How to Organize Working Capital for a Start-up Company?

Thursday, December 2nd, 2010

Startups usually start off with self-funding or funding by friends, and family. Sometimes the founding team will look for a partner who can bring in capital. However, it is important to ensure that the partner shares the vision of the founders.

Startup can also approach angel investors, though angels can be quite hardnosed about parting with their hard earned money. They will look for the ability of the team to deliver, the size of the business idea, and the possibility of creating a sustainable competitive advantage through patents etc. There are intermediaries who can help startups to find funding. These intermediaries can be useful provided they can provide honest feedback on the idea and connect the startup to a network of investors.

Do You Get to Draw a Salary, if funded by a VC?

Thursday, December 2nd, 2010

Heavens, yes! One of the purposes of bringing in an angel/VC firm may be to provide cash to disburse salaries to founders and new employees. Of course, you will own a smaller part of the company than you did before the VC came in. But if the inputs of the VC can increase the value of the company you will end up with a higher value in your hands, even with a lower percentage of ownership.

However a VC may also want to restructure the management team, so if you are the CEO, you may want to check on whether the VC thinks you can take the company to where the VC would like it to go. In other words, you’ll get paid a better salary than before, provided you retain your job! Often what happens is that the CEO position is taken over by someone else while the founder CEO takes on other senior leadership role in the company.

HKVCA Luncheon Talk OCT 22, 2010

Tuesday, October 19th, 2010

The Role of Private Equity in the Portfolio

Why invest in private assets classes?

• Rationale and long-term returns
• Recent trends in private investing
• What has changed post global financial crisis?
• Lessons learned

What is the role of private asset classes in the portfolio?

• The spectrum of private strategies
• Return and other objectives
• Role of real assets

Investment philosophy and strategy

• Determining target allocation, investment pace and commitment sizing
• Importance of diversification, by vintage year, geography, etc.
• Role of secondaries

Implementation: opportunities and challenges

• Key success factors
• Track records in Asia
• Alignment of LP/GP interest


The China Club,
14/F Old Bank of China,
1 Bank Street, Central, Hong Kong


12:30 – 2:00 pm

Register Here

Getting across to those who matter

Friday, July 30th, 2010

You’ve got this great idea. Its simple, powerful, and it just might change the world. Trouble is, nobody else wants to believe you. Not even your Dad, who threw a fit when you suffixed the demo with a demand for ‘angel’ funding.

Well, the reception may have nothing to do with the idea and everything about how you handle the most primordial force in the planet: resistance to change, also called the bestial bureaucratic bandwagon.

Most people who are in a position to help, don’t want the world to change. This includes VCssitting on those wads of cash you’re after. They want things to remain just as they are with minor upward tweaks in their own paristhitis ( situation in Hindi). Doing what they need to do to send you into orbit is just a bit too painful given the alternative of doing absolutely nothing at all.
They have never had an original idea in the last ten years, ( yes I mean not even one), so they have forgotten anyone could come up with one. Especially not a snot faced kid like you.

Even if you somehow convince them you may be right, they are in a jealous rage over not having been the recipients of the bolt from above and will do everything to pull you down.

So selling a new idea is hard. How do you do it? One, have faith. There is nothing so powerful as an idea whose time has come. So persist. Two, keep improving your idea by listening to your target audience’s reactions. There is no idea so perfect that it will not merit tweaking. Three, change your communication strategy. Its one thing to develop a great idea and quite another to communicate it in a compelling way.

If you remember these simple rules, one day, you may own a piece of real estate in the land of ideas that changed the world.

Startup Nation

Friday, April 30th, 2010

Israel is known for a lot of things – home of the Jewish people, locked in perennial strife with the Arab world, Zubin Mehta’s favourite philharmonic…What is less known is that Israel has the highest concentration of high tech startups on the planet. That many of the revolutionary leaps of the last thirty years have had at their core the Israeli innovation engine – from the microchip that fueled the personal computing revolution  to the router that made the internet happen.

Dan Senor and Saul Singer in their book Startup Nation explore the factors in the success of Israel. One of the unexpected drivers that they identify is the role of the military in creating entrepreneurs. Israel has a reserve army of civilians, all of whom have undergone 2-3 years of military service from the age of 18-20. These young Israelis are thrown into life-or-death leadership position at an early age, and are expected to make their own decisions, not merely carry out orders. Certain kinds of military training in the scientific wing of the defense forces are highly coveted and are open only to the brightest students in science and mathematics.

As a result of this exposure an Israeli coming out of college at 24-25 years has a far greater capacity to lead and manage than one emerging from most other parts of the world.

Two behavioural traits seem to be important  to the Israeli story: one is an innate need, a basic drive you will, to challenge authority. The argumentative Israeli is as thorny a specimen as the argumentative India, it would seem.  The authors point to the fact that nothing is above discussion including the scripture. In fact the Talmud is a collection of discussions over the centuries of Bibilical scholars holding diverse opinions on the specific injunctions of the  Holy Book

The second trait is resilience, and an absolute refusal to give up no matter what the odds. The turning point in the perception of investors on Israel came when a research team of Intel carried on their work despite bombs raining all around them in order to meet certain deadline, (with a makeshift creche improvised to take care of the children!).

So the question you could ask yourself is: does your startup encourage an atmosphere of creative abrasion?  and are you all willing to battle on even as bombs rain all around you?

The answers may determine your destiny.

Are markets efficient in technology provision?

Thursday, April 15th, 2010

Over the last two decades, economic theory is beginning to question the hypothesis that markets choose technology in an efficient manner. The ‘path dependence school’ cites the example of the adoption of VHS over Beta in the 1980s as the videotaping standard as a case study in the possibility of an inferior technology winning out over a superior one based on network effects or historical factors.

Further even supporters of the power of markets cannot ascertain the time taken for markets to arrive at the efficient solution (or ‘equilibrium’ in economics parlance).

There is another argument for intervention which is that even if the market were to choose the appropriate technology and do so soon enough, it may not choose the technology developed by the smaller, less well off entrepreneur. All things being equal, an incumbent has greater access to resources that enable entry into a new market. And if they are handicapped in their ability to innovate due to size or unwilling to innovate due to sunk costs[1], they can lock in their customers with sweet deals in order to stall the market till they come up with the new technology.

Given the tremendous spillover effects of the rise of national equipment manufacturers, a government  should care for the country of origin of the label on the new architecture, not just about the fact that it gets introduced after all. The market would pay no heed to this consideration.

Governments all over the world including the USA have played an important role in the development of technology.  The Chinese government has introduced a rule which requires sellers of high-tech products to acquire accreditation based on “indigenous innovation” — local intellectual property — before they can be listed in a government procurement catalog. Approved products will get preference over those without accreditation. Local companies will get an advantage in the multibillion dollar business of selling high-tech products to government departments.

Those of you who are working on technology startups need to understand the complex dynamics that will determine your success beyond the need addressed by you and the completeness of your solution.

[1] Incumbents locked in to a certain technology would have a preferred time window for migrating to newer technologies and an innovation cycle for developing new technologies. This represents a competitive disadvantage vis-à-vis new firms.

Why are so many VC/PE investors setting up offices in emerging markets?

Wednesday, April 14th, 2010

In mature markets there are many PE firms – as many as 2000 VC/PE firms in the US alone according to Stern Fisher (www.sternfisher.com).  On the other hand, a large emerging market like India has only about 150 VC/PE firms with offices in the country. As the Indian economy grows and approaches that of the US’s economy in terms of size and complexity – a process that might take fifty years or more – there’s no reason why India could not have 2000 VC/PE firms. That means that we can expect the number of VC/PE firms in India alone to increase by 10 or 20 per year for many years to come. India is a long term opportunity for investors, so while there may be fluctuations in the short run, we have a long way to go before the Indian economy reaches the mature stage of its evolution. Of course, fundamentally it will be return on investment that will drive the continued growth of VC/PE in India.

Another factor that will drive the growth of VC/PE firms in emerging markets is the rise of local limited partners, who are the true source of capital – VC/PE firms are mere intermediaries. Today, much of the VC/PE capital invested in emerging markets comes from the US, Europe and Japan. However, as emerging market LPs – insurance companies, banks, foundations, endowments, family offices and pension funds – become more sophisticated, they will seek to allocate some percentage of their assets in wider variety of investments, including VC/PE. These alternative investments provide additional diversification and can improve the risk –return position of the LP’s overall portfolio.  Having an active emerging market LP community will also ensure that the rise of VC/PE in emerging markets will grow continuously, as the local VC/PE firms will then be less dependent on transient perceptions of emerging markets as an investment destination; foreign perceptions of emerging markets fluctuate much more widely than the economies of  emerging markets.

What is the role of a VC association, like NVCA? Can they help me raise funds?

Wednesday, April 14th, 2010

There are dozens of VC associations around the world (Stern Fisher has prepared a list of them, which you can view online), and most of them provide the following services: advocacy on behalf of the industry (e.g. with respect to government regulations), promulgation of professional standards, training, conferences and research. While VC associations do not typically provide direct assistance to entrepreneurs, the work they do in the areas of training, conferences and research can indirectly help entrepreneurs raise funds.

The training programs organized by VC associations typically cover issues such as term sheets, shareholders agreements and instruments (e.g. redeemable convertible preferred stock).  Understanding these topics can help an entrepreneur negotiate with a VC firm, and during the training program the entrepreneur can meet investment professionals of all ages – including both junior associates and senior professionals that are part of the faculty.

Conferences sponsored by VC associations are another good way to meet investment professionals, who otherwise can be somewhat elusive.  While you may not have time to have a meaningful discussion, you should be able to at least exchange contact details and set up a time to meet.

Research conducted by VC associations can also be very useful as you plan your fund raising efforts. For example, the directory of members usually contains not only contact information, but also the sectors and stages preferred by each VC firm. Knowing this can save an entrepreneur considerable time and money.

Instead of borrowing from a bank, can I borrow funds from other sources that offer better terms?

Tuesday, April 13th, 2010

Banks are not the only source of debt capital. Other sources include friends, relatives, independent investors firms and factoring firms that provide cash against receivables and other assets. There are pros and cons to doing business with all of these sources of debt.

Borrowing from friends and relatives can be relatively easy because they are more likely to believe that you’ll repay them, and more likely to forgive you if you can’t. However, if you are not able to repay your friends or relatives, you may find that you have spoiled an important relationship. This loss of a relationship can be much more painful than having a bad credit rating.

Independent investors are often willing to invest, particularly if they like your business model and are able to also get an equity stake. You may want to structure such an investment as convertible preferred stock, which provides both a coupon (interest) as well as the option to convert to common equity at a predefined conversion ration (e.g. one common share for each preferred share).

A non-bank finance company can also be a source of debt for an entrepreneur. Purchase-order financing companies provide funds to companies that sell import goods and distribute them locally. It is a relatively new line of business — about 20 years old — and a variation on the old and much larger business of factoring, in which a company sells an invoice at a discount to get immediate cash.

Purchase-order financing, though similar to factoring, focuses on purchase orders rather than invoices.

Isn’t it better to grow slowly and retain control, than have all the headaches and risks associated with fast growth?

Tuesday, April 13th, 2010

Many entrepreneurs believe that it is better to grow slowly and retain control, rather than trying to grow fast by raising money from investors, and thereby losing control. This may be true in some cases, but one has to consider the fact that most businesses don’t have the luxury of time.  While companies have the potential to have a long lifespan, most companies have a lifespan that is less than an average person. Even large companies are short-lived. For example, in 1917 Forbes published a list of the 100 largest American companies. By 1987, 61 had ceased to exist. Similarly, as Dick Foster points out in Creative Destruction, “Of the five hundred companies originally making up the S&P 500 in 1957, only seventy-four remained on the list through 1997. ”

The average life expectancy of a multinational corporation is between 40 and 50 years (see The Living Company,  Arie de Geus, Harvard Business Press).  A recent study by Ellen de Rooij of the Stratix Group in Amsterdam indicates that the average life expectancy of all firms, regardless of size, measured in Japan and much of Europe, is only 12.5 years.

Given the short life span of most companies, most entrepreneurs who choose to grow slowly find that their company is no longer viable because it has been overtaken by new technologies or competitors whose higher levels of growth make them more competitive. These entrepreneurs might be better off pursuing growth than control.