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5 Important Reasons Not to Raise Capital for Your Startup

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I recently had dinner with co-founders of a startup who’d just raised quite a bit of money for their company, a deal which incidentally I’d passed on. The meal was fantastic: fresh salmon from the bay, washed down with a particularly good New Zealand pinot noir, while watching the sun go down over the water. Really you’d expect my mood to have been chipper… but it wasn’t.

The evening was spent with the founders congratulating themselves for raising money. I’m not being a killjoy but it felt like the end of the line, not the beginning. It felt like all the preparation had been done, all the work completed, all the sweat, tears and marriage breakups had already been had, and now finally they’d succeeded. Except of course that wasn’t the case. This was the beginning not the end.

All they’d done was raise some money. Money which, though it may be needed to fulfill their goals, stands as a liability. Now, I’m all for celebrating success but this attitude really worries me and here’s why.

VC culture has come to equate raising capital with success, where each successive round of financing successfully completed is denoted as success,but you know what, VC culture is wrong.

Success is success and raising money is raising money. Let’s not confuse the two.

Raising money amounts to taking someone’s hard-earned capital. Capital which has been acquired by sweat, savings, maybe even theft but it’s someone else’s nevertheless. That, folks, is a liability no matter which way you spin it!

Realise that even if the capital never came with strings such as board seats, preferred equity, liquidation preferences or any host of other typical “strings”, realise that capital ALWAYS comes with strings which I’ll get to shortly.

So in the event that you’re an entrepreneur, emboldened by the fact that most anyone in Silicon Valley today sporting a hoodie, some pimples, and professing to work out of his grandmother’s garage, can get funded and at eye-watering valuations, let me give you 5 reasons why raising money may be a bad idea for your business:

1. Lack of Focus

Multi tasking is rarely a great strategy for any business. If you doubt me, try rubbing your belly and patting your head.

37signals built one of the most successful businesses in their niche by remaining extremely focused on just one product. My point is that it’s next to impossible to be running around raising capital, while remaining focused on building your fledgling business.

Unless you’re sitting in Silicon Valley which stands as a distinct anomaly to the rest of the world, let me assure that raising money will likely take you far longer than you ever thought, will come with more distractions than you’ve even thought, and the progress in your business will suffer.

2. ROI Can Be Poor

Time has a cost. The time spent raising money can often be time poorly spent.

I little while ago I was pitched by a company which had developed a minimum viable product, cheap to produce, easily shipped and which when sold, netted a $10,000 profit. The founders were, however, trying to raise $250,000 and had been on a road show for 3 months already!

Consider that by focusing on building, marketing and selling that very product they needed only 25 products sold to reach their $250,000 they had spent the last 3 months raising. The sheer insanity of what they were doing forever precluded any investment.

3. It Can Be Expensive

Further to the above, as an entrepreneur you might consider paying brokers to raise you capital. While this is an option realise that in any financing round up to Series A, it’s not uncommon to have to pay up to 15% of capital raised, and sometimes even include some warrants, preferred stock or options.

In short, it’s expensive money. Really expensive.

4. Capital Comes with Strings

You should expect that incoming investors may want board seats and input in your company. Do you want that? Does the capital you’re looking for come with the kind of strings you are comfortable with?

You can take money from all sorts of sources.

  • Family and friends will invest because they like you, or maybe they hate you and want you to go away. Or they feel guilty and can’t bare the thought of the next thanksgiving dinner where they’re the only family member who haven’t backed your idea and aunt Marge will make a stink about it. These are psychological strings. Are you OK with them?
  • Angels will invest if they believe you’ve got a good chance at success and often, if they feel they can, add some personal expertise. These guys are not stupid though, and will likely structure deal terms including ratchets, liquidation preferences and so forth. Strings may be that the input by the angel(s) is not something you want. These guys can be of immense value but make sure interests and personalities are aligned otherwise you risk a lot of strife.
  • And venture capital comes with a set of different strings. This particular avenue of financing deserves an article in itself and I’ll write about it next week.

5. Too Much Capital Can Actually Be a Bad Thing

I’ve seen good ideas go to the wind when founders raise too much money. Money can certainly make people do daft things and I’ve learned that as well.

The fancy office space suddenly becomes “necessary”. Scrappy goes out the window in favour of “professional”.

You want to know what is really professional? A company that manages its cash flows, is scrappy as hell, is intensely, manically focused on building awesome value, and realises that when markets turn, as they always do, it’s the strong that survive and thrive. And the strong are always scrappy.

Make sure the money is aligned with your outcomes. Understand who you’re dealing with and what the motivations are. Most of all, don’t just follow the herd because the herd is rarely right.

If, after reading this, you’re not scared away and believe that your company has world changing potential, is less than $10M pre-money valuation and “needs to exist” then feel free to contact me. I’ll be happy to look at your pitch. I’ll almost certainly say no and be kind about it but maybe, just maybe that doesn’t take place.

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About the Author

This article was written by Chris of of capitalistexploits.at.

Entrepreneurship

The Opportunity for Indian Startups

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I was at a conference the other day, speaking on a panel with VCs and angels, when we were asked a question: With the softening of valuations and the famous Flipkart markdown, is there still a large internet opportunity in India?

My friend and co-panelist from a large VC fund jumped up and trotted out the now-standard schtick: that the combined market cap of Chinese internet firms is half a trillion dollars and as of now the combined market cap of all Indian internet firms is just around $30 billion — so yes, there is loads of room to grow. Maybe 10x or 15x or more.

But I believe there’s something terribly wrong with this logic, and the sooner we realise this, the better off we all will be.

Because you really can’t compare the internet opportunity in China and in India.

The Chinese market is a walled garden of sorts, open mostly only to Chinese businesses — after all, Google, Facebook and Twitter haven’t been allowed to freely operate in China. So Baidu ended up being the Google of China, RenRen is the Facebook of China and Weibo is the Twitter of China. And even Amazon has faced a huge uphill task there.

The Chinese have built their businesses without much global competition — that half-trillion dollar market cap came much easier, after much government protection. Sure Alibaba beat eBay — but that is one exception. There are significant regulatory, political and language barriers for non-Chinese internet firms to win in China.

It’s the same in Russia. Yandex is the Google of Russia and vKontakte is the Facebook of Russia.

While, in India, the regulatory barriers are almost non-existent, our internet is still mostly in English and our politicians aren’t able to control digital media companies like the Chinese and Russians can do in their countries.

The result of our openness? The Facebook of India is Facebook, the Google of India is Google, and the Twitter of India is Twitter.

And it’s just as likely that that Amazon — not Flipkart, will be the Amazon of India; that Uber — not Ola, will be the Uber of India; and that Tinder — not TrulyMadly will be the Tinder of India. And so on.

This has a few implications. First — if you want to see the size of the Indian internet economy, you MUST include chunks of Google, Facebook, Twitter and others in it — because these are India’s leading internet companies.

There are several ways to do it- one is to look at global revenues and market caps of these companies and attribute the Indian market cap to the share of Indian revenue in the global pie. I tried that, but came up across a big issue- not knowing the Indian revenues of many of these firms, because it’s not separately called out.

I tried it a second way — to attribute the India-linked market cap to the Indian share of the firm’s global users — and that data was a little more accessible. I took all data from public sources like press releases, or estimates from SimilarWeb and the like. Wherever available, I took user or customer numbers (in regular font below) and where not available, I’ve taken traffic numbers (in italics below). And instead of private company valuations which would count Uber and such — I’ve taken more conservative public company valuations. Oh, and further, all mistakes are mine alone.

Here’s what I came up with.

The top 10 global internet companies have a combined market cap of over $1.3 trillion. But one can attribute up to $150 billion to Indian users.

Yes, of course, there is a large caveat here. First that, as said before, the Indian share of global revenues will give a more accurate picture. And our share of revenues will certainly be less than our share of traffic or users. So you can discount this number by 25%, 50% or even 75% to adjust for that — but the final number is still significant. Though I do think market caps are not just a function of revenues — user base is also a prime consideration — after all that’s where the growth will come from.

Now if you add the $30 billion or so of market cap of our local unicorns to this $150 billion, we’ll end up with around $180 billion of market cap for our current Internet economy.

Then, adjust for the fact that China has 720 million internet users and India has exactly half, 360 million users. $520 billion of Chinese market cap per head across 720 million users is $722 per user. Our number turns out to $180 billion of market cap across 360 million users — or $500 per user.

So the real difference between the Chinese internet potential and Indian internet potential is not 10x or 15x — but perhaps closer to 40% or 1.4x. Or you can be pessimistic and call it 2x if you like. But 10x it isn’t.

What are the takeaways here?

First that there just isn’t as much headroom for growth in the broad internet economy for startups in India as you’ve been told there is. The $180 billion may grow over a few years to $300 billion — but $200 billion to $250 billion of that will accrue to non-Indian firms. Leaving $50 to $100 billion for Indian startups. Please adjust your expectations accordingly.

So a more apt way of looking at the Indian potential is to see us like the 51st state of the US. Or like a United Kingdom. Large market for global companies — not necessarily a large market for local firms.

So I’d say much of the growth assumed for our current unicorns is probably vastly over-estimated. Especially if the Indian unicorn has global competition in its way.

Second, the nature of Internet businesses is largely a winner-take-all in any niche. If you see the market share that Google ended up with in search, Gmail in email, Facebook in social networking, Twitter in microblogging, YouTube in video etc — they’re all well above 80%. So if you take on a niche — you either end up the leader with 80% of it, or a distant number 2 with 8% of it or a non-player with 0.8% of it. This is where the chips largely tend to fall — though there are a few exceptions.

So your likely playbook if you take on a global internet company are (a) to be bought by the global player or (b) to end up eventually as the 8% play.

So what’s going to happen to Flipkart now that Amazon and Alibaba have declined to buy it? Or to Ola now that Uber has declined to buy it? It may not be the nicest of news, I believe.

Which leads to the third take-away. If you want to build a large Internet business in India — then do it out of the way of the globals. Build something where the globals aren’t. From my own portfolio, I’d suggest that RedBus, CarWale, MyDentist, Chumbak and others have picked the right areas. Other firms like InMobi, Naukri and PayTM are on paths outside the globals’ footprints too. This is a good place to be, over the long term — unless you’re sure you can sell out to a global like Baazee did to eBay. I personally believe this is extremely risky — as the global firm may just turn around and say “nope, I’ll build it myself” as many are increasingly doing so.

In other words — try not to be the X of India. Try to be the yourself of the world. This is easier said than done, both because we have a long entrepreneurial history in India of building copy-paste businesses, from independence till now. And second, because most investors in Indian internet firms work for US or other firms who wrongly believe they can simply fund and build the “X of India” — and have some comfort in funding copy-pastes rather than backing originals. Even the copy-paste specialist Rocket Internet from Germany has failed in virtually every venture in India. Copy-paste just does not work in internet businesses in India. But I do see signs of this groupthink slowly giving way to backing original companies.

And the fourth takeaway — is for these firms to go global too. Naukri has expanded to West Asia. Chumbak is in Japan. InMobi is all over. And we’ll do better to expand to 2nd and 3rd world countries than taking on the first world. Because the nature of our markets and products is typically more suited to those economies than to winning in the US.

This is how you get long-term traction — do to local firms in those countries what the globals are doing to us.

Is this bad news for Indian internet startups? Only if you’re focusing on copy-paste and reading TechCrunch to see what you can quickly duplicate in India. Sure, we might not get the market caps the US firms get right away. But it will come to us, eventually.

Is this piece a downer on the start-up excitement in India? I hope not. Our unicorns can and must happen — but should happen in original areas. Alibaba didn’t copy anybody — it started in China and rules the world, Skype didn’t copy anybody — it started in Estonia and rules the world. And that should be our inspiration. Can we build great, global internet companies out of India? Yes, for sure we can. But perhaps not in the way we’re doing so currently.

Anyway, thought I’d pen this piece and see if it might trigger a few thoughts of your own — I’d love to hear those too!

Do comment here and share at will. And happy new financial year!

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About the Author

This article was written by Mahesh Murthy is a venture capitalist, marketer and entrepreneur. He tweets @maheshmurthy.

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Entrepreneurship

Do Aesthetics Matter?

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Asa product designer, sometimes I question how important beauty is when it comes to software.

Look at this list of some of the most popular websites on the Internet:

  • Craigslist
  • Reddit
  • Hacker News
  • Wikipedia
  • Drudge Report

These sites have little to no aesthetic appeal, but collectively they are visited by tens of millions people every day.

So I ask myself…

Are we just showing off our design skills to other designers? Does the average consumer notice? Do aesthetics have a direct impact on revenue?

These are questions worth answering.

“No, Aesthetics Don’t Matter!”

Some would point to the above examples (and more) to make the case that beauty is irrelevant. They’d say visual design is mostly un-measurable mushy marketing.

After all, software is a tool. We use it to accomplish tasks like communicating, writing, checking off a to-do, or socializing with a friend.

Giving the user the ability to perform a unique task is far more important than making it look good.

We jump on Wikipedia because it’s easy to get free encyclopedic information. We pull up Craigslist because we want to buy or sell something locally without having to pay for it. We visit Reddit for its distinctive take.

It doesn’t matter that these sites are ugly because they’re the best tools for their specific job.

In fact, part of the popularity of these sites has become their ugliness. It’s as if the user base is saying, “We just laugh at how ugly Reddit/Drudge Report/Hacker News is because we get quite a lot of utility from it, and that’s what matters most.”

You can’t build a valueless product, throw some eye-appeal on it, and expect it to last.

The ever-stunning rain poncho. Source

Take a rain poncho. This is an incredibly ugly piece of clothing. But millions of them are sold every year because they’re really good at their job — keeping you dry.

“Yes, Aesthetics Do Matter!”

Others say beauty is critically important.

stripe.com

For companies trying to build or sustain a brand, visual design matters because it’s part of the package. People recognize Stripe, for example, in part because of their stand-out aesthetics. Paul Rand said:

“Design is the silent ambassador of your brand.”

Something beautiful is also pleasing to use. And pleased customers keep coming back. It’s a piece (however small) of user experience.

When something is beautiful, you can feel that there was some thought put into its creation. That makes it feel professional and gives it an air of having been built on purpose — a feeling that whoever created this thought about you, the user, as they made it. When the opposite is true, it feels like someone just hacked it together.

Those sites mentioned above — Craigslist, Reddit, etc. — those are the exception. They’re popular in spite of being ugly because they were first to market and have an entrenched user base. For those of us building something new, there’s no reason to purposefully forgo aesthetics.

Think back a decade ago to when the very first iPhone came out. The usability and utility were there in abundance, to be sure. But people were also astounded by how beautiful it was. No other phone looked like that. Many people were (and still are) willing to pay an astronomical price for it, in large part because of that beauty.

My Takeaways

Which side are you on?

I don’t think it’s black and white. It’s a matter of priorities.

“Form follows function.” Function certainly comes first, but that doesn’t mean form is nonexistent.

To me, the priority goes like this:

  1. Utility. Does your software help the consumer perform a unique task in a distinctive way? If it doesn’t, the heart of your software is missing and it will eventually die. Who wants a tool that doesn’t help you accomplish something?
  2. Usability. Do you get out of their way so they can execute that task easily and intuitively? Is it reliable, speedy, organized?
  3. Aesthetics. Is it attractive in a way that contributes to utility and usability?

By all means, add beauty. Beauty is wonderful. But utility and usability come first because that’s why people are there in the first place. Build around the purpose, then add aesthetics on top of that.

Your user will thank you for it.

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About the Author

This article was produced by Jordan Bowman of HackerNoon. see more.

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