Venture Creation

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Presented below are excerpts form the speech made at the recent TiE ( IndUs Entrepreneurs) meet at Bangalore by Prakash Bhalerao, Serial entrepreneur. Angel investor & VC. Prakash Bhalerao, is Chairman of highly sought after Silicon Valley startups, the Alopa Networks Inc, Amber Networks Inc, CMOS Chips Inc, ConCio Inc., e-pundit Inc., Ishoni Networks Inc and Im the last one and half years, these companies raised over $200 Million in capital and have market capitalization worth billions of dollars. As an Angel investor and VC, Prakash has helped over forty companies worldwide. He has an incredible track record as an entrepreneur. Several of his ventures like Armedia (which also has an office in Bangalore was acquired by Synopsis) and C-cube are success stories. He is an active participant and limited partner in several Venture funds targeted towards India. Here are the excerpts:


A lot of people feel that I have a unique venture model. I don’t think my model is very unique. It is a well-tested old model, and that’s how the venture capital business started, though we have forgotten about this. In early 80s when the VC business started, fund sizes were US$30-40, which were managed by a maximum of 5-6 general partners all with operating background. Look at the background of John Dorr, John valentine or Vinod Khosla. All of them were having operating background and because of this combination of operating skills and general management skills they could spot things that a founder could not spot. That brings me to another common misconception about who is the Founder and who is the entrepreneur. To me the person on whose idea the company is founded on is the founder and it is not necessary that this person is the entrepreneur. For me the entrepreneur is the person who gives direction to all the confusion. These are two different roles, which often get confused.


We often call founders entrepreneurs and entrepreneurs founders. But none the less if you look at the history, the people (Venture Capitalists) who were successful, their funds grew to 400 millions dollars, but the number of General Partners did not grow because one could not add as many General Partners. Hence funds started hiring people from business schools, who had great analytical skills, but had very little of what it takes to run a company, what is takes to look at problem as the company converts from idea to business. So the model that I have is not so unique. If you look at their first generation companies, funded by these pioneering Venture Capitalists, they had very high success rates, and I too have a success rate, which is almost 100%. What I have learnt out of this process I would like to share with you.


Those of you who are good entrepreneurs should remember that money is more important that the idea. Make sure the money is lined up. And to line up the money here is the rule. Rarely do VCs and angels invest in unknown people. I have invested in more than 30 to 40 companies over the last twelve years. I have never invested in total strangers. Either I knew the people or somebody who knows me knew them. What is important is that they should have the technology. What is also important is that their character, well tested and well proven. Often angel investors do invest in people who have the right ideas, but in order to get to that, it I very important either you find an intermediary or you build a relationship with an angel or a VC. Now, I am a limited partner in 5 VC firms where I have invested money and also a partner in some Wall Street firms, guess what happens? Some founder comes to me, I like the idea, and then I take the risk in putting in the initial funding. It may take nine months or a year until you could get money from a VC. Now when I introduce the company to the VC typically I state the fact that I have some relationship with these companies.


So typically a VC invests in this company not necessarily because of the idea but because I am actively involved with more than my skin tied into the company, and that I am taking an active role in that company. This is very important to remember. John Dorr and John Valentine did not fund strangers either. They funded people who used to work for them in some companies before. Next thing that I learnt is that you must raise enough funds to take you through the next risk stage. Typically I get a lot of entrepreneurs saying things like “all I want from you is $ 50,000, just your name”… it does not work that way. What is required is that you should look at eh various stages of a company, first customer converting to more and then naturally more products. Enough money is raised upfront so that one goes through stage one. Then enough to let you complete stage two, you cannot stage two, you cannot run out of money in-between.


The model that I have may be different from other angels in that some times I have invested over 10s of millions of dollars in a company, and yet I have a strong belief in what we are doing and we have the passion and commitment from the people that we work with so that we can move around as the company’s market moves around. Some times we just do not have the control over the market, sometimes the market moves under you. One must have the ability and the financial strength to push through or make sure you raise enough funds in the company to go through with these situations and that is what I have made sure.


Investment is nothing but an act of faith. You might have the greatest idea in the world but if you do not have the faith, you will not get anybody’s investment.


Starting a company is hard business. I do not know of any company that started with a business plan of X and went through the exit with the same business plan. C-cube for example started of as an intelligent disk controller and went out as a video compression company; and I cite example after example where a similar thing happened. It is important to ensure that you constantly position and reposition your offering so that there is differentiation and this differentiation has to stick with the company.


Idea and business plan only get you in the game, it qualifies you to play the game, it allows you to get into the cricket ground, it does not ensure you to win the game, and that is just the stage one.


The day you incorporate you are behind. The only difference between you and your big corporate brethren is that they are tied in with institutional politics and rigmarole, but you can run fast with a single goal that you need to succeed. That makes the difference when it comes to sign up that first customer. Also find out who are your vendors and who are the partners who are going to help you in this process.


Show me the best team and I will show you the best product. Collect the best people that you can. There is no way that a company is going to have enough of sales people. In most of the companies I run in the beginning, it is my intention always to hire a CEO with a sales background. To develop the first million dollars of sale is the toughest thing in a company’s life. Everything else you can do, you can raise money, you can develop technology, you can do whatever you want but to get somebody’s dollar for your product, that is the toughest thing.


Entrepreneurs are often mistaken on focusing on valuation and which VC to go to, It is more important to focus on which lead investor, or lead corporate investor. It is very important to have the industry data to stage the discussion on the valuation. And lastly the point that most people miss, VCs do the due diligence on the company or the people, but the people do not run a due diligence on the VC and other partners. It is very important that you know what you are getting into. We get so enamoured with the money and the dollars that you want to sign up, but it is very important to know who are the people you are partnering with.


I think the companies in India are going to face series of challenges. I have some companies in India where I am involved but all these are product companies. There is a product vs. services mindset among Indian entrepreneurs born and bred in India as against in the US. Thus in most proposals I see the very aim is “service oriented”. If you want to start a service company fine, but if you want to start a products company do not mix it. The only one who can do products and services is Shiva who is Ardhanarishwar. The mindsets required are very different, one can be a product or one can be a services company, make up you mind what you want to be you cannot do both. Worldwide market knowledge and techno commercials are not possible sitting in India, so you need to start thinking bi-coastal.


Capital investments in telecom and microelectronics are the two technology driven entities that you can form companies around are very high. You need to plan your budgets and expenses accordingly. You cannot cut short on your telecom equipment to test your product for instance, it does not work that way, and you have to make those investments.


You have competition coming from other countries. I have seen proposals coming from Vietnam, Ethiopia, and China, which are product oriented in these areas. So beware, the competition is global.


Acceptance of the idea of distribution of equity and sharing wealth is very important. I see proposals from Indian entrepreneurs like “ I will keep 90% and distribute 10% among the VC’s and the employees” Well that’s not workable. You need to start thinking from Chaprasi to CEO and vendors around you and the people help you with full heart and commitment.


Acceptance in Mergers and Acquisitions is required. Selling a company is a stigma in India. The only way you can grow in an emerging market or a developing market is through merging and acquisitions. CISCO: only 3% of the revenue of Cisco today comes out of the original product CISCO had, 97% comes from Cisco’s acquisitions of technologies and companies. It is very important to think that Mergers and Acquisitions are OK, as long as it returns the right value to the shareholder.


Telecom and microelectronics is a massive opportunity and India can have a major breakthrough in this area.


Most importantly there are great institutions around you; Defence institutions, Indian Institute of Science and lots of other institutes. You can spin off technologies out of these institutions.


Thinking of Silicon Valley there are lot of interesting facts. It has the highest number of PhDs per square mile in the world. Highest number of patent holders per square mile is in Silicon Valley. In the heydays of the Valley there were 26,000 Indian multi-millioners. It is possible to make the same happen here in Bangalore.

Issue BG10 Jan02