Beyond the Margin: Redirecting Asia’s Capitalism

On August 24, 2011 Avantage Ventures released a report titledBeyond the Margin: Redirecting Asia’s Capitalismthe first to analyse the Asian social finance market.

I had the opportunity share some of my insight thoughts with the Avantage Ventures staff during the preparation of this report. The report has, for the first time, made an attempt to give a number to the estimated size of the Asian Social Investments market. The report highlights six key social sectors that would benefit most from impact investments, these include:

  • Affordable housing
  • Sustainable agriculture and agribusiness
  • Water and sanitation facilities
  • Primary and special needs education
  • Rural and elderly healthcare
  • Rural access to energy

Of these, affordable housing, primary education and rural and elderly healthcare represent the three sectors with the greatest market opportunity. The report also estimates the potential market size that can be captured through impact investing in Developing Asia to be between USD52 to USD158 billion by 2020.

The report Beyond the Margin  can be found here. or here av_report_final_full_screen_version

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Early stage investment in a start-up

A bunch of articles that talk about seed stage/pre-VC stage investments in startups. The debate is primarily between whether to do a convertible debt or to do a preferred equity. There are arguments both for and against each side.

The basic premise: convertible debt delays the conversation on valuation to the next round. It gives you the time to “set” the benchmark for your company’s valuation. Preferred equity is a simpler way of dealing with investments, if you are sure that your performances now gets you a fair valuation.

Brad Feld lays out the difference between convertible debt and preferred equity and points out that both routes have support. However, he does point out that if you do not intend to raise a big VC round next and hope to continue with small angel rounds, it is more sensible for you to do a preferred equity to be fair to your investors: http://www.feld.com/wp/archives/2006/02/whats-the-best-structure-for-a-pre-vc-investment.html

Josh Kopleman has a clear favourite in preferred equity because it aligns both the investor and entrepreneurs interest i.e. both with be interested in increasing the valuation of the company in the next round! However, he also says that a convertible note could be useful when you are already expecting a round of equity in a few weeks/months. He does give a few other reasons, read on… http://redeye.firstround.com/2006/04/bridge_loans_vs_1.html

Just in case you are suddenly confused about what Preferred stock is, here is a primer from the good old Investopedia to help you. Just go through the basics and come back for the remaining interesting stuff. http://www.investopedia.com/articles/stocks/06/preferredstock.asp#axzz1STNUO900

Seth Levine talks about the two options and clearly spells out the fact that though this seems to have a near term benefits for the startups he is not sure if it is sustainable in the long term. Great explanation of the context! http://www.sethlevine.com/wp/2010/08/has-convertible-debt-won-and-if-it-has-is-that-a-good-thing

Mark Suster clearly believes that convertible debt without cap is not here to stay for long. A nice write-up on how convertible debts came about and how the entrepreneurs should look at the option of convertible debt. http://www.bothsidesofthetable.com/2010/08/30/is-convertible-debt-preferable-to-equity/

Ok, the verdict is clear in the post title, Furqaan Nazeeri lists out reasons why he thinks convertible debt “sucks”. http://altgate.typepad.com/blog/2008/06/5-reasons-conve.html

Bill Payne explains the mechanics of convertible debt.  The graphs are missing but worth a read. http://www.matr.net/article-29148.html

A list of articles by Bill Payne on convertible debt and preferred stock. Great stuff in one place. http://billpayne.com/category/convertible-debt

Human Resource: Could be a complete drain on resources

One out of the three first employees that I recruited, turned out to be a rogue! He forged reimbursement bills, made issues about the work that he was supposed to do, tried to “poison” other team members. The fact that we are start-up, complicated things a bit more for us. I was ready to take his fussy attitude in my stride because these three people were amongst the first few in the entire history of their college to join a private sector job. Understandably, the change in attitude required would take some time. They were freshers.

Well, frankly speaking that reasoning is just a superficial reasoning. The real reason is that these youngsters have an academic qualification which is a basic legal requirement for our work and they were in short supply! The Govt seemed to offer jobs to all of them and let them have a job where pay was guaranteed but without any serious expectation of work!

It had taken us about 6 months to locate people, with the required academic qualification, who could be ready to join a non-Govt job! Once they did join, I was ready to treat them like kings. We had a great business model to operationalise and it was necessary that they  co-operate.

However, within no time I found out that this candidate was more than fussy. Much against the “rules” of a startup, I continued to “tolerate” this person for close to about a month. Incidentally, other than the difficulty of finding another replacement, the worry was that if he is chucked out, the academic institution will see my organisation as a  perfect example of the big bad private sector where people are chucked out at will and that would have killed the organisation because of the basic requirement of the academic qualification. Moreover, since our work was in the rural areas, students from one state could not be placed into another state due to language issues.

I started hoping that he leaves on his own. But when?

After a month of his being with us, he seemed to have been offered a job at another “private” organisation and at double the salary. It was a ridiculous amount. I somehow remebered those times when he was bothered about even the smallest of components in his salary. I had initially taken them as the widely held apprehensions in India about the “private” sector but later I realised that it is slightly more.

Anyhow, he decided to leave but not before claiming that a senior consultant, who was working with us, knew nothing. Moreover, he had rudely spoke to our HR person. Interestingly the consultant had had operational experience of 25 years including the top job at a semi-govt organisation and the HR person was possibly was one of the friendliest sort that I have ever seen.

The story does not end here because one of my worst fears became a reality 15 days later. More about that in the next post.

Learning: If your gut feel says that somebody is a bad guy, in all possibility he IS a bad guy.  Addendum to this learning in the next post.

Niche in life

Wrote this sometime back for my friends but thought I should put it on the blog.

When I was a kid, I was not very good at games….frankly speaking, I never had the opportunity to play many games. The only game that I ever played was football. In fact, childhood Bengal was a football academy. From Kolkata’s maidaan to the the small muddy villages, it was football allover. From the wooden spikes to the naked feet, it was football allover. From the anklets to the crepe bandages wrapped with safety pins, it was football allover. From the twisted ankles to the badly swollen shin bones, it was football all over.

Every year the city and the towns (not the villages generally because the people in the villages wouldn’t normally have enough to drape themselves) would be draped in Green and Maroon(colours of Mohunbagan club) or Red and Yellow (colours of East Bengal club), every four years the city and towns would be draped in Blue and white (colour of Argentina) or Yellow (colour of Brazil). Practically everybody was a footballer! Even if somebody did not play, HE had something to say about the game. (Frankly speaking Bengalis play a very few of the “games” on which they have a strong view).  The HE is capitalised here to point out that Bengali women were completely missing from this area of having a view on football. The women grew up attending music or dance classes, learning how to cook and getting ready to become a good marriageable “package” right from childhood. Once they are married, they concentrate on controlling the lout who happened to spend time mostly outside the house solving away all strategic worldly affairs. This lout is the husband.

By the way, all that is history now. People do not discuss football and girls are not limited to the home. Its cricket and its Mamata Banerjee.

Anyways, I was digressing a bit too much. My point was “Practically everybody was a footballer!” so finding a place in the class team, college team was always difficult. Given my physique which was several times worse (read thinner) than what you see now, football was a difficult game for me. Well, that is what people thought when they would look at me to decide whether I could join the team or not. Certain answer was a no. I figured out a strategy to ensure I was in the team because I knew that once I was in team I would give my team ample reasons to continue having me in the team. The strategy was, I said I play in the wings (a winger sticks to the right or left flank of the ground during the game).Nobody wanted to play in the wings. Everybody wanted to be in the middle. Everybody wanted to be a midfielder, a forward! But, I said I would play in the left wing. Playing in the left wing meant you’ve got to be able to kick with your left foot. I was lucky to be able to kick with both my feet. So there I was, giving my team a proposition to play in a position where nobody would play! Normally amateur football happens in the middle with everybody chasing the ball around the middle, the flanks remained empty. There lied my opportunity. I took the ball right down from the bottom and went past the midfield upto the corner of the opponents side. Nobody stopped me because every player of the opponent was stuck in the middle of the field! By the time I reached the other end, the opponent players would rush from the middle towards me in the side to prevent me from scoring. Now the middle would get empty. I simply lobbed the ball and centered it in front of my forward who would wait in front of the goal, unmanned and then a smooth header or a slow nudge saw the goal!

I scored a goal only on rare occasions but I had to adpot this weird strategy to ensure I was in the team. To ensure that I could strategically be at a place where no one else wants to be and yet have a ball!! I enjoyed my game.

No plan survives first touch with customers

  • The last word on startup success.
  • Why writing business plans is NOT done first. It is something different that needs to be developed first and that is – a business model.  A summary of the lessons learned is given below (copied from the original blog of Steve Blank HERE):
  • A startup is an organization formed to search for a repeatable and scalable business model.
  • There are no facts inside your building, so get outside and get some.
  • Draw and test the Business Model first, the Business Plan then follows.
  • Few if any investors read your business plan to see if they’re interested in your business
  • They’re a lot more interested in what you learned

Here is another article on the Financial Times (Read FT Article **). The article discusses the act of pivoting in a startup which refers to making minor changes in the original idea of a business rather than going for a completely new business altogether. It points out that though entrepreneurs start with an idea that looks perfect, it is the feedback from the customer that first triggers a pivot. The more successful you are in pivoting, better are the chances of your startup doing well. The article also discusses how along with many others Facebook and Twitter pivoted and then created history. I guess my previous article on Starbucks (Starbucked)also referred to the same without using the term pivot. I mentioned there that Starbucks didn’t start as a food service concept. Their idea was to sell coffee so that people could make it at home!

One interesting quote from Mark Suster in the FT article:

“Every entrepreneur starts with an idea that they believe makes sense. But then your customers start using your products, your competitors come out with new offerings and your partners decide to launch a similar product rather than working with you. You’re forced to pivot on a regular basis.”

For more from Mark, I suggest you follow his blog which is a must read for any entrepreneur. It talks more than just about pivoting!

** You will need to register for the FT article. Don’t worry, there is a free registration that allows you to see upto 10 articles a month. Trust me, it is a good idea to register free for that! Better still if you can go for a premium membership.

10 questions you should always ask once a month

Though the original blog article is meant for entrepreneurs (read here), I believe that a few of the questions would apply to you if you are a manager as well. (Of course, only IF your organisation gives you the liberty to take decisions and implement initiatives. 🙂 ) I have split it up into two parts. The first set applies better to the “managers” but the entrepreneurs would have the tougher job of answering both the sets! 😛

Set One:

  • In one sentence, what does your product do and who buys it?
  • In one sentence, why does someone buy your product?
  • What one thing is most responsible for preventing sales?
  • What’s one thing you could do to get more feedback from customers, potential customers, or sales you’ve lost?
  • If you were forced to hire someone today, how would you define her job such that she would contribute enough revenue to cover her expense?
  • What initiatives could be done half-assed without significant impact?
  • If you could get one solid hour of advice from a guru you respect, what would you discuss and what would be the goal of the meeting?

Set Two:

  • If you had zero revenue from now on, on what date would you run out of money?
  • If someone handed you $100,000 today, how would you spend it to maximize future profits?
  • Which of your business operations do you hate?

These are a brilliant set of questions which brings clarity of thought and clarity of thought is something which is at a great risk always when you are dealing with a highly fluid situation like building a new organisation or spearheading a new product launch.