Startup Pains & Pleasures #1 - Funding

People often ask me, what are the three hardest things about a startup? Raising money, uncovering cash and finding funds – without a doubt, this is the single hardest issue. A variety of factors contribute to it.

1. Stage of your startup. My experience is with what is called “early-stage.”This is when a germ of an idea needs to transform into a basic business. Angels or well-wishers, and then what are called SeriesA VCs (venture capitalists), fund you till the next stage. Zaplah needed US$3 to 5 million to complete this stage. Clearly, there is maximum uncertainty at the early stage and very few startups get beyond it.

2. External events. As I was getting ready to move beyond angel stage to early-stage VC, the October 2008 global meltdown occurred (my brother uses the word “meltdown” dismissively; maybe that is because in India where he is located, growth is still 5% (positive) but in places where Zaplah was relevant such as Singapore and USA, GDP was going negative). Okay, so let us call it the Great Recession; my only advice – don’t do a startup before a Great Recession (if you can tell it is coming!).

3. My lessons. As a veteran of the industry, I wanted to start building a business – don’t do it! VCs will NOT fund such an effort; they fund clever little ideas *at this stage*. Nobody funds the building of a solid new business even by a veteran. There are a bunch of “valid” reasons for this...

• During the early stage, investors want the bets to be small due to the large risk and hence small outlay.


• VCs want the startup to be in their backyard so that they can check up on it frequently. This is the push back I got from the 30 or so VCs in Silicon Valley I talked to. Zaplah is located in Singapore.


• VCs in countries outside the US are more risk-averse than US-based VCs. Singapore VCs have an appetite for early stage funding of chunks less than $1 million. Their horizon is very immediate – for great insight into Singaporean entrepreneurism, read the memoirs of the father of Singapore, Lee Kuan Yew (From Third World to First : The Singapore Story: 1965-2000 by Lee Kuan Yew). He talks about the Hakka community from mainland China who are the majority in Singapore - they are merchants who tally their sales and profits at the end of every business day! Quick returns are expected. I am definitely a super advocate of Singapore’s future role as a beachhead for a Greater SE Asia strategy – more in a later blog.


• Talking about VCs outside USA reminds me of another story.

By the way, I will alter the names of people and identifiable details so that none of you “blofers” will sue me. [I am a “blogger”; I have not found a good term of someone like you, “blog followers” – “blofers” is what I have coined. You are super-important to me; I and other blofers want to hear your comments and ideas]

• The story goes like this… I wanted to raise $100,000. I talked to a guy in the Middle East and he asked me how much cash I had to put in? I said “zero”. He said, “I will give you $100K and I will own 100% of the company. Else, I will give you a *personal* loan for $50K (with all the personal liabilities) which you put in and I will put in the other $50K and you and I will own 50% each!” If this story does *not* strike you as bizarre, you do not know the entrepreneurial philosophy that made Silicon Valley what it is.
• Also, watch out for how much of your company VC’s want to own. As a good industrialist friend of mine reminded me, it is like the “The Old Man and the Sea” (my all-time favorite fiction book; see the right margin for my non-fiction favorite); by the time the marlin is brought ashore, the sharks (you know who they are) have eaten all the flesh and you are left with the bones!
  
  So start as a “garage” operation, locate near the VCs, don’t enter into personal liability, and keep over 50% ownership of the company to yourself.
  
  Who you have in your team and how you measure yourself are super important factors - more about that next week.
  
  Enjoy the haiku . . .
  
  PG

Blofer-sans, please post your comments and questions; I would love to hear from you.

Let us conclude with a random haiku . . .

Hanami festival in Tokyo in April/May is a time when *everyone* makes it a point to sit under a sakura tree.

"Sakura falling on office-mates
Cool evening
Warm sake"

- by PG