with the real work.


  • Post incorporation funding: When you incorporate and create a bank account you need to then fund the account with money. Assuming the founders and early investors will put in money, take care to note down the money received, and if required, provide equity shares for the money. For example, if you have asked for an authorised capital of Rs. 500,000 and four founders want to initially put in Rs. 25,000 each, you might issue 2,500 shares of Rs. 10 ("face value") each to the investor, for a total "paid-up" capital of Rs. 100,000. A few months later, some investors might put up a further 100,000 and then you issue fresh shares of the same Rs. 10 face value (but these shares can be sold for higher, like Rs. 50, if you please)

Some other Links:
Startup costs in Bangalore

Thursday, May 10, 2007

Hacking the venture process

I just stumbled upon (not StumbledUpon) a site that discusses venture funding: Venture Hacks. Started by Babak Nivi and Naval Ravikant, both of whom have been on the entrepreneur and VC side of things, the site brings oodles of information for you, the entrepreneur. They present a series of articles on term-sheet-hacks.

The VCs know more than you do.

You, the entrepreneur, negotiate a term sheet once every few years. You negotiate your most important term sheet (the Series A) when you have the least experience. You negotiate against a VC firm that issues two to three term sheets per month. You negotiate against a “standard” term sheet that encapsulates decades of combined knowledge from hundreds of venture firms.

If you're a newbie to what a "term sheet" means, join the gang. You might want to read Brad Feld's term sheet series first.

Let me give you the low down: Term sheets are what VCs use to tighten hold on your private parts. If you don't negotiate, you will be left with a very painful experience. Don't let them get to you.

You probably know this, but both Venture Hacks and Feld's series are representative of VC points of view. Yes, they're both much more leaning to the entrepreneur, but you'll note a subtle VC bias in the approach, which simply means making more money for the VC at the cost of the entrepreneur. They never tell the entrepreneur to break a deal on a clause, but mention how VCs will take certain things like no-founder-vesting as a dealbreaker. Just so you know.

One thing though: these hacks assume that VCs are willing to "discuss" elements of term sheets, and that you have some reason for the VC to listen to you ("leverage"). If you find that is not the case with you, you can shut down your browser and either take what you can get or carry on without the VC world.

You might think that all of these things are applicable to India. They are, but you have to see them in the right context.

1. Convertible preference shares are "debentures" in the Indian context.

2. Very few Indian lawyers that know anything about negotation will come cheap, so if you hire a lawyer, be ready to shell out lots of Mahatma Gandhi adorned pieces of paper.

3. The legal process takes a lot of time in India, so please expect a lot more anti-entrepreneur clauses in Indian term-sheets.

4. Option pools have a serious Fringe Benefit Tax impact. If you set up an option pool based on VC term sheet, be ready to understand how this impacts your revenue guidance, since FBT is payable by the company. (Yes, you can bill it to the employee, but which employee will pay for illiquid stock?)

A better approach is to create a trust that will issue the ESOP, but the company must not own the trust. VCs will balk at this. Why?

Think about it. Let's say you get a pre-money valuation of 8 crores (for say 10 lakh shares), and VC puts in 4 crores. You think, heck this is great! 33% to VCs, rest to founders! Founders are worth 8 crores!

But they say they want a 20% option pool, created pre-money. Means, post their investment, they will have 4 cr. worth shares, option pool is another 2.4 cr. and you have the remaining - 5.6 cr. worth shares. Suddenly you're worth a lot lesser. And since the option pool is not vested yet, the real shares issued are worth 5.6 cr. (to founders) and 4 cr. (to VCs). This means they hold 42% of the company at investment.

If you went and created an option holding trust, the VCs only get 33% (since the option shares are issued to the trust). That's not in their favour - if they get a buyer they will benefit from unvested shares in the first case, but with a trust the trustees will benefit (and the founders will be the trustees). VCs will not be happy.

I hope you enjoy the sites. I did. I will write more about the Indian context to these options.

Friday, March 16, 2007


Geni is this brand new family tree engine that allows you, in one screen, to see all the people you have to buy gifts for. Basically it allows you to create your family tree and has just received $10 million in funding, for a total valuation of $100 million. From The Founders Fund. Which I had referred to in an earlier post, about how they are ok with partially paying founders when investing.

In this case, the founders of Geni are perhaps not quite in the need of money - they're all ex-Pay Pal, Tribe and such companies that, if venture funding was a religion, would be senior Gods worshipped in every household.

TFF, to its credit, is not the one giving the $100 million valuation. They only gave it a piddly 10 million dollar value and stuffed them with $1.5 million. The $100 million value was provided by Charles River Ventures, which, albeit the valuation, involves more venturing by the Charles River.

But you may be thinking: Is this company worth a $100 million? I must be honest: Even with my exposure to large sums of money flashing on all TV channels in the forms of scams, frauds, bribes, ransoms etc. this sum seems ludicrously large. $100 million is about Rs. 440 crores. This is the kind of money that will buy you a two bedroom house in Bangalore nowadays, and should not be considered a trifle. This house has a real garden.

Some of you may think I exaggerate needlessly. But I think if we were not intended to needlessly exaggerate Darwin's law would have eliminated all writing anyhow. I originally intended to put god in the last sentence but after my baby boy's colic attacks I have finally understood there is no god. But I digress.

Now the question is: Is Geni worth Rs. 440 crores? Is this 18 person company a proposition that, if exchanged for currency, would yield a 100 million greenbacks? The last time such a question was posed, they all laughed at you. This was February 2000.

But we will assume this is not February 2000, because we haven't yet invented the time machine. So is Geni worth so much because it is unique and can't be copied?

Geni is perhaps easily copiable, and is definitely not the first family tree representation on the planet. Unfortunately it has also not taken into consideration the probability that someone could have 13 siblings, like in my father's family and therefore it will not work unless I have a dual monitor machine. (Which I do, incidentally) What actually worked, when I had to explain the 126 "close" family members to my wife, was pen and paper and lots of arrows. Actually it's better represented left to right rather than up to down - all family trees are, IMHO.

But they have a business model for sure. Have you seen the most popular serials on television? What are they about? Some of the biggest blockbusters in the hindi film industry were: Maine Pyar Kiya, Dilwale Dulhaniya Le Jayenge, Hum Saath Saath hain, etc. Think of the basis of all of them. Everyone's related. And now, look at Geni's logo.

Soon, you may see Geni sprouting the capability of saying "I don't like this person" and you will see strange music in the background when you drag and drop people near each other. Perhaps even red colors as you move across the evil people who try to murder their mothers-in-law using faulty fans (don't ask me, I saw this on TV, I swear).

Then there will be mock fights and in comes the revenue from online betting on who will win. And you can SMS to a four digit number who you like the least so that person's icon will be relegated to a corner of the screen. The SMS revenue itself, shared 50:50 with Airtel, will yield millions.

And there will be people who will pay to see who is having whose baby in the Bold and the Beautiful and to unravel how, through a series of bad marriages, a person has become his own step-aunt.

Finally of course, look at the ease of understanding large family battles. If Geni were to host the discussion of the Bajaj family and their various holdings in various group companies that hold stakes in various other companies, it would be so much simpler to understand. After all you hear that Shishir Bajaj said Niraj Bajaj was siding with Rahuj Bajaj and his sons against Kushagra Bajaj. THe reader's band is baja(j).

Take all the business battles: Bajaj, Ambani (whose battles don't even have the same last name), Birla, Tata, Rin, Surf Excel etc. All these battles look so much better explained in a flash videos marked by respective family trees, and I'm sure stockholders will pay to see the darn thing unravelled. Eventually, though, they may be pissed off that the real owner is a pair of underwear or something. Still, that's information that someone is willing to pay for, either to know or to ensure others don't know.

I have now come to the understanding how this can soon become a billion dollar company. Maybe even a trillion dollars. Yes, success is an absolute, but you will see how it can be a relative.

P.S. Maybe there can be a Geni for India that gets there before they do -

Monday, March 12, 2007

The ESOP workaround

For entrepreneurs this budget - Budget 2007 - has one dissapointing element. Employee Stock Option Plans (ESOPs) are now classified as a Fringe Benefit, and one needs to pay Fringe Benefit Tax (FBT) on them. In essense, this means 33.99% of the difference between the price at exercise and price of grant is borne by the company.

A startup usually offers part compensation in stock, and the grant price will be abysmally low, like Rs. 10 or so. The employee can't buy stock at grant, because the options will vest over a few years. Even at vesting, the employee needn't buy stock - indeed, buying it will be of no use when the company is not public. And if the company goes public or gets sold, the company has to pay a ton of money as FBT for the options exercised.

Even if an option is exercised before the company goes public, the Income tax department will value the shares at the time of exercise (based on a valuation method that involves net worth per share) and tax the company on the difference.

Now a company may choose to recover this tax from the employee. I don't know how, though - what will the accounting entry say? "Received money to pay FBT"? Will that not classify as "other income" and get taxed in the company's hands? But that's a petty problem which I'm sure smart accountants will solve using fantastic words and phrases that will light up the room with their very presence. I'm not too worried about that.

What I'm worried about is that the government takes away a chunk of your employees' profits when it comes to a liquidity event (IPO or sale). I think I have a workaround to this, though I'm not yet sure it's totally fool proof.

If you're starting a company, start a "trust" which will hold shares that you have allocated for ESOPs. This trust is a separate entity (you could even have a different "not for profit" company) unrelated to the company, and will own the pool of shares you have set aside for employees. Ensure that the company does not own the trust - though promoters may do so.

Run your ESOPs the usual way, X shares every month for N months etc. But if the employee wishes to exercise, have the trust sell her the shares instead of issuing fresh stock (which is what happens with stock options).

The difference here is that the company is not involved - there is a third party transaction that transfers stock from the trust to the employee. If the "market value" of the share is much higher than the value it has been sold at, the trust takes the loss. The trust is a not-for-profit entity anyhow, and does not have a tax liability, so the loss is neutral for the income tax department.

The Income tax department may of course take a different view and disallow the loss. It could term the transaction a "deemed profit" for the employee and add it to the income of the employee. The idea here being that the trust intentionally sold the shares at a loss so that the employee must profit. But this can be fought in court, if you have an agreement between the employee and the trust on an earlier date that fixes the price of the share for later purchase. Such "call" options are common and legal, and in fact the very basis for convertible debentures.

Problem: If you get Venture capital and they want you to augment the number of shares given as ESOPs, you will need to issue more shares to the trust. Obviously this is going to be at a lower price than the VC price, which means the tax department will say it's a "deemed profit". That phrase again. But if the trust is created as a non-profit, you can avoid tax liability on such deemed profits too.

But such an arrangement will have to be stopped after the company goes public. Obviously, ESOP grants can't be transferred to a trust at a lower price after a company is subject to pricing laws when it is public. But as a public company, it may simply be better to use RSUs (Restricted Stock Units) instead.

What do you think?

Tuesday, February 27, 2007

Where angels fear to tread

If you're reading my blog post by post, I will sound like a broken record about this, but bear with me please.

I'd complained about the general lack of deal flow and VC issues here, here and here. A recent post on Venturewoods had comments leading into the angel investment space. Angel investors, for the uninitiated, are those that give money to entrepreneurs when have diddly squat to demo. When people want money to build something that they can make very big, they will need to turn to angel investors.

Why? Because the typical amounts such ideas need are between 10 and 50 lakhs. Why that much? Two founders, salaries for a year @25K per month, let's say they need equipment, outsourced graphics design and programming perhaps, colocated or dedicated web space, collateral, etc. And perhaps a small team of people towards the end of the year to be able to generate the traction needed for a VC funding round. Okay maybe this is too big an amount, but everyone is not debt free and rent free.

You might think: Ok, why not go to a VC directly? VCs have $20-100 million dollar funds. They don't want to invest pocket change in you right now - after all, what you have is a dream and everyone has a dream, including Martin Luther King. For unlike him, everyone's dream cannot become reality. So they tell you to do something, hustle around, get some "traction" and come back.

Plus, if they gave you your 50 lakhs ($100K) they will need to fund some 200 companies like you in order to cover their fund of 20 million. Now if these 200 companies gave progress reports just ONCE a quarter, the VC will have to meet 3 companies a day just to cover them all in a quarter, and heaven forbid someone wants time in between. Typically VCs do 10-20 investments.

You might say: Uhm, why not find a VC that has only 5 million? I will now ask you to sit back and think about how VCs get paid. They get a "management fee" which is a percentage of the fund value, and they get a profit fee. Profits are five years away at least, so how does the VC pay their bills? Yes, management fees. Say that's 5% (I am picking a figure from the air). For a $20 million fund, fees are $1 million which pays for the lexus, the chalet and the trips to investor meetings in Honolulu. (To any VCs that are reading: I'm kidding! The Lexus is already paid for)

Now think about a piddly $5 million fund. The fees there are $250K which covers less than Bipasha Basu's clothing, speaking in the VC world. (Not that Bipasha Basu is in the VC world, though if that happened we would have a lot less bickering) That kind of VC would have to travel economy class, which means 'regular' VCs will have the room cleaned with water from the Ganga after they visit.

So VCs won't want to hear about your 10-50 lakh thingie. Now what do you do? Let's say your project manager, a smart guy with lots of contacts and good industry knowledge, professes interest in providing you the money - but he won't join you. Just be on the board, help with some initial setting up and refining, and provide the money you need to get traction, so you can go to the VC.

In return, you give him equity - say 25% of your company. He is now your angel investor.

If, after a year, you go to a VC who values your company at 18 crores ($5 million) and now is happy to invest another 9 crores. What happens to your angel investor?

In the US, many investors will pay the angel the valued amount of his stake (full or partial) and take over his stock. Your angel investor is happy to get this kind of a return and doesn't have to wait 5 more years - that was his risk taking capacity.

This kind of partial or complete cash-out happens at many levels in the US - from first round to second, and even founder partial-cash-outs . This is what I call deal-flow.

Deal-flow is non-existent in India and the reasoning for this, judging from the comments in the venturewoods post, is because VCs are not happy to see other investors exit. Why aren't they staying, they say, and is there something they don't like about this company that we are overlooking?

Plus, of course, financially it means someone is exiting when you are entering. The greater fool theory means that I will buy at a high price and find a bigger fool who I will sell to at an even higher price. VCs do not want to be the greater fool. The fact that they are buying from someone else makes them feel they could be one.

But that theory holds very little water. In mature markets like stock exchanges and such, there are people who buy high and sell higher all the time. Even traders buy high priced goods and add their margin when selling to others - and you have been a greater fool at some point in your life. Ever drunk Barista coffee? You're a greater fool. Ever eaten at a five star? You're a greater fool. Ever bought a cinema ticket in "black"? There you go. Ok these are consumption themes, but I don't know what business you are in - even so, do you take a salary from your company? You are a greater fool - it is far more worthwhile to take the same money in a consulting role. Being a greater fool suddenly is not as bad as you think.

Of course the other big issue is of valuation. Startups are founded by people who may not have too much of an idea about finance. When I started Agni, we brought in two other people who frankly provided very little to the company (though one did give us some office space to start, and later charged us the rent) - but we gave them stake at the same proportion as our money bought. Yes, really. This was 1998, and I was an uninitiated fool.

VC's will generally identify that the founders have been screwed in an angel round, and therefore readjust the capital to distribute the real value. The being-screwed part is obviously subjective, for angels will argue that they paid money where nothing was visible, so their investment would cover the risk. But then the VCs have the money, and the golden rule of finance is: Who has the gold makes the rules.

Thus VC investment generally means that angel stake gets substantially corroded, and therefore it may be in her best interest to sell the stake during the VC round - there is no management input by definition, and there is no control, and this in a private illiquid company; all reasons to sell out. Of course, all of this may be overshadowed by the phenomenal growth potential, and most angels would stay invested. Yet, some may decide they would like to exit, and providing them that exit path is best for all in question - the VC, the founder and of course, the angel herself.

The one way to avoid this is to find angel investors willing to stay very long term. Not that tough, even project managers will have that tenacity. And the second way is to use bridge loans.

At seed time, valuations are murky, so there's no end to valuation arguments. Therefore seed investors can provide capital as a loan, convertible to equity at two points - a) if the company is acquired and b) if there is VC investment. In either case, the conversion will happen at a discount to the valuation offered; say 30% or such. Such loans will be given at about 5% above the market rates, and the accrued interest is not paid out, instead it adds on to the loan amount for a later conversion. This is called a bridge loan (or at least, that's what I call it)

This is great stuff - in fact if you are starting a company, and investing your own money, go down this route. Reason it's great is - if you buy shares early, then you end up valuing the company way too low, which obviously affects other investors later. Secondly, you keep the cash as a loan so if the company goes down you will have first claim on any assets. Convertible debt as a bridge loan is what even big companies do now, through convertible debentures, FCCBs and such. In fact, if VCs were not afraid of losing control, they would also use convertible debt as an option.

Angels can therefore provide money as a bridge loan instead. This kind of thing is just starting to happen, and it may now be the evolution of the angel process. Yet, angels will want to see the possibility of earlier exits if the angel space is to really evolve.

And why should the angel space evolve? Because when you start, you don't need $2-3 million. With tech becoming cheaper and cheaper, why would you take that much money when you can do with far lesser? But VCs won't give you lesser, and angels aren't even in there because the model doesn't permit exits easily. Perhaps we should change the model.

As for founders - I would say put your money as a bridge loan, and take stock options for your hard work. So part of your stake will come as conversion of your upfront money and another part as options vested over time. That arrangement comforts a later VC also about valuation.


Sunday, February 18, 2007

Parenthood is here

Yes, I'm a dad now! We're all excited and wanted to post here to let all the people who read this blog know, if both of you are still around. Cheers!

Thursday, January 18, 2007

Limited Liability Partnership

If you want to start a company you have two choices: start a Limited Company or a partnership/proprietorship.

A partnership or proprietorship has been a loosely held entity where the ownership and responsibility of the company is defined in a registered agreement. If one partner decides to take a loan and run away, the liability is transferred to all other entities in the partnership. Given such issues, most companies are loath to recognise partnerships as proper suppliers or customers. (Exceptions are professional organisations like Auditors, lawyer firms or architects, which by definition cannot be private limited companies) Again, no one will passively invest in a partnership because of the unlimited liability it exposes.

A Limited company provides for limited liability - i.e. you, as an owner, are only liable to the extent of your shareholding in the company. Currently, limited liability companies have a whole lot of statutory requirements to follow - having strict board meeting regulations, annual general meetings, rigid documentation etc. Not a very easy thing for a startup, and the costs, as you can imagine, are much higher. Plus, given that closing a company can take years in India, the cost of regulation can be high for a failed company.

Enter the Limited Liability Partnership (LLP). A new bill proposed in the Rajya Sabha in December, creates the potential for a new entity - the LLP - which will have the benefit of limited liability and the statutory relief of a partnership. (Read the bill in toto)

If this bill is approved, it may be an interesting vehicle for entrepreneurs to use. Plus, you can convert from it to a limited company anytime. An option has also been provided to convert a limited company into an LLP, which will give a lot of relief to owners of now-bust-companies.

Tuesday, January 16, 2007

Thoughts that will make you think

Thanks to my friend Mohit, I saw a list of entrepreneur thoughts at the gaping void.

What I liked best was:

Bill Gates may have a million times more money than me, but he isn’t going to live a million times longer than me, watch a million times more sunsets than me, make love to a million times more women than me, drink a million times more fine wines than me, listen to a million times more Beethoven String Quartets than me, nor sire a million times more children than me. Human beings don't scale.

The one thing I can think of is: He can help a million more people than me. That's perhaps why I should want the money.

Wednesday, January 10, 2007

Profit is a four letter word

In India, there seems to be a cultural disrespect for the word "profit". I remember walking in an exhibition and hearing this conversation:

"Kitna hua" (How much)
"200 rupees"
"Bahut zyada hai" (way too much)
"Isme bahut kam margin milta hai" (i don't get much of a margin/profit here)
"To margin nikal ke bolo na" (remove your profit margin and tell me the price)

I was flabbergasted. Sure, this is negotiation. But the implication was Sell me this item at no profit. This, by itself assumes that the exhibitor will give you the item at just about break even pricing! (Of course, shops are smarter than that)

But we have a history of con-jobs. Most times people indulge in uneven pricing - meaning they price items at different rates for different customers. Foreigners get the worst treatment here; and even the unsuspecting middle-class gets stiffed ever so often. In that light, a strong negotiator is very highly recommended.

The problem, though, is in the abhorrence of profit. It's not like "Give me your best price" - that is perfectly acceptable. But asking one to ditch his profits so he can make a sale seems unfair, and is fascinatingly acceptable in this part of the world.

With a new middle class, and cash rich people, will all of this change? We just have to bet on it.

Monday, January 08, 2007

Startup hiccups in India

Dharmesh Shah analyses why there aren't more software startups in India. By "Startup", he means a company that produces a product - not the BPOs, or the software service companies. He means software product companies, of the likes of Tally Solutions, Picsquare and the new startup that I will be starting in a few days but haven't had the time to build the darn home page yet.

Now yours truly is going to counter-analyse and put in points from a) someone who started a company at age 23 and b) someone who is going to start once more at 32, but this time on a completely different front.

Service companies have lower risk
Startup or service company? When you look at it from an entrepreneur point of view, it's about food on the today (service company) or a gourmet meal far far away in the distance. Dharmesh says the risk of a software service company is lower; and I agree.

I will digress right now into a brief history of my first startup; we went down the "service company" route, though initially only as a funding source.

When I started Agni, I was 23, it was 1998, I had unending reserves of energy and was totally clueless. Which are the prime requirements for starting a company with nearly nothing in your pocket. We put in Rs. 30,000 each - four of us - which was all the money I owned at the time. All of us also brought in our home computers, and set it up in a first floor room of a company owned by a company that was ok with renting it to us without a deposit.

Chirag and I - two of the four founders - had no rent to pay or other big liabilities so we decided that we would go full time into the business, and Arun and Bhaskar, the other two, decided they will get themselves a day job. The deal was: Within three months we generate cash flow to pay us Rs. 15,000 every month, and we all go full time. Otherwise, we shut shop and go away.

We started as "corporate trainers" - meaning we would go to big companies and do five day training courses on C++, Delphi, Java and the like. Even the day jobbers took part - and in three months we generated the required cash flow, everyone went in full time etc. All a happy story till now.

Enter the product. Fin-Acc, an accounting software that would beat the pants off the competition. Two founders would develop it full time - but how to pay their salaries?

(Note: We hadn't even started to think of marketing costs - we were conveniently using Chinese math like 100,000 companies register every month, and where will they get their accounting packages, we can easily get 1% of this market and so on. Our eyes were the shape of dollar signs - because the rupee sign simply does not make for good eyeball graphics - and we honestly believed that if we built it, they would come, hand over their money in small bills in paper bags, and beg us to give them our product. I love those times.)

So, to finance this, there would be a "services division", which was the remaining two founders looking for service contracts worldwide. Luckily we got a break in Europe and then in the US and the "services division" became stronger.

Eventually, as the product started to take away more money than we could throw at it, we began to pull the rug. Take out the newspaper ads. Pull down the hoardings. No more stalls at IT.COM. And later, ditch the product idea - let's sell the service of getting companies accounts online.

What am I getting at? We were forced to go down the service route initially because we had no money. Later, we did it because the product was just not getting COMPARABLE revenues to the services division. Services is easy. Products are tough. Period.

Lack of precedence: Dharmesh says that the Indian story lacks the inspiration provided by prior startups, like in the US you have the Intels and the Microsofts. In India, whaddya got? Infosys, which landed a big contract in 1990 and became a services giant. TCS and Wipro, which was funded by an established house. And while these guys have some product lines, they are primarily service businesses.

But I think India has good stories, albeit not always in the tech space. Suzlon Energy, Bharti Airtel and Rediff have grown from fairly humble beginnings. The recent IPO of has brought a new angle to tech IPOs - that a web company can get an huge valuation in the Indian stock markets.

But yes, the garage companies have still not set a precedent. There aren't that many IPOs - I don't know why, in the face of growing investor awareness, large fund investments and lower regulatory problems - but I'm sure that equation will change. After all, I'm not the only soul that realises even a sub 100 crore turnover is enough to take a company public.

Early stage capital is hard to find: I've talked about it in the context of "not enough capital" and "no more VCs?" earlier. Deal flow is not acceptable and angel investors are either not there or are more chip-on-shoulder than VCs. Okay, gross generalisation.

Bureaucracy: Dharmesh says:

Here in the U.S., I can have a brilliant idea for a software startup and within about 72 hours have launched a “real” company. By “real”, I mean it will be registered (LLC or S-Corp), have a Federal Tax ID, have a merchant account to accept payments, a bank account and a small business credit card. I’m not sure how long the equivalent process takes in India, but I’m guessing at least weeks.

This may not be such a huge hurdle anymore, as even Dharmesh admits in the comments. But let me see:

- Starting a company: If you start a private limited company, this requires a Director Identification Number (costs Rs. 2000 or so and can take a while to get), a copy of a PAN card and such. You also need some "Memorandum and Articles of Association" and application documents which your accountant will snag from another similar company. You will then need to apply for the name of the company, which requires government approval. Okay, it's a pain in the ass. But if you choose to start a partnership firm, which makes sense because you're not going into debt, it's a 10 minute job.

- Getting a Tax ID for a company is an over the counter thing nowadays, and a bank account takes from 1 day to 7 days.

- Merchant Account: You can get one easily at CCAvenue. If you want to be an offline merchant, i.e. get a swiping machine and stuff, it will cost you more time and money. And you have to convince the bank you're not going to cheat customers. Such is life.

- Getting a small business credit card: You can probably forget about this one. Businesses don't get credit that easy, and all you can do is get a personal credit card.

- Dharmesh mentions that it requires a more gregarious attitude to get things done in India. Well, I don't know; I'm not an introverted shy sort of person, I'm more of the sort Dharmesh describes that will "get things done". You probably have to find such a person, but I've found that accountants and social circles help.

All in all, bureaucracy is a pain only if you want it to be. To me, it's the cost of doing business. I would love it to go away - and it's slowly easing up - but it doesn't stop me from doing what I want.

A small digression: One of the reasons I've never wanted to take up a job in the U.S. is because they grudge work permit holders the freedom to start a business. With an H1-B, you never get that freedom until you land a green card; and that process can take around 6 years. I'm ok with waiting a month for my company's tax id, but six years, man that's tough.

Recruiting employees is a challenge: This is the big one, mate. There are two aspects to this:
1) Finding people with the "drive": A tech startup needs people who are extremely passionate about what they do. So if you're going to write mobile games, you have to find people who will breathe games and understand mobile technology as if the acronyms were built into their chromosomes. There are about 10 such people, and the big companies have hired goons to protect them from you.

Okay, I'm exaggerating. But it will sure seem that way to you after a 100 interviews, 200 phone conversations, one-on-one meetings in coffee shops etc. You know what ticks me off? The kind of person that proudly puts "COM and OLE" on his resume, and when asked about how IDispatch interfaces work with late binding, will say "I don't know, we didn't touch that part in our project".

The very excuse that their "project" did not involve a certain area of a technology seems to absolve them from the need to ever learn it. This kind of person can never work in a startup. And yet, such persons are 95% of your candidates.

2) Ability to hire them: Now let's say you hit a gold mine and found a few potential hires. Convincing them to join is ultra-tough, like Dharmesh says, in the face of big corporate salaries, perks, and importantly the cultural peace you get by working with a "known brand". I'm one of those guys who doesn't give a rats ass about my "career growth", but the Indian recruit-o-sphere is littered with those that want a shiny, polished, smooth-upward-curve resume, in which your startup obviously causes undesirable bumps. So you can't hire the career types, the money types or the known brand types. Now you are left with a sum total of two people you can hire, one of whom is you.

It's also interesting that Dharmesh mentions the marriage angle; that startups are not considered kosher for the marriage market. One of my friends, who was a consultant making obscene amounts of money working only six months a year, had to join a big name company when his in-laws postulated that the lack of a fixed job was not explainable to their relatives. Think about it. His wife and his in-laws were ok with his job, and the money was great, but he got a job so that their relatives wouldn't raise eyebrows.

He quit the job a month after his marriage.

Product companies are tough and creative: What Dharmesh says here is a little subtle; that Indians, in general, don't want to spend time on the creative nature of product development, and are more focussed on practical, heavy things. Uhmm...I think he's right here. There are some essential small parts of development - usability, clarity, no. of clicks to get something done etc. which are largely ignored by developers and companies alike.

I think it's not that we don't think of it. It's that we don't try to refine ourselves once our product is out.

A commenter also mentioned that a huge problem is lack of local market. India by itself is not so much a consumer of software products. Not only is piracy rampant, but people simply do not pay in volumes that make any sense. The lack of local market means that most startups look to get customers from abroad; it is now painfully obvious that you should be where your customers are, therefore the startup moves to other shores for selling, customer acquisition etc. and leaves India as a development/testing location. It is now no longer an Indian startup.

The lack of a local market is relative. Maybe this is not the place for a youtube or a facebook. For mobile content providers, it's *the* market. For online travel ticketing, jobs and real estate portals and the like, it's showing tremendous potential. And I believe there is a big market for discount bookstores, tax return software, fast food restaurants etc.

Overall, I think startups in India will be tough to come by. It's largely the lack of good people that will kill the enthu of the few that do start. Yet, all it will take, and I shamelessly borrow from someone whose name I don't remember, is a few good men and women.

Thursday, January 04, 2007

Targeted New Year wishes

A Google search for "Deepak Shenoy" has yielded this snapshot:

Look at the right - Sponsored links with my name on it! What a way to target a New Year wish :) What's even more impressive is what happens when you "click" that link:

More power to Mahesh Murthy and the people at Pinstorm.

To Mahesh, Pinstorm and all of you reading: Wish y'all a fantastic 2007!

Wednesday, December 27, 2006

Founder payouts are now in business

Turns out The Founders Fund has started talking openly a partial buyout of founder stock by Venture Capitalists. What this means in simple terms is: When a VC firm invests in a company, they give part of the money to the founder in exchange for her stock.

Now TFF (my acronym) is a group of founders, so you would think they are biased. They've been founders that have become VCs; and perhaps they understand the nature of entrepreneurs better. They are doing something a lot of people (including me) have been talking about lately. Paul Graham mentions this in two essays. For angels he ascribes this as a plus:

Angels have a corresponding advantage, however: they're also not bound by all the rules that VC firms are. And so they can, for example, allow founders to cash out partially in a funding round, by selling some of their stock directly to the investors.
And he says it to VCs too:
..letting the founders sell a little stock early would generally be better for the company, because it would cause the founders' attitudes toward risk to be aligned with the VCs.

What he means is that founders have all eggs in one basket. VCs on the other hand revel in diversification, and a little money to the founders balances the risk a little bit.

Imagine this: You have struggled like crazy through the early years of a startup, drunk the early morning coffee by staying awake all night, had a lump in your throat when you told an employee his salary would be a week late, and in general took your health, family and personal life for granted; you have then built your idea on the grave of everything that will matter in the long run, and shown some traction, and then pitched it to a VC who's decided that yes, it *is* ok to fund.

Now this VC demands a big piece of the pie, asks more of your time to give him a weekly report, releases the money in parts based on performance so the lump in your throat is now a physical feature rather than a temporary blip, and in general, expects a lot more than you expected when he signed up.

In return, you ask for a bit of money to make it all seem worthwhile. And give up a bit of stock for it. It's not the end of the road, but believe me, you like a road a lot more if every once in a while, you were able to see something interesting.

Investors find that disgusting and they would say 'Yeah, after all, it's our money, why should we pay them and not the company? Why do they get paid when we don't?'

But the same guys wouldn't mind the startup paying a sign-on bonus to get new blood. And they wouldn't mind having the company pay a CFO mega bucks, a big-name auditor to say "yeah, this kinda looks sorta ok",and pay lawyers to rewrite the website terms and conditions at $500 an hour. Yet, a founder payoff is miserable, somehow? (Caveat: If this happens a few days before a liquidity event, it's kinda stupid, because the event may value the company far higher than you sell stock for)

Founders don't get less hungry when they get paid. If money has taught me anything, it is that a little bit of it makes you want a lot more. Heck, why only money, it's the lure of anything. Revealing dress = more attractive than the lack of dress. It seems the VCs want you to wear burqas instead.

Wednesday, December 13, 2006

Disaffiliate marketing

Venturewoods has another interesting post: Where is the catch?

Will viral affiliate marketing work in India, Sanjay asks. Background: MakeMyTrip's High Five program and SeventyMM's free for life program are examples of viral programs in India, but they expect a referral to BUY the service rather than just sign up. That means they don't just expect you to get someone to sign up, but they have to pay up for you to earn anything.

Sanjay rightfully points out that this is a higher bar for such programs - that registration itself is not enough, a transaction must be made. On the other hand, merchants are quite willing to shell out money for paper and TV advertisements, or Google Adwords, which are simply impression or click based programs, and demand money for impressions rather than registrations.

So, he asks, will this viral marketing concept ever work in India? Here's my take.

Viral, Affilliate or Word of Mouth?
Don't care. What I'm talking about is the concept of having users refer others. Versus using a distribution channel where you have to cough up considerably higher money for branding and advertising.

Whether this is by definition viral or affiliate or otherwise, I am talking about having other people do your marketing, but not through the traditional distribution channels. Yes, this can mean MLM too, or a combination of all of the above like this one.

Where's the money?
What do the two sites offer you? MakeMyTrip offers Rs. 500 off on tickets you purchase from them in future. SeventyMM waives 1/6th of your fee for each member you register.

None of these mean hard cash for you. Cash off on tickets or fees bought means you only benefit by using the service in the future. It does not reward you for the task of referring a customer, for which the merchants are paying big bucks for in advertising anyhow. Imagine that MakeMyTrip went to StarTV and said, listen, we'll give you Rs. 500 off for every flight you take for the next three months, just show our ads 10 times a day.

"No, thank you", is what they will get. The "thank you" will likely be replaced with unprintable material even in the "Wingdings" font.

If web sites continue to offer benefits of the form of "you'll use us again, surely, and then we'll save you some money" - they will see very little interest.

Let affiliates make real money instead
Any affiliate program that's really successful in India needs to show people real money. (Not just in India, but anywhere, according to me. See Amazon) It need not even be cash or cheque (though that is vastly preferable), it could be transferrable coupons. If MakeMyTrip makes my coupons transferrable (I'm assuming they are not) then I could sell them on eBay for Rs. 450.

Seventymm needn't give me the cash off - Give me real money instead. Because in the current system if I get six people I have then got complete fees off - why should I then bother referring any more? I won't even place their link on my blog because heck, I'm not getting paid after six, right? (Or so I think, though the terms of use says that they will send me a cheque, but that's not substantiated anywhere on their affiliate page)

Cash can a pain in the neck for tax purposes, but it's a pain that can be solved, believe me. I have been in the business enough to know that I can hire accountants to work this out for less than Rs. 5,000 a month, so if anyone gives me "tax reasons", I say phooey. Service tax is an issue, so cut 12.24% out and offer the rest. TDS is an issue only if payments exceed Rs. 20,000 a year - you can obviously gather tax details at the time. And if this is still such a huge issue, simply allow people to buy gift or food coupons with their accumulated income; country-wide shops like Lifestyle, Westside etc. simply work.

For seventymm, whose customers are specific to two cities, even food coupons from SodexHo might work.

Offer the "referred person" a discount
India loves discounts. Instead of paying me Rs. 500, if paid me Rs. 250, and took Rs. 250 off the reffered person's tickets, that would be a heck of a deal. Same with seventymm.

So the deal is: If you come through me, you get a discount. You don't get that discount if you go directly to the site. So there's a tangible benefit, is there not?

I wouldn't mind a lower affiliate revenue if I can offer real value to my referral. And think of the conversation:
"Don't register directly, register through me",
"I get a referral commission".
"Hmm. Gimme half of it".

But that's the way it works in India.

Better to have:
"Don't register directly, register through me",
"You get Rs. 100 discount".
"Oh, cool, will do".

Guess what. That person will now WANT to get referred by you. Cut the affiliate's revenue by half, but it means she can get 10 times more people because they will see value.

Restrictions on earnings
MakeMyTrip limits your coupon earnings further: You can't use more than one coupon on a flight and the coupons expire after three months. So if I have 10 referrals, I get 10 coupons, and suddenly I must fly 10 times a quarter for this thing to make financial sense to me.

Seventymm restricts me from transferring my earnings. And I'm not sure about this, but I think they might cut my earnings off if my referral unsubscribes - though that's not written anywhere.

Make it easy
Referring customers right now is all word of mouth or referral emails. Why can't I paste a little piece of code on my blog to refer people over? Something like a Google Adsense referral or Amazon's referral code?

Or how about Nothing different except I get the referral income.

Make it a viable business opportunity
Referring people is not seen as a channel in India - but companies have got a hang of it and figured that instead of paying agencies they can pay half that to their own employees for referrals. Win-win.

And web sites can do the same, if they let users (and non-users alike) refer people. I don't mind the idea of pay-as-you-earn, meaning affiliates get paid only on purchase by referrals rather than on registration. Money begets money.

To make it a real business opportunity, sites should:
a) Offer real money or tradable currency
b) Let earnings grow when referrals grow
c) Offer discounts on affiliate based signups
d) Make it easy for affiliates to advertise to referrals

What do you think?

Thursday, December 07, 2006

Deal flow in India and not enough VC in general

Typical deal flow involves a new investor buying out an existing one as part of his investment. If I'm an Angel investor in a company that gets funded by a big VC, the VC will plough a part of the money to buy some of my stock, at the same valuation.

This happens hajaar in the US, but is practically unknown in India. While in the US they are even starting to talk about investors compensating (hold your breath) founders by buying some founder stock when they invest, in India most VCs will balk at even partial exits by prior investors.

Angel funding is only possible if there is a reasonable expectation of exits. In today's market a five year hold is probably the least you can expect to some exit event: M&A or IPO. Angels may have to hold even longer, since they fund the company from seed levels. VCs usually start buying in during year 2 - so they're ok with a three-four year hold. But angels shouldn't be expected to stay in forever - or at least, not with their entire money. VCs must understand the concept of deal flow and how it compensates earlier investors; actually, it's not that they don't understand, but it's a typical financial mentality to say "oh my god, this money won't go to the company, but to make someone else a profit, I won't pay.". That, in my opinion, is being very niggardly.

It can also be a fear psychosis, thinking "Why's this guy exiting?", but the answers to that are obvious. If a VC has done the right amount of due diligence, these questions have already been answered.

And if an angel eventually has like 5% of a company, it's practically too small for any level of control, and with more VCs in, there won't be board presence or even advisory roles for her (the angel). Letting them exit is just a better way to handle things.

But we have smart VCs here now, and I'm sure the negotiation table will start getting more and more open towards deal flows and partial exits.

Without partial exits, Angels will fear to tread into this space, and without Angel funding companies won't even be able to move to the VC level or even come to the VC with an expectation large enough for the deal to make sense. I mean you can go and ask a VC for $2 million today, because that's how much you have bootstrapped a company without funding. But 2 million is too small for most VCs to think about, with the huge liquidity of today. The right angels may have made the company ask for a lot more, and an angel exit alongside means that the VC can put in their minimum quantum (part for the angels, part to the company).

Now for the "entrepreneur" end. Why don't entrepreneurs run to VCs more often?
1) Stupidity: That "small pie big share" is less exciting than "big pie small share" is just not prevalent enough, mainly because everyone wants "big pie big share". If you can pull it off, BigPieBigShare is a great place to be. But to pull it off, you need NonDebtMoney and BigTimeContacts which VCs can get for you, and that means BigPie in less time than TheSpanishInquisition. But yes, SmallerShare. Even I have been guilty of this. Yes, I have been stupid.

2) They're Timid: So many people I know just don't have the balls to stand up and say they're good enough and they deserve it and they've done this. And when you combine "timid" with "to big an ego" it's complicated - first you have someone who's too scared to say "I am good", and when he does, and someone tells him "that's crap", he gets all flustered and unhappy. What you have to be is thick-skinned and frikking confident. And for heaven's sake, don't say "we" when you mean "I".

3) Urban legends and true stories: I've only heard bad things about VCs. Why? Because only the bad stories come out. If founders say they love their VCs and how "strategic" and "compatible" and other such words the VCs are to the business, you only think: "Saala, suck up kar raha hai because he wants more money". The bad stories somehow seem more spicy; there's a book called "BooHoo" which is a cry-baby book about's phenomenal failure after $100 million of funding. Guess who gets blamed.

4) Lack of respect: If VCs don't know your business you are bound to think about why you even bother to talk to them. It's easier to ditch them upfront, because then they will start the fishmarket haggling over silly things and piss you off. But what do you do when 90% of your VC universe is filled with prople who don't know XML from a bar of SOAP. Okay, that's changing. But it's still pretty lousy out there.

Having said that, I believe today does not have to mean tomorrow. Change is essential, and change is happening. In a few years, you will laugh reading this blog post and call it "those days".

Tuesday, December 05, 2006

Prawn de-shelling outsourced

Young's, a seafood firm in Scotland, has decided to send the prawns it catches all the way to Thailand, where the prawns will be de-shelled by hand. Then the entire thing comes back all the way to the UK to be sold.

Prawn shellers in Thailand cost as low as 25p per hour, versus the Scotland rate of £5 per hour or so. Machine shelling doesn't provide the high quality of scampi they need, and hand shelling is too expensive in Scotland. So they've decided to send the stuff 19,000 km. away to Thailand and bring it back.

The carbon dioxide emitted by the travel is supposed to be huge, say environmentals, who evidently know their carbon dioxide from other natural gases. The company could offset this by purchasing carbon credits with a £350,000 cost, it seems.

Think of it. Someone is sending prawns over 19,000 km of sea, to hand shell them at such a low cost that the travel is worth it. Outsourcing gone wild.

Of course it causes a loss of a few jobs in Scotland, but that can't be worse than this or this.

Monday, December 04, 2006

A μMoney update: Online photos and DVD rentals

From my last post about μMoney I've had some further ideas in two areas: Online photo printing and DVD rentals.

For the online photo printing, someone suggested that people who don't have access to photo printers may send their photos using MMS to a printer who can print/deliver/get paid.

But I believe most people do not have the ability to MMS their photos over. I think what might be a good idea is to have kiosks in malls which can accept cash or cards, and where you can connect your phone (all sorts of connectors, all sorts of phones). A touchscreen shows you the photos on your phone, you select what you want, and the photo comes out a little chute. Rs. 10 per photo. This can also be customised to a "send photo" option. Addresses can be read from a credit card or you can use different "ship to" addresses. And why stop at mobile phones: Allow cameras as well.

I like that idea, actually. An experiment in Forum mall in Bangalore may be a good idea; a one month manned kiosk (so no credit cards are needed initially) to gauge response. Can be done as a beta for Nokia mobiles exclusively. Hmm. Anyone game?

DVD Rentals: One thing of concern is that people buy pirated DVDs at 30 Rs. a movie (so I hear), which can kill the rental industry. Of course quality can be the head turner.

My thoughts: Quality is not so much an issue anymore. You can get pirated DVDs that have the same quality for something like Rs. 100, inclusive of a printed sheet and a DVD case. The issue here is the local dvd rental shop (of which at least one exists per area in India I would think) which buys such DVDs and rents them out. That simply kills the online DVD rental by undercutting.

But still, there is an interesting market for sitcoms and perishable content, which is too high strung and technical for the local shop. Essentially, get the producers to send you content over the wire, and you stream it to your local offices (of course you have local offices). Streaming is done on demand (when a customer wants a certain episode set) The local office then receives the stream and burns a DVD - a process that can take 10 minutes for a rewritable DVD (apart from the download time, which you can shunt out through quality lines and torrent style non-public peering). Royalties and revenue shares are the way to go, and investment isn't too high.

What do you think?

Fishy market analysis

I sometimes find such statements on blog comments:

India: Total subscription base of 9.5 crores…[GSM+CDMA]
If an application is targetted around this, and generates a bare minimum revenue of Rs 1 per month per user/subscriber….it has the potential to generate 9.5 crores INR per month....

This is a classic fallacy but used so often that most VCs will, on listening to this, splutter and choke and burst various unrelated blood vessels.

These figures talk about a "universe". Not a target market. (Peter Rip explains this very well.) The total number of mobile phone subscribers in this country is 9.5 crores. You can probably reach much much much lesser of them. For instance, you will not be able to reach or tap the fishermen who use the phones in the high seas to figure out which fishmarket to sell their catch.

You will not be able to tap the innumerable phones given to car drivers because the car owners understand that parking is tough, and visibility is less useful than radio frequency in such situations.

You won't get a hoot from people like me who are suspicious of anything which involves my paying money over SMSes or mobile phones. You won't get much interest from people who are sick of mobile spam.

I believe you will not be able to tap most of the 9.5 crore people anyway, even if you paid people 2 rupees each to send you an SMS.

Even if you tried stunts like having people pay automatically when they switch mobile zones, you will find people changing service providers or removing the service. You can't make people pay even 1 paisa when they don't specifically say they want to. Not in India.

Your real target market depends on what market you want - students, housewifes, drivers, people with bluetooth phones etc. And then it depends on what you do to get to that target market. Er...not clear? Here's the underlying concept.

--- Mobile business plan---

I will sell fish through mobile phones. There are 9.5 crore mobile phones. Of which 2 crore eat fish. Now fish is a perishable and requires freshness, so all people have to do is send me an SMS or give me a missed call and I will send it to them. Each family eats fish around once a week, and probably 500g of it at a time. That's 2 Kg of fish per month. I have a margin of Rs. 5 per kg of fish, so I can get a net revenue of:

2 crore people = 1 crore households, eat 2 kg of fish per month and I profit at rs. 5 a kg, so I make Rs. 10 crore per month.

I will spend five crores on marketing and people and all that and I net a cool 5 crore a month.
--- End of plan ---

Sounds fairly stupid to me.

Firstly, all the above assumptions are wrong in some way or the other. Secondly, I can't get one crore people sending me SMSs or whatever. I can probably reach 100,000 people in one city for a certain price point. Of that, less than 1% will buy my service. I can perhaps sell a thousand KG of fish a month, if I really try.

Reality is harder than you think. It's all very nice to start thinking of universes. What really matters is what you can reach.

India has 4 million home PCs. That means nothing to you. What you really should care about is: How many can I reach, with the 100,000 rupees I have for marketing?

Sunday, December 03, 2006

A India

Okay, that pun was largely wasted. But check out <seedfund>, a company that does extremely early stage investments in India. Their "seedfunda" is:

Big backing + tiny fund = giant impact

The folks behind it are Pravin Gandhi, Bharati Jacob and Mahesh Murthy.

They invest under $500,000 in their seed rounds. That's enough rokda to start small - what does one need to start an Internet company these days? Let's see.

A typical startup would have some development time to get the idea into the next stage.
- Salaries for the founders - money for the late night egg burjis, the petrol kharcha and the like - should be around 50,000 per month (averaged). For around 5 people, over a 6 month period, that adds up to 15 lakhs. (Initial cost: nil, running cost: 15 L)
- A 1500 sq ft. office would cost Rs. 75 K per month to rent, and plonk down 5 L for the deposit. Need to spend about 5 L on the UPS, carpeting, A/C, tables and that kind of stuff. (Initial cost 10 L, running cost: 4.5L)
- 5 laptops, 5 Desktops, 2 servers and network equipment would set you off by around 10 lakhs. (initial cost: Rs. 10L, running cost: nil)
- Internet connection, electricity, maintenance, paper, cards etc: Rs. 30K per month. (Running cost: 2 L)
- All the propaganda and internet space and all that would cost another 50K per month. (Running cost: 3 L)
-ATOB (All the other bull***) : Approx. 20 K a month (running cost: 1.2 L)

So getting a company up and running for six months will involve an initial cost of Rs. 20 Lakhs, and a running cost (total) of Rs. 25.7 lakhs.

That's about 45 Lakhs in total, a $100,000 fund in total. Scale that up to 10 people, 12 months and you're talking about approximately 200,000 to 250,000 dollars. Probably very much on seedfund's radar.

They have some major names on their investor list, like KB Chandrashekhar, B V Jagadeesh, Kanwal Rekhi and the hotshot companies like Reliance ADA, SVB's financial group and Edelweiss capital.

Check them out. They don't need me to advertise, of course. But they probably need smart ideas, so if you have one...

Wednesday, November 22, 2006

Micro-payments - μMoney

To avoid confusion with "Micropayments" this page has moved to:

Tuesday, November 21, 2006

Micro-money - μMoney

Alok Mittal wonders if businesses around the theme of providing a service to a million users at $100 a year (1m x $100) works in India. Or at least I assume he means in India. Of course, we don't speak the dollar language so I assume he means (1m x Rs. 5000) a year.

Specifically, Alok mentions:
1. Online DVD rentals
2. Online photo printing
3. Online tutoring (export oriented - ok more like 100k x $1000 here)

The theme behind such sites is - pay smaller amounts of money for a service rather than a product. You can rent, say, 2 DVDs for Rs. 200 a month, or pay Rs. 4.5 per photo to get it printed. Or get lessons off the net, with a real person delivering a course, at about Rs. 1000 per month.

I think such sites are the future for the software business in India, which is littered with software pirates. Piracy is so rampant that creating any "client side" software is a dead proposition from the start, unless you are able to build and sustain market share and then, hopefully, charge for it. I call this the Microsoft strategy, which has worked in India in the past, in the form of the Tally Solutions strategy.

But small entrepreneurs can usually not wait that long - after all, cashola is the king. Plus, if your solution can be pirated, it will be. The answer is to take the solution online: after all, no one can pirate your site and use it for free, and if they do you can fix it fairly easily.

I call this concept "MyuMoney" - a name for "Micro Money". Micro, in greek, is the letter "myu", so MyuMoney is written like this:


μMoney is the concept of charging small amounts of money for a valuable service. An amount so small for a value large enough that it flies under your customer's radars and therefore, she pays for it.

It's not something I invented. It's been there for decades, perhaps centuries. But it's new to the Indian software world. Why? Because we have been exposed to the US style of micro-money till now. In the US, μ meant $10 - $50 a month. To individuals and businesses this is so small it is under the radar. In fact for businesses, even $200 a month is an "below-the-radar" price to pay for a service.

Converted to rupees, this translates to Rs. 450 to Rs. 2250 a month. Not cheap by Indian standards. Cheap for businesses, perhaps, but not cheap enough. I can get an accountant to visit the office weekly, enter all my vouchers and invoices into an accounting software, reconcile bank statements and even prepare individual returns for Rs. 2,000 a month. I can get photos printed offline for Rs. 4.5 per photo. I can buy books at 15% discount offline (minimum).

So any service that's online must give me a deal that is just below my radar for a monthly service, or below the price paid for a similar offline service.

I should be able to pay monthly or per unit - anything that asks me to pay upfront for a year, or tells me they will send me 12 magazines and charge me annually, is off the radar. The yearly or multi-unit options are supplementary; I should be able to pay per unit if I choose to.

Further, online payment options are nice, but they must include Indian netbanking links (like ICICI or HDFC netbanking) and also have a "drop box" facility to drop cheques or make payments in cash (for sufficiently large sites). This is not easy but it's mandatory if you want a site to grow in India over the next three years.

So let me prepare the rules for μMoney:

1) It must cost between Rs. 200 to Rs. 500 a month for an online service. Ticket size should be less than Rs. 500.
2) I must be able to pay monthly.
3) I don't want to pay more online than I do offline.
4) I must provide online and offline payment methods for people who want to pay.

The unwritten deal is that I need to provide value for the money I charge; and the value should visibly be large enough for customers to know they're getting an absolute deal.

Who's available? Let's see:
-, the online matrimonial service charges between Rs. 282 to Rs. 425 per month.
- Real estate sites like 99acres, (charges Rs. 500 for 2 month).
- Share Trading advisories like PowerYourTrade (Rs.500 per month)
- Personal finance sites like personalfn (Rs. 300 per year)
- Photo printing services like PicSquare (Rs.3 per photo)
- Mobile games and songs and ringtones (usually Rs. 50 a pop)

Who isn't?
- Most online job sites. They cost upwards of Rs.5000 per month for jobs.
- Many stock trading advisories or magazines that charge annual fees upwards of
- Most other sites that don't even bother to offer this option.

μMoney is all about flying under the radar. In the Indian context, it means approaching masses. Selling software at Rs. 500 a pop. Retailing at 99 cents a song - yes, that model will work in India, but not for songs. Think about TV serials. Cricket match highlights. On CDs, not just downloadable. Heck, I love that idea but it needs more money that I have and higher time to returns than I can get capital for.

But the concept remains exciting: Make small payments for a service that can give you much greater value. μMoney is the way forward for Indian startups; and a way for the Indian Software Industry to finally mean 'software' rather than the types of Infosys and TCS. It's time we finally came around. It's time for μMoney.

I have just registered - I will build that site and list all the μMoney sites for India. And maybe,

Personally, I'm working on a site for India on the same front. It's based on the concept of "" - an online stock advisory that helps you become more knowledgeable about your investments. My idea is more than stock recommendations though - there are too many of those sites - and more of a complete investor tool. I've been writing about investing per se at, a basics and intermediate level site for the Indian investor.

Some of my thoughts includes tax accounting for investors, providing a look-see into "real" growth, comparing investment options, cash-flow analysis and a slew of other things that work for intermediaries.

I will expand on this in the future, and give you an insight into this "startup" which initially focusses on information, but in the end, aims to be the first stop for the Indian investor.

If anyone's interested - drop me a line at deepakshenoy at gmail.

Another idea I have, which I will not take up because I'm involved with the above, is an online "testing" tool focussed on companies testing candidates. I will write more about this, later, if I have some time.

Monday, November 20, 2006

Let them leave

Nirav Mehta loses two programmers without notice to L10NBridge (yes, that's a name), whose Human Resources (HR) person, when told about it, felt no remorse and threatened to hire the rest of Nirav's QA team with him (Nirav) helpless to do anything about it. Further, a request for action to be taken against the errant ex-employees was refused.

Nirav's rant is that:
a) Employees shouldn't sell their soul. Values matter more than money.
b) Lionbridge shouldn't have bought their soul. If you force employees to break contracts, what example are you setting?

Well, comments have flown back and forth and Vulturo has posted in detail that:
a) The blame is squarely on Nirav for not retaining his employees.
b) Employees aren't slaves, and they should be allowed to buy their way out of a notice period.
c) Money's a big factor. If you can't afford to match or beat the industry standards, it's your problem.
d) Nirav shouldn't be demanding explanations from LionBridge. They're just doing their job.

I think there are two definite aspects to this. The first one is an ethical dilemma: Should people just quit for the heck of it, without proper notice? And the second one is: If they do, shouldn't the hiring company be adamant that they complete their notice period, and get relieved properly?

This would not be a complex answer but for the "asshole employers" that dot the marketplace. The disappointment at losing key personell grows to resentment and vengeance is extracted, too often, by delaying relieving letters, not paying dues properly, and creating arbitrary hurdles to a smooth exit.

Would you buy a computer today if Microsoft told you that before you load Linux on that machine you would have to get a court approval to do so? Would you enter a shop that refused to let you leave unless you bought something?

Creating barriers to exit is a downright stupid thing to do, and employees are nothing less than your customers. You have to make it easy for people to leave, and perhaps even help them when they resign; it's not extremely difficult. Discuss it openly at company meetings: If anyone is looking for a job, let them talk about it. Organise farewell parties in the office for all those that decide to leave; not on the last day, but just after they resign. Stretch the notice rules; transition can always be worked out separately. Always tell them, "Look, if for any reason you don't like it there, come right back. We'll just forget this happened". Keep it simple, your paths may (and most likely, will) cross later.

If that is in place, your employees will want to be nice about it. Of course you have the bummers who won't, but you don't want them in your company anyway. (Give them that farewell party though)

Note here that I'm not saying Nirav made it difficult for his employees to leave. He does say that his company tries to treat employees like family - unfortunately a family position is much more difficult to sustain. The ability to separate gracefully is rare in Indian families; why would the soapy tear-jerkers (movies and TV) make so much money otherwise? So your employees are bound to dither and feel ashamed when they wanted to leave; and for as small a thing as money. It's not small, is it?

Now, should the new company be wary of have-not-properly-exited hires? They should, but even they are aware of the "asshole employers" concept. Also, HR targets are to get the best people as soon as possible, and that links directly to rewards. And finally, if they don't have the integrity, what can you do about it?

You definitely can't - or shouldn't - call and berate them. An email perhaps, if you can make it sound non-vindictive and helpful, but definitely not a phone call. They should be the ones calling you for a reference, but if they don't, you will not make matters any better by calling them. The exception here is if you know someone high enough at a personal level.

And most importantly, if you expect relieving letters and notice periods served etc., expect the same when you hire. I've noticed that often, in small and big companies, HR expects you to join "today, or potentially, yesterday", but will try to enforce a notice period when you leave. Chances are that will not be taken kindly.

While employers can't force a notice period down a person's throat, there are necessary approvals that they can withhold: Like a PF transfer form signature, or encashment of leave etc. It's illegal to withhold them, but relief is only possible through a civil suit, an option most people are loathe to use.

The question of references comes in often: Should you check references? Well, if you don't, then expect that people will leave you high and dry at the worst time possible; after all, you may hire someone who hasn't been as kind to her last employer. Should you give references? Only to those who were nice in leaving, and that you want to recommend. The lack of a positive reference is equivalent to a negative one, so you don't need to write a negative word in a reference. (In India, you can legally give a negative reference)

Oh and I forget about Bonds: companies routinely make employees sign bonds that they won't leave before X years, or else they pay Y money back. The justification is that this is training money spent; If so, I say take the money upfront. Return it once they complete X years. Suddenly the option doesn't sound all that great right? If you take money upfront you must train properly, and give a real certificate that means something to the employee. In most of the "bond" cases, none of that is happening. Bonds add no value, they only take away the trust in the relationship. Once you've lost the trust, no amount of legal threats etc. will bring it back to normal.

Lots of people think that such abrupt departures with no notice and SMS "break-ups" are bad for the industry in the long term. They are not. In fact, they build better businesses. The ability for your lousy employees to leave by just sending you an SMS is the best thing that can happen to you.

If you do not understand, let me tell you this. Marriages are better when the option to divorce is available. Cars are better if the only color you can choose is not black. Business are better if they can fire as well as they can hire. Online buying is better because there is no customs department involved.

The ability for employees to get up and leave in whatever manner they choose affords you the knowledge of who chooses to leave nicely and who does not. And in the same vein, to do whatever you can to keep those that goes the extra mile to keep it courteous.