A suitably bootstrapped perspective

As someone who routinely wears boots under Levi’s 511s, I understand the sheer utility of those small loops called bootstraps - Sramana Mitra’s high focus on an entrepreneur bootstrapping the start-up in her book “Seed India -How To Navigate the Seed Capital Gap In India (Entrepreneur Journeys)” helped me appreciate the criticality of this aspect in the Indian venture funding context.

The book’s USP is its brevity and the matter-of-fact, blog-like style but what keeps your interest on is the verbatim reproduction of the interviews. Spurred by the author’s knowledgeable querying, the interviewed entrepreneurs come up with some honest reflections & very useful insights into their successful entrepreneurial journey. Some statements though come across as anachronistic, particularly when Sachin Bansal of Flipkart seemingly undermines the adaptation, penetration & potential of digital books and affordability of e-readers in India - the fact that I was reading this book on my Kindle Fire HD made the assertion even more ironic.

While it is a welcome trend that Indian start-up stories are getting written about, I once again can’t help but notice that the term ‘start-up’ is gradually getting equated with IT/ITES/ Cloud enterprise.  Most other enterprise categories such as biotech, green-tech are clearly missing out being written about as interesting case-studies since they can’t quite compete with a typical cloud based start-up which (can..) starts generating income within few months of existence – As Sramana did admit passingly, the logic of bootstrapping one’s business is a very different ball-game if the start-up product offering is physical (~biotech) as against being virtual (~SaaS)

Coming back to the book, I felt that what was perhaps intended to be showcased by the author but not quite articulated is an observation that ‘bootstrapping an early enterprise’ comes quite naturally to Indian entrepreneurs given the culturally ingrained reluctance to diluting ownership/ stake of a start-up business early on & the practical jugaad (in a fair sense) mind-set of sailing in two boats before hitching on to the one of choice.

Considering this being a cluster/ market dominated by such lean business ethos & relatively more fiscally-conservative entrepreneurial attitude which by default de-risk the investor’s moolah, one’d have expected India to be a hot destination for an alternate asset fund manager looking for a safe-harbour for her/ his precious dollars, but quite obviously it is not. Of course it is also apparent that there isn’t enough fish in the pond for any LP to develop a serious strategy betting on Indian start-up scene & perhaps the only way to make this ‘LP-friendly entrepreneurial ethic’ work in India’s favour at scale is to seed more & more promising enterprises, bootstrapped or otherwise.

Afterthought

Just wondering.... the Global LPs could be a lot more interested if the Indian VCs claim to be ‘Conservative’ rather than being ‘Contrarian’ in their choice of deals :-)

Will Google deliver on the promise of a Uphone**?

A smart phone you can put together like one’d assemble Lego bricks?

When I looked up the Phonebloks link my niece sent, it all sounded quite phony (pun intended..) to me, a prejudice probably not helped by my ignorance & helped in a large measure by the prominent donate button on the blog-like website. I was cynical to the extent that I didn’t quite believe the site’s claim of Motorola collaborating with them, cross verified this on Motorola site and figured it’s indeed true – apologies Dave (Hakkens), my bad!!

I then stumbled upon Project Ara, a free, open hardware platform for creating highly modular smartphones which Motorola hopes will turn out to be the Android of Hardware. If I set aside the confusion of if Project Ara is a googlified version of Phonebloks OR if Motorola was indeed working on it for the past one year, as a user the concept of a modular phone that can be customized and reinvented unendingly does sound wow!

Then again, the whole promise is based on open source hardware development & the current phase of the collaboration seems to be still at the user level (Ara Scouts & Volunteers respectively). Assuming it’s rather early to expect the real collaboration of initiating projects to build the endoskeleton/ base & bloks/ modules to start, I’d still think before embarking on development & if indeed Google has to be successful in creating, in its own words, ‘a vibrant third-party developer ecosystem’ through project Ara, the more imminent need is for the creation of the right ecosystem that supports ‘open hardware development’.

Sure there seems to be some semblance of ecosystem out there wherein the open source hardware developers adapt/ use closely representative OSS licenses &/ or use hardware specific licenses like TAPR Open Hardware License. But given the massive commercial potential of the Project Ara & the implications and complications thereon, an open slot seems to exist for a specific purpose license that carefully addresses the scope & limitations of all applicable laws (patent, copyright, distribution et al) & standards and one that simultaneously enables collaboration and protects the commercial interests of the smallest member of the ecosystem - This responsibility I guess Google’s invited upon itself now.

Another possible challenge the previous generation of OS Incubators like Apache till date didn't have to worry too much about but Google/ Motorola will need to address proactively is the issue with potential for conflict of interest** owing to their mutually contrasting roles, one that of an investor funding (& thus part-owning) newer technologies of promising start-up enterprises & another, that of an impartial administrator/ incubator of an open development platform – while Android can be showcased as a precedent, I’m sure Google will admit hardware is a different devil altogether.

**I did a quick check on the portfolio companies of both Google ventures & Motorola Solutions Ventures but did not find any investment into any hardware start-ups – simultaneously reassuring and confounding J - what say Limor “Ladyada” Fried?

While I won’t certainly join the band of naysayers (like here..), I won’t hold my breath either - I will surely watch out though for the promise to materialize.

Afterthought

Why ARA?

Wikipedia offers two options 1) Ara, a southern constellation situated between Scorpius and Triangulum Australe AND 2) Ara, a neotropical genus of macaws with long striking tails, long narrow wings and vividly multi coloured plumage.

I choose Ara the Macaw, since this beautifully assembled by the primordial open-source development platform called evolution! & exotic creature sure looks like it could represent an assorted group of engineers putting together an equally assorted and exotic device. But knowing how project names work, Ara just can’t be a bird alone.. it should be an acronym too…… Android Rear-ending (into hardware) Alliance? :-)

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Disclaimer

**Uphone is a moniker I coined solely for the sake of using in this article that discusses the proposed modular smartphone from the recently launched Project Ara.

Deal-Flow : Value-addition :: Silicon-rapids : Organic back-waters

Reacting to the rather weird scenario wherein some VCs are trashing their own brotherhood, Bruce Booth wonders in his latest article if this is an outcome of a Lake Wobegon-like illusion or if it is the Dunning-Kruger effect in action.

In my comment against this post, I offered my own little suggestion for this apparent case self-deprecation (OR is it not) and more....

My comment:

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If I go by what Mahendra Ramsinghani said here on LPs bothering more about deal sourcing capability than value-add by VCs, Khosla’s indictment of ‘95% zero-value add VCs’ shouldn’t really rock the boat more than the supposed shake-up caused by the AngelLists’ & Kickstarters’ of the world – The ‘80% negative-value-add’ rhetoric though is way below the belt & confounding.

Perhaps these intriguing proclamations are a manifestation of nervous energy of the PE biggies that are ‘but-of-course rattled too’ by the progressive warming of the PE globe and thus eager to reaffirm their value-add alternate asset investor status to the larger LP universe.

Can’t help but note again that a lot of the above paradigms, shake-ups, prophesies & reactions are all still relevant mostly to the 'silicon-rapids' (IT et al) and much less to the 'organic-back-waters' (~biotech) – taking a cue from what you said about the CEO, I’d think the loneliest job in the world at present probably is that of a biotech venture capitalist :-)

Isn't 'Syndicate' a worrisome term on an online crowd-funding platform?

A recent article by Lora Kolodny on Venture Capital Dispatch raises some interesting aspects on how VCs perceive the impact of likes of AngelList (online crowd funding platforms) on VCs - all but the potentially most impactful feature of investment 'Syndicates'

Below's my comment on the above article;   

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I was waiting for something on this – a much needed & timely insight.

It’s good to see all four VCs cautiously optimistic & none too worried about the online equity participation platforms impacting the role of a VC – couldn’t agree more!

From what has been said by the VCs, my key takeaways are as follows;

1. Fundamental changes to the proprietary-deal-flow showcase of the VCs ~Rory Eakin, CircleUp

1. The additional costs of investing associated with online platforms ~Annie Kadavy, Charles River Venture

1. ‘Tragedy of the commons’ Risk – to mean the relative disengagement of investors owing to a portfolio comprising of multiple small investments ~Jeremy Liew, Lightspeed Venture Partners

1. The risk of misreading or missing a signal by investors – owing to low signal to noise ratio of all online leads ~Alfred Lin, Sequoia Capital

While all these pose some but varying levels of risk, I feel the evolving ecosystem (of online equity platforms) will soon equalize the same & make the impact minimal.

One aspect that hasn’t been discussed is the potential risk of ‘investment bias’ stemming from the syndicate approach – which may inadvertently shift focus from a few worthy signals that already suffer a low S/N ratio - What say Alfred Lin (& AngelList)?

End of the day it's all about the Benjamins', impressive TVPIs not withstanding!

In a wake-up call of sorts, Super LP Chris Douvos cautions GP universe that end of the day it's 'all about the Benjamins', impressive TVPIs not withstanding!...

'tis the central dogma of investing alright, but still leaves enough scope for a small repartee of my own - here goes;

My comment

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Not sure if it’s a norm, but it’d surely surprise me if the GP takes an investment call in a particular portfolio company without as much as doing a cursory review of its exit potential & potential exit valuation – they probably do too, but don’t necessarily assign a value, given the magnitude of arbitrariness in doing so. It hence is somewhat ironic that the exit valuation in this model is merely a derivative of the overall size/ value of the fund raised by the VC and doesn’t factor-in anything that’d determine the potential of an individual investee enterprise – confounding this  further is the VC having to justify this derived value.

So while the proposed analysis does sound like a non-nonsense approach to assessing the fund performance, that part about “reality checking those putative outcomes” would still remain the single most challenging & expectedly the most contentious aspect even as LP-GP engage with an intent to cracking the funding arithmetic.

Nonetheless, it’s good to be reminded that for all practical reasons the sum of individual valuations of portfolio companies in a particular fund is but an unexciting statistic to the PE Portfolio manager in the LP organization keen on showcasing something akin to the promise of an ‘absolute return’ his hedge-fund counterpart typically presents :-)

The start-up investing winds, they are a-Changing OR are they?

In his latest, 'SuperLP' Chris Douvos  writes about the fears of an impending VC apocalypse....., okay to start with, in silicon valley primarily triggered by the capital deployment in start-ups far outpacing funds raised by venture capital firms, essentially affecting that someone else is gaming the system rather than VCs themselves..

Given they appear only once in a blue moon, I couldn't really let go a SuperLP article without a comment... here goes what I posted on his article 'Scents in the Air'

My comment
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Comments

I am wondering if the issue with "capital raised by VC's increasingly falling short of capital invested into start-ups" is about true of all start-up hubs & not just Silicon-valley AND, that probably in general it’s true of all VC activity across the globe (tho' i do understand this data is of NVCA and for USA)

Out of the entities you mentioned, I see the following two as the key contributors to this skewed ratio;

1) CVC: The emerging aggression of CVCs whose enthusiasm to invest is in equal measure helped/ influenced by not having a limitation of capital to deploy AND by their necessity to shortening the product introduction cycle in face of an increasingly unproductive in-house innovation (think... a top-10 pharma major investing in start-up biotech with just one pre-clinical asset....)

2) Angel: The recent market regulatory changes indicate (JOBS et al) that the government is attempting to bring down the dependence of start-ups on the VC's - primarily by way of increasing the available angel base & encouraging HNWIs to risk their money a lot more freely than before.

Surely the above aspects do suggest why there's a scent of fear in the winds blowing through VC quarters.

I personally feel that these newer sources of capital need to establish their longevity & consistency before the start-ups can forget about serenading the VC for funds – particularly given that non-financial companies tend to be a lot more impatient with IRR cycle-times and HNWIs a lot more prone to gravitate towards less complex and shorter-term alternative investment options.

Essentially, IMHO what goes around comes around & VC as a source of start-up capital would remain a lot more relevant in the long-term

Posted by: Murali Apparaju | July 22, 2013 at 01:20 AM

Coordinated rulings by SEBI & SEC - Winds of Market Regulatory Harmonization OR plain coincidence?

Viewed solely from the perspective of rationalizing regulatory framework to support creation & sustenance of new enterprise, a lot has indeed happened in the fortnight between 25^th June and 10^th July in India & USA.

While I’ll desist from repeating what many other bloggers, journalists & analysts have already written on, viz., the obvious v/s inferred derivations of the enactments & how they’d impact the start-up scene et al., my intention in putting together this piece is from my point of view to highlight certain clear similarities, interesting contrasts and some uncanny conjectures these two sets of reform throw up when seen together & what would this coincidence amount to.

Before getting there, below is a quick snap-shot of the regulatory changes (wherever possible, I used the official language of the regulator) that may be cross-referred down the line;

25 June 2013, when the SEBI (Securities & Exchange Board of India) board took, among others, the following three key decisions that impact the start-up investment scene;

      1.   Amendments to SEBI (Alternative Investment Funds)      Regulations, 2012 – thereby recognizing the angel          investors pools as category I venture capital funds

2.       Enabling Listing of Start-Ups and SMEs on Institutional Trading Platform (ITP) without having to make an IPO

3.       Acceptance of recommendations made by “Committee on Rationalization of Investment Routes and Monitoring of Foreign Portfolio Investments”

10 July 2013, when the SEC (US Securities & Exchange Commission) met to approve, among other things, adopting amendments to Rule 506 of Regulation D and Rule 144A under the Securities Act of 1933 to implement Section 201(a) of the JOBS (Jumpstart Our Business Startups) Act that essentially means enabling;

1.       Lifting the ban on general solicitation or general advertising for certain private securities offerings, thus improving the chance of a start-up raising requisite capital

Now coming back to the original story,

What is similar?

The Intent behind the reforms:  Enabling creation & sustenance of new enterprise within the respective countries

The primary approach of making funds available being by way of rationalizing  angel investment framework

Some level of similarity in enabling a regulator supported solicitation**;

o   Solicitation of investments by way of listing on ITP (Investor Trading Platforms) without having to make an IPO

o   Solicitation of investments by way of advertising on online & offline platforms after complying with filing of Form-D & submission of solicitation material with SEC et al

What is dissimilar?

While the intent is similar, it is interesting to note the subtle differences** of approach;

o   SEC comes across as more conservative in its approach of cautious provisions that simultaneously can OPEN-UP (owing to wider investment choices due to open solicitation) & CLAM-UP (some individual angels falling off the radar due to tightening the requirements of accrediting individual investors..) angel funding

o   SEBI on the other hand comes across as aggressive with its attempting sweeping changes to channelling & control of foreign investments while retaining FVCI as an independent investment class with benefits and simultaneously attempting to enhance access to domestic funds for the start-ups

**Just wondering, is this caution & aggression merely characteristics of a government that has just assumed power & one that is facing polls the coming year??

      While SEBI was at pains to formulate investor minimal requirements (min investment size, maximum angels in a particular scheme to be NMT 49 et al) – SEC seemed to have left the due-dil to the “issuer” by setting only some guidelines

      Finally, while the solicitation provisions are similar, the motivation/ rationale itself was pretty different with SEBI aiming to help improve exit-options of investors & SEC aiming to help raising of capital by the start-ups.

What are those uncanny conjectures?

Ponder this tango of “Accredited Investor” (SEC) ~ “Notified Investor” (SEBI);

-                  Portion of text from section 3.3ai of “Amendments to AIF Regulations” (SEBI):

“Such investors shall also be required to have tangible net assets of at least Rs. 2 crore excluding the value of the investor's primary residence”

                    Portion of text from text under Rule 506 of “New Rule Making” (SEC)

“An individual net worth or joint net worth with a spouse that exceeds $1 million at the time of the purchase, excluding the value (and any related indebtedness) of a primary residence”

Contrasts apart, the similarities & conjectures make it appear like the market regulators in USA & India have been comparing notes, if not working in tandem, while formulating these acts, amendments – I wonder if this is some sort of market regulatory harmonization effort going on? – Surely not unlikely!

Food for thought!

There's some traction (in exits') for Indian VCs & that ain't bad!

Expectedly, there was some excitement & some skepticism over the recent acquisition of redBus by Ibibo. My comment on one such recent article "Is the redBus exit really good for the VC ecosystem inIndia?" on StartupCentral is as follows;

My comment:

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What you have said above sounds (to me) like;

If only the ‘sheer-return achieved on one exit’ by the VC is looked at in the broader context of ‘performance of the fund’ as such (disbursed funds?) rather than merely as a nX return on investment made into that particular company, only then will the overall picture emerge.

Now, just because you mentioned 200mio USD fund in your article, I wish to know if I can assume that one of the three VCs (or all three as an average) who disbursed funds of ~200Mio USD across past 7 years among multiple portfolio companies has hitherto managed only one attractive return of ~15-20X? (of RedBus) & this sheer return still doesn’t amount to being anything substantial to the LPs from whom the 200mio fund was raised?

If the answer is yes, I agree with you that for the Indian VC universe ‘Dilli abhi dhoor hain..’ (loosely translates as ~miles to go before resting on ones' laurels...)

Of course I’d also be cautiously optimistic when I say that if only the VCs that invested into RedBus used a similar good-sense & judgement while identifying, nurturing the other portfolio companies within this 200mio fund, then it is likely they’d still see some more good exists, including some from an IPO even.

Overall I guess there’s some traction & that aint bad. 

My question, merely rephrased, is still open - IRR v/s Impact Investing: Do financial institutions necessarily go through this dilemma?

So I now can save some breath by saying 'Impact investing' whenever I have something to say about social impact of investments - that still doesn't mean I get the whole picture now! 

Below is my comment on a recent article on Forbes titled "Pierre Omidyar, Steve Case And Mike Milken On The BusinessCase For Impact Investing"

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Comment:

Earlier in Jan 2013 I posted a poser on my blog titled "IRR v/s Social Impact: Do financial institutions necessarily go throughthis dilemma?"

Even as I am still unclear how social-impact can coexist with bang-for-the-buck at the macro level (~LPs), I see a definite hope in the approach being pursued by Omidyar Network, which made a great start just by terming itself as "a philanthropic investment firm' – The document “From the Field: Lessons Learned in Impact Investing” goes on to showcase how ON takes this moniker seriously – Bravo!!

From all I could see, ON is still an investment firm that’s funded (largely) by its philanthropic founders & there is no ‘raising of fund from LPs’ involved in this unlike most VC/ PE firms that dabble in similar volumes of investments/ portfolio.

That brings me back this intriguing question of how the likes of JPM measure their social impact? – I am sure I am missing something here.

Cipla Ventures - What's the real story Gen-3?

Greed for quality & comprehension makes one less effective & less productive.........
........... Stash away those cudgels people, this is NOT about pharmaceutical manufacturing, this IS about my realization after a month of sub-par blogging that resulted in my number of posts going low (just one article to be precise in June 2013!) and the number of views I get per a month hitting the nadir! - A promise to myself... will try to type out a few "casually turned out" articles every now n then, instead of generating it through my oft employed time-consuming approach of Mull-it-over-for-a-week-Type-it-on-Word-Edit-it-as-though-HBR-were-publishing-it-and-finally-Paste-it-on-the-blog....... Spontaneity ain't dead yet!

Now the REAL topic...

The recent news of Cipla charting new course to achieve a $5 billion revenue in next ten years caught my attention & got me thinking.... Not because a 10 year objective as this is anything novel, but the simultaneous creation of a dedicated investing arm Cipla Ventures, towards this vision, is what interests me. 

Now again, what's so novel about corporate venture capital? its's been around for some time and the trend is bound to catch-on with whichever company that's sitting on surplus cash reserves jumping into the fray if not anything else, as someone said (Super LP??) for the blood & gore and the adrenalin rush that venture investing & enterprise incubation gives.

What interests me is.... 

........ the brief agenda of this arm of Cipla, as reported by Economic times, that says will "weigh the prospect of investing in companies from start-up hubs like Boston and London among other places, in areas such as biotechnology, medical devices and new chemical entity

What interests me is.... 

....... the expansive & prophetic way in which the new CEO Subhanu Saxena says "Out of the five or six bets I place, only two or three need to pay off"

What interests me is.... 

....... what is this "pay off" for which Cipla is ready to take "sensible risk", a novel term for a generic Indian company that has taken the traditionally low risk option of staying close to the home turf?

What interests me is.... 

...... what key takeaway Saxena is walking away with from Novartis & bringing to Cipla?

Let me be clear, I am not insinuating anything unethical here nor I am attaching ulterior motives to a darn-clear writing-on-the-wall business opportunity, all I am doing is trying to get to the heart of matter as to what will Cipla gain eventually through these investments..

Two theories that strike me right away are as follows;

i) TOOL FOR NEGOTIATION:  

The multiple niche stakes & thereby the 'possible' control on the licensing /sale of the pipeline candidates & technologies of the portfolio companies in the NCE, Biotechnology & Diagnostic space will potentially help Cipla negotiate/ barter generic deals with the big pharma companies whose drugs Cipla is/ will/ would aggressively pursue to market in the US & European markets

Will this fly...? despite the generous window of hit-miss offered by Saxena, this is an opportunity completely out in the ether & my guess is as good as Cipla's :-)

ii) EXIT PREPPING OF FOUNDER PROMOTERS: 

Before I am clobbered for suggesting India's most nationalistic  private pharmaceutical company would sell-out, let me remind that no one's above liquidity & no company is unattainable in this corporate game. Let's also remember that the new leadership of Cipla is, surprise, surprise.... of all places, from Novartis, the bête noire of Cipla in many a litigation?? - Let's also remember that the new leadership of Cipla in US & EU is Ex-Teva... the generic behemoth that can make big-ticket acquisitions every now and then (read: $6.5 billion Cephalon; $7.5 billion Barr et al..)

Will this fly...? Of course it'll - the lure is the access to a 1.24 billion strong Indian market.

Anymore theories? 

A start-up messed up at its foundation OUGHT TO be fixed!

The celebrated venture investment guru Peter Thiel postulated a law that says "a start-up messed up at its foundation cannot be fixed" - Bruce Booth attempted a commentary of this law in the context of Biotech ventures through his blog post titled 'Foundings Matter: Thiel’s Law Applied To Biotech' - While Bruce's application of Thiel's law is based on a tacit agreement of the postulation, I believe this can be argued differently, as indicated by some campus talk here...

Below is my comment against the article by Bruce Booth, wherein I agreed and disagreed with the author in two independent contexts....

My comment:
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It bugs me no end just how little the VC & PE literati out there ever attempts to explain all those lurid, smart theories in the context of biotech enterprises instead of solely building case-studies out of super-achieving IT start-ups that brought-in bags of cash to the VCs very early into its life cycle. This peculiar penchant among the authors for avoidance of anything called biotech enterprise I feel is owing to a general investor impatience for acknowledging the veracity of any investment that can’t be cashed out profitably within 3-5 years & thereby not showcased as a text-book case of intelligent investing. While otherwise is a decently thought-provoking & stimulating book, “Venture Capitalists at Work: How VCs identify and build billion dollar successes” by Tarang Shah is one such recent addition to my list of disappointing treatise.

Peter Thiel too probably isn’t greatly different after all, since a lot of the wisdom he’s been postulating is validated only within the narrow context of IT start-ups - Your effort Bruce, at ‘pharmifying’ the ‘Thiel’s law’ is thus a very welcome diversion.

None of the mess-ups you listed right from ‘un-reproducible science’ to ‘inappropriate capitalization’ can be contested as inconsequential in any which way & together these six make a great check-list for the entrepreneur on how not to go wrong initially & for a full-fledged due diligence by the VC either at the initial funding or an informal, abbreviated review prior to subsequent funding rounds. I however am struggling a little bit to accept that the DNA can’t ever be repaired once messed up – isn't disruptive innovation, which inherently amounts to re-coding the DNA of the enterprise /or enterprise's innovation/ business model, an accepted strategy now?

In the June 2013 issue of HBR, Rita Gunther McGrath (Author of “The End of Competitive Advantage”) talks on how the current day enterprise scenario is all about moving away from the conventional ‘Sustainable competitive advantage’ model and instead moving towards “Transient competitive advantage’ – Biotechs' that operate within an ever evolving, dynamic clinical scenario I believe can’t really base their strategy on sustainable competitive advantage & have to necessarily adapt, quickly & efficiently to the transient competitive advantage model & this may necessitate periodic re-coding of the enterprise DNA - What I quote here is what pretty much you and others said earlier regarding the need of emergence of ‘lean-start-ups’.

So instead of trying overtly to ensure all loose ends are tied-up upfront (…including the phantom scenarios!) & showcase a supposedly fine-tuned enterprise DNA to the VCs, the start-up would do good to expand the scope of the business plan to incorporate a well thought through set of situation-appropriate pivots & an alternate disruptive innovation model or two.

My two Rappen*

*on a business trip in Switzerland at the time of posting this article

Nobody’s saying no to India’ – phew, that’s a relief...

The survey of a few global LPs by VCCircle that was intended to understand 'what a LP wants from Indian PE managers" but actually feels like "why a global LP wouldn't want to put his best bucks in Indian PE" threw up some expected & some strange surmises, but nevertheless makes an interesting read –

The link to the article is below & below that is a repro' of my own comment on the article;

http://www.vccircle.com/news/general/2013/05/20/what-do-limited-partners-want-indian-private-equity-fund-managers-results

My comment:

---------------------------------

Interesting surmises!

What makes the takeaways less validated however is the lack of disclosure or at least a categorization of the LPs surveyed**. This gap I felt more acutely for a few like the question # 9 the response pictorial of which indicates that 50% of LPs surveyed will put money in PE/ VCs that're focused on investing in growth-stage enterprises – this averaged-out response doesn't allow one to assess if this is the response of each LP sub-set falls within this range or if some LP sub-sets deviate from the mean significantly.

I also felt a lot of the questions were overtly leading & that could skew the responses in favor of the inherent bias/ prejudice in the question (for e.g. 10 & 11..)

And yeah, the sliver-lining… It warmed my cockles that LPs have acknowledged of the promise of Healthcare Industry in India & the candid confession that ‘no body’s saying no to India’ – phew, that’s a relief.

**I realize it’s possible this can be done still from the data available OR it has already been done… only I couldn’t see it in the downloaded report.  

Dear HBR, defend your research!

In the May 2013 issue of HBR that has a ‘spotlight on entrepreneurship’, Adi Ignatius observes in the very first paragraph of his editorial that the “IPO market has been soft for years” & on a closing note hoped for ‘a steadier flow of IPOs’ as the economy is on the path to recovery.

This angst I thought pretty much reinforces the dominant LP complaint of an ‘absent IPO market in venture backed firms’ these days. Given this, I expected the articles to focus on elucidating about scalability of an early enterprise to the entrepreneurs – which I realized wasn’t the case after reading through the same.

Each of the four articles & the one interview instead seemed standalone in content & interestingly anti-VC in tone & tenor – not sure why. Since an elaborate hypothesis on these already elaborate academic articles didn’t appeal to me, I felt capturing the essence of each article in a single line would make it crisper - but given the duality of the message in the articles/ interview, I decided that the take-away messages should be in two sets, one for the entrepreneur & one for VC.

Here goes;

FOR THE ENTREPRENEUR

Go the Lean-way or Fade away¹

Seek out the client, not just an investor²
To err is VC – YOU, be the driver³
Marry the VC if you must, just make sure the pre-nup is not one-sided!⁴
If you are good, a Top VC will find you / If a Top VC funds you, you must be good!⁵

FOR THE VC

Lean is in – Junk the flab (read: 5yr business plan et al.)¹
Failing early is a virtue, at times, most times²
Focus on great returns, not on large fees – Stay relevant³
VCs are good but dated – Brace up for the Gen-Y entrepreneur⁴
If you aren’t a top-quartile VC, tough luck!, great deals don’t happen to you⁵

Article reference:

Click link to access the article, (I pay for my Kindle edition tho’..)

1.        Article “Why the Lean Start-Up Changes Everything” by Steve Blank

2.        Article “What Entrepreneurs Get Wrong” by Vincent Onyemah, Martha Rivera Pesquera, and Abdul Ali

3.        Article “Six Myths About Venture Capitalists” by Diane Mulcahy

4.        Article “How to Negotiate with VCs” by Deepak Malhotra

5.        “In Search of the Next Big Thing, Interview of Marc Andreessen

Most of the above messages have been around for some time now, only this comes across as a tacit academic endorsement of the market grapevine - If I forget scalability for a moment, my summarized takeaway from the above is;

Whether or not there’s something basically and drastically wrong with the current VC model, the emerging new trends in the start-up strategies make it pertinent that the early investors, in particular the VCs, should evolve in tandem – This is important not only for sustaining the radically different new-gen start-ups but also for the sustenance of the VC domain itself.

I always liked the way the professors are called out to defend their research in “Idea Watch” section of HBR, So do I now say; 

Dear HBR, defend your research? 

Game on…


After thought:

Ponder the following exchange between Adi Ignatius (Editor HBR) and Mark Andreessen (Venture Capitalist) - ref: “In Search of the Next Big Thing

Adi:    You’ve developed a strong philanthropic focus. Is the next generation of investors thinking about social investment?

Marc:   No. [Laughs.]

Adi:    So much for my hopes for the next generation.

Marc:   Many younger entrepreneurs have a social mission or a philanthropic agenda. They start early. Investors, not so much.

Considering this is towards the end of the conversation, I thought Marc was pretty dismissive about another aspect that investors both big and small HAVE to eventually look at "Corporate Social responsibility" of financial organizations. I pondered on this in my earlier article titled "IRR v/s Social Impact: Do financial institutions necessarily go through this dilemma?" - No answers tho'.

Does the SEC validation of TFC model pave way to cyberization of venture capital? – a SWOT

It’s always exhilarating when the old, routine systems and approaches evolve by embracing and respecting the newer technological trends – the recent endorsement by SEC (The US Securities & Exchange Commission) of the TheFundersClub (TFC) model of venture funding is surely an exciting harbinger of things to come.

Some suppositions & sweeping statements before a SWOT

• Even as the Venturebeat article is upbeat about this validation of SEC being ‘significant for the venture capital and finance industries as well as start-ups looking for more flexible methods of fundraising’ – I’d consider that TFC is essentially a platform for individual accredited investors to spread their investments and risk & NOT (still) a VC firm that went online!
• At this juncture, this is indicative of the strong trend towards of ‘gamification of investing’ rather than ‘cyberization of venture funding’.

STRENGTHS - This shift, whether or not paradigm, is promising

• NUDGE TOWARDS A VC PROCESS UPGRADE: Like the Venturebeat article says, while VCs routinely chase investments into innovation, VC process itself has been largely untouched by technological advances – THIS is definitely is a nudge in the right direction
• ENHANCED ANGEL INVESTOR BASE: The ability of an individual investor to bring down the investment size than otherwise possible offline will potentially open up the angel funding domain to a lot of HNWIs that else would go in for more conventional investments such as equities trading, real estate et al.
• IMPROVED DECISION TIMELINES: The USD1K - 250K window for investment allowed by TFC is pretty much within the risk-threshold of an individual investor (the median deal size of an angel investor is ~0.6mio USD) & considering TFC makes screening of potential deals easier for the angel, it does appear TFC and the likes (clones that’ll invariably emerge & soon), can potentially get popular among the non-regular, domain-neutral angels that have a need to invest but very little time & inclination for any kind of foot work/ due-diligence.

WEAKNESSES - Good to be aware about what to be wary of

• IMPATIENCE FUND: What helps the current ‘offline’ VC model is that the relative smallness of PE/VC funds in the total investment pool of an LP, essentially makes VC a patience-fund & this in effect is largely true with Angel investors that behave like the VCs. An open, online competitive crowd sourcing of funds may change the expectations of the investors and take the patience out of the fund.
• CROWD BIAS V/S TRUE POTENTIAL: Again, the same transparency that lets the investor see the cumulative investments a particular company is attracting may also trigger a crowd-bias categorization of the hosted investee companies as attractive or unattractive merely by their ability to attract funds & not necessarily by their true potential, thus making it a gamble rather than an investment.
• INVESTOR ATTRITION: And, while the range of investments allowed could lure a lot more investors like it has been mentioned before, it is also highly probable that the investor will compare it with his other investment options that may offer a quicker ROI & get disillusioned
• SCALABILITY ISSUES: I’d think the scalability of a venture funding follows the path; angel investing --> venture capital --> private equity. Looking at the regulatory scenario & the way LPs operate, it doesn’t look plausible that this model can be applied in a scenario that i) Involves fund raising from traditional LPs & ii) Involves funding rounds involving multiple VCs  

THREATS - Being the devil’s advocate in an angels’ gathering

• OFFLINE IS THE EVENTUAL DESTINATION: It is interesting to note that the SEC ‘no-action’ letter substantiates the non-action mostly based on operational relevance of the offline arm ‘FC Management’ rather than online TFC as such. – If not anything else, this indicates the omnipresent importance of an offline validation of an online user interface – But what’s the threat perception in this realization?... ponder this; It’s a well acknowledged fact by now that the real-money is offline & the scalability of any e-commerce platform is only when it triggers the quintessential O2O retro transition – This is particularly true in a case wherein it becomes necessary for TFC or the likes to generate more carried interest in order to be sustainable & the requisite scale of operation makes it pertinent that the investor & the investees are physically & comprehensively attended to – thus there exists a threat of the model progressively getting offline & hence get inconsequential.
• CYBER-CONSUMERS ARE A DIFFERENT BREED: I always felt that the absence of
  
  scope for a visual prejudice or lack of pressure in conforming to imposed stereotypes makes the worldwide web a great leveller wherein most consumer demographics tend to blend and behave in a very similar fashion in being impulsive, adventurous, trend-junkie, impatient – meaning essentially everyone’s a teenager on Cyberia. For a marketer this means that the average risk taking capacity of a consumer online is higher than when the same consumer is offline – but on the flip-side this also means that the cyber-consumer is seldom loyal & quick to get bored & that’s a definite & short-term threat.

OPPORTUNITIES - It’s eventually the potential of the Opportunity that prevails

• The SEC endorsement qualifies the current TFC model as being the proof of concept for (eventual) handling of venture capital non-conventionally. As postulated above, there appears to be a lot to sort-out before the model can be scaled-up successfully, but the opportunity of defining a paradigm shift in VC is out there & I'm sure someone's already cobbling together a design to overcoming these road-blocks to scalability.

As Heraclitus said long ago, the only constant is change!