Let's Celeberate Failure : An open letter to Indian Start ups, Entrepreneurs, VC's, and Startup employees

(by Bhavin Turakhia)

Over the last few weeks, there has been consistent bad press around a few startups in India concerning lay-offs, (ref. TinyOwl, Zomato,Housing.com, Vizury), bad decisions, hostage situations (ref. TinyOwl) and more. The general air has been negative and I had to pen down my thoughts, as someone who belongs to this community. I am disheartened by the negativity and I want to provide some perspective.

I was motivated to write this post after witnessing a general level of negativity over the last few weeks with comments like “This is what you get when you join a startup” and “The whole country is crashing.” etc. doing the rounds. Here are my opinions, perspectives, advice and candid two cents in no particular order for entrepreneurs, employees and VCs:

There is no such thing as Failure

One of the most important reasons why the valley has been so successful in creating some of the greatest tech companies in the world is that culturally the valley recognizes failure as a stepping stone to success. You will find literally hundreds of entrepreneurs who have had failure after failure and continue to pursue the next idea and continue to receive funding interest.

Valley VCs know that someone who has failed on various occasions actually carries with them valuable lessons reducing the risk of failing at a subsequent venture.

I love how the Valley infact has re-defined failure. They don’t even call it that. They call it a “PIVOT”. Now isn’t that a mighty word? No one ever fails. You simply pivot  The perfect case in point is the Pinterest story which was founded during the recession, survived early failures and developed as a company for the long-run.

Recommended reading – ‘Becoming Steve Jobs’ -. People see Steve Jobs through the lens of the iPhone, iPad, iPod and the Apple of today. It is easy to forget that he was ousted from Apple and floundered for almost 10 years with Pixar and Next, losing most of his money before he made a comeback.

Let’s Get Some Perspective On The Failure Rate

Over 95% of startups are expected to fail. In fact I think we are doing considerably better in India at least as far as valuations go for the time being.

Here are some stats about Y-Combinator – one of the most successful startup accelerators. Their acceptance rate is about 3 to 5%. Within the ones that do get accepted the odds of success are 10%.

General industry thumb rules point to the fact that 1 or 2 in 10 startups eventually succeed. Most fail or remain mediocre.

And Here’s Some Perspective On Past Market Crashes

To the folks who are comparing current times to the 2000 dot com crash and the 2008 financial meltdown, let me point out a few facts.

The 2000-2002 dot com collapse resulted in a loss of $5 Tn in market value, and a loss of 1.735 Mn jobs in 2001, and an additional 508,000 during 2002.

In 2008, the IMF estimated that the financial crisis would produce $3.4 Tn in losses by 2010. 2+ Mn jobs were lost in a mere four months with several million jobs being lost in the years to follow.

Yes folks. Those are the numbers. That’s the kind of upheaval the valley and world went through before producing today’s global giants. Any monies lost in India or the downsizing taking place here pales in comparison. It is too early to get pessimistic. Don’t get me wrong. I don’t say this out of lack of empathy. However, in any new market a ton of money and time has to be spent in gaining experience before one can see a growth phase. India is still a fledgling story.

And Some Perspective On Timing And Challenges

India is JUST starting out, folks. Our smartphone penetration and internet penetration are in low double digits (<20%… I believe actuals are even lesser than 15%).

In a market this nascent – a lot of money will have to be spent in educating the masses and getting basic technology adoption – before we truly see monumental successes.

Remember that China had to get to over 40% internet and smartphone penetration before they began seeing explosive growth.

India is a VERY different market in comparison with the United States or China. People seem to draw comparisons when replicating business models. However, there are several nuances and one very important difference. India while politically one country is more like 29 different countries for a startup – each state has a different language, culture, practices and needs.

Never Give Up

Fellow Entrepreneurs – Keep at it. I often get asked about things that were instrumental in our success. And if there was one thing I can point to in my journey is that I NEVER GAVE UP. Two posts I had written a long time ago are relevant here –

Pursue Mastery and not Success

Winners never quit

In the words of Michael Jordan – “I can accept failure, everyone fails at something. But I can’t accept not trying” – Michael Jordan

Spend Wisely

Capital has been boundless over the last few years. However, my advice is – spend EACH dollar like you would spend your own. At Directi, we have had an interesting journey. We have never taken on any external debt or investment. As a result, every time we spend money we are spending OUR money. While arguably that has its own constraints, on the other hand we have become VERY good at figuring out how to spend money wisely. We have an unbeatable track record of getting to profitability in the shortest time possible across all our startups. So the next time you get $50 million in funding and want to spend $15 Mn on an IPL campaign – just ask yourself what would you do if that was your hard earned $50 Mn.

Don’t Pay Your Users To Use Your Product

I have been witnessing what I believe is the most unhealthy trend in the industry over the last few years – Paying people to use your product. I just don’t get it. I can maybe understand providing incentives for acquisition. But incentives for engagement never made sense to me. Here is my perspective on this trend –

If you have to PAY users to keep using your product you have a serious problem. It means that your product is by itself not good enough or intuitive enough to keep users engaged. You cannot fix that by giving discounts and cashbacks. If your users are not engaged, take all that money and spend it on identifying why users are not engaged and fixing your product.

Giving money to users to use your product creates an unhealthy incentive linkage. Users will now expect it by default to continue using your product. Read Daniel Pink’s book – Drive. While he talks about this from the perspective of employees, the same principles apply to users. Do you want your users to be motivated by money or by the value your product provides?

Paying people to use your product is the quickest way to burn all your cash. The most successful companies in our industry NEVER had to pay people to use their products. Imagine if Google started off by saying I will pay each user to use my search engine. Or Facebook paying for each post. Or Twitter, LinkedIn, Microsoft. Even the handful that did dole out cash incentives (Paypal), did it ONLY for user acquisition and did not continue doling money out for continual usage.

At Directi we have developed over 50 different small and big products across our 11 businesses and we have NEVER, I repeat, NEVER paid users to use our product.

The biggest clue for me is what people talk about when they use your product. Without naming names, most users I have met – whether using an ecommerce app, taxi hailing app OR food ordering app – are talking about cashbacks and discounts and not convenience OR experience. Now that’s a huge warning bulb for me. When everyone in the country is saying – use this product buddy and you will get Rs 700 cash back, instead of saying – use this product and it will give you an amazing experience.

My Priority Order Of Spending Money

I have always followed a strict order on where I like to spend most of the money for each of our businesses. I call it the three P’s of spending –

People – I will spend as much and more money and MOST of my time on hiring, retaining and training the best of the talent in the country.

Product – The simple formula for a successful business is to create a product that provides more value to a user than the amount of money you expect to earn from that user. Spend money on product.

PR – The first order of marketing is PR and not Advertising. And yet most entrepreneurs in the country spend millions of dollars on advertising campaigns while completely neglecting the importance of good PR. Recommended reading – The Fall of Advertising and the Rise of PR by Al Ries -. In fact while you are at it read all his other books too. They are all amazing!

Advertising – If perchance there is any money left over after spending as much as I can on all of the above (and I sincerely hope there isn’t) then I *may* spend it on advertising. Advertising is the biggest sinkhole for cash. Again read Al Ries’ book above for more context.

Some Pointers For Investors

While businesses I have founded at Directi, have never needed capital infusion, I have met several amazing VCs and investors across the industry in the last 18 years. Many I have tremendous respect for. Time and again I believe the following success principles matter when investing –

Leave adequate skin in the game for the founders in the initial stage (Series A / B) – If founders get diluted to low single or double digit percentages within the first 2-3 rounds, you are creating a misalignment of incentives.

Chase retention and engagement as opposed to a paid install base. I would rather have 10,000 users who are using my product because they love it and there is nothing out there that’s better, than have 1,000,000 users who I have to keep giving money and discounts and cashbacks to for them to continue using my product.

Mentorship is more important than money. After all many of these investments are being made on bright 21 year olds. I remember when I was 21 years old. Heck if I could talk to my 21 year old self right now I would have a ton of advice to offer. Don’t just leave these entrepreneurs on their own with oodles of money. Hold their hands and take them through the journey.

Some Pointers For Employees

There have been a large number of lay-offs announced over the last few months and I can empathize with the general feeling amongst various employees. Let me offer some advice here:

Do not get disillusioned by a few failures. As I stated above, India is just about starting out at this stage. Startups have their risks, but the rewards of working in the space far outweigh the risks.

In a fast moving startup environment, your learning and knowledge growth will typically be 4X of that in any conventional stable company. A startup provides most of its employees the opportunities to wear multiple hats and get diverse exposure.

Most startups will provide early batches of employees an opportunity to participate in wealth creation that is beyond what conventional jobs will offer.

Do you want to look back at your life and say – I took a safe choice and led a normal life? Or do you want to be able to say – Heck I was part of an exciting journey with its ups and downs, but I created something, I took a chance.

Take a page from culture in the valley, where entrepreneurs and employees alike – move from one startup to another without skipping a beat – without getting dejected or pessimistic.

None of the above comes from a lack of empathy. I actually partly blame our education system. I strongly believe our education system needs to better prepare us to deal with uncertainty. A true entrepreneurship culture can only flourish when people can not only handle uncertainty, but relish it. 

My intention is to arrest any general pessimism in the industry as a result of a few events. Let’s learn to celebrate failures folks. For without failures there can be no success.

Source: (http://inc42.com/buzz/lets-celebrate-failure/?goal=0_f709ffb264-98228775f9-105830197)

Seven Lessons from the Startup Failure

(By Pradeep Goyal)

I thought I would make millions through my startup, but failed miserably. I read awe-inspiring stories of Flipkart and Zomato, but nobody told me that 90% startups fail within two years of their launch. I failed in the first year. Sometimes I feel cheated, but it was my fault that I failed to look beneath the glitter.

I built an ERP product for schools. We attracted some customers but could not scale up the operations.

My startup failed. But I refused to be defeated. The failure of my startup made me introspect on the shortcomings and I wish to share a few tips with you. Hope these takeaways from my failure help you avoid similar pitfalls.

Know Your Customer Before Building Your Product

The point should be clear by now. We built our product based on assumptions and the features  of our competitors. We should have reached out to our prospective customers before building our product.

We should have convinced two or three schools of different standards to test our product. In exchange, we should have provided life-time free product and support for early adopter schools. We could have offered unlimited free SMS or something similar to save money.

Know Where to Spend Money

We spent most of the money on office infrastructure and employee salaries. We could have avoided 80% of expenses by working from home and hiring employees on survival salary + ESOPs.

We were avoiding expenses on the professional design of sales material, marketing tools, and paid consultancy. We should have spent money on the things that translate into more sales or leads.

Now it seems a no-brainer, yet most first-time entrepreneurs commit the same mistake. If the primary source of your customer acquisition is your website, then you should spend money on content marketing, sales deck, and sales pages. If you acquire your customers offline, then spend money on sales brochures and other printed materials.

Involvement in Tech

Non-technical co-founders are clueless about technical know-hows and tend to remain so. They should not behave like a foreign client who just assigns work and expects them to be taken care of by the technical team.

That did not work in my startup and it will not work in yours.

I advise you to start coding, even if you are non-technical. There might be some exceptions but a non-tech co-founder can take better decisions if he knew how things in the tech department get implemented.

If you do not have a tech co-founder and still building a software product, then there is no exception. Joel, co-founder of Buffer, tells you why non-tech co-founders should learn coding.

Involvement in Sales

I shied away from conducting sales because I thought my co-founder was better at communication and public speaking. We were unable to close sales despite his good communication and HR background. One main reason was that we were not talking about the pain points of the customer but just trying to sell our solution.

The sales process is not just about good public speaking but addressing the concerns of the customer.

When I moved to Chandigarh, I tried sales in the local schools. I visited about 50 schools in one month and closed three deals. I learned not only the sales process but also got acquainted with customers’ real issues. You can build a great product with a better understanding of customers’ pain areas.

Disclaimer: I am not suggesting that all co-founders should be doing all the things all the time. NO. They should be owners of their areas, but at the same time they should have first-hand experience of all levels of jobs in a startup.

Trust Your Intuition and Be Decisive

We were bad at taking firm decisions. We started postponing tough decisions like spending budget of sales, hiring or firing an employee, offering equity to the employees, chasing big schools or small schools, offering free solutions or charge premium, and lastly how to go separate ways.

Since the closure of my first venture, I started taking firm decisions based on the available information at that time. You can never have 100% data available for taking any decision. You should be smart enough to derive a conclusion with 60-70% information and fill the gap with your intuition.

Trust me, I always felt good  after taking a decision and sticking to it until I found solid evidence to change my decision. That is how things evolve. If you are confused with your decision, then you will not be able to execute with 100% confidence.

Don’t Stop Learning

Alarm bells ring in my ears when someone starts behaving like an expert and refuses to learn new things. You are doomed to fail if you stop learning.

There are so many sources of gaining more knowledge and insight learning – reading books/blogs, from juniors/seniors, from competitors/customers/vendors. I don’t hesitate to learn from my three-year-old kid.

The biggest source of my learning is by experimenting with my startup and life.

Money Is Just a By-Product

I learned it very late, but some of you might have realized by now. We entrepreneurs start a venture to solve a customer’s problem (or to explore our passion) and money is just fuel for our startup vehicle.

If you focus on money then you will become short sighted. You can make money in short-term but you will lose strength in the long term.

Focus on solving problems and keep your customers happy. The money will follow.

…And Be Generous

The most important lesson from my entrepreneurial journey – Be Generous, Be Polite, Be a Giver.

I always remember a beautiful line –

“Be nice to people on your way up because you’ll meet them on your way down.””

First give something to the world, then expect something in return. It will be even better if you just give without any expectation. Help people who cannot help you -that is the real gesture of generosity.

Source:(http://inc42.com/resources/seven-lessons-from-the-failure-of-my-startup/?goal=0_f709ffb264-98228775f9-105830197 )

Stayzilla aims  to be the Godzilla of Alternative Stay Sector

Airbnb, a US-based startup that touched $25 Bn of valuation in just seven years. Airbnb is no more just a name but a service, an alternative to a hotel, or lodge accommodation for travellers.

But if you were travelling in India, you would more often come across Stayzilla than Airbnb. That so because, after taking on the accommodation marketplace, the Bangalore-based startup is expanding  by venturing into alternative stay space.

But Stayzilla wasn’t Stayzilla when Yogendra Vasupal (Yogi), Rupal Yogendra and Sachit Singhi got together to launch their startup. Stayzilla started as  Inasra, an online travel agency for hotel booking, in 2005. However, five years later, the trio decided to pivot the business into a hotel aggregator and renamed it Stayzilla. Till then, it had only 1500 contracts. However, since 2010 it has scaled up to 40,000 properties in 4500 cities.

“Earlier there was hesitation among the hoteliers, about the model. They would give out only a few rooms of their property at a mere 2% commission to Stayzilla. However with time it moved up to 18% as the hoteliers saw traction and became more comfortable with the business,” said Yogendra Vasupal, founder-CEO of Stayzilla.

In Yogi’s words, “Stayzilla was founded with a laser-sharp vision to become India’s largest online marketplace for stays. Going beyond the realm of just hotels, we serve a well-balanced package comprising of all manner of stay options to our customers including lodges, homestays, guesthouses, etc.”

Understanding The Business

Stayzilla’s business is bucketed into three categories – Structured, comprising  of 2, 3 and 4-star hotels; Unstructured, comprising of 1-star or 0-Star hotels and lodges; and; Alternative Stay which includes homestays, hostels and bed & breakfasts.

Alternative Stay is the fastest growing among the three categories. The company had increased its focus on Alternative Stay earlier in June this year with limited rooms at its disposal. In just three months, since then, it has scaled to 33,000 rooms. With over 3.5% of the volume, today Alternative Stay accounts for over 18% of the business. Structured Stayhas 4200 properties, averaging at 35 rooms per property and accounts for 25% of the business. While Alternative Stay has picked up pace increasing its contribution to 18% of the business, Unstructured Stay category still brings in bulk of business. And over 25% of the business is from weekend travel.

Stayzilla boasts of a mobile application that will cater to both homeowners and tourists looking for differentiated and unique stay experiences. The mobile application allows homeowners to choose guests on various parameters such as common interests, educational and professional connections.

Stayzilla introduced Concierge service in 2012. It has a connect  platform within the app that connects the guests to the hosts. Like a typical concierge service provided by any hotel, the guests update the time of arrival and the time of departure. They can even use the platform to share their preferences, like beverage, television, internet facility and more.

Over a period of time, Alternative Stay is projected to rake in half of the total profit,while 20%-25% is expected from Structured Stay and remaining from Unstructured Stay. In three years, it is expected to grow 40 times from where it is today.

Market Size

According to ‘Make In India’ report on Tourism and Hospitality:

The sector contributed 6.8% of country’s GDP.

In 2014, foreign exchange earnings (FEEs) from tourism were $20.2 Bn as compared to $18.445 Bn in 2013, registering a growth of 9.7%.

India registered 7.7 Mn Foreign Tourist Arrivals (FTAs) in 2014, registering an annual growth of 10.2% over the previous year.

The number of domestic tourist visits in India during 2014 was 1281.95 Mn, as compared to 1145.28 Mn in 2013, recording a growth rate of 11.93%.

FTAs (Provisional) from January to July 2015 were 4.48 Mn, an increase of 4.8% over the same period of previous year.

India faces a huge gap in demand and supply. As per the data shared by Yogi, in India, there is only one room per 1000 domestic trip. China has 7 rooms per 1000 domestic trip and that number is 9 in US. Europe is doing best with 14 rooms per 1000 domestic trips.

Competitive Landscape

Apart from the US-based Airbnb that competes in the alternative stay space, Stayzilla’s major rivals are aggregators like Makemytrip, Yatra, Goibibo, Expedia and Cleartrip. Interestingly, Stayzilla is working towards extending business partnership with hotel room aggregatorsOyo Rooms and Zo Rooms to build on the hotel standardization that these startups offer.

That would leave Makemytrip as its largest rival. In the quarter that ended on September 30, 2015, 
Makemytrip’s revenue from standalone hotel & packages booking stood at $42.4 Mn. The 15-year old public listed startup, however, is going in just the opposite direction with aggregators. It recently blocked Oyo and Zo from listing their properties on its platform. Another player, Yatra, that also blocked Oyo and Zo, has also entered the budget accommodation space with TG Rooms and TG Stays, in partnership with TravelGuru. Stayzilla might have to face off with another new entrant – Alibaba-backed Paytm plans to foray into the accommodation space.

“We are not competing with them (Airbnb). What we aim to provide is much beyond an accommodation. Imagine a 60-year old woman in Delhi giving away space in the house for Jagjit Singh fans. A couple in Coonoor is opening up their farmhouse for Cheese-lovers. A woman is opening up her house for customers travelling with their pets. You won’t find this in Airbnb,” the Stayzilla founders point out. Also, if number numbers are to be believed, Airbnb entered India around 2013 but have acquired only 7500 rooms on their portal, while Stayzilla is adding 2500 hosts on a monthly basis.

There are a number of startups that have sprung up in this space. A few of them are Vista Rooms, a Mumbai-based online branded budget accommodation aggregator, Delhi-based Qik Stay a hotel branding and aggregator startup, Wudstay.com, Zenrooms and Fabhotels.

Roadmap Ahead And Funding

Earlier this year, Stayzilla had raised $20 Mn in Series B funding from Nexus and Matrix Partners. Prior to that, it had raised $0.5 Mn from Indian Angel Network (IAN) in 2012.

Stayzilla is eyeing five times growth year-over-year. Its monthly run rate for September was at $5Mn, while in October it touched $6Mn. It is operating at an annual GMV of $70Mn; however, considering the last 12 months, it should touch a run rate of $120Mn by the end of this fiscal.

In next three years, Stayzilla aims to list half million properties in alternative stays, adding around 7000 rooms on a monthly basis.  It is confident about ramping up the present base to 50,000, in the next three months.

Challenges

According to government data available, there were only 1376 hotels and only 76,567 hotel rooms in India in 2012, 50% of them in three-star hotels. A Cygnus report in 2011 stated that total supply (number of hotel rooms) in India is expected to reach more than 180,000 within 2016.

This number is pretty low when compared to the number of travellers in the country. Clearly, there is a huge gap in demand and supply. And that is because hotel businesses require  high capex and witness low utilisation unless it is in a high-growth city or a known tourist destination. According to Yogi, the capex of 100 rooms has risen up to a million dollar. Furthermore, it is typically real estate investment, with 80-100 rooms per property. In India, the budget hotels are small and fragmented, with just 20 rooms per property. In plain terms, this translates to a web of small hotels; and players like Stayzilla are faced with the challenge of bringing them on board in order to compete with the established big players.

India’s travel and tourism sector is rapidly growing; it is set to grow at a much faster pace of 7.5 per cent and than 2014. In this scenario, stay aggregators need to explore the alternative stay options to give the tourist more choices.  Stayzilla has identified the gap in the sector and got down to increasing its reach and depth while keeping its focus on affordability. The going seems good for Stayzilla as it is adding numbers to its Alternative stay sector. Stayzilla has to focus on curating the best budget options, standardizing the experience if it wants to survive the fight in the sector which is heating up by the day.

Source:(http://inc42.com/startups/stayzilla-startup/?goal=0_f709ffb264-98228775f9-105830197)

Anatomy of the coming Bubble Part 1 and 2

From Bay Area to Bangalore, if there is one word which is stirring the fancy of the masses in general and analysts in particular, “Startup Bubble” seems to be that word! It doesn’t matter if you are in the crowd or away from the crowd, bubble is bound to get into your radar, be it at a conference, Twitter feed, newspaper columns or random article forwards.

At one end of the spectrum, there are the believers, led by big bulge VCs riding their unicorns, chanting data and waving neatly presented big graphs showing mobile phones’ sales growth, internet data usage, volumes of WhatsApp messages, number of photos clicked and other mind-numbing metrics and speaking loudly as to why it is not 2001. However as it generally happens, the other side, consisting mainly of newspaper columnists, accountants, finance professors, out of work CEOs and some missed-the-boat-VCs/entrepreneurs, is not amused by all this mumbo jumbo and looking wryly at daily funding news and murmuring loudly to anyone who cares to listen, about these crazy valuations, lack of profitability and unsustainable business models. For them, the 2001 dot com bubble is very much here and that too in a 10 times bigger format. Not to be left behind by the VC crowd, they have their own set of anecdotes, stories and data graphs though from 2001 era.

This war between valuations and sustainable business is not new or started this year or last year but has always happened whenever there is a significant shift in asset prices. In fact the talk of startup bubble stared way back in 2011, when Uber, leader of the present Unicorns raised $12 Mn at a valuation of $60 Mn and Wall Street Journal published an article with title, “In Silicon Valley, Investors Are Jockeying Like It’s 1999”.

Four years later, with Uber valued at $50 Bn, the noises have only grown louder and bigger though Uber has not shown any slowdown in growth or in its ability to raise billions of dollars while growing by a whopping 800 times in less than 5 years.

Interestingly the division is deep and lines are clearly drawn as each group has its own set of believers, followers and relative data to back.The whole argument has slowly turned into a debate of the deaf where each party is consumed by their own arguments without understanding the counter point.

The main reason as to why the general public, commentators and all those business leaders are wrong in prediction of the Startup bubble burst is mainly due to their limited or rather skewed understanding of the way venture capital world operates and how the dynamics of the VC world has evolved in the last 2 – 3 years.

These jaw dropping valuations splashed everyday around business dailies are fuelled by mainly two set of investors in the venture space – the early stage investors investing just after Seed round or late stage investors investing at 500 million plus valuation rounds. Interestingly both parties are feeding to each other in a self fulfilling prophecy.

 In recent times, the availability of liquidity and declining gap in innovation has created a scenario where investors believe that capital, rather than innovation, has the edge in building a leadership position. 

In recent times, the availability of liquidity and declining gap in innovation has created a scenario where investors believe that capital, rather than innovation, has the edge in building a leadership position. This belief in primacy of capital over innovation has fundamentally changed the usual performance based investing model.

Hence in a scenario, where there is no technical edge or technical risk in the product, the investors are trying to eliminating market risk by investing 100s of million dollars in these ventures as they believe that capital will create entry barriers and will give the invested company enough power to scale to formidable heights.

This fundamental shift has changed the way earlier VC rounds used to work. The days of of multiple venture rounds based on the performance / execution capability of company, have been replaced by much simpler three main rounds. First round of $300K to $500K happens at MVP (minimal viable product) stage, which is followed by Seed round of $2 Mn to $4 Mn and is done for validation of hypothesis and building some traction. However post validation of hypothesis / execution capabilities, the third round is happening in the range of $20 Mn+ and going upto $100 Mn.

 This round of $20 Mn to $100 Mn range is also called as the ‘Scare Round' 

This round of $20 Mn to $100 Mn range is also called as ‘Scare Round’ as it scares the competition, chokes further supply of money to competitors and aims at a land grab in a validated market opportunity. As one can easily see, this scare round of capital/ valuation has hardly any correlation with the revenue of company and thus gives a crazy sense of valuation to the usual public which does not understand that this large round or scare round is not related to performance of the company but rather related to the size of opportunity and ambition of investor in owning the particular market opportunity.

So if it is early stage investors who are creating this false sense of bubble through their scare round commitments and by giving valuations with little correlation to present revenue numbers, the late stage investors are creating a sense of bubble by taking very large risky bets at crazy valuations. These monster rounds are creating a sense of euphoria as well as a bubble where it seems to the army of commentators that investors are a bunch of morons who are again driven by greed and ignorance and are being icarus. However unfortunately our commentators don’t know that all these investors are deriving their happiness and courage for investing at such crazy valuation from a quite standard legal clause hidden in voluminous share holder agreement (SHA) knows as LP or “Liquidation preference right”.

Liquidation preference clause (LP), a standard VC industry legal clause, is used to protect investors from pre mature exits as well as downsides given the risky nature of business. However hedge funds have discovered a totally new use of the LP clause. LP clause gives investors a huge downside protection while guaranteeing return in upside thus converting an equity instrument into more like a superior debt paper which has strong downside protection but unlimited upside. This unique scenario where very large companies are staying private and needs loads of capital has attracted hoards of hedge funds who are using the LP clause to ensure healthy returns even in the case of a downside e.g. if a company raised $ 300 Mn at a valuation of $5 Bn with 2x participative LP clause, the investors will make $600 Mn (2x return)even if the company is sold at $600 Mn ( a steep 88% drop in value), a rare probability for large companies. Hence the large amount investing is becoming like capital protection betting where one can gamble as much as one can with capital guaranteed.

This clause along with the fact that a large number of companies are choosing to stay private while consuming loads of capital has created an ideal play ground for hoards of hedge funds, which are anyway flush with liquidity and looking for new areas for investments.

No wonder this kind of utopian scenario is getting capital by drove and every week we are witnessing announcements which are much bigger and audacious with Unicorns becoming the new normals in the startups hinterland.

However if the general public is missing the argument due to lack of understanding of basic dynamics of the VC industry, the VC community is not far behind in mis-calculating the fail safe nature of their investments by over estimating the capability of capital, underestimating the human spirit and assuming deterministic solutions to a problem.

Overestimation of capability of capital is creating a scenario where investors are led to believe that capital will breed innovation as well as help in scale and build walls of defence. However as it happens in the laws of nature, the best laid plans go haywire and works counter intuitive as its not the capital but generally lack of capital which breeds innovation and creates focus. Housing.com is a perfect example of capital going nowhere in building a powerful business and hence walls created by capital will only force the sharper downfall of the business due to the very weight of the wall.

 Walls created by capital will only force the sharper downfall of the business due to the very weight of the wall. 

Further by underestimating human element there is a false sense of belief in first mover advantage in low innovation fields. History has shown that first mover advantage is the worst advantage in low innovation fields as traditional players are able to catch up with the first mover by copying the low threshold innovations in the long run. As venture investments are not a sprint race but a marathon of 7-8 years, a lead in first two years is of no significance as founders of FashionandYou can attest. Hence the no brainer sectors which are attracting capital by droves will also see the maximum casualties in the long run – be it hotel room aggregators, food delivery market places or asset leasing models – as traditional corporates will play catch up or new solutions will emerge. The other problem with large ticket investments over a very short time period is the folly of taking a deterministic approach to a problem as solutions are still in the evolution stage.

Remember mobile pager market or a taxi operator like Meru Cabs which is perfect example of low innovation field challenges as well as changing business dynamics. At one spectrum, Meru faced constant challenges by new players due to low entry barrier where capital was the only wall of defence while at other spectrum it has been obliterated by new solutions like Uber which just made the classic business of leasing cars and renting them out totally unviable.

Hence, only time will tell if this massive shift in asset prices is going to be a type I error (a false positive) or a type II error (false negative) and whether VCs will have the last laugh to the bank or will end up facing analysts with a smirk on their faces!! Till then enjoy the irrational exuberance of these interesting times. Ah the coupons!!

Anatomy of the Coming Bubble-Part 2: Its all about color of Capital

The great Startup bubble has finally burst or so the experts would like us to believe as the evidence (as per them) is mounting day by day. Around 1500+ employees at various startups in India have been laid off. One of the Founders was held hostage in Pune and worst of all, the biggest proof, a certain CEO had to send a strong email to his sales team on missing their quarterly sales target. No its not any ordinary sales target, it was the Quarterly Sales Target. Generally in other sectors, companies fold up when they miss their targets, but damn this VC money, such non-performers are still in business despite missing their top-line goal.

So missing sales targets, 1500 jobs lost and angry employees laying a siege to the CEO!!! What more proof do these moron VCs need, wonder our expert commentator(s) / analyst(s). Interestingly, all these arm chair experts, with all their analysis, comments and advice are no where involved with startups/VC world in any manner, (barring few angel investors) but nonetheless have great insight / perspective on every thing startup, be it business models, path to profitability, unit economics or any other thing under the sun except probably as what makes these dumb VCs from la la land to give up millions of dollars to these kid entrepreneurs who are still learning the ABCD of business. (signs of time, our experts will tell you).

The bubble discussion is no longer a matter of perspective but has now acquired shape of definitive reality, where judgement has already been delivered. Now everybody in the crowd is just waiting with baited breath for the big bang slaying of the unicorns, while the experts like seasoned matadors, are taking their time and using data to bring the Unicorns down, with noises getting louder and louder with chants of “End is nigh” filling the air.

So is the bubble really bursting or are we all over analysing things? An email or for that matter any communication by a CEO to his sales team about missing quarterly or annual sales target is not a bubble. It is a routine dressing down or pumping up of teams as any sales director or CEO will tell you and missing of sales targets or decline in numbers, don’t bring doom as GAIL or NIIT CEOs can attest (GAIL profit dropped by 66% in second quarter this year and NIIT has also seen some swings in its quarterly numbers in last 15 years, and no bubble has burst yet). Same way loosing 1500 jobs is a sad but routine affair and is almost a tiny drop in a big country like India where one startup is setup everyday and some 600+ startups have raised capital in the last 18 months.

 Loosing 1500 jobs is a sad but routine affair and is almost a tiny drop in a big country like India where one startup is setup everyday and some 600 startups have raised capital in the last 18 months. 

Hence these incidents are not a sign of the bubble but signs of the next phase in the life of these startups as they meet reality of the business world and enter the adolescent phase of life. Some will flourish, some may die and some will just hang around but that is the usual darwinian world about survival of fittest, not a bubble burst!

The one thing the experts are missing while thinking of 2001, is the fundamental shift happening in the world economy due to mobile / tech and automation which is similar to the society transformation as it happened during the industrial revolution. The impact of the present wave of innovation will be far more severe, permanent and disruptive on the society. The change is real and is happening, though a lot of arguments (Luddites, Software taking over jobs) have remained the same as they were during industrial revolution. Unfortunately, we all are looking at this new paradigm through our old coloured glasses of the Industrial revolution and using the same metrics to measure new dimensions.

However the single reason why this startup bubble won’t burst despite questionable business models of many players, is nothing related with massive machine revolution, or new business paradigm but a simple technical matter that is “Color of money” or simply put “type of capital” being invested in these startups. In 2001’s dotcom bubble, which continues to overshadow all the advances made by internet businesses, almost 90% of the companies were listed and were funded by public money while in 2015 the numbers have just reversed as almost 90% of the companies are funded by private capital or the alternative investment pool. This private capital coming from alternative investment pools seems quite high but still is a tiny fraction if one considers the overall investment capital pool.

 However the single biggest reason why this startup bubble won’t burst is because of the simple technical matter of the “Color of money”! 

In recent times, AUM with alternative investment pools has been growing at a healthy pace, however it still constitutes less than 25% of all asset class. Further this 25% constitutes Real Estate, Hedge Funds, Buy-out funds, Energy & Commodity funds, Private equity (Venture capital is tiny subset of Private equity), and hence money invested in tech companies (through venture capital and some hedge funds) is tiny compared to overall investment pools. To give some perspective, Venture funds in the US invested close to $48 Bn in 2014, and all over world the total capital deployed in a year is less than $60 billion while in 2008, the money allocated by USA Govt for bailout of banks was $700 Bn (actual amount came to $460 Bn). Hence liquidity is not going to dry up very soon, as money flowing in the venture / new tech space is still very marginal and even few losses here or there won’t shift the needle.

The second big reason or rather main reason due to which probability of a bubble burst is negligible is that on account of investments by VC/PE industry, these companies are remaining private without any need to access public markets and as of now there is enough capital waiting on the sidelines to keep these companies private for the foreseeable time.

So how is this private capital impacting the bubble burst? A bubble burst in any economy is defined when there is a sharp contraction in the value of an asset and when this contraction is happening across sectors with the majority of assets. This sharp contraction in value is generally driven by liquidity crisis as survival of a business generally is not a function of business model but rather that of liquidity in the system (some may argue that liquidity is function of business model but that is not always the case).

Now this liquidity crisis is created either by a debt call or a sudden crisis in the environment which creates panic and overall negative sentiments and thus ends up choking money supply to a company.

A liquidity crisis can hit any company, however a privately held company is in much better position than a public listed company in handling it. Since listed companies are under intense public glare, quarterly earnings and disclosure norms sometimes perpetuate a liquidity crisis as any miss in revenue/profitability estimates or cancellation of a large contract create a run on the stock and in turn leads to crisis with an already struggling business. Discourse norms/insider trading rules create inherent disadvantage to a public listed company in the following manner:

a) Other than management, no body has access to financial performance and hence a bad quarterly result can create massive shock / panic due to sudden drop in stock value.

b) As almost all data, escpecially negative ones is in public domain, management has not much room to manoeuvre/ hard bargain with investors.

c) Short sellers /option traders perpetuates the crisis by short selling thus creating a further run on the company stock. All these actions lead to sharp drop in share prices which in turn create a panic among all stakeholders i.e suppliers, creditors, clients, customers employees and investors.

These kind of shocks further put pressure on other companies in the same sector and many times lead to a contagion effect if that sector is facing strong headwinds and may result in re-rating of sector thus leading to massive drop in asset value. These actions leads to chaos as mob mentality takes over the rationality and completely chokes the money supply resulting in unwarranted fire sale or financial crisis.

In comparison to public listed companies, a privately held company is generally protected from all the trauma caused by pressure of quarterly earnings, disclosure norms and public glare. All this restricted public info gives an inherent advantage to unlisted companies when it comes to negotiations for capital, terms as well as in managing information flow etc. Moreover, as  the investors are much more aware about the direction and performance of companies and are generally in knowledge of the crisis in advance, they are able to work out solutions while closely working with management – be it fund raising, M&A or right pricing the company stock as we saw it happening with startups like Myntra, LetsBuy, TaxiforSure etc were acquired without.

Hence the possibility of a large scale panic where majority of startups will go bust is remote for the reasons mentioned above as investors / founders will continue to negotiate and create liquidity situations in case of strong headwinds without external panic. They will also be helped by the fact that the amount of capital deployed & the value of business is not more than 25% (Uber valued at $50 Bn+ has raised  $ 8.2 Bn (16%), FlipKart valued at $15 bn has raised $ 3.15 Bn (21%)) and emboldened by LP clause, more and more hedge funds are waiting at sidelines to enter these markets.

However it does not mean that no company will go down under as the private markets work in a discrete manner showing bursts of activity, then freeze and then again hectic activity. The evidence of this can be seen from the investment pattern as seen in Indian ecommerce market where after showing initial euphoria in 2011/12, funding market just froze for ecommerce in 2013 and then again became super active in the later part of 2014. Hence rather than a bubble burst, we will continue to see these cyclical investment patterns and any company with not enough cash to survive these short bouts of nuclear winter will go down irrespective of business model, insane consumer happiness, superior unit economics or growth as we have seen with IndiaPlaza.com and host of other businesses. If there would have been a bubble, all of the companies would have been able to raise money at their terms but we are yet to see evidence of this.

It will be good for experts to remember that an asset bubble is more a function of the nature of capital deployed rather than that of business logic. This behaviour probably explains why the Indian real estate bubble never burst so far and in fact will never burst despite noises being made about this burst since 2006. In India, debt by PSU banks is almost like quasi equity which is permanently structured and can never be recovered due to over friendly regime of bureaucrats, policy makers, politicians and Indian courts (lender to KingFisher can very well attest to that). As the debt is never called, it does not create liquidity pressure and all we witness is cyclical market movements (hectic activity and total freeze) while maintaining the asset prices at nearly the same level.

Hence contrary to common perception, no bubble is going to burst but a Darwinian world will continue to evolve in the true sense given the nature of capital as well as of the market. For the experts, keep writing and voicing opinions; after all what is life without talk and gossip, only a few vices are allowed after all without any medical warning.

Source: (http://inc42.com/resources/anatomy-bubble-part-i-the-missing-argument/?goal=0_f709ffb264-e890a75c2a-105830197 and http://inc42.com/resources/anatomy-coming-bubble-part-2/)

How to Make Money (The Startup Way)

Having a good job is no longer the preferred way of making money among the younger people. This is why:

Starting a company, as a way of money making is riskier but more straightforward than working a job. There is no boss to decide what happens to you. There are 4 protagonists: you, your customers, your investors, and your co-founder. If you succeed, they succeed. And the way to making money for you looks like this:

Find a product (or idea) that is popular but not yet perfect

Buy one and study it in detail

Figure out how to improve it

Make a prototype

Show the prototype to 100 people

Remake it until people are willing to pre-order (for example on Kickstarter)

Find a co-founder who can build it with you

Split the equity– give your co-founder 50%, but use a vesting agreement so that their share becomes worth more the longer they work on the company

Find an investor. This can be a person who has a lot of money (an angel investor)

Give her or him 10% of your company

Make the product

Sell your product to 1 Million people

Get more money (this time from VCs)

List your company on stock exchange (this is after you’ve either raised a lot of money or have a lot of revenue, or better yet profit)

Sell a lot of shares when you list on stock exchange

Then just wait out the cooling off period (about 6 months) and you will have your money

Pokkt gets $ 5 Mn  funding from existing and new investors

Mumbai–based video advertising and app monetization platform, Pokkt, has secured close to $5Mn in a funding round led by existing investors along with new investors such as Segnel Venture, Shinji Kimura and Sundar Chanrai. The startup will use the funds in product development, increasing the technology team and global expansion. Prior to this round, it raised $2.5 Mn in Series A from JAFCO Asia, SingTel’s Innov8, Jungle Ventures and K Ganesh. It was part of Rajesh Sawhney GSF Accelerator. Pokkt was founded in October 2012 by Rohit Sharma (former CEO of Reliance Digital), Vaibhav Odhekar (founding member Zapak.com) andManish Tewari (former founder of Koovs). It has over 70 people strong team across its offices in Delhi, Mumbai, Bangkok, Singapore, Jakarta, Vietnam, Malaysia and more, including 20-member strong Pokkt Labsin Bangalore. It is building a pipeline of new products around video and gaming app  slated for next year, and is looking to beef up its technology team for the same. Pokkt has four major offering in the market namely Connect, Play, Money and Prime. Its core business revolves around Connect and Play, where it reaches to Game and Video app developers providing SDKs. Pokkt Play is a video ads platform for video campaign.  “We have lot of product launches lined up for the next few months and we need to scale out product development and technology team. One key area of investment will be in analytics and Big data. In last one year, we expanded to new geographic location like Indonesia, Thailand, Vietnam, Malaysia and other regions as well,” said, Rohit Sharma, Founder & CEO of Pokkt.

Pokkt claims that over 150 game developers that are using its SDKs. Some of its marquee clients in the gaming world are Octro (makers of rummy India, Teenpatti etc), Rovio Games (makers of Angry birds),Nazara Technologies (makers of Rounders) and Reliance Games. Another offering, Pocket Money is a B2C offering that provides free mobile recharge talk time to users. It asks users to download apps from their platform or by participate in brand surveys and rewards them with free call talktime. Pocket Money has over 4Mn users.

(http://inc42.com/flash-feed/pokkt-raises-5-mn-funding/)