Ideas|Products|Startups|VCs

Entrepreneurs think that their business idea is very good and will manage to attract VCs. For VCs, more than the idea its scalability that matters. Its a very common reason for VC to turn down your business proposal stating your business venture is not scalable. 90 out of 100 business plans are rejected citing lack of scalability, and questions hovering around scaling. So what is scalability and why is necessary to attract VCs.

Classic example i can quote is movie rental service. I worked in a  movie rental startup company, they started with Bangalore centere and within 6 months started operating in Mumbai and Delhi, this is scaling. In order to run operations/stores in multiple location it requires a head office cost and costs to develop and deploy ERP/SCM/CRM solutions. Thats is why each additional center will contribure much higher amount towards profit. This movie rental service company scaled to 8 cities and successfully raised $21M.

The point here is that if you are seeking external investment from people other than friends or family, they will want to know how they can exit from their investment – which will be from building a business that is sellable. To be sellable, you have to be scalable. Make sure you are clear about this and your business plan should reflect that.

For dotcoms, the ability for a Web site to grow at a rate comparable to that of the business itself is known as scalability.The website should be able to serve all users request seamlessly with increasing volume of online traffic. For ecommerce its just not your technology but their complete business model has to be scalable as well by entering into new product category or new market.

So assess your business plan well on scalability factor before pitching it to VC.

-Hitesh, vcBytes.com

Wishing all the readers a very happy friendship day.This week is marked as friendship week, so this post is all about analyzing VC and entrepreneur relationship. Can VC and entreprenur be friends? it’s a little tricky question and don’t have straight answer for it.

Let’s investigate few scenarios -

a) There is no guarantee that VC will invest in company which is run by his/her entrepreneur friend. One instance its worth mentioning here is a prominent VC based out of Bangalore had long discussion with entrepreneur friend who runs a prominent F&B chain. VC didn’t find the value in that deal and was convinced exit won’t be easy with 7x-10x kind of returns. Running a 8-10 fast food chain has different kind of problems than running 80-100 fast food centers.

b) There are instances where entreprenuers have become good friends with on boards VCs just be their sheer execution capability, and entrepreneur have become Partner in the same VC firm after successful exit. Mark Suster became general partner at GRP partners after successful exit of his venture backed by GRP partners.

c) Sometimes founder can be displaced out of the company day today’s operation if VCs perceive founder is thinking VC money as his/her own money and performance of the company is quite mediocre. Entrepreneur founder is always in a impression that they are indispensable which is a big mistake they commit.

-Hitesh, vcBytes.com

2009 was tough year for companies in raising venture capital since most of the VC firms were averse to taking risks. However VC investments and deals took place.  Here are the top 5 VCs in terms of investments -

• Intel Capital invested in One97 Communications, IndiaMART.com, Global Talent Track, FINO,  ItzCash and BuzzInTown.
• Matrix Partners India invested in FIIJEE, Ver se Innovation Private Limited, Siesta Hospitality, ItzCash and  Quikr.
• NVP invested in  PubMatic,  MapMyIndia, Eka Software Solutions, VMops, OLX Inc,  Deccan Healthcare and mCheck.
• Helion Ventures invested in Pubmatic, YLG, Brand Calculus, GETIT infoserve and Global talent track.
• Aavishkaar invested in Waterlife India Pvt Ltd, Zameen Organic, Swas Healthcare, Saraplast, Suryoday and Utkarsh Microfinance

-Hitesh, vcBytes.com

Groupon raising close to $30M triggered its clones to emerge globally, there is a groupon clone in every continent barring Antartica. Groupon clones in UK, Russia and Germany have successfully raised capital from VC firms, question arises here will Indian clones can also taste the success like their european counterparts.

Lets look at the grouping portals in India – Grabbon, Koovs, Mydala, Snapdeal, Wanamo, Mobstreet, BindaasBargain.

In my view Groupon clone should feel highly fortunate if they able to raise funds and bring in VC to their board.

a) No clear differentiating factor – There is no stand out and clear differentiator, every clone works in same way, only differentiating factor i see is location/city they are serving and some clones are justifying the distinction on the basis of numbers of fans in their respective facebook page.

b) No entry barrier – One really don’t need any extra skill sets to come out with one more version of clone, with the help of 2-3 developers and 1lac of investment one can up and run the clone. Absolutely no entry barrier.

c) Deals aren’t lucrative – None of the clones are focussing on a particular vertical, most of the deals are related to restaurants, weekend package, spa etc. Interestingly none of them are focussing on the lines of Nimblebuy, its also a groupon clone founded by my ex CTO at Andale Prashant Nendungadi , it deals only in electronic items.

d) Lean Profit margin – how much margin grouping site makes on each deal? my view is somewhere around 10-15% and additionally they would be taking a flat fee as advertising charges from the merchant. So if a grouping site sells close to 500 deals then they are doing some business which may attract a VC, but unfortunately they tend to sell on an avg 25 deals/day.

so what do you think about Indian grouping sites, share your views.

-Hitesh, vcBytes.com

What are the most important things that investors look for before investing in a start-up? What separates rejects from stars? Here are seven characteristics most venture capital investors look for in a promising venture.

A Proprietary Product, System, Method or Approach

Investors look for surefire indications that the firms they are investing in have a leg up on competitors. While patents, trademarks, copyrights and other trade secrets do not guarantee success, many successful ventures enjoy one or more of these advantages.

A Large Potential Market

What good is a great product or service if the potential market is too limited? In a relatively small market, a venture might have to capture the entire market to be profitable. Most investors look for ventures that operate in markets large enough to result in significant revenues and profits. Large sustainable profits usually lead to greater enterprise value.

Customer Acceptance

Nothing is more convincing than a rapidly growing base of satisfied customers. Well-written business plans, multiple patents and spectacular Power Point presentations are great, but early rapid product acceptance is where the metal meets the road.

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