NextWala

The Silent Killers of Startup Growth

[Published in abbreviated form on Mint on May 30, 2013. Also on Lightspeed India blog here.]

[Credit: Laurynas Mereckas]

Building a startup into a successful high-impact company is not easy – it is hard no matter where in the world the founding team may be located or which geography is targeted.

It is even harder in India, despite the macro outlook almost always looking rosy – 1+ billion people, strong economic growth, emerging market/BRIC, technical expertise, many underserved needs etc.

Many of India's successful startups have navigated a maze of challenges, creating leading brands and sustaining for long periods of time.  Correspondingly, it is much harder in India, relative to the US/Europe, for competition to unseat leading brands.  Erstwhile startups that have created a successful brand include Cafe Coffee Day, Dr Lal's Pathlabs, Flipkart, Indian Energy Exchange (B2B), Indigo Airlines, Infosys (B2B), InMobi (B2B), Justdial, Makemytrip, Naukri (B2B), one97 and Snapdeal.  

Here are some of these environmental challenges that I see many startups facing here. These are almost never explicitly discussed. Perhaps this is because it’s like the air – it is just self-evident and it is hard to solve for these.

Market friction

Many of the successful companies we talk about today in India took 10+ years to get to escape velocity and impact.  Why? India-focused startups have to change buyer behavior and/or create infrastructure  (eg Flipkart's several thousand people in logistics, Meru Cabs' owned & operated taxi fleet, One97's PayTM mobile payments infrastructure), as opposed to purely focusing on better/faster/cheaper solutions.  As a result, I generally see linear organic growth in companies targeting the Indian market.  There are some companies that have overcome this by creating low-friction offline models e.g. Dr. Lal Pathlabs with low-capex collection centers, and micro-finance businesses with repetitive hassle-free loans to the bottom of the pyramid.

Some other sources of friction include:

• the need for offline presence (even for mainly digital companies).
• difficulties in payment collection from consumers and businesses.
• gatekeepers that have optimized for self-preservation/cashflow.
• government-driven paperwork for compliance & set-up and regulatory uncertainty.

A series of small markets

Startups need large markets (Rs 2500cr+ or $500 million+) to get large and succeed.  This is hard to find in India, perhaps due to early consumer demand, unorganized markets, regional differences or foreign substitutes.  For example, digital advertising is a roughly $400 million annual business here, with mobile at 10% of that. To access and maintain growth, almost every new startup here needs to increase their focus on creating and evangelizing their category versus just focusing on their own startup's growth.

Some examples of overcoming this challenge include:

• spending large amounts of capital to create a category (eg ecommerce, OTA, wireless telecom).
• expanding into adjacent markets (eg Info Edge, which expanded from jobs into matrimonials, real-estate, education etc.).
• building or piloting in India and transplanting to the US (eg Zoho)
• aggregating several emerging markets outside India, perhaps before proceeding to Western Europe and the US (eg InMobi, iFlex, Subex).
• attacking a large spend base (eg Micromax for hardware, Cafe Coffee Day for coffee/tea/snacks, BillDesk for bill payment).

While many startups choose to access existing categories abroad (eg smartphone apps), many Indian startups have successfully created India-specific categories, including inbound marketing (Justdial, Zipdial), B2B marketplace (Indiamart, Indian Energy Exchange), assisted services (OneAssist, Onward Mobility, Suvidhaa), MVAS (OnMobile, IMIMobile), entertainment services (Dhingana) and transport aggregation (Redbus, Ola Cabs).

Lack of trust

Lack of trust is endemic in India, whether you are driving through the streets (and perhaps Delhi is an extreme example of lack of trust!) or negotiating with corporate partners. Examples include:

• (some) people misrepresent themselves materially without any consequences (eg overselling).
• (some) founders focus on control at the expense of value creation.
• potential buyers have a hard time parting with payment details or paying for off-the-shelf software.
• (some) people negotiate all the corner cases in extreme detail, to the point where the law of diminishing returns kicks in pretty strongly.
• trust gap between regulators, law enforcement and business.
• trust gap between promoters (aka founders) and investors and potential misalignment on timelines and strategy.
• (some) government and companies focus on protecting themselves from the 1% of customers who are gaming the system at the expense of the 99% remaining customers.

Relationships, not contracts, govern deals.  Many brands in India are created from execution reliability at scale rather than product differentiation.  Brands  in India are disproportionately more valuable as they represent a trusted provider of products or services - think about the enduring value of the Tata brand in multiple unrelated categories.  As one consequence, I believe more startups should think about brand-building here in India relative to if they were in the US.

Hard to find strategic talent

Almost every entrepreneur and investor I speak with has this issue.  This is not easily solvable - the only potential solution is to focus on A+ people right from the founding team onwards and never compromise on that front, even if it means slower roll-outs.  Zoho and InMobi are often cited for building great teams.

Strategic talent is hard to find, including executives, product managers, product marketeers and design experts.  We find ourselves scouring large established companies in India for executives and many times find these executives short on ability to take career risk and lower startup-level compensation in exchange for equity.  We look abroad sometimes to import talent.   One other friction point tends to be lack of middle management willing (or empowered) to take their own initiative and a cultural bias for say:do ratio > 1 (interesting quote by an anonymous founder) which generally means that execution requires a lot of hand-holding.

The smaller pool of founder/co-founder and risk-taking startup employees results in lots of churn and inordinately long hiring cycles, although this is changing fast at a cultural level in India.  It is also quite stunning how many times people who have signed employment contracts do not show up on their first day of work.

Not enough experienced mentors

India has an early (but fast-growing) eco-system for new venture creation. I see successful founders giving back to the founder community in a big way through investments, mentorship and driving industry hygiene.

However, there aren’t enough successful founders yet to cater to the much larger group of new founders who need help.  Without the perspective provided by aligned mentors, many founders are finding it tough to pivot or accelerate.

I am optimistic on this front, as many experienced and competent mentors have stepped forward over the last two years.  In my opinion, this is one of the reasons driving the creation of many of the incubators and accelerators in India which are centered around these hard-to-find mentors.

Constricted access to capital

This has been an issue in India for a long time and is probably why there is a higher focus here on companies to get to cash-flow breakeven fast or to trade-off growth for cash-flow.  It is not surprising that the early successes in Indian ventures have mostly come from services-oriented business (e.g. outsourcing, BPO) or offline consumer businesses that grew organically for a while.

Many would point to investors being over-cautious and risk-averse.  I think that the environmental factors mentioned above are the causal factor for investor cautiousness and not vice versa.  I would argue that the $1.1B in 2011 and $762M in 2012 (source:  Venture Intelligence) that went into venture in India was perhaps more than the market could absorb efficiently.  Capital is abundant in the growth stage, once product-market fit and/or profitability has been achieved, and hard to come by in the development stage (ie pre-revenue and/or pre-traction stage).

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Indian startups have developed a unique set of growth strategies to overcome the challenges mentioned above.  I will write about these different growth strategies (and perhaps deep-dive into some of the challenges) in subsequent posts.  I am hopeful and excited about companies in India that are overcoming these challenges.

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Thanks to the brain trust, who provided feedback and contributed ideas, including Bhawna Agarwal, Kunal Bahl, Raj Chinai, Ashwin Damera, Pranay Gupta, Ravi Gururaj, Ravindra Krishnappa, Sasha Mirchandani, Kavin Mittal, Suchi Mukherjee, Pallav Nadhani, Hitesh Oberoi,  Janhavi Parikh, Avinash Raghava, Amit Ranjan, Rajesh Sawhney, Vijay Shekhar Sharma, Amit Somani and my colleagues here at Lightspeed Ventures Maninder Gulati, Apoorva Pandhi, Anshoo Sharma and Bejul Somaia.

Please note that three companies mentioned in this article - Dhingana, OneAssist and Indian Energy Exchange - are Lightspeed portfolio companies.

Get an Independent Board Member

(Source: Tiarescott)

[Published on Pluggd.in]

Your board should be an asset to your company, providing guidance and advice at critical strategic junctures, as well as functionally helping with executive recruitement, M&A and other liquidity options, and key strategic outreach into regulators, distribution partners, suppliers and customers.

In my opinion, the smaller the board, the better. When you start out with your company, perhaps there are one or two founders and an independent on the board, for a total of three.  I have seen most boards at about five and some at seven to nine members. Six or above, in my opinion is too big and unwieldy to make fast and correct decisions.

In all the hubbub of starting and growing a company, it's easy to overlook the creation of  a strong and value-added board. Most times, the board consists of management (initially founders) and investors and remains that way for quite a while.  But it can be even better.

I've seen independent board members help out a fair amount.  So whether it is an empty seat set aside for an independent or no seat at all, I would recommend getting somebody onto the board soon. And constituting an 'advisory board' doesn't achieve this purpose.

Some of the roles I've seen independent board members play are:

• helping resolve complex and difficult situations or stand-offs between the CEO and investors.
• providing a balanced perspective when management and investors may have drifted into extreme positions
• working closely with the CEO outside of board meetings to provide specific deliverables back to the board (eg compensation proposals)
• provide a sense of real perspective from a long and successful career in their industry
• serving as a mentor and guide for the CEO to enable the CEO to learn and grow in his or her role as a leader and manager

So, who should your independent board member be?

• Should have strong rapport with the CEO and not be just a 'yes man.'  
• Should ideally have a point of view/relationships/experience in an area that is currently under-represented in the senior team
• Should have a financial interest in the success of the company. Ideally would have invested their own capital into the company
• Has time to spend for board meetings and outside of board meetings with the CEO
• Is genuinely interested in seeing the CEO and by extension the company succeed

Some good posts & examples:

• From Brian Halligan of Hubspot: The Benefits of the Perfect Independent Board Member
• From Elad Gil: How to Choose a Board Member
• From Matt Blumberg of Return Path: Why I Love my Board

Have seen you seen independent board members play other constructive roles? Please let me know in the comments section.

4 Crucial Slides for Your Investor Presentation

   (Source: Dilbert)

[Also published on Yourstory.in]

Earlier this week, I was invited to mentor the GSF Accelerator's startups on Pitching & Investors Decks.  I thought I'd summarize what I said there.

I certainly don't claim any special knowledge on what makes for a good first investor presentation.  There have been many books and blogs written about this.  However, I've seen hundreds of investors pitches over the past several years of coaching CEOs on IPO roadshows, raising capital as a founder and listening to pitches as an investor.  Heck, I've even been involved with investing in the leading presentation sharing company - Slideshare - which has helped accelerate a trend toward storytelling in presentations.

The first meeting is not about getting investors to agree to invest (although perhaps it is when you are looking at angel/micro-VC funding). The key is to start to develop the relationship and get them excited enough and intrigued enough to want to dive in deeper in a subsequent meeting.

You can greatly improve the odds of having a productive first meeting by telling a compelling story in a concise and hard-hitting manner.  Make it personal. Hit the main high points first to generate and assess interest. Then provide backup to your claims to cement the story.  

Here are the 4 key slides that you need to nail.

Some guidelines on creating a good investor deck from Dev Khare

 

After these four slides, stop and assess your audience by asking them what they think, their key concerns etc.  You should then be adept enough to address these concerns as you continue with the familiar series of slides on traction, product overview/roadmap/differentation, market sizing, business model, go-to-market, financial projections and funding requirement & milestones.  Finish by showing the Investment Highlights slide again and summarizing the key points.  Leave this slide up while you go through any final Q&A with the investors.

Some other guidelines and pet peeves:

• The point of the slide should be the title of the slide e.g. don't say "Team" as the title of the slide. Instead, say "Extensive Team Experience in Adtech" if you are doing an Adtech startup.
• The meeting is not about reading out the presentation, it's about your conversation and engagement with the investors, with the presentation as support material.
• No more than 2 minutes per slide. I've seen 30 minutes spent just on the first slide where the whole pitch is given with that one slide.
• You should be able to run through the presentation by yourself in less than 30 minutes.
• Place yourself between the investors and the projected or laptop-based deck. Otherwise you'll have the tennis match effect of spectators swiveling back and forth between the presentation deck and you.
• Don't leave the meeting without asking investors: "What do you think?", "What are your main concerns?", "What did you like specifically?"
• Know what your investors have invested in or said about your space before you meet them. The Web is your friend.
• Please don't take the slide deck I've embedded above as an example of the colors, fonts or layout that you should use. 

Learning from Slideshare's Founders

(Source: Marttj)

[Published on VCCircle]

I have worked with the Slideshare team, as a user, investor and board member at different times, from 2008 till late last year.  After the Slideshare + LinkedIn announcement last week, I have been reflecting on how much has changed and how much (or little, depending on your perspective) I have learnt from this experience since starting out in the venture business several years ago, as well being a founder myself in the late 1990's.

Here's what I learnt from Rashmi, Jon and Amit about best practices of founders.  I appreciated their willingness to work with me and be patient. 

Passion & Focus

• Passion about your userbase is contagious. It impacts the employees and their retention, it impacts your core user base and their retention, it impacts customers and their retention.
• Focus, focus, focus on honing the product – UX, scalability, security, data, analytics and more – but keep trying new product angles quickly to iterate toward high engagement and clear value.
• Focus on crystallizing value to paying customers – make it easy for customers to understand value (packaging, positioning, messaging), connect value to price, and make it easy to pay as customers receive value. To do this, understand who your super-user segments are and why.

Growth and (or versus) Monetization

• Be frugal (if possible) but keep innovating, so you are around when lightning strikes in terms of user growth, revenue or outcomes.
• It’s tough to balance growth versus monetization versus profitability. There is definitely a trade-off. Get lots of input on this from people who have made these trade-offs successfully.
• Understand path from user acquisition to engagement to retention to monetization early on and track associated actionable metrics (a la Dave McClure’s AARRR). Especially for user-generated content, there’s no automatic connection between usage and revenue.

The Outside World

• Acquisitions and successful partnerships take time to develop.  They generally come from engaging over long periods of time. At the end of the day, it’s about people getting to know people.
• Keep tabs on competition, don’t obsess about them though – most companies die of self-inflicted wounds, not because of competition.
• Investors are people. Sometimes your investors and board members know what they are talking about, sometimes they don't, hopefully more of the former.

Becoming a Better Board Member

Through hits (and misses), I also learnt some lessons on how to become a better board member over time:

• Be respectful w.r.t. founders – they known their business better than you do.
• Be patient – there’s no such thing as an overnight success – don’t get too impatient but still hold management’s feet to the fire
• Be thoughtful and have a high bar when suggesting workstreams for the company – their time is precious, don’t waste it.
• Focus on strategic impact – as an investor, focusing on daily management decisions (i.e. micro-managing) will not have a positive impact on the company (and may have a negative impact). Focus on strategic changes, such as building the best management team, making the right bets on monetization, making the right introductions to partners/acquirers, holding people accountable for outcomes.
• Conduct board meetings for the right reasons. Board meetings should not primarily be about reporting only but also about trying to solve problems together and laying the groundwork for scale.  The real action happens outside of board meetings though.
• Align with founders on outcomes. Understand your goals and risk-profile as an investor early on relative to goals and risk-profile of the founders & management team.  Align.
• Angels and VCs are not at loggerheads. As long as companies continue to build value in a large enough market, angel investors and venture investors are aligned.  All the media hype about the two communities being at loggerheads with each other is overdone.

Congratulations to Rashmi, Jon & Amit at Slideshare for LinkedIn sale

I am incredibly happy to see Slideshare's founders - Rashmi, Jon and Amit - find such great validation for their vision of bringing together the world's professionals through their content. Congratulations also to Ross and the rest of the team in the US and India.

LinkedIn's acquisition of Slideshare is a great outcome and I'm sure both organizations will grow symbiotically together.  As an avid user of both, I look forward to many more technical and product achievements over the coming years.  

I remember meeting Amit in Delhi on one of my visits from the Bay Area in August 2006 as he was blogging at Webyantra.net about the web in India.  We kept in touch - he told me to keep a lookout for something they were about to launch.  And then Yee Lee reminded me of Slideshare when they were starting on their fundraise. We got to meet Rashmi and Jon at that time and appreciated not only the care that they had for the Slideshare community but also the power of the content to draw you in for long periods of time. Subsequently, David Siminoff and I led the Slideshare Series A financing at Venrock.  After the fundraise, we got to know many other people in and around Slideshare, including the inimitable Dave McClure, Ross Mayfield and many others at Slideshare in San Francisco and Delhi.  The rest, as they say, is history.

One other note: I am excited that this upcoming transaction will do a lot to boost the entrepreneurial eco-system in India. A good portion of the Slideshare team is based in Delhi - they have proven that teams in India can innovate on product at a world-class level.  In addition, given the relative newness of the venture eco-system here in India, it is great to have so many people find value in their stock options - hopefully this continues to prove to aspiring entrepreneurs and employees at startups in India that their equity can pay-off handsomely.

For old time's sake, here's the presentation that Slideshare put out publicly in May 2008 after the Series A funding. Brings back some good memories...

Meet Dave Meet SlideShare

View more presentations from Rashmi Sinha