Startup Advice: Inside Tips From Expert Entrepreneurs

When the dot-com bubble burst in early 2000, many investors lost 80% to 90% of their net worth; some lost even more. The CEOs of those tech startups fared no better. Many companies that were once million dollar babies soon became the laughing stock of Wall Street. But, after a slow and deliberate crawl back to a state of equilibrium, the startup scene is thriving once again.

To gauge the pulse of today’s tech startup ecosystem, we spoke to a group of New York-based entrepreneurs and investors. We asked the CEOs of Learnvest, Roadify, Hunch, and HowAboutWe what it’s like to pitch, run and grow a company. We also asked angel investor David B. Lerner and seed-stage venture capitalist Brett Martin what they’re looking for when they evaluate a company.

How healthy do you think today’s tech startup ecosystem is? Are you a founder? Investor? Enthusiast? Let us know what you think in the comments section below.

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'Super Angels' Alight

No Longer Flying Solo, Big Investors Attract Others to Juice Start-Ups
By PUI-WING TAM And SPENCER E. ANTE

Much of the venture-capital industry is undergoing a shakeout. But a growing
breed of start-up investors dubbed "super angels" is rapidly raising new
money-and ratcheting up competition with established venture capitalists in
the process.
Aydin Senkut, a former Google Inc. executive, plans to announce that he just
closed a $40 million super-angel fund from institutional investors and
wealthy individuals including hedge-fund manager Peter Thiel. His fund
follows a $20 million super-angel fund by start-up investor Ron Conway in
May and an $8.5 million fund from by former Google executive Chris Sacca in
June.
Meanwhile, former PayPal Inc. executive Dave McClure is raising a $30
million super-angel fund, according to a regulatory filing. And super-angel
investor Mike Maples, who raised a $33 million fund in 2008, is raising a
new $73.5 million fund, according to a regulatory filing.
Many super angels started out just as mere angels, wealthy current and
former Silicon Valley entrepreneurs and executives who invest their own
money in technology start-ups.
Aydin Senkut, in his office in Palo Alto, Calif., last week. plans to
announce a $40 million super-angel fund.
What elevates super angels into an unofficial upper class generally is the
magnetic effect their participation in a deal has on other investors-a main
reason entrepreneurs like to do business with them.
And for super angels, investing has evolved into something more than a
hobby. These players are now raising funds with outside money, investing
full time and competing with VCs.
While their funds tend to be small, super angels have had an outsize impact
on Silicon Valley. As many traditional venture capitalists retreated after
the tech bust last decade, super angels filled the gap, investing small
amounts of $25,000 to $1 million in dozens of new start-ups such as Facebook
Inc., Mint.com and Zynga Game Network Inc. Super angels also work with
established venture capitalists to bring them new deals.
As these micro-cap venture capitalists now raise their own funds-giving them
more ammunition to participate in later financing rounds of a start-up-they
are siphoning off more investment deals and fund-raising dollars from larger
venture firms.
Judith Elsea, a managing director at Weathergage Capital, a $250 million
fund-of-funds firm that invests in venture funds, says she recently invested
in Mr. Senkut's new super-angel fund and has also put money into Mr.
Maples's super-angel fund-at the expense of traditional venture funds.
"It's been pretty spotty" performance from regular venture funds, says Ms.
Elsea. So "we have material exposure to several of these [super angel]
managers."
Investing in super-angel funds can pose risks in that they typically invest
in far-less-proven start-ups than venture capitalists do. And unlike venture
capitalists, who have hundreds of millions to invest, super angels generally
don't have enough money to fully fund a company to fruition.
Still, super angels are increasingly jockeying with established venture
capitalists for stakes in start-ups. Geoff Yang, a venture capitalist at
Redpoint Ventures, which closed a $400 million fund earlier this year, says
his firm has been "squeezed" into a smaller ownership share in some
investments because super angels wanted a bigger slice of the deal. While
angels have brought many new start-ups to Redpoint's attention, "every
[venture capitalist] is trying to figure out what their strategy is" with
them, he says. "Are these guys friend or foe?"
Some start-up entrepreneurs say super angels have thrown them lifelines they
couldn't secure from venture capitalists. Ryan Howard, chief executive of
San Francisco online health-care start-up Practice Fusion Inc., says venture
firms turned him down in 2008. They "want no risk," he says.
Super angels wrote Mr. Howard checks for $25,000 to $100,000, so that he was
able to raise $1 million by early 2009. "Their network is mind-blowing,"
says Mr. Howard, whose firm raised a venture round from Morgenthaler
Ventures late last year.
The super-angel activity contrasts with the rest of the venture industry,
which is winnowing out after a decade of poor returns amid a lackluster
initial-public-offering market for start-ups. The number of active venture
firms is nearly one-third less than the 1,326 in 2000, according to research
firm VentureSource.
Super-angel Mr. McClure says he tends to make dozens of small start-up bets
and can comfortably make money if just a few of the start-ups are bought by
larger acquirers for less than $100 million.
In contrast, big venture funds-often sized at several hundred million
dollars and up-need bigger paydays to turn a profit on their huge funds.
"We have a whole different set of exit criteria," says Mr. McClure, whose
biggest exit to date is Mint.com, the financial website that Intuit
<http://online.wsj.com/public/quotes/main.html?type=djn&symbol=INTU> Inc.
bought late last year for $170 million.
Mr. Senkut, who has invested in more than 60 start-ups as an angel investor
since 2005, says he raised a super-angel fund because he wants to shift from
being a minority investor in start-ups to taking majority stakes more often.
With the new fund, the 40-year-old is growing from a one-man shop to a
larger operation by hiring two staffers.
Having seen 10 acquisitions of start-ups in his portfolio over the past
year-including Mint.com to Intuit and social search service Aardvark to
Google <http://online.wsj.com/public/quotes/main.html?type=djn&symbol=goog>
Inc. for $50 million in February-Mr. Senkut says he is exiting from his
start-ups three months to three years after the initial investment. By
contrast, most venture-backed companies now either go public or get sold
after a median time of 9.4 years, according to VentureSource.
Write to Pui-Wing Tam at pui-wing.tam@wsj.com

In India, Wal-Mart Goes to the Farm

HAIDER NAGAR, India — At first glance, the vegetable patches in this north Indian village look no different from the many small, spare farms that dot the country.

Enlarge This Image

Keith Bedford for The New York Times

Factory workers sort produce for Bharti-Wal-Mart.

Related

· Times Topics: Wal-Mart Stores Inc. India

But up close, visitors can see some curious experiments: insect traps made with reusable plastic bags; bamboo poles helping bitter gourd grow bigger and straighter; and seedlings germinating from plastic trays under a fine net.

These are low-tech innovations, to be sure. But they are crucial to the goals of the benefactor — Wal-Mart — that supplied them.

Two years after Wal-Mart came to India, it is trying to do to agriculture here what it has done to industries around the world: change business models by using its hyper-efficient practices to improve productivity and speed the flow of goods.

Not everyone is happy about the company’s presence here. Many Indian activists and policy makers abhor big-box retailing, fearing that it will drive India’s millions of shopkeepers out of business. Some legislators are suspicious of the company’s motives. The government still does not allow Wal-Mart Stores and other foreign companies to sell directly to consumers.

But Wal-Mart is persisting because its effort in India is critical to its global growth strategy. Confronted with saturated markets in the United States and other developed countries, the company needs to establish a bigger presence in emerging markets, like India, where modern stores make up just 5 percent of the country’s retail industry.

Establishing good relations with farmers is a centerpiece of the company’s plans. Though Wal-Mart is pushing many of its traditional products in India, like clothes, electronics and home goods, perhaps none is as essential as food. Wal-Mart needs high-quality produce at low prices to attract customers in volume.

The challenges are significant. Buying and transporting vegetables and fruits are difficult tasks because India has millions of small-scale farmers and an agriculture system riddled with middlemen.

Here in Haider Nagar, in India’s bread basket state of Punjab, farmers who supply vegetables to Wal-Mart say they like working with the company. It typically pays them 5 to 7 percent more than they earn from local wholesale markets, they said. And they do not have to spend money transporting produce because Wal-Mart picks it up from their fields.

Abdul Majid, who sells cucumbers to Wal-Mart, says his yields have risen about 25 percent since he started following farming advice about when to apply fertilizers and which kinds — more zinc, less potash — from the company and its partner, Bayer CropScience.

Mohammad Haneef, a farmer in a nearby village, said he had sold to two other companies before Wal-Mart came to town, but one shut down and the other cheated him and paid him late. Wal-Mart is much better, he said, but its buyers are picky, taking the best vegetables and leaving him with the inferior ones that he still has to truck to wholesale markets.

“You have to establish trust,” he said in Hindi. “Wal-Mart has been paying on time. We would just like them to buy more.”

For Wal-Mart, establishing an agricultural beachhead in India will not be easy. Many Indian companies have abandoned or significantly scaled back efforts to run supermarkets. Some companies grew too quickly and flamed out. But many others were undone by the numerous Gordian knots that hold back Indian agriculture: laws limit who can buy farmers’ crops, 35 percent of fruits and vegetables are wasted because of inefficient transportation and farmers earn too little to invest in their marginal farms.

“Anybody who says they can revolutionize retail in this country in a short period of time” is overestimating their abilities, said R. Gopalakrishnan, executive director of the Tata Group and chairman of Rallis India, a company that makes fertilizers, seeds and pesticides.

Wal-Mart is also limited by New Delhi’s ban on foreign-owned retail chains that prevent it from selling directly to Indian consumers.

“Not having access to our own retail stores through our own investments is a serious impediment,” said Raj Jain, who heads Wal-Mart’s Indian operation. “How do you pay for that big back end if you are not going to have access to the front end?”

Right now Wal-Mart operates in India through a 50-50 joint venture with Bharti Enterprises, an Indian conglomerate that also owns the country’s largest cellphone company. Their partnership, known as Bharti Wal-Mart, supplies retail stores that are fully owned by Bharti and runs a wholesale store that sells to shopkeepers, hotels and other businesses.

Wal-Mart executives would not say how much money the company has invested in India, but its operation is at the forefront of a second big push into emerging markets. In the 1990s, Wal-Mart set up shop in China, Mexico and Brazil and now has hundreds of stores there. By comparison, Bharti Wal-Mart has just one wholesale store and will soon open two more. It employs 800 people in India, and hopes to have 5,000 in three years.

In recent speeches, senior Indian leaders have suggested that they would like to remove restrictions on the retail industry to help reduce food prices, which were up 20 percent in January compared with a year earlier. Last month, Prime Minister Manmohan Singh cited the need “to take a firm view on opening up the retail trade.”

But even as senior leaders speak of more openness, regulators recently published a rule that would restrict wholesale companies like Bharti Wal-Mart from earning more than 25 percent of their revenue from sales to affiliated “group companies” — a term that is not clearly defined in the rules. A spokeswoman from Bharti Wal-Mart, Arti Singh, said the company was trying to find out what this meant.

Last year, a committee in the Indian parliament said the government should not allow any more wholesale stores because companies like Wal-Mart were using them as “camouflage for doing retail through back door.” The legislators also asserted that foreign companies would raise their initial low prices after they had driven small retailers out of business.

Wal-Mart has not waited for Indian policy makers to effect changes. It has spent the last two years building relationships with farmers and suppliers, and setting up its supply system. It is building a big distribution center outside New Delhi to supply Bharti stores, which are branded Easy Day, in and around the capital.

Wal-Mart also has learned to adapt its operations to numerous challenges. For instance, because trucks move slowly on the country’s congested roads, Wal-Mart’s fruit and vegetable distribution center near Haider Nagar supplies retail stores only within 200 kilometers (124 miles) to keep produce fresh. By comparison, similar Wal-Mart facilities in China supply stores as far away as 400 kilometers.

But that means the company will have to set up more distribution centers with expensive power generators, making it more difficult to make money in India.

Still, Mr. Jain, who previously worked for Whirlpool and Unilever, was optimistic. He said the company would add more farmers and stores in Punjab and neighboring Haryana State, then begin expanding further.

This is “a controlled experiment,” he said. “It will take some time to make it sustainable and economically viable. Then once that happens, we need to take it to some other geographies and prove the model.”

Yes, You Can Build a Web Company in India. Here's How.

by Sarah Lacy on Mar 24, 2010

Silicon Valley and India have a cozy relationship, but a big question has resulted in friction, failed companies and millions in losses: When will the Internet catch on in India in a big way?

A few companies have done well and a few more are coming up, slowly but surely. But there are hardly any true breakout hits.

RedBus is pretty close. It's essentially an Expedia for bus tickets in India. It sells about 3,500 bus seats per day, is the fourth most-trafficked Web site in India and has at least tripled its revenues year-over-year. The company sells seats for roughly half the bus operators in India, and that's saying something: This is an insanely fragmented market that had next to zero centralization just a few years ago. All of this has been built in three years on about $1 million in venture funding. (The company raised another $1.3 million in 2008, but it's still in the bank. Investors include Helion, Inventus and Seedfund.)

I can vouch for the company being cheap. Having spent my morning in the plush eight-acre Infosys headquarters, the offices of RedBus were a marked contrast. They are split among two buildings located in one of those very chaotic Indian neighborhoods where vendors are shouting, cows are wandering and smell of open sewers is not too far off. It feels far from the sanitized, steel-and-glass rows of multinationals.

None of this is intended as an insult– co-founder and CEO Phanindra Sama is proud of his cheapness. (Sama is pictured above, sorry it's so blurry. My camera was having issues.) We met in a no-frills, un-airconditioned conference room. He didn't turn on the air conditioning for famed Silicon Valley Indian entrepreneur Kanwal Rekhi, when he visited last month either—and Rekhi is an investor in RedBus.

Despite the sweat trickling down my forehead, arms, legs and back throughout the interview, I didn't want to leave. What Sama and his two founders have pulled off in a short period of time with little funding in India is impressive.

Background for Americans: There are two kinds of buses in India—those that make stops and have ticket-takers on board and that go to one destination only and sell pre-paid tickets only. There are some 3,000 operators of the latter category and, before RedBus, there was no way to contact them directly. To get a bus ticket, you went to an agent. That agent only had inventory from a few bus lines. To book the ticket, he or she would call one person who was in charge of booking every seat on that particular route. There was a long wait time, and frequently the routes the agents knew about were sold out – meaning you had to change your travel plans, or find another agent who had different sources. Meanwhile there was no standardization on pricing and commissions. The agent simply wrote the cost on a piece of paper and if you wanted to ride, you paid it.

Now, RedBus has a central database that gets seats from half of India's bus operators. It has done so well that it powers the bus ticket applications for most of India's more general travel sites like MakeMyTrip.com. It also sells an OpenTable-like software-as-a-service product to help bus companies manage their own inventory and better integrate their inventory with RedBus. In terms of seats, it sells less than 1% of the 750,000 rides taken daily, but with several channels and few other easy options, there's a ton of room to grow a big company.

Sama didn't set out to build a company. I know that's a cliché with startups these days, but it's a rarity in Bangalore where the glamor of being a Web entrepreneur runs high and plenty of TechCrunch-reading kids save up money, quit for a year, try to start a company, and go back to a multinational if it doesn't hit quickly. When RedBus's mentor first suggested the company raise $1 million, Sama gasped. He hadn't even thought in those amounts. His only immediate thought was: "If I had $1 million, I'd put it in the bank and make interest."

That mentor was Sanjay Anandaram formerly of Neta, Wipro and other ventures known between the Silicon Valley and Indian entrepreneur communities. Sama met Anandaram through TIE's JumpStartUp program. Despite the reach, influence and press of TIE—the uber-Indian networking organization started in the Valley— Sama is the first entrepreneur I've met in India who gives it this much credit for his company's survival.

Specifically, he cites Anandaram's advice. When RedBus was trying to sell software to the bus lines, it was Anandaram who said: Don't keep trying to sell the same thing, ask what they need and build that. The bus lines needed to sell seats. So RedBus built a site, and bought the inventory itself from the bus lines to list on the site. Once it proved it could move seats, the operators were happy to pay the company a percentage of seats sold.

Once the company could prove results, it was Anandaram who warned them to undersell expectations: Tell an operator you can sell one seat for them a month, even if you think you can sell fifty. If you sell two, you'll be a hero, not a disappointment. RedBus has carried that over to fundraising, admittedly forgoing higher valuations because it didn't want to oversell and under-deliver.

That's harder than it sounds for an entrepreneur, who is usually the single most bullish person on his company. And it is absolutely shocking in India's startup culture. I had a blog network tell me on my last morning in India – with a straight face – that it would be doing double the revenues of Gawker in a few years. I like to give entrepreneurs the benefit of the doubt, but I also know the media business. Forgive the generalization, but Indians just love to over-sell. It's deep in their trader heritage. "You have to sacrifice your ego," Sama says.

But, especially for a startup in India, the most important piece of advice Sama and his co-founders got from Anandaram might have been this: You are not an Internet company. Because the Internet isn't more widespread in India, there has to be a core mindset that the Net is an important channel, but just a channel. Just under 50% of RedBus's business comes from the Net, much of the rest is via mobile phones.

And the company invested early in two expensive ways of skirting that Web limitation. The first was building its own network of bike couriers to deliver tickets and take payments, ala the hugely successful Chinese online travel company, CTrip. The second was investing in seven different call centers throughout India, not one central call center. Says Sama, if you don't localize a call center to local slang, languages, and customs the customer service won't work.

Seriously? An Indian in Bangalore arguing a centralized, remote call center can't give good customer service? That has about as much globalization-irony as China's BYD refusing to outsource any of its manufacturing.

For Anandaram's part he noted the founders' willingness to listen and learn from someone who'd been there. He says the biggest mistakes he sees Indian startups making are not seeking advice, being too obsessed with retaining control and not valuing sales, marketing and partnerships.

The RedBus story squares with something I've been noticing more in my travels to emerging markets—frequently when entrepreneurs complain about a lack of angel investing or venture capital, what they are really lacking isn't just the money, it's the mentorship. This came up in my recent conversation with Pierre Omidyar, whose philanthropic effort, the Omidyar Network, seeks to fund both non-profit and for profit entrepreneurs specifically those in the poorest areas of the world. Omidyar Networks has money it can gives these entrepreneurs, thanks to eBay and the dot com boom—lots of money. But what the organization is increasingly finding so lacking is that horrible buzz word "human capital."

In Omidyar's own experience, eBay never touched the $3 million it raised from Benchmark in 1996. But the mentorship he got was well worth giving up 25% of the company. "That's what is so hard to find around the world," Omidyar says. "We're increasingly looking at whether $500,000 worth of human capital could help more than $500,000."

I know that the idea the VCs bring more than money is ridiculed by most entrepreneurs today, but those are usually entrepreneurs operating in a scene that has had an explosion of startups—both failed and successful ones—in the last fifteen years. Even the shiest, most awkward or most unconnected entrepreneurs in the Valley can find a mentor with little effort. Sometimes we take for granted that that's not the case in much of the rest of the world.

Lucky for RedBus's founders, they were an exception.