NASSCOM EMERGE Community Catalyst for Growth of Emerging & Start-Up companies

1. Start a small company with some money from my own side and some from friends and family and approach a VC/HNI/Angel/Corporate Investor?
2. First line up the investment and then start a company given that the funding required is much beyond my self funding capacity?
3. Look for an Entrepreneur-in-residence type role with a VC, thrash out the details of the product, the business plan, the execution strategy, the initial prototyping and then formalize the same when the project is ready to be scaled?
4. Sell my idea for a small sum to someone who can "cosume" it?

Aravind,

Let me take a shot at the above list you have put out! My order of preference would be

1. First Option is 3, if this is really possible, for which, one has to be a 'branded' Entrepreneur OR should have held executive positions in big branded companies in the past and strong relationships with VCs
   
2. Second Option 2 - I feel this is the best practical option. Especially, after me having experience in trying Option 1.
   
3. Third Option is 1 (my comments are as above)
4. The Fourth One. This may not be a practical option, as my understanding is that no body buys ideas.

Suresh

Hi Suresh,

Thanks for your comments. I was also curious to see if there any "other" options that one can suggest.

Best,

Arvind

Arvind, my vote is clearly to start with Friends & Family, then find an Angel, going on to a VC. The way we did it this time around is pretty much that - we are now close to looking for VC money. The last time around (in the US), we did something close to Option 3 and that went nowhere. That does not mean the model does not work - it just did not for us. And in my first start-up, we began with our own money but graduated quickly to a reasonable-sized operation thanks to sales, so we never needed any other funding.

There are at least two other options: debt-funding (something I would strongly speak against) and finding a "strategic" investor who will pay for product development from the get-go (works in specific niches - don't know about your case).

IMHO, Option 1 is the ONLY way to build a good product in a large context. I have a number of other reasons, too, for picking Option 1:

a>    By your own admission, you need to "learn". Never better than from someone who's already made the mistakes that you don't want to! I can admit that having a seasoned mentor in my Angel Investor has been of terrific value.

b>    By your own implication, you can't/don't want to (I hope it is the latter!) put up the 5 MN. If you did, this is a moot discussion - just go do that if losing it won't break the bank!

c>    Given the numbers you are talking of, I think a strong outside investor will help tremendously in scaling the business. I assume valuations in 5 years will be in the range of 200 - 500 MN - you need someone who can make deals at that level on your side.

d>    At each stage of your growth, you will need different types of advisers. Starting with friends who trust your judgment implicitly, you will "graduate" to VC Board Members who'll all have their own agendas, but ultimately want the company to succeed. I think that progression is very important in any product company's growth.

Whatever choice you make, all the best! I am sure it will be a lot more fun (and, hopefully, rewarding) than running large Dev teams!

Arvind,

To start with, my order of preference to your post would be:

1. Start a small company with some money from my own side and some from friends and family and approach a VC/HNI/Angel/Corporate Investor?

2. Look for an Entrepreneur-in-residence type role with a VC, thrash out the details of the product, the business plan, the execution strategy, the initial prototyping and then formalize the same when the project is ready to be scaled?

3. First line up the investment and then start a company given that the funding required is much beyond my self funding capacity?

4. Sell my idea for a small sum to someone who can "cosume" it?

Two important strategies as highlighted by Narasimhan, are open as well, though debt funding again may not always be the best option. You could always counter that economics prove "raising debt is less costlier", to which i say *conditions apply

Since your is a product domain, a strategic product development partner may give you what you want. Money, as well as expertise!

Nothing better, if in the partner, you could also find tap in a VC along who is the right "MENTOR" for your domain, and who has a proven past.

The numbers stated by you, with growth and expansion, you would need different strategic advisors to your business who have the expertise in scaling up and as I always put it very strongly "have graduated in life", as they should be capable of not just visualizing these numbers from the Startup stage, but also keep the focus and the vision intact throughout the growth phase.

Every product has a "life cycle", thus I suggest you work out the whole venture into phases, which you already have in your Bplan, and in these phases have strategic partnerships, which leverage the uniqueness of each partner bringing one expertise or the other to leverage your business.

In your domain, innovation would be one key factor, thus such partnerships, may go a long way in supporting you, create Innovation itself!

Thanks,
ParitoshS,WeYouPoint.com 

Arvind:

If you are a risk taker use option one (more practical) to start with. Option four will be a cheap sale. If you are not a risk taker, find a job where you can use this idea and execute with passion to make nice salary. It is similar to option four but not an outright sale of the idea - that normally doesn't carry a good price tag (or value) without execution.

If you are EXTREMELY Lucky, you can start with option two - like a lottery! Before drafting your business plan, just try to find out the number of companies (in % terms) who made it to $100M in less than five years to set realistic expectations.

Arvind.

I think all the options you listed are risky. Risks are the same, whether on your money, or on someone elses - and as a wanna-be enterprenuer, your first job should be de-risk whatever you are doing.

And that can only be done by finding out who would buy your "product" rather than who would fund your product. If you can find even 10/100/1000 people who are willing to buy your product - the number of customers you should look for would depend upon the kind of idea or product you have - And if you can actually manage to get a large customer to give you money to build out your idea, you may never need an investor!

After finding customer(s), I would recommend looking for an execution team who could actually execute what you have in mind. Looking for an investor would be the third step, and should be more for being able to scale the business, and not necessarily only for cash.

Essentially, I advocate finding customers over finding VC's. Any day. A customer is your best funding partner!

My two cents -as I have been-there-done-that!

-Sangeeta

Sangeeta,

Getting customer even before you have a "product" is nearly utopian. Wont the customer "own" the product/outcome? Even if she is willing to give you some rights, wont the dilution be significant? If you dont take the risk, why would you expect the big rewards? 

I would also like to thank all others their feedback. This post was created to stir some debate and get the community thinking on this topic. Many folks from different backgrounds have asked me the question and I wanted to see what the feelings were on this out there.

Some of you have understood this as a "personal" conundrum - its not. My apologies if this came thru differently.

Looks like #1 is the top choice for "dreamers" and #3/#2 for the more "practical".

# Start a small company with some money from my own side and some from friends and family and approach a VC/HNI/Angel/Corporate Investor?
# First line up the investment and then start a company given that the funding required is much beyond my self funding capacity?
# Look for an Entrepreneur-in-residence type role with a VC, thrash out the details of the product, the business plan, the execution strategy, the initial prototyping and then formalize the same when the project is ready to be scaled?
# Sell my idea for a small sum to someone who can "cosume" it?

Hi Arvind,

I would like you go thru the article I wrote some 5 months ago on Funding Fundas in DQ. Please click the URL below.

http://dqchannels.ciol.com/content/space/108030302.asp

Coming to the options of funding, I've done two ventures and raised capital both thru angel route as well as VC route.

In my experience , I would say your option 1 will be more feasible and manageable. Again , you will have to go step by step whilst raising capital. Once your first round of funding is raised thru friends and relatives, you should look at a seasoned HNIs or a Angel who'll wait for the returns to come which you must plan at least 3 to 4 years. then you should begin your series A with VCs. I also would like to suggest a book called "Entrepreneurial Connection" by Gurmeet Narula. It's a fantastic read and gives lot of insights into how great ideas have been transformed into reality.

Hope this helps.

Having dealt with Silicon Valley VCs and their clones in India, and are currently dealing with them in my current start-up,  I would be very careful in understanding very clearly "What kinds of Ventures are they funding currently?" and "What kind of growth path are they looking for?". I would not believe for one moment all the "motherhood and applepie" pitches VCs throw out periodically in the meetings where they are trying to inspire people to go the venture funded startup route. Many will find out these realities very painfully!

At any time, only certain sectors are "hot" with VCs. These are

1. Online versions of successful proven US ventures such as Naukri(a la Hotjobs,Monster), Seventymm (Netflix in the US), Redbus, Travelwala (a la Expedia in unexplored sectors like bus tickets).

2. Web 2.0 startups (whatever they mean) - like clones of LinkedIn, etc.

3. Software As A Service (SaaS) - SaaS versions of popular software that can be Standlone (like Sales Force AUtomation), CRM, etc

VCs have bosses (Pension Funds and other larger VC funds in US and wealthy individuals in India)  just as they are bosses to startup companies. They have to show 10X returns or some part therof on the whole. They looking for 9 so-sos and 1 that's a google like winner that can make the rest of the investments reach 5X or 10X the investment in their current fund.

So as such if your startup is in the Enterprise Software side, you may get a lot of meetings, waste a lot of time and get the runaround. They will see if you are still around in 6 months time to ask for money! From their point of view they have reduced their risk if they make you wait and see if you have added customers fast enough at a rate that shows immense potential!

Nothing succeeds like success.  In fact the ONLY thing that matters is if companies are willing to shell out money to buy your product. Do they have a pain and is the pain, painful enough for them to spend money TODAY. Not Tomorrow or Day After. Today!

If you can show very fast growth in some company, no matter if you make and sell cow-dung cakes, as long as you can show $50M in 5 years, you will get venture funding. But this is a chicken or egg - which came before kind of situation. You will have to show some growth before you get VC funds and to show the growth you may need the VC funds.

Also remember that growth does not have to be in terms of revenues alone - if you can demonstrate that your business has the potential  of achieving other growth parameters like hits on a  web site, signing up even for free, high spending young people in India, etc - those can attract venture funding.

You will have to get friends and family to pitch in for a product company. It will be painful to get to a stage where you can start lining up customers but persistence and focus may pay off - you may not need venture funding - Oracle, Microsoft, PeopleSoft were all companies that grew a lot before they took small or no venture funding.

The trick is to understand how and why VCs invest money. This is where including me entrepreneurs delude themselves till they are bankrupt with all kinds of self-delusional talk - my product is so great that people will realize how great it is and line up before my gate - my product is so patentable that no one on earth will be able to figure out for another 50 years - all of them painful lessons to learn. You don't want to do that I have been in many even venture funded companies that do this!  By the time I finish this post the dynamics could have changed with the Financial Meltdown in the U.S. These things keep changing constantly!

If you have an idea that is defensible IP wise and has global potential, go for it. If you build a customer base quickly and compellingly the VCs will call on their own.

That's the only way to prove that your idea is good - show customers willing to shell out money for buying it rather than fool around in-house for ever with half baked substitutes!

Good Luck!

Hi Nari,

Thanks for sharing the experiences of "first-hand" dealing with VCs. My own experience at Movico is very similar to what you describe as vc-strategy-for-enterprise- product.

My own reading is that the VC community in India is nascent and it needs more "risk-taking" and "enterpreneurial" change agents.  The "professionals" have more of a numbers based approach to investing. For me, the wisdom of John Warnock - handed down at an employee meet - defines my enterpreneurial style - markets that dont exist can not be measured.

I have a +ve outlook on this and believe it will happen..

Warm regards,

Arvind

Dear Aravind,

On top of all I would suggest, Try marketing your concept as a solution by making a prototype and let the customers know that you are going to provide them a proper solution.  In fact every product is not a whole.  It is customizable any ways(if that is true in your case.)  You get one customer for your self.  You get two customers for your self.  Next approach with your ideas of funding in what ever the direction you wanted to.  This can be happened with all the little money that you saved.

Your product having customers will give you more energy and you can better manage your investors too.

Regards

Srikanth.

09346777581

Dear Arvind

If you require any marketing support please let me know

Regards

Srikanth.

09346777581.