You Be the VC...?

Micro VCs galore. They come in all shapes and sizes. Who knows, someday they might even upstage the established juggernauts....

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Y Combinator, TechStars, Plug and Play and now PARC are just some of the organizations that pair investing with an incubator environment for small startups. New York-based Bang Ventures, a self-styled investment firm, not a VC, is launching a online social network called “You Be The VC,” where startups submit their business plans then compete for funding. The public can vote on their favorite companies, then Bang will fund the top three companies with $15,000 and a host of other incubator services. It also includes social networking features so contestants can also meet each other and network.

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T-20 cricket has been an instant hit... more so since Team India grabbed the first world cup. Will UBVC do it to the role models...? Crossing fingers.

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Do VCs need trust your product ?

Most startup founders approach me after their direct pitch to VCs go without a trace. Factual reasons could be many – a lousy pitch, bad timing, no homework done on target customer segment, market size, competition or made the pitch to the wrong one. But almost everyone have the same explanation – the VCs just want web apps ; they don’t understand our product. As if making amends, many often confound me with this first question – Do you trust our product ?

My standard (yet honest) answer is “I would have to”. Some of them are baffled at that. It’s time that I set the record straight thro this post. By using it as a template, I can avoid wasting my vocal energies with the next carper that comes along.

I would never say you abandon the product of your labor in one mighty fling because half of the world found it crappy. If deep inside, you have a feeling that it’s a winner, it probably is. Do not prevaricate. Rather than expecting others to *trust* your product, you must go the extra mile to disprove them by demonstrating on your own how well the market welcomes it.

Nobody, I repeat nobody will *understand* or even try to understand your product as much as you do and your customer will ; just because you are the only pair having an interest in its functionalities and outcome. A VC’s interest is focused on your team’s ability to market it, its scaling / revenue potential and based on that, the ultimate enterprise value. It's impossible for any VC to have mastery over every technology or product. If that's a criteria, the VC model would've never survived. For instance, it's the same John Doerr of KPCB who built the unrivalled record of backing industry defining startups in fields as diverse as Computing ( Sun Microsystems, Compaq), Software (Lotus, Intuit), Biotechnology (Genentech, Millenium), and the Internet (Netscape, Amazon).

A VC often bets on the team, not on the product. He does not take the risk entirely, he just partakes in it. If the team is good, it will try, err and entrench the product in its logical destination – the customer’s mind. VCs know it only too well and smart consultants know the VCs ways much better because they track the deal world closely.

When founders pop the question prematurely “do you trust my product”, they have no choice but to reply in the affirmative simply because it’s not the VC/consultant’s business to get pleasure out of knocking an upstart cold – they just meant `if your product is indeed great as you say, let’s hear it from the market”. They stopped just short of elaboration of the obvious.

The founders get judgmental too soon, blame the VC mentality, self-inflict the wounds in an impulsive tirade and begin to sink in a sea of wallow even as the game has just begun. My advise - don't.

Also read my related post here.

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Primer for India VC practice

When you scroll down this blog, you’ll find several posts which suggests what customizations Indian VCs could bring about in their setups / mindsets, on the basis of the feedback I got from several startup entrepreneurs.

Wake up and smell your coffee. This is India, not your father's economy.

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I was in fact thinking of putting up a summary post as a one point referencer for VCs looking at India to do business when I chanced upon this superb K@W interview with Netcore CEO Rajesh Jain.

[ Excerpts ]

[Rajesh Jain] “I believe we need a new approach to venture capital in India. There is a very limited legacy, so it's not going to evolve the way the U.S. did or even perhaps the way China did. In India there are lots of gaps across multiple value chains. Sometimes a service fails to take off because some parts along the value chain are not appropriately digitized. What ought to happen is a large amount of investment across building out an ecosystem of companies. Instead of waiting for an entrepreneur to come up with a business plan, venture capitalists need to be much more proactive. They should say, "The capital is available, now let's find a CEO for this business and back that person with funding. Let's start multiple companies based on what we have seen in other countries, and what we think the opportunities are in India."

This is a very different, inside-out approach, where you end up flipping the model around. That requires much more work. It will not work if the core venture capital team lives abroad and just comes to India once in a while. We need people on the ground who understand the realities of India today, who understand how the technology is evolving, and who can make bets on what the future is going to be.

Sometimes the VCs tend to behave more like private equity firms by investing in companies that don't need the capital, or which are pre-IPO companies. For example, the investment by Kleiner Perkins into Naukri.com [a job-search web site] was a pre-IPO investment. There was really nothing "venture" about it. Westbridge's investment in Times Internet was of the same type. Those things need to change. You need to really get in there, work with people and focus on building out the ecosystem. Most of these things don't exist, and that's the great green-field opportunity across this space. How can education be done differently with digital technologies? How can health care be done differently? We need to look at different industry verticals and think about how to transform them given the presence of broadband, of computers, of mobile [devices], of software sitting on the network. We need to rethink how business gets done. I think that is the real opportunity.

Knowledge@Wharton: What are the principal risks?

Jain: This is a "build-it-and-they-will-come" approach. If you build it and they don't come, that's a problem. If you are too early, you lose. If you are too late, you lose. The risk is that you may be too early or too late. But that's what all the great successes in the entrepreneurial world have faced. You need luck on your side also to make it work. Basically as an entrepreneur, you have to live in the future. You have to imagine what is going to happen. You have to create the future and make others come to it.

I recommend it as a must read for all VCs who are seriously looking at India to do business.

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Getting into Forbes Midas List of VCs

Remember Vinod Khosla, co-founder of Sun Microsystems, ( now a Forbes Midas VC focusing on clean energy ventures thro Khosla Ventures ) amongst others ? The Silicon Valley venture capitalist who hit it big during the telecom boom in the 1990s, turned two years ago to embrace green technoloy. Everyone thought his outlandish bets on untested technologies such as celulosic ethanol - which most experts caution will be only be commercially viable in two years, at the earliest — would take some time to show results.

Vinod paid no heed to that advice and went straight ahead with his investments in the space and got rewarded handsomely. He knew it was an opportunity when he saw one in in Cambridge, Mass.-based Celunol last year as part of a $60 million venture capital round. Biotech company Diversa announced Monday it will acquire Celunol in a deal worth roughly $182.45 million. Cellulosic ethanol is a process that uses non-food plants and other waste to make ethanol, and it is much more efficient, and thus better for the environment, than regular corn-based ethanol.

Normal refrain of all VCs is that they are interested in funding Ventures where they have a clear domain expertise. Point taken. I had always argued that what separates a great VC from a good one is the level of their prescience in seizing an early opportunity and their deftness in moving along the vetting and mentoring processes including roadmap for execution to deliver a multi-bagger. With the first few hits and misses, the great one gets the picture right. Then it’s only a question of taking an early intelligent bet than having a direct domain expertise. They assess the strength of the idea, the management team and help the founders reinforce that team with outside talent drawn from wherever. That’s how they get into Midas list.

Vinod has done just that. He’s not been much on clean energy to begin with but has done his home work well before he took the plunge. Clearly the stuff VC legends are made of.

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Do you think other VCs can take a leaf out of this and make a difference ?