We (the think-smarter crew) are going to introduce you to a novel technique called the “blank presentation method” which will enable you to identify 70% of what should be built with 10 blank sheets of paper. No kidding. The following parable brings out the basics of how this gets done.
A story is told of a tourist in Paris in a bar one night. He got talking to a young Parisian and they hit it off. As it got late, the tourist said “I must go now”. The Parisian replied, “Let me walk you home”. “You don’t even know where I’m staying”, said the tourist. “You don’t need to tell me, I’ll take you there”, said the Parisian. Intrigued, the tourist accepted the offer. The Parisian took the tourist’s elbow and led him out of the bar. He then proceeded to walk the tourist home by exactly the same route that the tourist had walked home the previous two nights. The bemused tourist asked. “How did you know where to lead me? Have you been following me?” “I didn’t lead you” replied the Parisian. “You led me”.
How did the Parisian take the tourist home? What he did was actually quite simple. After exiting the bar, he applied slight pressure on the tourist’s arm as if to turn left. The tourist’s home was to the right, however. The tourist reflexively reacted to the pressure negatively by pulling his arm slightly away, and the Parisian was able to correct his course and turn right instead. Similarly, at each intersection, he guessed which way to go, and was able to correct his course based on the tourist’s reaction to the pressure he applied on his elbow.
Thus, through a simple process of hypothesizing where to go, validating the hypothesis, and correcting his course, the Parisian was seemingly able to lead the tourist home.
Lead, listen, learn, iterate.
December 3rd, 2006
From: Rosen Sharma
Sent: Sunday, December 03, 2006 9:04 PM
To: ‘jboudreau@mercurynews.com’
Subject: RE: India VC 2.0
John,
Read your article about India VC. I want to thank you for increasing the awareness of what is happening in India. Please don’t take the following as a criticism, but more as an informed opinion.
Everyone who goes to Bangalore for the first time does the same thing: they go an meet the Silicon Valley bank officials, meet Sridhar Mitta (with TIE) and a couple of VCs. While for the first time visitor this gives them some perspective but it is a one-sided point of view.
I think almost all US-connected firms with India funds are completely screwed up. Their structure is determined by the needs of the partners in the fund rather than the reality of the environment
Most funds in the US are built on 2% management fee and a 20% carry on the profits. So if a fund is $100M the management fee will be 2M and the carry is on the profits earned. (NEA is one exception to this – it is cost based – which allows them to raise very large funds.) On an average a US general partner in a fund makes $400K-$1M in salary per year. Thus a $100M fund can have 3-4 partners and the rest for expenses. Most US funds for India have the same or similar economics.
…
So we have funds which have USD 100M-150M under management. Such a fund can support 3 GPs. A fund is typically invested over 4 years in the US (there are several around which have a 3 yr investment cycle). If we assume the same for India, this means that 25M a year is being invested. You would invest 5M/company that’s 5 companies a year among 3 GPs which is reasonable. But consider that you can invest 2M/company, that’s 12 companies a year … that’s a bit much.
Now let me ask the key question: what is invested in each company is determined by what the company needs or what the VC needs to invest to make their model work? Why are the US-connected Indian VC’s more keen in investing in companies which can gobble up 5-10M? Why are they investing in real-estate and hotel companies? Most companies in India need an initial investment of less than 1M.
This is one of the problems: the US-India funds are based on the needs of the individuals and the funds rather than the needs of the companies.
There are several other problems with the models which exist today. Most companies over their life time in the US end up using $25M+ of cash, and companies in the India are not going to be very different. The eco-system in India today can’t fund individual companies to that extent (round C, D, E). You have people like Warburg who will do later rounds, but they only do certain kinds of deals. So if I do round A and B in India there is no bridge to US for getting the later rounds done. Infact it is going to be a struggle. In addition, most of the people who would be GP in an India fund, would not be on equal footing with GP’s in the US (not from a compensation perspective), but from a relationship, clout perspective. So if you are a GP in India and your company needs more money, can you swing the partnership into funding a tough situation: unlikely.
My opinion is that it is not the entrepreneurs in India which need to be frugal, it is the VCs. They need to have an economic models which meet reality of the market, and a cost basis which makes it possible. We have a long way to go.
Rosen Sharma
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President & CEO
Solidcore Systems
www.solidcore.com
December 3rd, 2006
