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...