tag:blogger.com,1999:blog-47785939516688909172024-03-27T14:37:39.271+08:00My Observations on Startups and Venture Capital Piyush Chaplothttp://www.blogger.com/profile/07198035147355350402noreply@blogger.comBlogger15125tag:blogger.com,1999:blog-4778593951668890917.post-69416740444882149872018-09-26T08:46:00.000+08:002018-09-26T08:57:24.693+08:00Its time for Trustless Platforms<div dir="ltr" style="text-align: left;" trbidi="on">
ICO party is over and sanity is back. Crypto enthusiasts have started asking about the adoption and possible adoption. So how will real adoption come?<br />
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Here is my hypothesis:<br />
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1. The blockchain infrastructure is almost ready to handle expected loads and security. There are numerous options ( Ethereum, Ontology, Hyperledger, etc.) with varied features for founders to build upon.<br />
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2. The reason why someone would want to build using blockchain is to leverage on its trustless nature where "True Peer to Peer" transactions will take place without an intermediary (brokers, institutions or platforms). In other words, Mathematics will possibly disrupt the FANGs and alikes. Google Ads get replaced when content publishers can connect directly with audiences and have a mechanism to reward them. Uber gets replaced when drivers, car owners and riders can connect automatically. Insurance companies gets replaced when people create mutuals and insure themselves.<br />
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3. Some of the junior platforms with existing users could potentially do a reverse ICO and try to disrupt themselves and possible the larger incumbents. For example - Spuul has created a platform called Spokkz. If Spokkz succeeds in creating a content generation and consumption economy which is fueled by their tokens, they could possibly go against the likes of Youtube and Netflix of the world.<br />
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Still very early days for the blockchain ecosystems and lot of maturity has to come. But I think the Trustless Decentralised Networks have a fair chance to disrupt the Disruptors of last decade.<br />
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Piyush Chaplothttp://www.blogger.com/profile/07198035147355350402noreply@blogger.com3tag:blogger.com,1999:blog-4778593951668890917.post-56120438304385192162017-07-31T10:33:00.000+08:002017-07-31T10:33:16.653+08:00Building a Tech Portfolio<div dir="ltr" style="text-align: left;" trbidi="on">
Technology is reshaping every industry and its dynamism and impressive growth rates make it a must-consider sector for virtually every investor. But how to build a portfolio of assets in this ultra dynamic asset class. Here are some pointers:<br />
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<b>1. Follow adoption, not hype</b><br />
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Believe what you see not what you hear. 44% of humanity now has a Smartphone and you can see it. And people spend between 5 to 12 hours per day on that device. Mobility is a trend which already is redefining things that we can do using that device. One could have easily invested in Apple after seeing early adoption of i-Phones and still made a killing.<br />
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But beware of buzzwords. Every year people come up with new buzzwords that seem like the next big thing. They are usually technologies looking for a problem to solve. Block-chain, 3D printing, Internet of Things, etc. People claimed that 3D printing will disrupt the entire manufacturing industry in China and bring the manufacturing back to the "First World". Unfortunately, I only saw people printing neon coloured figurines for testing. It is still too expensive to go mainstream. Maybe some technology breakthrough will make it cheaper and then it can get adoption in mainstream. Until then, stay away. Another very latest addition to this hype is ICOs ( initial coin offerings). People are selling shares in their companies against Bitcoins. As interesting as it sounds, it is no different from crowdfunding. Equity crowdfundings so far have failed miserably. It is almost impossible for "crowd" to understand early stage companies. Even VCs with significant minority get class rights to protect themselves. How will these minority shareholders protect themselves without any regulation in place.<br />
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<b>2. Stay super agile:</b><br />
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Technology has a rapid cycle of obsolescence means that winners and losers in technology do not necessarily maintain those positions for long. Winners can quickly become losers and declared losers can make pundits look like idiots.<br />
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Groupon launched in 2008 and went for an IPO in 2011 at a valuation of $12.7 B at a per share price of $20. By the end of 2012, its stock traded less than $5. Facebook launched its IPO in Feb 2012 at $38 per share. However, its share price quickly dropped to $17.55 per share in Sept 2012. This seemingly loser is now priced at $172.45.<br />
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Agility of tech companies can turn around the futures pretty quickly. Microsoft was founded in 1975 and more than a few tech writers have already penned its obituary as a leader in the field. But appointment of Satya Nadela catalysed the stock into a new territory. Apple was left for dead in the 1990s due to the dominance of the WinTel duopoly, but sprang back to vigor with its innovative smartphone products.<br />
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<b>3. Knowing which Metrics to chase</b><br />
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Technology companies that are doing well will never be cheap according to the analysts who track traditional mature companies. The way to analyse technology companies is to know the metrices that really matter.<br />
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When looking for platforms, the metrics should be its leadership position. Winner takes All. Google controls 80% of search market globally as against Bing which claims about 10%. When looking for SaaS companies, the most important metrics are growth and churn rates. Similarly, for a lending platform it should be growth and default rates.<br />
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<i>Pro Tip: Bet on yourself. Yes, if you use a product or service and absolutely love it. Just invest. You will not regret. </i></div>
Piyush Chaplothttp://www.blogger.com/profile/07198035147355350402noreply@blogger.com0tag:blogger.com,1999:blog-4778593951668890917.post-43923342500415336772015-11-06T11:02:00.000+08:002015-11-06T11:02:05.060+08:00Marginal Burn versus Opportunity Loss - Founder's Dilemma? <div dir="ltr" style="text-align: left;" trbidi="on">
Founders of growth stage companies face plenty of dilemmas while deciding on allocating precious resources. Particularly while hiring their senior management team. Often, to save money, they end up hiring smart people who may not have the relevant experience but are willing to experiment and learn. At a stage when the company is trying to take off, this can be an expensive experiment.<br />
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I recently attended a Board meeting at one of our fast growing portfolio company. New sign up rate was at all time high but so was churn. A deeper dive into causes of churn revealed that it was mostly during onboarding phase. Once onboarded properly, with a human touch, customers stayed for long. It quickly became apparent that we needed to hire more people in support for new customers. The fact that this discussion happened at the Board level worried me because CEO himself was trying to solve the problem. His deputy who was responsible for customer success was in that role for 6 months and yet the fast growing company was experimenting with support. I questioned the experience and skill set of the customer success manager and was explained by the CEO that such experience is not available locally and would be expensive to hire someone with relevant experience.<br />
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Founder was obviously concerned about the marginal burn that the company would incur if someone with relevant experience was hunted and hired. But the founder had quietly accepted the opportunity loss that the company would have to bear because that was not clearly visible. Company's monthly burn was S$150K and hiring someone relevant would have costed additional S$10-15K.<br />
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This was not the first time. Last year, one of the startup was looking to hire a COO to share the burden with Founder and during the search process, I saw the Founder to be very cautious with COO salary range. They were lucky to get smart people at the price but not many of them had relevant experience. The new hires had to test and learn from scratch and eventually costed the company more.<br />
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Dilemma of marginal burn can also be seen while deciding on marginal marketing spend. Founder of another startup was not prepared to experiment with increasing the marketing burn. Their marketing budget was about 10% of their monthly burn of S$80-90K. And, they would not experiment burning another S$20-30K in additional marketing/PR.<br />
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I understand that it all adds up when you increase marginal spend in all areas simultaneously. But a decision has to be taken considering - "Marginal burn is visible but Opportunity Loss is not."<br />
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Are you going with the safer option? Be mindful of the opportunity loss.<br />
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Piyush Chaplothttp://www.blogger.com/profile/07198035147355350402noreply@blogger.com1tag:blogger.com,1999:blog-4778593951668890917.post-3684813701365421492015-05-21T11:58:00.000+08:002015-05-21T11:58:00.845+08:00How to structure a FUNCTIONAL Board ?<div dir="ltr" style="text-align: left;" trbidi="on">
<div style="background-color: white; line-height: 1.5em; margin-bottom: 15px; padding: 0px;">
<span style="font-family: inherit;">Do you feel excited about the upcoming board meeting? Do you feel that the hours spent with your Board members are worth more than the money they invested? Do you ever wish that if it was possible to hire those Board members as part of your team? <span style="line-height: 1.5em;">Or</span></span></div>
<div style="background-color: white; line-height: 1.5em; margin-bottom: 15px; padding: 0px;">
<span style="font-family: inherit;">Are you one of those founders who think Board meetings are a complete waste of time? Do you wish that the frequency of Board meetings should be changed from monthly to quarterly? </span></div>
<div style="background-color: white; line-height: 1.5em; margin-bottom: 15px; padding: 0px;">
<span style="line-height: 1.5em;"><span style="font-family: inherit;">Clearly, if the Boards are not functional and productive, it can have deep impact on the future of Startups. There is an old Silicon Valley saying that </span></span><span style="font-size: 16px; font-style: italic; line-height: 28.7999992370605px;"><span style="font-family: inherit;">“Good boards don’t create good companies, but a bad board will kill a company every time.”</span></span></div>
<div style="background-color: white; line-height: 1.5em; margin-bottom: 15px; padding: 0px;">
<span style="line-height: 1.5em;"><span style="font-family: inherit;">How to structure an awesome, effective and productive Board?</span></span></div>
<div style="background-color: white; line-height: 1.5em; margin-bottom: 15px; padding: 0px;">
<span style="line-height: 1.5em;"><span style="font-family: inherit;">1. Right People - Choose your bosses wisely</span></span></div>
<div style="background-color: white; line-height: 1.5em; margin-bottom: 15px; padding: 0px;">
<span style="line-height: 1.5em;"><span style="font-family: inherit;">As the CEO, you report to the Board. They assess your performance and decide on key matters of your company. Would you let investors appoint anyone as your boss? You need to "know" the investor representatives who would be appointed on your board even before you sign the term sheet. Spend time with them and if the investor director nominee is not as excited as you about your business, look for replacement. You should also consider diversity of skill sets on the Board. Checking references is also very important. First impressions can deceive. </span></span></div>
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<span style="line-height: 1.5em;"><span style="font-family: inherit;">2. Size of the Board - Small is beautiful</span></span></div>
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<span style="font-family: inherit;">One of the Board meeting that I attended last month had seven people in the room excluding key management of the Company. Harder to have deeper and meaningful discussions in a larger setting. </span></div>
<div style="background-color: white; line-height: 1.5em; margin-bottom: 15px; padding: 0px;">
<span style="font-family: inherit;">Monthly Board meetings are a time when you get out of your day to day execution mode, take deep breaths and think strategically using directors as your sounding board. The smaller the group, the better the discussion quality. </span></div>
<div style="background-color: white; line-height: 1.5em; margin-bottom: 15px; padding: 0px;">
<span style="font-family: inherit;">Ideal size of the Board at seed stage is three and Series A is five (including founders).</span></div>
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<span style="font-family: inherit;">3. Board observers - Try to minimise</span></div>
<div style="background-color: white; line-height: 1.5em; margin-bottom: 15px; padding: 0px;">
<span style="font-family: inherit;">Lets be practical, in a meeting, observers don't just observe. They pretty much act as a Board member. They have views, ideas, questions, etc. and it is rude to tell someone that they are there just to observe. Founders should try to minimise the number of observer rights they assign to every investor in the syndicate. </span></div>
<div style="background-color: white; line-height: 1.5em; margin-bottom: 15px; padding: 0px;">
<span style="font-family: inherit;">It does not mean information can not be shared. Board materials, discussion minutes, etc can be shared with everyone who holds a reasonable stake and confidentiality is assured.</span></div>
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<span style="font-family: inherit;">4. Chemistry between members - critical</span></div>
<div style="background-color: white; line-height: 1.5em; margin-bottom: 15px; padding: 0px;">
<span style="font-family: inherit;">Culture at the Board level is critical. The chemistry and respect among board members for each other defines the overall quality of the meeting and outcomes. </span><span style="line-height: 1.5em;">This does not mean th</span><span style="line-height: 1.5em;">at all the members have to agree to everything that has been shown or said. Diversity of views should be encouraged. Open and frank conversations are key. Founders have to play a key part in building</span><span style="line-height: 1.5em;"> </span><span style="line-height: 1.5em;">this culture even at the board level.</span></div>
<div style="background-color: white; line-height: 1.5em; margin-bottom: 15px; padding: 0px;">
<span style="font-family: inherit;">One loose canon on the Board can destroy the entire team spirit and that affects functioning of the Board. Founders need to know how to handle critical observations and encourage data backed debates. </span><span style="line-height: 1.5em;">Stay away from the five types of dysfunctional board members </span><a href="http://www.businessweek.com/stories/2007-10-18/directors-who-dont-deliverbusinessweek-business-news-stock-market-and-financial-advice" style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; border: 0px; box-sizing: border-box; color: #4479bd; font-size: 16px; font-stretch: inherit; line-height: 24px; margin: 0px; outline: none medium; padding: 0px; text-decoration: none; vertical-align: baseline;">as defined by Jack and Suzy Welch</a><span style="line-height: 1.5em;">: The Do-Nothing; The White Flag (will do anything to avoid confrontation); The Cabalist (driven by personal agenda); The Meddler (dwells incessantly on details); and The Pontificator (only enjoys hearing himself speak).</span></div>
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<span style="font-family: inherit;">5. Advisers are not Directors - understand the difference</span></div>
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<span style="font-family: inherit;">Investor Directors are shareholder representatives. They are mostly generalists and rarely specialists. </span></div>
<div style="background-color: white; line-height: 1.5em; margin-bottom: 15px; padding: 0px;">
<span style="font-family: inherit;">If you need specialised advice on something on an ongoing basis, you need to assemble a separate Board of Advisers. However, it is not necessary to have advisers appointed to the Board. </span></div>
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<span style="font-family: inherit;">6. Independent Directors - worth having one</span></div>
<div style="background-color: white; line-height: 1.5em; margin-bottom: 15px; padding: 0px;">
<span style="font-family: inherit;">Independent Directors are great to bring balance to a Board. In cases, where there are deadlocks between Founders and Investors at a Board level, an experienced third party can help. </span></div>
<div style="background-color: white; line-height: 1.5em; margin-bottom: 15px; padding: 0px;">
<span style="font-family: inherit;">Very few startups like to get Independent directors involved and most ID seats are generally unfilled. </span></div>
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7. Frequency of meeting - communication is important<br />
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Better Boards meet monthly and communicates more frequently than that. <span style="line-height: 1.5em;">Startups operate in a very dynamic environment where traditional quarterly meetings are useless. </span><br />
<span style="line-height: 1.5em;"><br /></span>
<span style="line-height: 1.5em;">Besides meeting in person on a monthly basis, real time communication and decision making on key issues is important to build trust and transparency. </span><br />
<span style="line-height: 1.5em;"><br /></span>
<span style="line-height: 1.5em;">8. Split Board meetings into two sessions and involve key management</span><br />
<span style="line-height: 1.5em;"><span style="font-family: inherit;"><br /></span></span>
<span style="font-family: inherit;">In
a healthy board-CEO relationship, the board and CEO need quality time together
where they can have private discussions. A customary approach that works
well is to divide board meetings into 2 sessions: First there is an open
session, where senior management team members may be invited and they may even
be responsible for parts of the agenda. Then there is a private session where
everyone except for directors is excused and the agenda shifts to the private
Board-CEO discussion and governance matters. </span></div>
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Piyush Chaplothttp://www.blogger.com/profile/07198035147355350402noreply@blogger.com1tag:blogger.com,1999:blog-4778593951668890917.post-71843036419574034232015-04-24T16:59:00.000+08:002015-04-24T16:59:01.604+08:00Alert: Venture Capital Tsunami in South Asia <div dir="ltr" style="text-align: left;" trbidi="on">
<span style="font-family: inherit;">Last 12 months have been nothing short of a Tsunami for Venture Capital industry in South Asia ( India + ASEAN). Unprecedented capital inflows and interest have completely shaken the local ecosystems. </span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">Strategic investors such as Softbank, Rakuten, Alibaba, Naspers, etc. are throwing money as if there is no tomorrow. Sovereign Wealth Funds such as GIC, Temasek, QIA and Khazanah want their share of the pie. Even Private Equity firms do not want to be left behind. </span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">Lets look at some mind numbing data first to feel the intensity of this tsunami:</span><br />
<ul style="text-align: left;">
<li><span style="font-family: inherit;">Flipkart raised 3 massive rounds from Series F ($210M), G ($1B), H ($700M) in a 7 month span between May and Dec 2014.</span></li>
<li><span style="font-family: inherit;">Ola raised Series C ($41.5M), D ($210M) and E ($400M) in 10 months between Jul 2014 to Apr 2015.</span></li>
<li><span style="font-family: inherit;">Snapdeal raised more than $727M between May and Oct 2014.</span></li>
<li><span style="font-family: inherit;">Grabtaxi raised 4 rounds of funding from Series A, B ($15M), C ($65M) & D ($250M) in a 9 month period between Apr and Dec 2014.</span></li>
<li><span style="font-family: inherit;">Tokopedia raised $100M in Oct 2014.</span></li>
<li><span style="font-family: inherit;">Housing.com raised $18M, $19M and $100M between Apr and Nov 2014.</span></li>
<li><span style="font-family: inherit;">PayTM parent One97 raised $635M from Alibaba and SAIF partners in Jan 2015.</span></li>
</ul>
Remember Webvan?? Webvan raised Series A ($125M ) and Series B ($275M) from Softbank and Sequoia within a short span between 1998 and 1999. Looks like the same story is being replayed here in South Asia all over again.<br />
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<span style="font-family: inherit;">I can never comprehend how a startup moves from Series A to Series D in 9 months. Such sudden influx obviously causes ripple effects. Early stage valuations are going through the roof. Series A rounds look like erstwhile Series C rounds. The race is now on to reach a billion dollar valuation in the shortest amount of time. Hate to say this but to a certain extent these funding rounds now decide who is going to be the winner. Taxiforsure lost its battle against Ola not because their product or team were not great. But because, they did not raise such quantums at the right time. </span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">Until recently, we never had to worry about a Startup raising too much money. Risk capital was scarce and hence, the default advice was never to worry about dilution, valuation, etc and to raise as much as they can. </span><span style="font-family: inherit;">More money allows for mistakes thereby empowering founders to experiment. A huge funding round also keeps competition at bay. </span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;"><b>However, it is time to be cautious. </b></span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">1. Impatient capital will have unrealistic expectations. They would want to achieve leadership position by throwing money to solve the problem. However, i</span>f fast growth is achieved only due to capital by providing unsustainable discounting and similar loss leading tactics, then there will be a continuous need for capital. Any reversal in investor sentiment can cause failure.<br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">2. Too much money too soon is fundamentally bad for startups. It forces aggressive execution even for startups who are still discovering their most optimal business models. They just get pressured to enter the rat race. </span><br />
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<span style="font-family: inherit;">3. Growth is not always directly proportional to the money you burn. </span><span style="font-family: inherit;"> </span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">I am not advising against raising big rounds of capital. I am cautioning against over capitalisation. Know how much you need and when ( and also from whom... if you get the choice).</span></div>
Piyush Chaplothttp://www.blogger.com/profile/07198035147355350402noreply@blogger.com2tag:blogger.com,1999:blog-4778593951668890917.post-73830792197191794282015-02-08T12:42:00.000+08:002015-02-08T12:42:25.013+08:00Venture Debt : Good, bad or ugly?<div dir="ltr" style="text-align: left;" trbidi="on">
<div style="text-align: left;">
<span style="font-family: inherit;">DBS has just launched Venture debt for tech startups in Singapore. I think this is a first by any Asian Bank and a new product for SE Asia. Silicon Valley Bank (SVB) has been active in India and China but they don't have any presence in SE Asia. Here is the link to DBS' announcement - http://www.dbs.com/newsroom/DBS_launches_venture_debt_for_tech_start-ups_in_Singapore</span></div>
<div style="text-align: left;">
<span style="font-family: inherit;"><br /></span></div>
<div style="text-align: left;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEilVUNdjqIUeyhyphenhyphenbrGepuMBZjjTcu_EuiYXdaprv9vrTk2ZSSRJ8koI0HmcWMbfVMlc65yHR-XRtkTDHokMxXL5A56tQxmyb1XJ2umNDQ8hsTCae_3OuADKAzqZIYAs9zYVLvRwGqs4SAHp/s1600/good+or+bad.jpg" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEilVUNdjqIUeyhyphenhyphenbrGepuMBZjjTcu_EuiYXdaprv9vrTk2ZSSRJ8koI0HmcWMbfVMlc65yHR-XRtkTDHokMxXL5A56tQxmyb1XJ2umNDQ8hsTCae_3OuADKAzqZIYAs9zYVLvRwGqs4SAHp/s1600/good+or+bad.jpg" height="199" width="200" /></a><span style="font-family: inherit;">Startup community in Singapore has welcomed the move and<span style="background-color: white; color: #100f0f; line-height: 20px;"> r</span><span style="background-color: white; color: #100f0f; line-height: 20px;">ightfully so, this opens up options for many startups. However, before jumping on the bandwagon, startups and VCs need to clearly understand its pros and cons. </span></span><br />
<br />
The Good : Venture debt<br />
<ul style="text-align: left;">
<li><span style="color: #100f0f; line-height: 20px;">Extends the "cash flow runway" for the company and makes it easier to achieve the next valuation milestone</span></li>
<li><span style="color: #100f0f; line-height: 20px;">Venture lending represents a less dilutive type of financing than venture capital financing since venture lenders generally require less of an ownership position</span></li>
<li><span style="color: #100f0f; line-height: 20px;">Venture lenders typically take less of an advisory role in its portfolio companies and do not serve on the corporate board of directors</span></li>
</ul>
<span style="line-height: 20px;"><span style="background-color: white; color: #100f0f;"></span></span></div>
<div style="text-align: left;">
<span style="background-color: white; color: #100f0f; line-height: 20px;"><span style="font-family: inherit;">According to SVB website, </span></span><span style="color: #100f0f; line-height: 20px;">the best time to raise venture debt is in conjunction with or immediately after raising a round of equity, i.e. when there is the most capital in the company. It can be done at other times, but often with less favorable terms. Venture lending is appropriate at the following times:</span><br />
<ul style="text-align: left;">
<li><span style="color: #100f0f; line-height: 20px;">As part of a funding round where, for example, rather than raise $10 million in a funding round, a company can raise $7.5 million in equity and $2.5 million via venture debt</span></li>
<li><span style="color: #100f0f; line-height: 20px;">To extend cash runway when a company knows that it will need to raise another funding round in 12 months, but would like to extend that timeframe to 18-24 months</span></li>
<li><span style="color: #100f0f; line-height: 20px;">As the last round before an exit instead of, or in addition to, an internal round where taking venture debt will help the investors/promoters receive roughly the same amount with less investment on their part if a venture loan is taken to top up growth capital</span></li>
<li><span style="color: #100f0f; line-height: 20px;">As working capital in a situation where even though a company has sufficient operating cash, it needs cash for working capital and can extend its resources via a debt facility</span></li>
<li><span style="color: #100f0f; line-height: 20px;">To finance purchase of equipment or finance office expansions and buildouts, for which equity would be a more expensive alternative</span></li>
</ul>
</div>
<div style="text-align: left;">
<span style="font-family: inherit;">For startups in Singapore, DBS bank has put in these following criteria:</span></div>
<div style="text-align: left;">
<ul style="text-align: left;">
<li><span style="font-family: inherit;">M</span><span style="background-color: white; color: #100f0f; font-family: inherit; line-height: 20px;">ust be strongly backed by DBS’ partner venture capitalists. </span></li>
<li><span style="background-color: white; color: #100f0f; font-family: inherit; line-height: 20px;">Should have raised at least SGD 1 million of Series A funding</span></li>
<li><span style="background-color: white; color: #100f0f; font-family: inherit; line-height: 20px;">Be incorporated for at least two years, be in operation for at least one year and have demonstrated that their business model is commercially viable.</span></li>
</ul>
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<span style="font-family: inherit;">In simple words, that means DBS is prepared to come in as early as immediately after Series A round. They are basically relying on the ability of their partner VCs to assess the startups that are commercially viable. </span><span style="font-family: inherit;">Startups that have the confidence to reach inflection points can make good use of this Venture debt. Leverage can amplify the returns for all shareholders.</span></div>
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<span style="color: #100f0f; font-family: inherit;"><span style="background-color: white; line-height: 20px;">So what is NOT so good about this Venture debt?</span></span></div>
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<span style="color: #100f0f; font-family: inherit;"><span style="background-color: white; line-height: 20px;">1. Accepting Venture debt too early</span></span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg-3McQAnh8YPLQFiXmChBSNplqb0uSCw9FePk-ExfhTmr205C_vO6r606hzk0pi-KmBNPAZEBj3vnyhDqwEfuAKtISRCTNuzv6PPoGZqA_TweJzL6MyCbh38IDcDqsYqlxMBd2mofXlaVq/s1600/bad+debt.jpg" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg-3McQAnh8YPLQFiXmChBSNplqb0uSCw9FePk-ExfhTmr205C_vO6r606hzk0pi-KmBNPAZEBj3vnyhDqwEfuAKtISRCTNuzv6PPoGZqA_TweJzL6MyCbh38IDcDqsYqlxMBd2mofXlaVq/s1600/bad+debt.jpg" height="200" width="200" /></a><span style="color: #100f0f; font-family: inherit;"><span style="background-color: white; line-height: 20px;">Accepting venture debt too early in the life of a Startup is risky. Leverage is a double edged sword. It good times it can improve returns for all but in bad times it can cause more harm. In case the Startup fails to reach its inflection point, it might become nearly impossible for the debt loaded Startup to raise follow on funding from other investors or pivot. It is best when debt is used to fund organic and inorganic growth at later stages. </span></span><br />
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<span style="color: #100f0f; font-family: inherit;"><span style="background-color: white; line-height: 20px;">2. Covenants and other default clauses</span></span><br />
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<span style="color: #100f0f; font-family: inherit;"><span style="background-color: white; line-height: 20px;">It is also important to learn how DBS writes its loan covenants. In case, the business growth is not as expected, the bank might recall its cash when the startup needs it the most. It is hard for banks to behave like VCs. </span></span><span style="color: #100f0f;"><span style="line-height: 20px;">“Material adverse change” and other “subjective default clauses” can allow a lender to recall their loan due to events beyond the company’s control (e.g., an existing equity investor deciding not to participate in a future round).</span></span><br />
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<span style="color: #100f0f; font-family: inherit;"><span style="background-color: white; line-height: 20px;">3. Using venture debt financing as a last resort</span></span><br />
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<span style="color: #100f0f; font-family: inherit;"><span style="background-color: white; line-height: 20px;">Venture debt doesn't suit a company which is unable to raise follow on equity financing and expected to run low on cash. This would over burden a non performer and eventually make it harder to turn around. </span></span><br />
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<span style="color: #100f0f;"><span style="background-color: white; line-height: 20px;">To conclude: We would have to wait and see the details of terms and conditions DBS is going to propose. Assuming that they are at par with SVB, venture debt is a strong option for venture-backed companies who want to add capital and minimize dilution. Though more expensive than traditional working capital lines, venture debt offers far greater flexibility. However, excessive debt or loans with heavy restrictions can be detrimental to a business, and the terms of any potential financing should be considered carefully.</span></span></div>
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Piyush Chaplothttp://www.blogger.com/profile/07198035147355350402noreply@blogger.com1tag:blogger.com,1999:blog-4778593951668890917.post-23105412354528133682014-11-17T15:28:00.003+08:002014-11-17T15:28:20.224+08:00Can Singapore produce Billion dollar tech startups?<div dir="ltr" style="text-align: left;" trbidi="on">
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiTfdTIkYKhh5Q-eiX-8bvos61_upj-eQ5kZmeKS93K_EiEcrplDE-U9OliqQYNE7Xr_12rw8xyFVstn-08fnyYnkJsvIzbECUIHQFUhtE5rLuTJch0z6aoydxY_Vqe3yQUnO_hc0TPOPOE/s1600/Billion+dollar+image.jpeg" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiTfdTIkYKhh5Q-eiX-8bvos61_upj-eQ5kZmeKS93K_EiEcrplDE-U9OliqQYNE7Xr_12rw8xyFVstn-08fnyYnkJsvIzbECUIHQFUhtE5rLuTJch0z6aoydxY_Vqe3yQUnO_hc0TPOPOE/s1600/Billion+dollar+image.jpeg" height="133" width="200" /></a></div>
<span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18.2000007629395px;">Singapore's tech ecosystem has remarkably improved from what it was five years back. From an occasional early double digit million exits, we have now seen many companies hitting the Centurion (100 million) mark. But has it improved enough to produce Unicorns ( 1 billion) ? Does the ecosystem have capabilities to produce the next billion dollar tech startup?</span><br style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18.2000007629395px;" /><br style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18.2000007629395px;" /><span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18.2000007629395px;">Lets do a deep dive and assess the elements that are necessary for that to happen.</span><br style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18.2000007629395px;" /><br style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18.2000007629395px;" /><span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18.2000007629395px;">1. Quantity : Number of startup formation had reached healthy levels in 2012-2013. In 2009, we used to receive two pitches per WEEK. Contrast that with 2013-14 average of two pitches per DAY.</span><br style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18.2000007629395px;" /><span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18.2000007629395px;">We all know that this did not happen organically. Government has done a lot to prime the pump. In my mind, the biggest contributor to this ecosystem was the TIS scheme launched by National Research Foundation (NRF). This was not a perfect scheme. But it gave Singapore the right to call itself the regional hub for tech companies. It attracted talent from all over South East Asia. Sadly, NRF has shifted its focus from what they consider "Low tech" to "High tech". I personally don't think that iJAM reload can completely fill the gap. But that is making iJAM program really competitive. I was on an i-JAM panel recently and to my surprise the quality of startups was at par with some of the TIS companies. IDA is getting active by approving a number of new incubators to seed many more as well. However, Spring Singapore seems to have taken a back seat. Time will tell if the ecosystem can adapt to these governmental decisions but the activity levels as of now are healthy.</span><br style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18.2000007629395px;" /><br style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18.2000007629395px;" /><span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18.2000007629395px;">2. Quality: Over time the quality has become better as well. The teams are well rounded and have more experienced founders. But do we have the quality of producing Unicorns? I personally don't think that we are short of skills here. We have lot of founders who are great starters who can take the companies to Series A. We also have talented experienced hires available in regional head quarters of various tech companies who can scale the potential winners. However, we need smart capital that can make this transition successful. I personally know that some very smart people are raising Series A funds and are in various stages of closing those funds. The challenge for all these funds would be to come in early (earlier than a typical Series A) and fill the void created by NRF. Will they? I don't know. May be that will force the founders to be more creative on how they syndicate and/or Bootstrap.</span><br style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18.2000007629395px;" /><br style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18.2000007629395px;" /><span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18.2000007629395px;">3. Support systems: We now have a reasonably healthy mix of incubators, co-working spaces, growth funds and corporate participants. However, we are short on two things: good seed stage funds (accelerators) and regulation.</span><br style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18.2000007629395px;" /><span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18.2000007629395px;">Seed stage shortage can not be addressed by Angels. We desperately need smart seed stage investors who practice emergent strategy and can help transform ideas into scalable businesses. This will build the pipeline for Series A funds about to be raised. This is the single biggest problem with our ecosystem. Series A gap is being filled at the expense of Seed Stage capital. Most active seed investors are now becoming Series A investors.</span><b style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18.2000007629395px;"> </b><span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18.2000007629395px;">In absence of good acceleration funds, they all might have to retune their expectations.</span><br style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18.2000007629395px;" /><span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18.2000007629395px;">Regulators are also not in sync with what is expected from the "easiest place to do business". I have had some experience dealing with Monetary Authority of Singapore (MAS). And they are no where near UK Financial Conducts Authority (FCA). If we want to play to our strengths, we can't ignore Fintech. And, we can't focus on Fintech without a proactive MAS. Hope someone is listening.</span><br style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18.2000007629395px;" /><br style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18.2000007629395px;" /><span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18.2000007629395px;">To conclude, IMHO, Singapore can produce billion dollar startups provided it plays to its strengths. Enterprise Software and Fintech are two areas that we can easily build without going anywhere. And, regional consumer startups are also a huge opportunity if we move out of our comfort zones and explore Southeast Asia.</span><br style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18.2000007629395px;" /><br style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18.2000007629395px;" /><span style="background-color: white; color: #444444; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13px; line-height: 18.2000007629395px;">What do you think? Constructive criticism is very welcome.. </span><br />
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Piyush Chaplothttp://www.blogger.com/profile/07198035147355350402noreply@blogger.com1tag:blogger.com,1999:blog-4778593951668890917.post-21899318847153863712014-07-14T10:53:00.000+08:002014-07-15T09:53:55.973+08:00Alibaba's investment in Singpost and its implications for Startups and SMEs <div dir="ltr" style="text-align: left;" trbidi="on">
Alibaba recently took a significant minority stake in Singpost for S$ 312.5 million ( US$ 249m). This was announced right after its US$ 206 million investment in Shoprunner Inc. and participation in US$ 250 million Series D in Lyft. These transactions made it amply clear that Alibaba wants to complete the loop by inorganically playing the last mile delivery scene. But why this interest in last mile delivery from a successful enterprise commerce platform?<br />
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Alibaba clearly has the global sourcing under its control. It would be hard to find a decent supplier or manufacturer in China (and beyond) who is not a verified (paying) member on its website. It dominates the Business to Business commerce. But whats next?<br />
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Their ambition now is not just to supply to distributors, traders, brands, and other intermediaries. They want to connect the producer to consumer. No intermediaries. It seems that now they have set their sights on Business to Consumer commerce. As a result, its business model is rapidly evolving from "Factory to Port" to "Factory to Door". And it is the last bit of "Port to Door" that Alibaba is now trying to sort out.<br />
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Imagine a world where an individual in Ulaan Bataar ( do you know where it is?) can use their phone to logon to Aliexpress, select anything that can be manufactured, verify the manufacturer, make payment and get it delivered the same/next day at its doorstep. This completely removes middlemen and the 7 time price hike from FOB price to MRP.<br />
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What does it mean for SMEs who are just intermediaries?<br />
Death. Yes. All those businesses that thrive on being an intermediary and making money on inefficiencies and opaqueness of the market will eventually become irrelevant. Good luck to private equity players who are busy doing deals in "mature" intermediaries.<br />
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So where is the opportunity and what does this mean for Startups?<br />
It is really important for all e-commerce related startups to think beyond just creating a shop front and throwing money on google adwords. Can they build a sustainable business model? What would be their edge when a common man can buy anything direct from the factory floor. Can they be part of the future value chain? Lots to think.. and act :)<br />
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Note: We have invested in www.anchanto.com that provides logistics and fulfillment services to businesses and brands in SE Asia and are looking for more opportunities to invest and build the businesses of future.<br />
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Piyush Chaplothttp://www.blogger.com/profile/07198035147355350402noreply@blogger.com0tag:blogger.com,1999:blog-4778593951668890917.post-66022157037063889322014-02-10T11:38:00.000+08:002014-02-10T11:38:50.975+08:006 CEO types to avoid<div dir="ltr" style="text-align: left;" trbidi="on">
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<span style="font-family: Helvetica Neue, Arial, Helvetica, sans-serif; font-size: x-small;">I felt like I have mined a bitcoin when i recently came across this interview with Tom LeFevre, co-founder of Intuit on assessing startup CEOs. Link here for detailed interview: http://www.confmanager.com/main.cfm?cid=77&nid=14305</span></div>
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<span style="font-family: Helvetica Neue, Arial, Helvetica, sans-serif; font-size: x-small;">He highlighted <span style="background-color: white;">six types of CEOs to avoid while investing </span><span style="background-color: white;">- Functional Vice-presidents, Researchers, Inventors, Fund-raisers, Small businessperson, and Corporate Executives.</span></span></div>
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<span style="font-family: Helvetica Neue, Arial, Helvetica, sans-serif; font-size: x-small;"><span style="background-color: white;">The first three types he called "not" CEOs because they lack general management skills. The remaining three types he called "flawed" CEOs.</span></span></div>
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1. <b>Functional VPs</b>: who were successful but never made the transition to CEO. When these CEOs encounter a business problem, they try to solve it using their functional skills. As an example, a CEO who had been a vice-president of sales in his past life, approached every problem by trying to get more sales. His company's problem was in operations. Sales volume was already more than the systems could handle, so more sales orders just made the problem worse. But this CEO couldn't make the transition from functional expert to general manager.</div>
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2. <b>Researchers</b> : Their passion is investigating the technology. The product never gets finished because there is always some issue they want to go explore. They spend their time and resources on that instead of commercializing.</div>
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3. <b>Inventors</b> : They like to invent things and may even come up with products, but they have no interest in commercialization.</div>
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4. <b>Fund-Raisers:</b> These people are really good at raising money for their company, but they aren't very good at running the business. They don't understand the customers. Products don't get done; revenue progress is weak.</div>
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The CEO is so good at selling the potential. There hasn't been a down round, but we're unlikely to ever see returns.</div>
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5. <b>Small Businesspeople:</b> These people have the CEO title and they sort of function as CEOs, but they don't really do the job. Either they lack focus, have low potential, or they can't scale. These CEOs can manage a seed stage startup with eight or ten people in one location but are over their heads once the company starts to gain traction and grow.</div>
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6. <b>Corporate Executives:</b> They typically don't understand the importance of cash in a start up and require high overhead to function. The company will end up with four "C" level executives, three vice-presidents, and twenty-eight managers in a low margin hundred-and-twenty-person company.</div>
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Piyush Chaplothttp://www.blogger.com/profile/07198035147355350402noreply@blogger.com0tag:blogger.com,1999:blog-4778593951668890917.post-40984601632600571022013-12-03T12:28:00.001+08:002014-02-04T12:24:36.555+08:00VCs : Adapt or get disrupted<div dir="ltr" style="text-align: left;" trbidi="on">
Venture Capital industry makes its livelihood by investing in disruptors but the functioning of VCs have not changed much in decades. However, this is all about to change very soon.<br />
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Angel List is changing the way seed/early stage syndicates are formed. Google Ventures is changing the way Startups are spotted. 500 Startups is delocalising the industry. Corporate Venture arms are investing as early as Series A. Here are the 6 ways VCs need to adapt before its too late:<br />
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1. <b>General Partner (GP) composition </b><br />
<span style="text-align: justify;">General Partners (GPs) have so far survived on being good generalists. But, entrepreneurs are getting more savvy. They are becoming more demanding. They are not just looking for money. They are looking for money + a platform, a network and a partner who can do business development for them. </span><span style="text-align: justify;">VC firms who invest in supplementing GPs with operating partners (for specialist assistance in growth hacking, hiring, business development, M&A, etc.) and in some cases, venture partners (for domain expertise) would attract more savvy founders. Obviously, this would mean a smaller pie of management fees but hopefully, a larger pie of carried interest based on better performance.</span><br />
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2.<strong> Delocalisation</strong><br />
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Gone are days when aspiring entrepreneurs have to line up within 30 minutes driving distance of VC offices in Silicon Valley. New hot spots of innovation are emerging. With improvements in connectivity, it has become much easier to build a billion dollar Start-up (in some sectors) from Bangalore, Shanghai, Jakarta or Singapore. And, money follows opportunities. Sequoia is present in the US, India, China and Israel. Accel is present in the US, UK, India and China. And, they are not just investing in the countries they are present in but they are also syndicating with smaller funds around those regions. Some VCs might retain the criteria of investing locally within a certain travelling distance and end up having many more satelite offices as a result of that.</div>
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3.<b> Data driven investing</b><br />
This might sound a bit too geeky but it has been established that successful start-ups can be spotted better by applying data analytics techniques. Google Ventures claim to use some of those techniques. Firms like Angel List would have lot of clever data to predict the home runs of future. Savvy investors have successfully used algorithmic trading for gaining that unfair edge.<br />
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4. <strong>Increased spend (time and money) on Self branding and outreach </strong><br />
<span style="text-align: justify;">Traditionally VCs have limited themselves to PR and marketing only when they invest in a Start-up or have had a successful exit. </span><span style="text-align: justify;">But things are changing for the good. They are now churning out blog posts, tweets, interviews, speeches, etc. Some are leading by making the ecosystem more transparent and providing thought leadership while others are quietly building sector and domain expertise. Some are even raking up air miles to speak at every possible opportunity anywhere in the world. </span><strong></strong><br />
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5. <strong>Multiple stage funds </strong><br />
<span style="text-align: justify;">Stage focus is going away. Investing in either seed or growth stage alone will be difficult.</span><span style="text-align: justify;"> Micro VCs would find it difficult to survive because when Start-ups have a choice of raising money from someone who could do follow on funding versus someone who can't, they would choose the former. </span><span style="text-align: justify;">Also, growth stage VCs will find it hard to source deals. </span><br />
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6.<b> Syndication with</b> <strong>Corporate Venture Capital firms</strong><br />
<span style="text-align: justify;">Corporate VCs are generally ignored because nobody likes Strategic investors at the early stages of a company. But I think they will become a much stronger force in the future. They are getting more aggressive and are even willing to invest at the seed stages.</span><br />
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<span style="text-align: justify;">What do you think? Anything you would like to add to the list?</span><br />
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Piyush Chaplothttp://www.blogger.com/profile/07198035147355350402noreply@blogger.com0tag:blogger.com,1999:blog-4778593951668890917.post-15197756768942406422013-06-15T14:18:00.000+08:002017-08-13T07:43:06.616+08:00Bet on the Horse or the Jockey?<div dir="ltr" style="text-align: left;" trbidi="on">
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Besides the usual screening process, every investor I have met so far, also has an unwritten methodology known as the "gut feel". It is difficult to admit but investing is as much an Art as it is a science. Partners of the same firm who would follow the same technicals sometimes differ from each other when taking an investment decision.<br />
<br />
What exactly is that gut feel? I think it is the Big Data analytics derived by the super computer in our head by scouring through years of varying experiences. I was looking back at my experiences and how my gut feel has evolved over the years. Do I tend to invest in a good idea or a good founder? Essentially the age old question that every investor has in mind - Bet on the horse (idea) or the Jockey (Founder)?<br />
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Before I formally started my investing stint, I used to think that a good idea is everything. All you need is that one bright spark...and thats it. I used to take execution for granted. My belief was that if you believe in your idea and are investing your blood and sweat into it then it should have a high probability of success. But when I saw some really passionate and dedicated guys making deadly mistakes, I realised the importance of founder's capability of being a real chief "Executing" officer. <br />
<br />
Naturally, I started giving lot of importance to the Jockey. But then, as luck would have it, I met a lot of capable founders solving the wrong problems. Either the idea they were working on was too early or too late. Investors who believe in the Jockey often argue that a smart founder would timely pivot and steer the company in the right direction. Easier said than done. You never know how many pivots are needed before the original idea transforms into a successful investment. And also, there is a new fashion of failing fast. If something is not working out, chuck it. Investors already know that not all of their investments are going to succeed. <br />
<br />
But is this really a either/or question? or is this a neither/nor question? <br />
<br />
Practically you can never find out whether the founder is good or not until you spend time with them. Needless to say that finding a good idea is exactly equally difficult. So does it mean investors can neither bet on the Jockey nor the Horse? Then what ...... Spray and pray (like most Angel investors)/ Lean VC (Poker) style like Dave McClure - Bet a little, assess and then raise your bet. How should professional VCs invest? I looked at some big name VCs in the valley. <br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhdfL-MbjURvQDBXdzz3ibK7V1US1UaaUhM6ZrufWfnIbIx7hAux-pdp8q0TBQZGFniFs4HDmdUVAkhRXlzLI_H0oV8JlRn_chWiQGeUVvoxTQlK4w46Dav5RkEcyg8sSuvZZDssS6dsrtl/s1600/Bill+Gross+Study.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="386" data-original-width="750" height="164" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhdfL-MbjURvQDBXdzz3ibK7V1US1UaaUhM6ZrufWfnIbIx7hAux-pdp8q0TBQZGFniFs4HDmdUVAkhRXlzLI_H0oV8JlRn_chWiQGeUVvoxTQlK4w46Dav5RkEcyg8sSuvZZDssS6dsrtl/s320/Bill+Gross+Study.png" width="320" /></a></div>
One thing was common: They all start top down. They identify industry trends, zoom into the sectors that makes sense to them and then pick the founder and idea. KPCB is investing in Mobility heavily. Sequoia is looking for SaaS deals. Accel launched a 100 million big data fund in 2011. <br />
<br />
Is it time we start looking around the region, figure out what CWCs (Companies-with-cash ) are/would be looking for and fund those sectors? May be its time to bet on the right race (and not just on the Jockey or the Horse)...<br />
<br />
What do you think? Do we have enough deal flow in the region to do that? I will let you know if I change my mind again ;)<br />
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Piyush Chaplothttp://www.blogger.com/profile/07198035147355350402noreply@blogger.com0tag:blogger.com,1999:blog-4778593951668890917.post-26536177673828972272013-02-15T18:06:00.000+08:002013-12-28T11:33:22.628+08:00How to perform Due Diligence on a tech startup?<div dir="ltr" style="text-align: left;" trbidi="on">
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Asian tech startup ecosystem is itself in its early stage.
And as a result, we do not have enough investment and compliance professionals
who are familiar with the most appropriate and efficient Due Diligence process.
Venture Capitalists and Angels end up ignoring certain areas due to lack of
specific knowledge (particularly Corporate laws) while Compliance professionals
from CPA firms end up overdoing certain checks because they look at startups
from listed company point of view. I recently came across a startup that was
reviewed by a BIG4 accounting firm in a way they would audit a listed utility
company. Felt like someone is cutting tomatoes with a sword.<o:p></o:p></div>
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In my view, Due Diligence effort is most productive when it
is tailored to the stage of investment. <o:p></o:p></div>
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<b><u>Seed Stage Due
Diligence<o:p></o:p></u></b></div>
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This is most relevant for Angels and/or Early stage VCs. At
this stage, the company would at most be a few founders and a prototype. The
most important things for an investor at this stage to do are as follows:</div>
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<ol style="text-align: left;">
<li><span style="font-size: 7pt; text-indent: -0.25in;"> </span><span style="text-indent: -0.25in;">Jobs to be done (JTBD): Is there a real market
need? Speak to potential customers.</span></li>
<li><span style="text-indent: -0.25in;">Team capability: Does the team have necessary
skill sets to execute and the temperament to sail through the ups and downs?
Meet up with Team members individually and do reference checks on key founders.</span></li>
<li><span style="text-indent: -0.25in;">Competitive landscape: Prepare a summary of
local and global players in the same/similar area and collect as much
information as possible.</span></li>
<li><span style="font-size: 7pt; text-indent: -0.25in;"> </span><span style="text-indent: -0.25in;">Exit potential: Prepare a list of potential
acquirers and document why they would acquire a company like this.</span></li>
<li><span style="text-indent: -0.25in;">Founder’s pre-nuptial: Ask founders to document
the terms of their co-working arrangements. Verbal agreements or inappropriate
drafting of these arrangements can cause lot of disturbance for the company. If
possible, also need to get founders to sign a non-disclosure and non-compete in
case of a break-up.</span></li>
<li><span style="text-indent: -0.25in;">Employee contracts: Ask for employment, non
disclosure and non-compete agreements duly signed by all part-time as well as
full time employees. If there are non-local employees, look out for their legal
employment status.</span><span style="text-indent: -0.25in;"> </span></li>
<li><span style="text-indent: -0.25in;">Pre-existing liabilities: Ask founders to
disclose all pre-existing liabilities including options granted and/or notes
issued to third parties. Get them to sign an undertaking.</span></li>
<li><span style="font-size: 7pt; text-indent: -0.25in;"> </span><span style="text-indent: -0.25in;">Licensing agreements: If the entire technology
of a part of that technology is licensed from an external party, the terms and
conditions of usage of technology should be properly documented.</span></li>
<li><span style="text-indent: -0.25in;">Record keeping: Select some transactions from
the financials (if any available) and look for supporting documents.</span></li>
<li><span style="text-indent: -0.25in;">Co-investors: Meet up and get comfortable with
key co-investors particularly those who are close to founders.</span></li>
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<b><u>Growth Stage Due
Diligence<o:p></o:p></u></b></div>
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This is a stage when there is lesser ambiguity than seed
stage. The company would likely have more data points and records to ensure a more detailed Due Diligence. This is a stage where involving a CPA and a lawyer makes sense. But it is still not possible to outsource all of the required Due Diligence. Partly because the professionals here are not very familiar with technology startups and partly because there are areas that CPAs and/or Lawyers would have no clue. <o:p></o:p><br />
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In my view, at this stage, the most important items to watch for are:<br />
<br />
Value Proposition:<br />
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<ol style="text-align: left;">
<li>Look out for the "unfair advantage" and verify that by speaking to at least one or two industry professionals. It can be the technology, business model or a combination of both.</li>
<li>Obtain a competitor landscape from the founders and verify that independently. Big red flag if founders have missed out on some prominent ones. </li>
<li>Get details of Strategic alliances, Joint Ventures or other partnerships. Check if any of that might become a roadblock in future exit plans. </li>
<li>If the company has multiple products, obtain features and pricing details for the entire product range.</li>
<li>Request for details of "Use of capital " and ensure that it makes overall sense. </li>
</ol>
Investment history<br />
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<ol style="text-align: left;">
<li>Obtain a Capital structure table (Captable) and verify that with data independently obtained from government agencies (like ACRA in Singapore or ROC extracts in India) or independent data providers. Ensure all convertible notes, stock options, warrants, etc. are fully disclosed to calculate fully diluted outstanding shareholding pattern of the company.</li>
<li>Ask for a copy of previous Shareholders and Subscription agreements. Go through previous investors rights/options to participate in the current round.</li>
<li>Meet up with at least all the investor representatives on the board of directors. It is important to establish that the future board is going to be functional.</li>
</ol>
Legal and Secretarial<br />
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</div>
<ol style="text-align: left;">
<li>Get a copy of Memorandum and Articles of association to ensure that they are upto date and reflect all the changes made during the previous investment rounds. </li>
<li>Obtain minutes of all previous board and shareholders meetings.</li>
<li>Ask founders to provide details of all existing/previous/threatened legal disputes, litigation, arbitration or judgement/s. A declaration/undertaking from the founders that information provided is complete to the best of their knowledge is also desirable.</li>
<li>Ask for details of all Patent, trademark, copyright applications (in-progress and/or granted).</li>
<li>Go through all licensing and other agreements. </li>
</ol>
Financial performance and projections<br />
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</div>
<ol style="text-align: left;">
<li>Get a copy of latest board approved budget, management accounts and audited financials (if available). Compare revenue and expenses between budget and actual accounts to identify and explore deviations. This can also be used to analyse future projections.</li>
<li>Review gross margins and net margins for each product line and assess if direct expenses have been pushed below the line as overheads. </li>
<li>Analyse working capital items (debtors, creditors and inventory). Ageing list can be very helpful. </li>
<li>Ensure that amounts due to technology and other service providers are accrued and recorded in accordance with agreements as liability even though they are not paid out. </li>
<li>Obtain details of bank mandates and signatory limits.</li>
<li>Obtain copy of bank statements for all the accounts held in company's name. Match bank balances with the latest audited/unaudited financials provided.</li>
<li>Ensure that the company has filed all its tax and annual returns with relevant authorities. Get copies of tax assessment notices. </li>
<li>Carefully look for related party transactions and ensure that they were conducted at arms length. </li>
<li>Go through the list of fixed assets and verify material items. If there are huge intangible assets capitalised in the balance sheet, make sure that they are valued realistically.</li>
</ol>
Human Resources<br />
<ol style="text-align: left;">
<li>Get a copy of company's organisational chart and list of employees with their roles. </li>
<li>Verify employment contracts, non-disclosure and non-compete agreements (where applicable).</li>
<li>Look for historical attrition rates to identify unusually high staff turnover.</li>
<li>Ensure that all the employees have the right to work in the country they are based in. Also, verify that the company has been promptly paying the employer's contributions in accordance with local laws. </li>
</ol>
Technical (Depends a lot on the sector whether it is software, hardware, biotech, cleantech, etc. but there are some common themes)<br />
<ol style="text-align: left;">
<li>Capability of the technology: To ensure it does what it promises, schedule a demo. Prepare a walk through of various use cases. For software, go through the functionality from both front and admin ends and document screen shots. For biotech, look for data coming out of independent trials. </li>
<li>Stability and scalability: This is relevant primarily for software startups where architecture, algorithms and databases need to be assessed for stability and scalability. Obtain a list of infrastructure monitoring tools used by the company. Get a description of redundancies built into the hosting platform and hardware.</li>
<li>Usage data: Obtain monthly traffic reports like site visitors, unique visitors, registered users, returning users, etc.</li>
<li>Third party tools: Obtain a list of third party tools and/or content utilised by or embedded within company's products. Ensure that licenses are in place. </li>
<li>Development roadmap: Review company's plans and "Use of capital sheet" to assess if significant pivot in product direction are anticipated in coming years. </li>
<li>Ownership: Evaluate academic affiliations of Founder/s and/or CTO to assess competing claims on the technology. If the technology is licensed from a research institute, assess the impact in an exit scenario. </li>
</ol>
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Hope this is useful not just to investors in their assessment but also to founders in preparing well in advance for a smooth and efficient due diligence. Do please let me know if I have missed out on any other important item. </div>
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Piyush Chaplothttp://www.blogger.com/profile/07198035147355350402noreply@blogger.com1tag:blogger.com,1999:blog-4778593951668890917.post-65830794574508793552012-06-29T11:08:00.002+08:002013-12-28T12:16:44.463+08:00Startups: Dont get caught in the missing middle<div dir="ltr" style="text-align: left;" trbidi="on">
Can you find a place on this planet where it is easier to start a venture than Singapore? Thanks to various schemes by government bodies like National Research Foundation, Spring Singapore and other agencies, you at least have 25 different sources of seed capital. You can even get enough grants to keep your company alive for first few years. In my personal view, if you can’t raise seed money here, you do need to seriously think about your chances elsewhere. <br />
<br />
But the real drama starts AFTER you have raised the seed money. Most people believe that half a million dollars is enough to take the company to the next level. Hard to disagree if you are a couple of graduates working on a cloud based application or a mobile app. But not all startups fit that bill. If we want to build serious technology based startup companies in Singapore, then we are looking at much higher monthly burn rates and/or much longer incubation periods. <br />
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If we look at emerging markets around us, there is so much opportunity in solving real needs of the masses. But all we are busy doing is creating these lite web and mobile based products which most of the times are clones of startups in America. Hard to see solutions around that can have real targeted impact. <br />
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One of the reasons why we don’t see innovative technologies around is because those few who tried in the past failed miserably. Some of them failed because they had poorer technology but some failed because all they could develop with seed money was a prototype or a not so commercially viable product. Most sensible people would now ask - " Why were they not able to raise more money to continue developing or marketing their product?". This is what gives me a pause. Try raising a follow on funding with a prototype in hand. Most follow on investors in Singapore are "Growth" investors and their first question: "How much is your revenue?". Most rejection letter would be worded around these four words - “too early for us”.<br />
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We either have lot of seed stage investors or lot of growth stage investors. Who is going to invest in between? Can government do something about either enabling seed stage investors to move beyond this half a million limit or encouraging growth stage investors to take more risks by de-risking their pre-growth investments? <br />
<br />
Until something happens at the government level, what would you do if you are thinking about starting up a company that needs more capital and time. I dont have the perfect answer for you. But you can try creating a syndicate between everyone who you can rally together. Find angels and/or strategic corporate investors who are willing to co-invest with incubators. There are some exceptional firms like Walden who do invest in pre-growth. Infocomm investments probably would be willing to co-invest if you have a lead investor. You could try some GIP funds listed here <a href="http://www.edb.gov.sg/etc/medialib/downloads/why_singapore.Par.9434.File.dat/LIST%20OF%20GIP-APPROVED%20FUNDS.pdf">http://www.edb.gov.sg/etc/medialib/downloads/why_singapore.Par.9434.File.dat/LIST%20OF%20GIP-APPROVED%20FUNDS.pdf</a> because they are required to make some early stage investments in Singapore based companies to get tax exemption. You can also think about leveraging research assistance from agencies like A*Star. <br />
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It is not easy but you can't do ordinary things to build extra-ordinary stuff. The effort required would also be extra-ordinary. Just be mindful of the missing middle. <br />
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Piyush Chaplothttp://www.blogger.com/profile/07198035147355350402noreply@blogger.com2tag:blogger.com,1999:blog-4778593951668890917.post-70354536732087878842012-05-17T12:51:00.003+08:002013-12-28T11:33:44.017+08:00Why is VC money relatively scarce in Asia?<div dir="ltr" style="text-align: left;" trbidi="on">
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"What are you doing here in ....., you should be in Silicon Valley". Do these words sound familiar to you?<br />
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In Asia, it is not very uncommon for Founders with great ideas to either run their companies in boot strap mode or relocate to Silicon Valley. Even great talent is expected to take huge pay cuts when they plan to join a startup. We dont need a scientist to figure out the primary cause of this issue. This is primarily because of the scarcity of risk capital in Asia. Good ideas have to slog for cash. One of the key factor that gives wings to the dreams of most Silicon Valley startups is the free flow of capital that lets them dream big...really big. Silicon Valley is blessed with excess capital. And, that is probably why failure is embraced. How do they get that kind of money? What is the source? Who are these Limited Partners (LP)?<br />
<br />
As per Wikipedia, the sources of funds are Public pension funds, Corporate pension funds, Insurance companies, High Networth Individuals (HNI) / family offices, Endowments, Foundations, Fund-of-funds and Sovereign wealth funds. In addition, there are many cash rich corporates that have their strategic investment arms hunting for opportunities.<br />
<br />
Compare that with the sources of funds in Asia:<br />
<br />
1. Do you think any government in Asia would allow pension funds to become LPs in Venture Capital funds?<br />
<br />
Certainly not. At the most, governments would allow use of pension funds to be invested in real estate and approved listed equities. CPF Board of Singapore allows a portion of provident funds into property, gold, selected equities and top 25 percentile managed funds. All the usual suspects of low risk investing. Nothing wrong with that. I also view that as prudent considering the fact that venture capital industry as a whole is a loss making industry. Of course, we hear everyday about the success stories of Facebook, Google, Twitter, etc. But we choose to ignore the stories of failures. I read a report recently ( <a href="http://www.kauffman.org/uploadedFiles/vc-enemy-is-us-report.pdf">http://www.kauffman.org/uploadedFiles/vc-enemy-is-us-report.pdf</a>) that mentioned that the average VC fund in US fails to return investor capital after fees.<br />
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2. Do we have foundations and endowments who can risk a portion of their money? <br />
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No. Most endowments and foundations outside America would choose to place their money into fixed deposits with highest rated banks or managed funds. In Singapore, the three local universities (SMU, NUS and NTU) together have about $2.7 billion in endowment funds plus another $1.7 billion in accumulated surpluses and operating funds, some of which is actively managed. Portfolio allocation to venture capital is probably close to zero. Compare that with Yale and other educational institutions in USA. Yale allocates 33% of its portfolio to private equity (venture capital and leveraged buyouts). Average actual allocation of an american educational institution to private equity is around 10.5%. Since 1976, Yale participated in a number of startups that helped define the technology industry including Compaq computer, Oracle, Genentech, Dell Computer, Amgen, Amazon.com, Yahoo, CISCO, Red Hat, Juniper, Google, Facebook, Linkedin, Twitter and Zynga. Its investment policy document says : Alternative assets, by their very nature, tend to be less efficiently priced than traditional marketable securities, providing an opportunity to exploit market inefficiencies through active management.<br />
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3. Do HNIs have any incentives to back risky tech startups?<br />
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Not at all. High net worth individuals are so busy doubling and tripling their money every year in emerging economies and traditional sectors that no one has any bandwidth left for technology. Recently met some HNIs who were busy buying hotels and warehouses in Myanmar and Srilanka. What kind of IRR can GPs offer to beat emerging market returns? What I mean to say is that the traditional sectors are growing at such a fast rate that HNIs have no incentive to look for other alternative investments. The society is highly entrepreneurial but unfortunately no incentive yet to try out tech entrepreneurship.<br />
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So what are we left with? How can tech entrepreneurship flourish in Asia? <br />
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In my view, corporates can play a big role here. In South East Asia, SingTel has shown leadership by launching their fund Innov8 and sponsoring an incubator called JFDI. If top 10-20 corporates in each country can launch similar funds and sponsor incubators, it would certainly create a demand. And may be that demand for investment opportunities would act as a catalyst for some of the wannabe entrepreneurs as well as angel investors.<br />
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In addition, if University endowment funds can also allocate 5-10% of their portfolios toward venture capital, it would be a great boost for the entire tech startup ecosystem. <br />
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Hope for the best,<br />
Piyush<br />
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Piyush Chaplothttp://www.blogger.com/profile/07198035147355350402noreply@blogger.com2tag:blogger.com,1999:blog-4778593951668890917.post-4362640256244915422012-05-05T22:01:00.000+08:002013-12-28T11:33:57.479+08:00Risk Management for Early Stage Venture Investing<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="font-family: Georgia, "Times New Roman", serif;">Andreessen Horowitz recently revealed that its investment of $250K in Instagram became $78 million. Thats a multiple of 312. Investing in early stage ventures is indeed very rewarding yet inherently risky. It thrives on multiple high risk bets out of which one or more would achieve high rewards. But that certainly does not mean putting blind bets on anything that comes your way. Those who believe in "Spray and Pray" kind of investing are often losers in the long term. Most VCs through their experience would have developed some sort of an internal braincloud (mental) checklist which gets ticked during the pitching sessions. Relying on mental checklists again is risky. Some or more of those check points might get sidelined if the idea falls into one of the soft spots of the more influential team members. So <strong>how can venture capital funds systematically mitigate undue risks?</strong></span><br />
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<span style="color: black; font-family: Georgia, "Times New Roman", serif;">Here is a list of <strong>risks</strong> inherent in Venture investing along with practical risk <strong>mitigation</strong> strategies and if needed a <strong>Jugaad</strong>. <em>Jugaad colloquially means a creative idea, or a quick workaround to get through commercial, logistic or law issues.</em></span><br />
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<span style="color: black; font-family: Georgia, "Times New Roman", serif;">1. <strong>Risk of the Unknowns</strong> : Most people think a business is after all a business whether it is hi-tech or low-tech. If it makes money, why shouldnt one be part of it. Some argue that if one understands the need of such a product/service, one qualifies to invest. But most would forget that it takes a lot more for a venture to succeed than just a great idea. Devil is always in the detail and execution. If you come from an e-commerce background and are offered an opportunity to invest in an orthopedic surgical device, think twice. How would you figure out what is the right amount of field trials you need to carry out before pitching it to potential acquirers? What makes more sense - licensing the technology to an existing player or go solo? <br /><strong>Mitigation</strong>: Invest ONLY in areas where Fund Managers have some domain knowledge.<br /><strong>Jugaad</strong>: If you are excited to support an idea where the investment team does not have relevant expertise, the fund management should think about appointing an advisor who knows that domain and is willing to work closely with one of the investment team members. </span><br />
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<span style="color: black; font-family: Georgia, "Times New Roman", serif;">2. <strong>Risk of loss of visibility</strong>: This is something I have learnt from my own and my partner's experience. I am a firm believer in technology and remote working when it comes to Shared Service Environments in large multinational companies where job descriptions are clearly laid out and roles are well defined. However, it just doesn't work in startup environment with founding team sitting in a different time zone. Having a development centre alone in a different time zone can create headaches and delays.<br /><strong>Mitigation</strong>: Invest LOCAL.<br /><strong>Jugaad</strong>: Appoint local advisors as representatives and enhance corporate governance measures by inviting -local independent directors to the board.</span><br />
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<span style="color: black; font-family: Georgia, "Times New Roman", serif;">3. <strong>Risk of Founder's fatigue</strong> : Starting up is hard enough. Doing it alone makes it even harder. What would you do if the key founder throws in the towel? It is indeed very difficult for a startup to find a CEO material to pick up and run.<br /><strong>Mitigation</strong>: Invest in TEAMs not Individuals. Also, test individuals in the team by offering them less salaries than their expectations. This would be a small test for them to prove that salary is not their motivation and they understand the big common goal. <br /><strong>Jugaad</strong>: If the founder has prior track record, that can be viewed favorably. </span><br />
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<span style="color: black; font-family: Georgia, "Times New Roman", serif;">4. <strong>Risk of running out of cash</strong>: Most startups before getting proper funding are in boot strapping mode. Spending is conservative and revenue prediction is optimistic. Who hasn't seen those hockey sticks and the great magic of excel? But as soon as they get investor funding, startups tend to shift modes. They think more like a real company with real overheads.There is nothing wrong with that except the fact that monthly burns suddenly shoot up to such an extent that there is not enough time left to pivot. If the idea spreads virally, it works. Otherwise, founders are happy to treat this as a learning opportunity on the scholarship provided by VCs.<br /><strong>Mitigation</strong>: Assess how much cash is required as per the most reasonable forecast. Multiply outflows by 1.5 and inflows by 0.5. Scott Anthony says: "It always takes longer and it always costs more." Fund the company with at least 20% more than the number you arrive at. An early stage company needs at least 18 months runway.<br /><strong>Jugaad</strong>: Syndicate with someone who can do follow on investments. You are going to need that money whether the company does well or not.</span><br />
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<span style="color: black; font-family: Georgia, "Times New Roman", serif;">5. <strong>Risk of post marital blues</strong> : It is very common to have disagreements whether it is among co-founders or between founders and investors. Being humans conflicts are inevitable. Most of the time people manage to settle these issues by a little give and take. But there are instances where there are gridlocks and relationships become so sour that the parties can't even stand each other. <br /><strong>Mitigation</strong>: Investment lead should be identified and allocated to the investment opportunity even before the first pitch. This person, through the course of due diligence, must pose some difficult questions in front of the team and observe the team's reaction. If the team shows any signs of arrogance or denial, this must be looked into greater detail.<br /><strong>Jugaad</strong>: None. Stay away if you see such early signs. </span><br />
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<span style="font-family: Georgia, "Times New Roman", serif;">I sincerely believe that there really is a science to nurturing successful startups, and that it has to do with methodically knocking down risks to get to the rewards.</span><br />
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<span style="font-family: Georgia, "Times New Roman", serif;">Happy Investing,<br />Piyush</span></div>
Piyush Chaplothttp://www.blogger.com/profile/07198035147355350402noreply@blogger.com10