Amar Goel

Om Malik of GigaOm writes that “The truth about Indian start-up scene is that there is more money than actual start-ups. We have talked about it before, and we will say it again. Venture Capitalists – both local and US-based are showering money on start-ups, some of them quite marginal.”

I’m not sure this is the correct conclusion.

The VCs that I talk to in India all seem to be investing at a pretty rapid pace, putting their $100-150M funds to work in 18-36 months. Yet, the deals that are getting done seem to me to be pretty decent. If you look at the portfolios of folks like Helion, Nexus, Sherpalo, and Matrix Capital India it doesn’t seem like they are doing stupid stuff, quite the contrary.

According to Ernst & Young, through the first 9 months of 2006 there was $178M of VC investment in India (about $240M on an annualized basis). For a country of 1.1 billion people and an economy growing 8-10% depending on the year, $178M hardly seems out of control. Even if it triples in 2007 to $720M it just doesn’t seem like that much (but that’s subjective).  Another way to look at this is that in 2006 the $13 trillion US economy had about $28B in VC investment (for every $ of GDP you had about two tenths of one cent of venture investment).  In India in 2006 you had a $804 billion economy with about $240M in VC investment (for every $ of GDP you had about three hundredths of one cent of venture investment).  Basically, the amount of venture capital being put to work in the US, adjusted for the size of the economy, is 7x that of India.  For India to have the “same” (economy adjusted) amount of VC dollars as the US there should have been $1.68B in venture investment (not $240M) in 2006.  Of course the US is a far more venture-ready environment than India, but a 7x differential seems pretty healthy.

On a slightly different note, I actually think the bar for Indian companies to be funded is higher than many in the US as most of the VC firms mentioned above are first time funds and are quite concerned about having too many failures in their portfolio. I’ve had several tell me that.

My conclusion is that it doesn’t appear that there is too much money. The other point is that if you look at the US the environment is pretty overheated there, with venture investment at record levels. There are 4 or 5 or 10 companies getting funded in every space.

Anyways, these are macro stats.  At the end of the day, if you focus on building a good business with a good team the fact that there is too much or too little money will be of little relevance.

The last installment of Harry Potter (Harry Potter and the Deathly Hallows) released on July 21st at midnight. The book was released at midnight (Friday night/Saturday morning) GMT (Greenwhich Mean Time, the time in Britain). This is 4:30am IST (India Standard Time). Because of all the hoopla surrounding the book security to make sure it wasn’t leaked was tight.

Eight hours later, at 12:30pm on Saturday, I was in a car in Mumbai on the way to brunch. While at a traffic light a book hawker approached us offering a hardcover version of Harry Potter and the Deathly Hallows for Rs795 (about US$20).

This is pretty amazing. This book was under intense intense security. There was one publicized leak that received a ton of press. So you have one of the most highly anticipated books of the year under a ton of security to organize a global launch, and 8 hours later it’s pirated on the streets of Mumbai?

The world is getting flat… information spreads like crazy!

Information Architects has released their 2nd Web Trends Map. Pretty cool map of the most important sites on the Web, and especially Web 2.0, ordered by category, proximity, success, popularity and perspective.

It’s always fun to see information presented in new and different ways. Sure, as hell beats an Excel sheet or a PowerPoint.

Based on all the comments I got about my previous post, I thought some of you might appreciate a guest posting I made at StartupAvenues about recruiting in India recently:

“Are you marrying me or the company?” One of the engineers on our team at Komli told me that the other day. This is probably one of the best lines I have heard in a while. He was talking to one of his friends (located in Pune) about joining a startup and his friend was concerned that if he joined that startup his parents and his fiancé’s parents would be very concerned about the stability of his job; they might even break off the engagement. The engineer on our team didn’t understand why everyone was so focused on his friend’s job.

When I got engaged I was actually unemployed. I had just left the startup I had previously founded when I graduated from college (Chipshot.com, an online e-commerce company focused on golf), and was figuring out what to do next. Nobody called off the engagement or threatened or even hinted at it.

This stark contrast helped me realize a huge disconnect in India’s ability to really innovate and build companies like Google, Yahoo!, Microsoft, and Oracle (interestingly enough, all four of those companies – four of the best technology companies ever started – were all started by people who dropped out of school and NEVER had a full-time job before they started their companies). Generally speaking, youngsters in India are still too concerned about the stability of their jobs and getting married.

There are both logical and emotional arguments to why this might be the case. I am going to present some thoughts on why this concern with job stability just doesn’t make sense if you are really good at what you do and are confident in that.

Reason #1: The spoils go to those that take risks — the ones who work at startups, very early on.
Microsoft is the most successful technology company of all time (though Google is hot on its heels). The first guy at Microsoft made about $50 billion (Bill Gates). The second guy (Paul Allen) made about $25 billion. Steve Ballmer who was one of the early few and joined in a leadership role made about $15 billion. If you were in the first 50 people and got 1/10th of 1% (common for a startup today) you made about $200M. So the first guy made $50B, the 50th guy made $200M. Guess how much the 1,000th employee made, probably about $20M. And the 10,000th employee maybe made $2M. This is in the most successful technology company of all time.

If you want to make some serious money and you join a really good company (where the numbers will be 1% of Microsoft’s) as the 10,000th employee or even the 1,000th employee you are not making the right decision – the math just doesn’t work in your favor. If you want to make some serious money you have to take some risk and join something early, at least among the first 50 employees. I’m not saying that every job you take should be at a startup, but if you never do it, it’s going to be hard to make serious money in the tech industry, unless you work for 20 years and climb to the top of a big company.

Reason #2: The right startups are not that risky.
What is the worst case in any startup if you are not the founder? The startup goes out of business. Your downside is that you have to find a new job. Going back to my original caveat, if you are good at what you do and confident about your ability, then in India it will be relatively easy to find a job. India’s overall economy is growing so fast (2nd fastest growing economy in the world in 2006), and the hi-tech industry is growing even faster, that most people seem to get a 25% pay increase when they jump from job to job anyways. If you add in to that a startup that has a good working environment, good management, good investors, good customers, and you feel that the products are useful then the risk is dramatically reduced. You’ve gone from a 5% chance that something good happens to a 35% chance that something good happens (I made those numbers up, but you get the point).

I know a number of people in Silicon Valley who have made a career of working at startups, and are fully aware that some will be winners, and most won’t. They figure if they work at 5 startups over 10 years maybe one or two will be successful and that’s more financially rewarding than working at an already successful company as the 2000th employee. Crucially, for all 10 years they were excited about the work they were doing. Here is what Paul Graham, a well known entrepreneur and writer, has to say about this: “Economically, you can think of a startup as a way to compress your whole working life into a few years. Instead of working at a low intensity for forty years, you work as hard as you possibly can for four. This pays especially well in technology, where you earn a premium for working fast.”

Reason #3: Often that stable job isn’t so stable.
I have seen a lot of people go to the stable company and then leave after 1 or 2 years because they just don’t like the work or the company. What is the difference between joining a startup that you like and the worst case happens in 2 years versus you join a “stable” company and in 2 years you leave because you don’t like the work?

Reason #4: Do you want to make your parents happy by a) always working at a stable job or b) potentially being Narayana Murthy (who took a lot of risk to start Infosys and almost went out of business early on)?
I’m serious. Wayne Greztky, probably the greatest ice hockey player ever, once said “You miss 100% of the shots you never take.” I’m lucky to have a wife who tells me “The only thing worse than failing is not even trying.” I’m sure you are saying “Amar, you don’t understand, you don’t know my parents or my in-laws, or it just seems too risky to work at one of these little startups.” You are right, I don’t understand. You get more ownership of the work you get to do, you can make the same salary as a big company, you get a meaningful percentage of equity – what’s not to like?

Reason #5: It is probably the best time in the last 25 years, if not ever, in India to start a company.
If you are smart, have a good idea, and can assemble a good team, then statistically, you have a lesser chance of failing today and in the next 10 years than at any time in India’s past.

India has entered a period of fast and sustained economic growth, as long as the government keeps on its current path of increased economic liberalization. With a demographic bulge in the 10-25 year age bracket, the country is virtually guaranteed a consumption boom for the next couple of decades. There are so many industries in India that are already growing at 20-30% per year. More opportunities will also open up as the government makes hitherto closed sectors open to private sector participation and competition. With a fast growing economy, solid worldwide economic growth, and a large talent pool at your disposal, it has never been a better time in India to start or join a startup as an early-stage employee.

What does this all mean for India?
In the US there are tens of thousands of people employed at startups, working hard to innovate and build products and services. The US has tens of thousands of hi-tech startup companies. India has a few thousand. It’s unlikely that India’s thousands of tech startups are going to create more winners than the US’ tens of thousands of hi-tech companies — the US just has too many more chances at success since it has so many more startups. If you think the US example is too far-fetched in that the US already has it good with great infrastructure and a society that is historically not as risk-averse then just look across the border to China. China’s economic growth and pace of innovation over the last two decades has been stunning; in large part this is due to the entrepreneurial culture that has taken hold among the young. What is really interesting about this is that China was traditionally as hierarchical and custom-bound a society as India.

Until India’s culture begins to shift to embracing risk takers rather than eschewing them it will be difficult for India to become the global technology leader. Surely society plays an important role here, but the easiest way to begin the transformation is for each individual to look within and really understand and push her own risk appetite.

Since I’ve gone through the process of raising venture capital a few times I often get asked how it works and what it’s like.  I thought I’d share some learnings, based on my experiences. I’m not an expert by any means, but I’ve done it a couple of times so I am not a total newbie. Here are a few thoughts I have:

1. Before trying to raise venture capital, decide what you want your business to become. Think out 3-5 years and figure out what ideally would your business look like in terms of size (revenues and people) and what business are you in.  If you are not sure about wanting to build a large business then do not raise venture capital.  If you are concerned giving other people a lot of say in your business do not raise venture capital.  If you never want to sell your company or go public do not raise venture capital.  If you would like to build at least a $20M business over 3-5 years and ideally a $100M+ business over 5-7 years you are a prime candidate for venture capital.  If you want to build a $3M business over the next 5 years do not raise venture capital. 

Venture capitalists are in the business of giving entrepreneurs money and then eventually getting some multiple of that return back.  They do that by investing in people they think can build big businesses, by investing in concepts that they think can be big businesses, and then eventually turning their equity stake into cold hard cash.  Venture capitalists get their money from investors and they have to return a lot more back to their investors some years after taking the money.  These are the things that motivate venture capitalists.  If you are doing something that is not in line with this then working with venture capitalists will be very painful.

Having venture capitalist invest in your company means you are signing on to be a high growth company and will do the things necessary to grow quickly and build the talent base, processes, and infrastructure that is necessary to support a high growth business.  This is great if the business is doing well; if the business runs into tough times and you are not profitable but rather investing in your company this can cause the company to run off a cliff (i.e., run out of money) or you to lose control of your company.   Just something to think about…

2. It takes a lot of time to raise venture capital.  Let me restate that in a more emphatic fashion: it takes a crapload of time to raise venture capital.  I started my first company when I was 19.  It was an e-commerce company called Chipshot.  When I graduated from college at age 22 I went to raise venture capital.  As you can imagine most venture capitalists wanted nothing to do with a 22-year old (this doesn’t make that much sense to me since all the biggest hits ever have come from folks in their 20s, maybe another post on that later, I guess too many failures of folks in their 20s).  Anyways, I digress.  Back to the subject… I did have a running business doing $100k a month, and for 1998 that was quite a bit of business to be doing online, so venture capitalists were interested.  Turning that interest into funding took 4 months of almost full-time work.  I basically spent 15 hours a day on phone, email and in meetings selling the heck out of my company and our team.  Then once you find some folks who are interested, you have to figure out if how they value your company is how you value your company and if then negotiate the deal.  Trust me, with term sheets, lawyers, negotiations, strategizing, and, oh yeah, you wanted to spend some time on your business, right? — it is brutal.  We were lucky to get through this process, not kill our business (thanks to some great guys on our team), and find some great partners in Sequoia Capital who invested $3M in our business in September of 1998. 

I find lots of people who seem to get really excited by the prospect of raising venture capital.  Don’t be.  It’s overrated.  It takes a lot of time and takes you away from your main aim – which is building your business.  Venture capitalists, for the most part, are decent people who are investors.  Some are very smart and people who I love to interact with, some I wonder what value they add.  There is nothing special about them as a whole.  And raising venture capital, while a nice milestone for your business, does not make your business a success.  It, in fact, raises the bar higher on the success you have to achieve.  The goal of your business is not to raise venture capital (well maybe it is, but I don’t think it should be).  The goal of your business is probably to have lots of happy customers and employees and make truckloads of profits (maybe in a different order).  Don’t forget that – the sexiness of a press release saying you raised venture capital from XYZ and ABC lasts about 1 day.

3. Most venture capitalists are paid not to be innovative dreamers, but rather data driven.   How many times have you seen a venture capitalist do something innovative, something that really changes the VC business?  Recently, Charles River Ventures started the CRV QuickStart program.  I was impressed by this – a VC actually shipped a product that dealt with the changing nature of the venture business and did it in a very advantageous way to them and to entrepreneurs.  Impressive.  But these examples are few and far between. 

VCs are not in the business of coming up with crazy ideas and then throwing them against the wall and seeing if they stick.  That is the job of entrepreneurs.  That’s why most VCs will be loathe to invest in some “idea” you have that will change the world that nobody has ever done before.  If you can’t give them any proof points of people using your product, or some initial demonstrations of the technology, or some customers who say “if you build this I will buy it” they will push you to get to this stage before they invest.  For VCs, it’s all about risk and reward. Bill Gurley, a partner at Benchmark Capital, talks about wanting to invest in social networking companies after they’ve taken off, as it’s really hard before the fact to figure out which ones will be successful.  About a year ago I had a VC at a top firm tell me that they prefer to invest in Series B deals over Series A in India because they find that valuations haven’t gone up that much (maybe 50%), but the business has had the chance to evolve a lot more and is derisked (if that’s a word).  Way lower risk, almost the same reward. 

4. Venture capital is expensive, and there are many other forms of investment available.Venture capital is a very expensive form of investment for your company.  If you are the typical early stage startup you are going to give 20-35% of your startup for $1-4 million of investment.  If you were instead to raise $2M of debt you might pay a 10-15% interest rate, so each year of debt would cost you $200-300k in interest payments.  That is a lot cheaper than selling 20-35% of your company.  The catch, of course, is that for a high risk venture that has a good chance of flaming out it will probably be difficult/impossible to raise debt unless you have an amazing track record of building companies before (if you have an amazing track record you probably wouldn’t be reading this posting). 

Friends and family and angel investors are another route.  It is harder to raise large amounts of money from these groups, but if you just need a $100k or $500k to get to some milestones friends and family and angel investors might be easier to work with and you will sell less of your company in aggregate. 

Of course, there is also investing your own money.  I started my current company Komli by investing my own money.  I felt this aligned me with all my investors and showed my commitment, I also wanted to bet on myself.  Investing your own money is more of a personal choice as you are also investing your own time and energy and may be getting a lower salary at your startup than you did in the corporate world (which is your opportunity cost).  I also once had a good friend tell me that if you work in the corporate world don’t get your life built around making some huge salary.  Manage your life so you can live on some relatively decent money (he said $75-100k in the US), and then just save the rest.  This way when you start something you can invest your own money to get it going, and having to go from some high salary to some lower salary (like $50k or $12k for a while) won’t be an impossibility.  If think is decent advice; it’s not easy for most people to follow though. 

5. The right venture capital partner can be very valuable to you as an entrepreneur.   After hopefully giving you some nibblets to chew on and think about before rushing into venture capital, I will say that the right venture investors can be HUGELY helpful to building your business.  I have been lucky enough to work with a number of venture capitalists in my career and so far I haven’t had any bad experiences with the folks who have invested in my company.  I have been lucky enough to have only good experiences.  It’s a little bit like a marriage so choose your partner carefully; it’s pretty hard to get your venture capitalists out of your company if you decide later that you don’t like them.  Venture capitalists can generally bring you one or more of the following things: 1) strategic understanding of the market, 2) technical knowledge of the market and how to build a better product, and 3) relationships/Rolodex, and 4) venture capital wisdom (this is the catchall category that represents the wisdom many venture capitalists have after having played the game a hundred times before your company).  Think about what you want out of your venture capitalists — what things are you weak at and what do you need help with.  Just like having the right employee makes your life so much better having the right venture investor helps you think through a lot of issues, provides a sounding board, and knows enough people to ask for a second opinion when you want a second opinion. 

Okay, those are my thoughts.  I hope it helps.  Look forward to any comments.