Published February 20-24, 2021
Cash is the oxygen for a startup. Without cash, there is no venture, adventure, startup, entrepreneur. One of the entrepreneur’s early decisions is to decide how the initial capital is going to come. This is the decision that determines whether the startup will be a proficorn or not when it grows up.
When I started IndiaWorld in late 1994, the initial capital came from my savings in the US with some additional help from the family. Before IndiaWorld, there had been a couple other failed ventures which had consumed much of the capital. So, I had a very limited runway when I started IndiaWorld to turn profitable. At that time there was hardly any funding available for new companies from either angels or VCs. So, the choices were very limited to self, family and friends.
I had to go out in search of revenues almost immediately. Two streams helped me survive the initial months – subscription fees helped fund US expenses while website development took care of the Indian costs. It was later that advertising started coming in and that boosted the surpluses each month.
I got interest from a VC within a couple months of launch. But the deal never materialised. Through the five years of IndiaWorld this same story was repeated many times – many conversations but no deal. I was in no desperation to raise funds because we were generating profits each month by the end of the first year of operations. And thus was born a proficorn.
For entrepreneurs today there are many external sources of capital available. The question is: should one raise capital or not? If the business is capital intensive, then one has no choice. However, for many businesses not raising external capital can be an option. It forces a discipline on spending and drives the early push for revenues – both are good for the longer-term survivability of the venture. Besides, the search for external capital takes away a significant time of the entrepreneur – time which should really be spent building the business. Also, no capital comes in without giving up some freedom and control – again the entrepreneur can do without having to worry about MIS statements and monthly review meetings.
Risking one’s own hard-earned money is never easy. That’s why it is important to think through the worst case scenario and have clarity on how much capital one is willing to spend in building the venture. The reality in India is that most ventures are still self-funded – very few are able to raise startup capital. We only read about those who got the funding and not about those who did not. In software it is the entrepreneur’s time that is actually the investment; so it is much easier to get started.
In short: the entrepreneur’s early focus should be to stay away from external capital, put in one’s own money to get going, focus on building the product, and work on getting early revenues to fund the expansion. Success on these fronts is what will create a proficorn.
Few ventures that make it past the initial months and years. Infant mortality in startups is very high. Contrary to the perception of every entrepreneur, most ventures fail. The longer a business survives, the greater are the chances for longer-term survival. Once a venture has made it past the early hurdles and gets a revenue stream going, the fear of death fades away and attention turns to the future. It is at this stage the entrepreneur faces another crucial decision: to raise growth capital or not.
I too faced a similar decision in 1998-99 when I was running IndiaWorld. We had good momentum in terms of traffic and ad revenues. But the Internet was hot and competition was intensifying. Capital (domestic and international) was more easily available. While I had some surpluses, it was not enough for me to expand the senior management team and spend on marketing as many of the other funded competitors were doing. Every time I saw a full page ad in a newspaper from another Internet player, I missed a beat.
I spent many months trying to raise capital. I travelled often to the US to meet potential investors. I even met some Indian investors. In all meetings, I would state my expected valuation upfront – so as to minimise the how-much-are-you-worth dance that took up a lot of time. And I kept increasing my valuation with every failed meeting! I also did not budge from my valuation. A few months before I sold IndiaWorld for Rs 499 crore, I had got a pre-money valuation of 17 crore. I was stuck at 17.5 crore. Neither of us moved to bridge the gap and the deal did not happen. Sometimes, luck favours the brave!
I could say No because I had money in the bank and the business was profitable. The portals we had built (our product) had a natural virality. I would tell my team: we can advertise and get people for the first time on our website, but after that it will only be the content and the user experience – and not additional ad spend – which will determine whether they returned. So we focused on the product. And a delighted audience spread the word and kept our traffic (and therefore ad revenues) growing. The pressure on me to do a deal to raise capital to fund losses was not there.
This is not to say that one should not talk to potential investors. These meetings are always useful. I would meet interested VCs regularly – in a meeting or two, I would understand the competitive landscape and some of the gaps in my business. This outside-in view and advice (for free) helped me strengthen IndiaWorld without diluting equity on unfavourable terms.
My recommendation to entrepreneurs is to delay raising any external capital as much as possible – and completely avoid it if you can. This will mean much greater thought needs to be applied on how to get the revenues quickly. If one wants to build an enduring business, this has to be solved – so might as well do it early. The best way to fund a business is by generating profits. Instead of spending half one’s time dealing with raising funds or reporting the health of the business, an entrepreneur is better off thinking about the business models and talking to customers.
To Raise or Not
As I look back to my IndiaWorld journey a quarter century later, I realise that my inability to raise capital created my eventual success. Had I raised either startup or growth capital, I would have expanded too fast too quickly – which could have been fatal in those days because the market was just not large enough. What investors want is high growth – followed by the next capital raise. That becomes a treadmill. Angel funding followed by Series A, B, C and so on. With each new fund raise, the entrepreneur’s stake diminishes. I have seen cap tables where the original entrepreneurs have a stake so small that the business is in effect owned by the investors and the once-entrepreneur is nothing more than an employee with limited decision-making powers.
While raising external capital is right when the business absolutely needs funds for growth, my belief is that most tech businesses are asset-light and thus do not need too much capital. While it is fashionable to become an entrepreneur in college, it must be recognised that the norm for most ventures is failure and not success. All experience is good so the earlier one gets it the better. But what the entrepreneur must ask is: how can I maximise my chance of success? Creating a venture that is bound to fail is not the best way. (Of course, there are exceptions to every rule. There are many stories of college dropouts who have built successful ventures. That does not make my point invalid – it is just that 99.99% startups fail and entrepreneurs need to keep this mind. The job of an entrepreneur is not to take risk – it is to go to work daily to reduce the risk of failure.)
Entrepreneurship is not something just for 20-somethings, even though those are the stories we tend to hear. Age is irrelevant; the idea and execution is what matters for eventual success. Age is no bar for an entrepreneur. Experience working in other startups or mature companies can deepen one’s understanding of how to build a successful business. Also, the additional time spent working can create a pool of surplus capital which the entrepreneur can use for funding a new venture. This is exactly what I did – the 2 years I spent working at NYNEX gave me the necessary experience and $30,000 savings (in 1992) which I could use to start my entrepreneurial journey in India.
I am probably in a minority when I say that entrepreneurs should delay raising capital as much as possible – and ideally not even raise it. I have done it twice – IndiaWorld and then Netcore. While not raising capital in IndiaWorld was a mix of some luck and pluck, in Netcore it was much more of a conscious decision. I have talked to many VCs and PEs through Netcore’s 23 years – my ability to fund and our profits always give me the advantage in such conversations. While we may have grown faster with external capital, it would not have been without costs – either in operating freedom or stupid expansion decisions which I could later regret. As I look back, I tell myself and my team – we chose the path less taken. Only time will prove whether we made the right call or not. But we can all sleep easier with the belief that our destiny is very firmly in our control.
Getting the initial team right is perhaps one of the most important determinants of startup success. An entrepreneur cannot do everything and so needs to get an equally passionate set of colleagues who can help build the product and get early customers. Getting the first hires right is perhaps the single most important challenge for the early stage entrepreneur.
Why will anyone join a high risk business which has a 99.99% chance of failure? This is where the entrepreneur’s persuasion skills come in. Very rarely can the entrepreneur pay market salaries so money cannot be a draw. A vision of tomorrow’s world, the entrepreneur’s infectious passion, the thrill of a rollercoaster ride, the opportunity to learn – all have to come together to attract talent.
Putting together an initial team that complements each other is critical for success. Entrepreneurs must recognise what they are not good at – and then work to bring in others who can plug in those gaps. If one is very good at building a product, then someone who is good in sales is needed – and vice-versa. Every venture must have a good technology person – because almost everything today has tech at its core. Forming this initial team and ensuring that the key team members get along well with each other is the entrepreneur’s primary responsibility. This is the kernel which will build the venture.
While deep skills are required for each of the functional roles, it is also important to bring in people at the start who are open to filling in whatever is needed. Startups do not necessarily have clear and well-delineated job descriptions; there are days when a critical emergency will need everyone to chip in. A “that-is-not-what-I-was-hired-for” mindset is not what is needed. A software developer may need to double up as a customer service rep or even do a sales call. Flexibility, an open mind, a positive attitude and the ability to work well as a team are important attributes that the entrepreneur must look for in the initial hires.
My initial IndiaWorld team was built from the remnants of my previous failed venture. I did, at that time, make my best hiring decision – getting my wife, Bhavana, to start working with me. We had been married for a year and she had seen me stumble into a morass of my own making through this year. I asked her to help me because I did not then have the money to hire someone else. Little did I know then about her versatility. In those early years, she became the soul of IndiaWorld – doing everything that was needed with a smile. It is a work partnership that has endured to this day! Sometimes, maybe the best first ‘hire’ is your better half!
The greatest challenge a startup faces is getting the first customers. Persuading people to part with money is a non-trivial exercise. It is an exchange – they will pay if they see value. For an entrepreneur, getting the “product-market fit” right is what will determine eventual success. While it is obvious that one must build what the market wants and will pay for (either with money or attention), not every product ‘fits’ what the market wants. Finding the early customers once the product is ready is what will prevent failure.
Here is what a16z (Andreessen Horowitz) has to say about product-market fit (quoting Andy Rachleff):
A value hypothesis is an attempt to articulate the key assumption that underlies why a customer is likely to use your product. Identifying a compelling value hypothesis is what I call finding product/market fit. A value hypothesis identifies the features you need to build, the audience that’s likely to care, and the business model required to entice a customer to buy your product. Companies often go through many iterations before they find product/market fit, if they ever do.
When a great team meets a lousy market, market wins. When a lousy team meets a great market, market wins. When a great team meets a great market, something special happens.
If you address a market that really wants your product — if the dogs are eating the dog food — then you can screw up almost everything in the company and you will succeed. Conversely, if you’re really good at execution but the dogs don’t want to eat the dog food, you have no chance of winning.
You often stumble into your product/market fit. Serendipity plays a role in finding product/market fit but the process to get to serendipity is incredibly consistent.
You can always feel when product/market fit isn’t happening. The customers aren’t quite getting value out of the product, word of mouth isn’t spreading, usage isn’t growing that fast, press reviews are kind of ‘blah’, the sales cycle takes too long, and lots of deals never close.
I have failed many times in my life – in every case, I created a product (that I thought was great) which the market did not want. We see this mismatch around us all the time. Ads or promotions can attract an initial audience first, but they will not return if the product does not match their needs. Getting the first customers and demonstrating product-market fit is what will push an entrepreneurial venture along. As Eric Ries puts it: “The term product/market fit describes ‘the moment when a startup finally finds a widespread set of customers that resonate with its product’.”
There is no magic formula for getting product-market fit right. Even the best can get it wrong. And that is why so few products (and ventures) succeed. But get it right – and the prize is big! This is the thrill and excitement in the entrepreneurial journey.