The J Curve myth – By Aravind G.R

How long did it take the ‘Technology Empires’ to build their empires (from scratch)?

While the ‘J curve’ (or hockey stick in Indian parlance) is the norm in almost every business plan that an early/growth stage company makes (and we are often guilty of being perpetrators of the J Curve biz plan). It would be a revelation to see what the actual growth curves were for the tech empires (read: blockbusters of today, er, well, yesterday also).

The table in this blog splits the top 100 tech companies into Rocket Ships, Hot Companies and Slow burners based on their ‘rate of growth’. Interesting to see that the’ Rocket Ships’ took an average of 5.3 years to reach the magic mark of $50 million in revenue.

(Granted, this list doesn’t include the more recent ‘Lightspeeders’ (I couldn’t think of things faster than rocket ships) like Groupon, Facebook, Zynga et all who are claimed to have reached the magic marks in a matter of months if not years. These companies actually ‘J curved’ really fast! But, you can count these Lightspeeders with the fingers in just one hand.)

So with the exception of a tiny number of Lightspeeders, practically, the fastest companies take 5-6 years to reach a certain respectable revenue stage (note: this doesn’t mean an exit opportunity for VC’s). The duration is much more stretched in a country like India, where it takes longer than the US norm for start up’s to reach a certain scale. Investors need to factor that into their investment thesis for India.



Why 2011 is not 1999 – By Alap Bharadwaj

Are you nervous about internet valuations yet? If you aren’t, then you might want to consider checking out this fabulous article on dealbook called – Investing like its 1999! The article discusses the possibility of a new tech bubble and is interesting as it highlights both the similarities and differences between the situation in ’99 and ’11. There are some great anecdotes on some of the more notorious failures from the bubble era and these indicate why it might be different this time around. My personal take is that while the fundamentals are a lot stronger this time around, the problem centers around applying the same valuation exuberance that Facebook, GroupOn and Zynga (companies with proven scale in terms of BOTH users and revenues) command to companies that are in their growth phase.

Greasing restaurants with funds – By S.V.Krishna (Guest Author))

Remember those greasy and sweaty (yet tasty) quick service restaurants or Darshinis that sprouted in Bangalore during the late eighties. I never really enjoyed jumping in to the queue to purchase my food coupon in those sticky food dens.

Still it served its purpose- I could have a quick snack after school. It was a time when entrepreneurs- from Mangalore- were able to open one restaurant and in a couple of years scale the model up within the city.  By the end of the nineties the Darshinis and Sagars were all to common here. These entrepreneurs were content and I wonder if they ever knew what VC funding was.

I was out the other day in a food court and I saw a couple of old restaurants like the Taj and New Krishna Bhavan experimenting with the fast food or quick service model- were even an element of branding comes in to play. I was curious about this development and I met one of the owners of such a restaurant to find out how these dirty old dens became conscious about brand and image.

Then I almost choked, as I swallowed the roti that he served me. Don’t worry the food was great- it startled me because he said he was VC funded. Come on! What was the world thinking?

Suddenly grease seems to taste like cream to angel investors and VCs. I hear these entrepreneurs talk about business models when previously they would only be talking about the flour and the dough in store.

To make matters worse- I found 5 such investments in restaurants and interest is growing. Strangely I have lost my appetite again- I begin to wonder will money be burnt or will it find itself in a bottle of red wine.

Only time will tell what business models will work- I know that VCs have taken a stand on casual dining, QSRs and fine dining.

Then I can tell you that it is a bet that they can take because Indians are eating a lot and statistics show a rise in consumption inside the urban Indian’s stomach. For a short period of time all these business models will only grow and VCs can expect a return. But will the sum affect be the creation of a national chain. That is a foresight left to the entrepreneurs and not the VC’s.

Mentoring the Mentor – Deepak Srinath

A couple of years ago, when Viedea was a relatively new start up, I was approached by somebody who offered to become our mentor. I remember being surprised, because the person neither had experience of entrepreneurship nor of leadership in a corporate set up.  Needless to say, we politely declined the offer.

As the number of entrepreneurs and startup’s grow in India, it is but natural that various elements of the support ecosystem also develop.  Organizations like TiE and NEN, angel Networks like IAN and Mumbai angels are all doing a phenomenal job of supporting entrepreneurs. So too are numerous individuals and private organizations like Mentorsquare, Morpheus, etc. who have created innovative models which hopefully will create the sort of support ecosystem Indian entrepreneurs need.

However, the trend that has left me partly amused and partly concerned is the rapidly growing breed of entrepreneurs who are in the “business of mentoring and incubation”.  I have interacted with many such “mentors” over the last few months and barring a few exceptions most have left me with the feeling that they do not have adequate experience or skills to mentor a startup. Some of them are barely out of college themselves and many of them claim to be serial entrepreneur s (on closer inspection, it’s more like ‘serial company starters’, none of which have managed to last beyond a year).  It’s extremely worrisome that young entrepreneurs with smart ideas could be signing up such mentors, giving them equity and wasting a lot of time in the bargain.

A good mentor is a critical part of an entrepreneur’s journey. A few tips for entrepreneurs from my own experience –

  1. Choose your mentors wisely. Sometimes, finding and pitching to the right mentor is as difficult  and as important as finding the right investor,
  2. You may need multiple mentors on your entrepreneurial journey, for different stages of your venture or for different domain skills. It is likely that you will outgrow a mentor as your business evolves and takes different shapes. Make sure your relationship with the mentor is flexible and not joined at the hip.
  3. Decision making should never be delegated to the mentor. The mentor’s role should be to give you perspective and advice, not to make decisions on your behalf.

A few months ago I was approached by a leading incubator to empanel myself as a mentor. However, I did not feel I was qualified to be a mentor just yet.  As an entrepreneur I continue to learn immensely  from my mentors. Only when we have achieved the goals we have set out for Viedea will I believe that I have the right to mentor other entrepreneur’s and share my experiences.

Testing the waters: Our experiences as customers of start-ups – By Uday Disley

Being in the start-up ecosystem has its advantages, for one gets a firsthand view of new products and services which are at either a concept stage or at a beta stage. Now that the people in this ecosystem are most likely to evaluate start-ups from a business viability point of view, we at Viedea more often than not try out these products/ services as consumers. So has the experience been good? Well it’s been interesting to say the least, let’s see what we have here:

Enterprise Software company: Building an enterprise product is the holy grail for most in the IT products space, and there are plenty of them out there, trying permutations and combinations of various ‘features’, which unfortunately end up remaining just that, a bundle of features and not a wholesome product. We have used a software product of a start-up in the past, which had obvious issues of not understanding its users and their workflow well, and to top it had really bad UI. Whilst you may have the intention of building a great product, but one needs to understand that a hundred features, may not solve the core problem, which the product was to built to address in the first place. Verdict: Use this logic – Simple product = address core need = great user experience = happy customer

Printing services company: If somebody needs to build a great service platform, here is a case study. This printing services company came up about the same time we started off and we have been loyal customers since then (though not a volumes customer). What we like about the place is its clean approach to addressing a customer need and delivering the same with reasonably high service standards. Well let’s see what works for them – they have demystified printing for the consumer with a fairly interactive and easy to approach delivery mechanism, in other words the first time user is as comfortable as a regular user. Verdict: Consistency in service = happy returning customer

Consumer electronics company: Ok we have not been early adapters when it comes to consumer electronics, but that is set to change, as we took a big leap of faith and pre-ordered a tablet pc from one of the most talked about start-ups in the tech space. Well we have been tracking this company for the last six-eight months and if not anything else this is a superb study of how a product can be built, evangelized, supported and maybe even funded, by a community. For the community of supporters it has been an interesting and frustrating journey, for it has stood by this company through its development stage to product delivery stage, going through the teething problems of a start-up. Anyway the company has delivered the product in its first round of pre-order, where most of the users have been very happy, meanwhile the second set of pre-orders though much delayed, is eagerly awaited. Verdict: Hype and good response needs to be followed up with good customer support.

Apart from the ones mentioned above, we have tried various start-up food services, salons, online stores, bought bus tickets, books, with varying degrees of ‘customer’ satisfaction (or dissatisfaction). It’s a classic dilemma for somebody who follows the start-up ecosystem, while you want to support it to the hilt by buying and endorsing the product/ services, at the same time you as a consumer can’t stop yourself from criticizing a mediocre product/ service. Instinctly you feel for the start-up team and are able to relate to the teething issues that they might be facing, but at the same time you want them to succeed by pushing their limits. The start-up ecosystem needs supporters and critics to be consumers as well and in all fairness guess it just completes the loop.

Is the Education investment opportunity for real? – Aravind G.R

“Sorry, I don’t need any money right now”. No, this is not me shooing away pesky telemarketers, it’s the line I hear from the archetypical ‘Gyani Sirs’ who run education companies.

While the whole investment community has been upbeat about the education space for most part of the last decade, why aren’t we seeing as many deals? For both sides (i.e. investor & investee) the answer still lies in the quality of opportunities. By quality, I mean a combination of team, product/service and more importantly the valuation expectation.

From the potential investee’s perspective: “I don’t need any money”- because:

  1. My business is working capital positive- My students pay up almost the entire fee in advance when they enroll; whereas my expenses are deferred throughout the duration of that course.
  2. I’m not planning to invest much, even while I’m expanding (Well, ‘going national’ is the buzz word I use for expansion) since my plan is to employ franchisees who would cough up the capex.

(Comment: A large number of MBA test prep companies threw caution to the wind and accepted franchisees all over the place. An average franchisee has little skill to maintain the quality of delivery that the particular brand of test prep company is known for)

From the Investor’s perspective: I’m being extremely cautious & picky while investing because:

  1. I‘m not sure what works: While ‘me too’ models works in every other sector, models which are followed elsewhere in the world do not seem to work here. I can take calculated risks, but I’m yet to see successful models emerge out.
  2. I cannot stomach the valuation expectations: Last week a news article quoted some bankers saying that some promoters in the sector are expecting valuations as high as 40 times EBITDA. This creates two problems: The first one being, how do I justify this valuation to my investment committee. The second being ‘exits’- An M&A opportunity diminishes as soon as the company crosses  the 15-20 crore revenue mark, they just become too expensive (with asking rates at 80-100 Cr) for any Indian education company to buy.
  3. I don’t know how to handle a situation where ‘Gyani Sirs’ say that we are used to showing only 50% as ‘white’, our revenues are actually two times the number you see in our P&L statement.

Summary: The volume of investment activity will continue to be muted over the next couple of years. We believe the industry will make a natural progression towards maturity and only then will the activity mirror the potential the sector posseses.

Investment opportunities in Digital Entertainment – Alap Bharadwaj

A quick analysis of the entertainment sector that is served via technology in the US reveals three main areas of interest – Music, Gaming & Video.  Music & Video can be further divided into purchased and radio/streaming and Gaming into console and handheld, all of which are doing fairly well in the west. Given India’s status as a late adopter, the question remains – Will the country’s entertainment focused technology companies see the same success that their American counterparts have?

The answer varies for all three subsections and in my opinion hinges on a critical difference in the engagement propensity of users when interacting with these different mediums. Beginning with music, I don’t believe tech companies focused on this space, be it pay and download or radio, will have much of a future. The average internet consumer in our country has gotten used to downloading music in ‘lossy’ (mp3, etc) compressed formats and widespread piracy of the latest music both in Hindi and English hardly provides much incentive to switch to paying. Hard evidence exists in the form of Apple’s continued reluctance to open their blockbuster iTunes music buying service to the Indian public.

Additionally the problem with offering a radio service in India is plagued with its own issues. The ability to listen to internet radio at work would be disabled for the majority of India’s working public (due to strict work policies against such actions) and the poor quality plus high cost of India’s 3G networks make streaming of radio and on demand music a distant dream. While a case for exception can be made for technology companies focused on providing cloud services for people’s personal music collections, these too would suffer from the access problems mentioned earlier. Above all music as an entertainment medium might have many consumers but suffers from the critical flaw I mentioned earlier – the users are not engaged, thus reducing inclination to pay for such content.

Gaming and Video however do not suffer from this flaw. Both sections boast scores of engaged users with the inclination to pay. The gaming market has largely been tapped and conquered by the Xbox360, Playstation 3 and the Nintendo Wii, but what off the online video market? This is the area I believe with the largest chance for growth. Indian GEC and Bollywood content has virtually no presence online and any exceptions are pirated content that regularly get booted off websites like YouTube. Indian content is crying out for a desi version of NetFlix or Hulu backed by demand across India and more importantly abroad. Investors would queue up for companies that would be able to offer a high quality offering in this space as the model has both a proven growth strategy and significant exit potential due to the availability of appetite from retail investors for public equity of this nature as well as global acquirers.

I strongly believe that video will be the space to watch in the coming years on a variety of fronts. Content aggregators (a la Netflix) as well as companies focused on enhancing the viewing experience and constructing analytics and software for the unique conditions in India will flourish in the coming years. Investors have already backed certain players – Althea Systems, that makes a social video browser called Shufflr, raised US$ 3 MM from Intel Capital in November 2010 and Apalya Technologies, that specializes in Mobile video streaming, has raised three rounds of funding, the latest in January of this year. Given that the video focused technology space has seen investment, we now expect to see significant investor appetite for players in the content aggregation and video destination space.

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