Saturday, May 10, 2008

If Wishes were VCs..


A Young and successful entrepreneur can be a charmer or a bungler. It is easy to tell when the person faces venture capitalists. Jacob Cherian sits through a mock deal flow session.

YES. I do.” Those three little magic words that embark a person on the matrimonial pulpit on a journey full of uncertainties and hopefully big rewards. In the world of business, they are very occasionally uttered by venture capitalists to an entrepreneur who had fallen in love with their money. But when they nod, they walk into a relationship as complex as marriage, only with a higher failure rate.

It is quite natural that they relish saying “No, Forget It” much more frequently.
Making a neat, quick pitch to potential investors is one of the key skills that an entrepreneur must cultivate. The future of one bright idea or an early stage marvel may very well depend on those few minutes. Venture capitalists will refuse a proposal even if they have a slight doubt about its viability or the business leader’s ability to execute it. In many cases, the refusal may not amount to the rejection of the idea itself, but a safe option for want of conviction.

It is in this context that the event the other day in Mumbai was keenly watched. It had the tone of a high-profile conference or the mood of a law school moot court. It was Red Herring Atre 2007’s final event — Meet the Money — where entrepreneurs faced a panel of three venture capitalists, arguing why they must invest in their businesses.

The learnings were typical of what it takes a startup to succeed in attracting other people’s money and how easy it is to botch it all up. At the ballroom in Taj Land’s End Hotel, the air was thick with the talk of money. Except that none was involved. It was an event where the VC pitches would be heard and decided, but no money exchanged at the end of the day. It was just a game after all, we were told.

But the three entrepreneurs and the venture capitalists were real. Ajay Kumar Kapur, CEO of Sidbi Venture, Promod Haque, managing partner at Norwest Venture Partners and Harshal J Shah, CEO of Reliance Technology Ventures played the potential investors, judging whether the entrepreneurs deserved funding to scale up their operations.

Alex Vieux, CEO of Red Herring, spelt out the rules of the game and acted as the moderator for the evening. Each aspirant had to make a 60-second presentation and answer queries over a fourminute session.

First on stage was KP Vinod, director of BigTec. He sauntered on to stage, probably rehearsing his pitch but wasting some of his 60 seconds. He had a faint smile on his face, almost betraying a casual approach that this is only a game.

Describing his company as a diverse portfolio company, Vinod said, “We fund products ourselves,” and asked for VC funding so his company, in turn, could put the money behind innovative ideas. He went on listing the areas the company was interested in, from software engineering to biochemistry.

The short presentation over, Vieux asked, “How much money are you looking for?” Vinod popped out, “Ten million dollars.”

On being asked about the team, Vinod related the names of all the people involved in the company and who headed which department. “But you’ve said only the names of the team member. That doesn’t tell us anything,” protested a panellist. Then, Vinod went on to relate the names of departments attached to each name. “But what is their background?” an impatient Vieux asked. Vinod was obviously nervous and could muster enough of an answer.

“You’re basically an incubator,” Norwest’s Haque said.

“We wouldn’t call ourselves an incubator. We are a product innovation company,” countered Vinod.

“But you are basically an incubator,” Haque insisted. “For a startup incubator, why are you spreading yourself across three different sectors?”

“We have the option to shut down all the other technologies and focus only on one thing. I think that innovation is a fundamental part of our DNA. And that means we have a pipeline.”

Not much impressed, the panel quizzed him on cash flow and he said his company would go on incubating early stage and late stage innovations. Eventually, the technology would be spun off as a product and money would, one day, surely come in.

Vieux asked the three-member panel to vote. “NO,” “NO” and “NO”.

“Here is the issue,” said Vieux, taking charge of the floor. “When you communicate your value proposition, you make your company seem more unfocused than it is in reality. You are in the bio-tech sector. You are in a very good niche. You want to make it look bigger than it is, and because of that it, seems like you are doing something very fuzzy. And there’s another thing VCs don’t like. VCs don’t like people who do their job with others’ money. It is their job to fund companies and fund innovation. And you are then telling them that you want to take their money so that you can fund innovation. So you are in a genre that they don’t like.”

One of the VCs then took over. “I know someone who relocated from the UK for his company. He said this is all I’m going to focus on. He was like ‘I am either going to make it or break it’. That is the kind of passion and dedication we want to see. If you’ve got that, then you’ve got it. You want to diversify your portfolio for us, remember that we are already good at diversifying. It is better for you to focus on one thing and gain that market.”
Vieux continued: “If you are an entrepreneur, burn all your ships.

Don’t worry. If you are going to sink you are going to sink. But burn all your ships. Go for it and go for that one thing that you are good at it. Don’t hedge yourself. If you hedge yourself, it means you are not sure that you are going to succeed. If you want someone to invest in you, you have to be that sure.”

Up next was Netalter. Its vice president for communications, Gurudatt Shennoy, unveiled his wooing plan. “We have some very innovative solutions for the internet. We are developing the Netalter browser. Our mission is to have the Netalter browser on every computing device in the world. We are also looking at having our solutions for the enterprise market. We are talking to a couple of major players in Europe who are interested in our P2P technology. Their clients are interested in this. We will get our revenues from this by licensing our technologies. But we need funding so that we can get the human resources and set up the infrastructure there.”

Sidbi Venture’s Kapur asked, “What pain point are you dealing with? Why would people want your product?”

“With current browsers there are security issues, spam, cookies and privacy. We have a secure P2P technology that we have invented and patented. This will create an opportunity for a more organised network than the current network.” This was Shennoy.
“Do you have beta customers?”
“No. That is why we are seeking funding. Because we believe that we can come out with our product within three months. The key thing would be to get them to shift over to this. It could be for e-commerce or social networking or other such things.”
“Who will be your beta customer?” the panellists wanted to know.
“People who are not satisfied with the internet. People who feel that their time is wasted on the Net. For instance, I get a lot of spam in my mail and it wastes my time. It would be for both individuals as well corporates. The basic browser would be free. For the corporate to work on the browser, it can be customised.”

Then came the inevitable question: “How will you get your revenue if you offer it for free?”

And then the familiar answer. “We want to create the market first. We are already tied up with content providers. When we launch we will tie up with job-portals, travel sites and such like.”

“Who are your competitors?” asked the VCs. “There are no specific competitors currently. However, as we develop up all the big companies will develop similar technologies. We will have a search engine, a browser. The P2P platform can be converted into a grid. We call it a democratic grid. If you participate in the grid, you can use it to search for information using other computers as well. The results can also be outputted on your mobile phone.”

Clang, and it was time up. Again, all the three said No. However, Kapur did seem a bit interested and said “No as of now, but possibly with another round of discussion. I still do not have clarity on what this is about.”

Shennoy attempted a quick exit with a “Thank you” but Vieux cut him off and said, “Don’t go. Time to debrief. Don’t be too intelligent for your own good. You are trying to hedge. You have a first product and a second product and a whole lot of other things. My advice to you is to do one thing and do it well. People don’t understand why you have different things. This communicates a lack of focus and VCs don’t want to see that. This makes you too intelligent for your own good. You ought to focus on creating differentiated value.”

The final aspirant was from MAIA Intelligence. “You have had companies before you and the VCs are used to saying no,” Vieux said welcoming CEO Sanjay Mehta. A confident Mehta was unruffled. “Let’s see if we can change that.” Meanwhile, pamphlets describing MAIA’s product were being distributed among the VCs.

“We are in the intelligence space. My background: I am a serial entrepreneur with four startups behind me,” Mehta said. “We entered this space as we saw that people have issues in reporting their progress on the operational front. We saw that they typically use excel or people are writing queries. So we decided to target this space. We already have this product out and some of our clients are Reliance Capital, Edelweiss Capital. With one of our clients, we have 1,200 users. We are looking at becoming the largest BI user base in India. We have just got our first customer in the US,” he says.

“Are you looking for money?”
“We are looking for $15 million as we are looking at marketing and branding, not product development.”

Reliance Tech Ventures’ Shah asked, “How much of your revenues comes form Reliance?”
“We have 37 customers and one of them is Reliance. And every deal is around (Rupees) 9 lakh each,” Mehta replied.
“Can you tell me about your team?”
“We are six people. Totally we are two chartered accountants, three on the technical side and one on the alliance side.”
“What are your plans for the $15 million? How are you going to take it?” the VCs asked.

“We can take it $5 million at a time . The product is already ready. We need the funding to take it to market.” At this point, Vieux interrupted.
“Twenty years ago I used to work with enterprise software. My first company went public. From that experience, I know you don’t need that much capital.”
Then, Kapur asked the entrepreneur what was the market size for a product like the one being described. To which, Mehta began citing a Gartner study but Kapur cut him off and asked, “What is your number?”

Mehta conceded that he didn’t have a number, but “by 2009 March, we should have 400 customers with an average deal size of Rs 15 lakh.”
Time for the final vote of the day. And at last, those magic words of approval were heard. Shah of Reliance Tech Ventures said. “Yes, but I want to qualify my ‘yes’ because I would always like to look at a company that has managed to sell to Reliance. I know how strict Reliance is when deciding a purchase. Also, I’ve seen a domino-effect happen with other companies in the past. Get Reliance as a customer and their competitors want to have a look at you.’

“Yes, this is true,” said an obviously relieved Mehta.
Haque then gave his verdict. “No. I would not invest in a company that is built around a reporting product. I have experience in this field myself.”
And thus ended a session that saw virtually every trick in the book that wouldn’t work while talking to venture capitalists. As a parting advice to Mehta, Vieux said: “When you go and talk to a venture capitalist, do your homework. For God’s sake, do your homework. Come out with market size, numbers, percentages, your plan of action, your team. Be crystal clear and crisp. You aren’t prepared even though you knew that you had to make this presentation for the past few days. When you talk to those people, you need to be prepared with your numbers. You have three things going for you: You are a repeat entrepreneur. The second thing is that you have a proof of concept that is selling and you sold to one of the most difficult companies. Finally, you are at the right place at the right time in business intelligence space.”
Article Resource:
The article appeared in The Economic Times, Mumbai in one of their successful columns on Entrepreneurship/Start-ups called "Starship Enterprise".

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