What to do promoters in India fear the most. I think it is Dilution or the “D” word. It is obvious that if you can build a billion $ company and own 90% or even 30% of it then it is great. However, if you could build a billion $ company and own only10%. Would that appeal to Indian founders/promoters ?
My view is that founders/promoters should think big and to attract talent/capital be prepared to dilute. This is surely a controversial view and against most of the big successes we hear about in India.
What do people think? How many new billion $ market cap companies will emerge from startups in the next decade in India ? Of these what will be the average holding by founders/promoters when the market cap touches $1 billion ?
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Sanjay & Muthu,
On the D word….What drives an entrepreneur to go after his dream ? More than his conviction, it’s his anxiety or enthusiasm to prove his worth to himself and then to the world at large. Ideas of such entrepreneurs will definitely be a hit and for such Entrepreneurs D word never matters much. They want the idea to work more than in whose name it rings. Such people would surely let in others who can beef up the original idea and in the process end up building a business much larger than what was originally conceived.
But the D word is of course a force to reckon with for many a startup founders. They almost develop a sentimental attachment to their ideas. It’s not uncommon for such people to normally use a combo of debt instruments together with equity / preference stock while designing their capital structure. The term sheet can provide for liquidation preference of these various instruments upon achieving different milestones. This is staged funding / liquidation.
But then not many are able to convince the VC’s of the ability of their projects to consistently achieve their milestones. In turn, they might remain as mere projections. That’s when the debt gets converted into equity by default and lands the VC firmly in the saddle with a brute majority. But then you can’t blame the VC’s, can you ?
Way out….Get ( your idea thoroughly vetted by techno / legal / financial experts and setting plausible milestones ) real before you go to a VC…!
Krish
Muthu,
I’m very impressed by your Trillion dollar dream. It is easy to dismiss it as unrealistic dream. And I did it – that is the easiest thing to do. Then I contemplated on how to make it possible. Here is my 2 cents 🙂 on it:
Convert it into Rupee dream. At the first look it becomes even more difficult. I don’t mean it literally. It is more symbolic. I mean, base the dream( or its implementation) on Indian values rather than western values – rather a right mix of Indian and western values.
In the Indian Classical fine art tradition, practitioners integrate it with life and then art shapes life and life shapes the art. It is a living system even today. May be, such systems can be put in place for biz creation/growing too.
In other words, Guru Shshya Paramparya for biz/ventures anyone?
Hope you *get* my 12 Annas worth!
Sanjay: I agree with most of your answers excep this last one where you say – “For those who want to create large companies which employ a lot of people they normally end up needing investors. ”
I am not sure if creating large companies always means it will have a large number of employees and need a large amount of capital. Craigslist is 19 people and the 7th most trafficed site. I am sure all of us know this but the point is that there is a glaring lack of focus on creating scalable business – ones that scale without having to add people in a linear fashion. I think that is at the core of the Valley.
I think it will be vastly more valuable to have 1000s of 10 person companies doing some cool things, rather than 10s of 1000 person companies.
I am rambling from the main point here but I think the model on which a company is built can really dictate its financing needs and so on. There can definitely be exceptions like chip startups that need money early on.
Himanshu,
What you say has a lot of merit. It depends on what the entrepreneur wants to do.
For those who want to create large companies which employ a lot of people they normally end up needing investors. In addition to dilution, loss of control could create anxiety. In most cases investors will let entrepreneurs run the company. If however, money has been raised based on certain deliverables and those are not being met, investors may even fire the entrepreneurs.
There are a lot of businesses like yours or opening a great restaurant which add consumer value and provide a “comfortable living”. I think India needs both the large companies and great ten people companies. In most cases the ten people companies will not need or be able to attract angels/VC’s so dilution/loss of control etc. will be academic.
Ack. Ignore last post. Here is a second attempt at the full post.
I dont fear dilution for the lowered personal exit value – it usually increases that. I fear dilution because it forces founders to change direction.
I think there is an opportunity now with Adsense-supported sites to make a comfortable living for a team of less than 10 people, (e.g. check out the example of Plentyoffish at http://www.site-reference.com/articles/Website-Development/The-Surprising-Truth-About-Ugly-Websites.html) but not necessarily a multi-million $ exit. Relying on SEO and word-of-mouth for marketing also frees you from having to hire anyone but engineers – so that you can keep re-inventing yourself and do something fresh every 2 months.
The goal of “a comfortable living only” allows us to build great value for users. In that vein, we have built
http://www.bixee.com – search engine for India jobs
http://ww.glogblog.com – classifieds site for India
http://www.pixrat.com – photo bookmarking site
Reminds me of a conversation I was having with someone from one of the large job sites in India, to get permission to include their jobs at Bixee. He was worried that we might build traffic “using their content” (his words) and then eventually build out a job site instead of just a search engine. I assured him we had no interest in building a job site. I offered to back it up in a more formal/legal way if he wanted. He said, “I dont fear the founders of any company. I fear the investors.”