Tuesday, September 12, 2006

Green Ocean ,Blue Ocean ,Astronomer & Astrounaut

This saturday i attended a event organized by Tie-BoA . Agenda of this event was to announce a collaboration /Alliance bitween Tie and Band Of Angeles as an initiatvie to nurture a Silicon Valley like Eco System in india.

I am writng this post to highlight one aspect of any such event which i have seen in all of the gathering sometime under the surface sometiem openly .

Its the Silo or Communication gap bitween Investor and Enterprenuer .

Be it VC or Angel , Institutional or Individual there is always a conflict of interest bitween both of the parties . As a matter of fact this phenomena is not confined to this country . Even in developed economies tales of VC-enterprenuer conflict is commonplace.

This used to baffel me when i started attending such gathering around a year back . by every logic i can think of , VC and Enteprenuer should work togther and it should be a win-win deal . but after one year and 10-12 such gathering i can safely say that this is hardly the case .

what is suppose to be a "Meeting Of Minds " often Turns in to a "Clash of Heads" :) why ?

As an aspiring enterprenuer i have a significant interest in exploring answer to this Question.So that when i approach potential investor in my venture i can avoid all that .

Before i start let me tell you a very interesting but true story to set the context


After three moths of talks and many presntations when it was time to decide . A leading Ex-i banker Turned VC said to a budding indian enterpreneur "u seems to have a good idea and i don't really doubt your credentials , team is ok . but your IDEA can be easily copied by big guys ".

He answered "yes sir! it s very likely that they can . but unlikely that they will" .

VC said "what stops them to enter in your space. ?"

He said "Well only thing which stops me is lack of money to hire programmers and run my operation but big guys don't have that constraint so i guess nothing will prevent them if they want to ,but they will not ."

but VC was ex I Banker and Ex MBA with the habbit of throwing TLA (Three letter Accronym ie ROI,NAV,TVC,TQM,EBIDTA etc ) in every sentence and enterprenuer was a street smart guy who despise all the "Theory " about business.

so VC said " what i am worried about is how you will create a Blue Ocean ? "

By this time enterprenuer was totaly frustraed and decided that he will not work with this guy even if he give me a million $ . so he said in a mocking tone

" i will take a "Green Ocean " of Money from you and Turn it into Blue Ocean of Commpetieve Advantage and thus we will have an ROI which will show dissporoptinate value creation .We will disrupt the existing eco system of our Industry and we will alter the risk reward equilibrium for ever . [LONG PAUSE]

Sir I don't want to work with you now so I am telling you the truth , I don't want your GYAN . you can't run a kirana shop with all your TLAs. Truth is, idiot like me come to you for your money Because thats what you are good for.

don't trust me ?? ask your wife why she married you . "


Needless to say he didn't get the funding :) .


I don't think that the gentelman's response was justified by any yardstick .NO MATTER WHAT THE PROVOCATION WAS . But still i choose this example because i wanted to highlight the deep rooted despise an Enterprenuer have toward all this management lingo. if there is a story which show it in true color this is the one . The silo we are talking about is very very big .

Green Ocean :

Marriage is the only war where you sleep with the
enemy.


- Gary Busey
I think this Gary fellow never raised money from a VC

-annonymus enterprenuer


About a year back, i attended a talk by legnedary VC Jhon Doerr of KPCB. He said that in every booming market where there is a possibility of making quick money ,there are two type of people . Mercenary and Missionary .

Mercenary wants to create quick wealth and Missionary wants to create a great product /company. Mercenary is driven by greed & Missionary is driven by sense of achivement . and trouble is that Often It is not easy to differentiate bitween the two .

In the context of our story the mercenary is the one who is only interested in "Green Ocean" of money .
I have seen some enterprenuer who are so much obssesed with funding that for them success of venture equate to securing funding only. On the other hand we have heard that in some of the greatest success stories of our times Promoter end up having only a minority shares at time of exit .

Collective equity founders of yahoo or Excite or even SGI were less than 25% at the time of IPO/acquisiton . sadly in india we don't even have these numbers available with us . i really don't know what to dedeuce from this observation . i am in a fix .

In the light of these fact when VC and Enterprenuer approach each other they always seems to believe that the guy on the other side of the table is interested in "Green Ocean" only. This leads to a feeling of mutual distrust. I seriously believe that its a job of enterprenuer to take initiatvie to comfort the VC and Clear the mist .

Blue Ocean :

"Big companies are good at extracting the value from existing products, but bad at creating new ones. Why? To start with, most big companies have some kind of turf to protect, and this tends to warp their development decisions.

For example, Web-based applications are hot now, but within Microsoft there must be a lot of ambivalence about them,because the very idea of Web-based software threatens the desktop. So any Web-based application that Microsoft ends up with, will probably, like Hotmail, be something developed outside the company."
Paul Graham



BLUE OCEAN .This is the latest buzz word in venture circle :) . Very often investors ask this Question .

What stops Yahoo or Microsoft or Google or IBM (Darn !!!) from entering in your line of business ?

and the only correct answer i can think of is Nothing .

Nothing can stops Microsoft from opening a Hamburger joint in Subway and compete with Macdoanld . but the Question is will they do it ?

May be ,May be not ? Will they be doing it before a small nimble footed startup ? certainly not .

It takes a month to put a server in server farm at Redmond ,so much for flexibilty and agile business.

Funny thing is investor talk of having Blue Ocean of Competetive advantage . in my view unless you are in to very very hard core technology ,startup can have only one advantage .
Advantage of size and low cost operation.(not sure if its a "Blue Ocean" or not ) startups are basically experiment . and experiement can go wrong .

Yahoo should defintley come in my line of business .that is the last think we should worrry about . i will be a fool if they don't .

Million dollar Q is if they came ..will they Buy me or Copy me or Buy my competietor ? well i think this depend on three factor

1) When they discover me ? Pre Launch or Post Launch

2) How good a job i have done ? (userbase ,scalability,Brand etc)

3) Do i have the right connections to close the deal ?

I think if VC really wants a "Blue Ocean" they should create one by Taking care of #1 & #3 so that enterprenuer can focus on #2 . That is the only "Blue Ocean" a startup can afford . :)

So i strongly believe that the concern about "Blue Ocean" and fear of being copied by Big guys are baseless. isn't that the opportunity for which all of us are here ? isn't it the fun ? :)


Astrounaut & Astronomer :

What is the diffrence bitween an Astromomer and Astronaut ?

Astronomer study the space from a distance , chart a path for ship , do the calculations, warn about any possible metroide which may hit and then clears the way for astrounaut . Once in outer space astraunaut is on his own . He steer the ship on his own judgement with ocaasional input from ground station .sometime all the collective wisdom of astronomers won't help him and he will have to act on his gut instinct if he wantto come back safely .

Yet every kid want to be a astronaut and hardly any one know about astronomer till he start preparing for his voyage .

launching a venture is like a space voyage where VC is like astronomer ( because of his experience) and enterprenuer is astronaut . This is the best analogy i can come up with to expalin my understnading of an ideal relation ship bitween VC & Enterprenuer . Both are equally important for a succesfull space voyage .

There should be an exchange of ideas and clarity of communication bitween them . Tendency to one up each other won't help any of them .

I admit enterprenuer enjoy moe lime light but if you remove the exception of Microsoft i am yet to see a success story where VC was not significantly involed in shaping the destiny of venture (and his own by side effect:) )

This is my Two cents on this issue , i would like to have your feedback on this .Please help me to get it right :)

P.S .I know it is a very long post so if you are still reading . Thanks for your patience .I hope it was worth your time :)



18 comments:

RK said...

"I have seen some enterprenuer who are so much obssesed with funding that for them success of venture equate to securing funding only".
I share the same opinion. This experience of mine is regarding a startup I was working with a few years back. I was awed by the energy and ideas of the founder and till this day I respect for those qualities. But he is completely focused on investor. His vocabulory is investor speak, rather than customer speak. The firm is in its 6th year of its operations and I think it has got multiple rounds of funding , but not multiple customers.

I like your analogy of astronaut and astronomer. A similar one I used to have in mind was this: All Venture capitalists should be like consigliere ( Tom hagen in Godfather) and should aid Entrepreneurs to become Marlon Brandos of Business world.

Siddharth said...

Hi importantly,

since i have interacted with the VC ecosystem and keeping track of activites...you are rite about the VC role.. but importantly profiling a VC according to ones need is very important which many people dont take care of.. So VC's distrust is eminent from first meeting as one hasnt done their study...as far blue ocean theory is concerned...you are all rite abt it...and i think so VC's know the answer hence rather than gettin offended by question one need to show why such big enterprise is not in this market and showing those negatives for big people as advantages for oneself...

overall good post...

Cheers

Rajan said...

Hi,
Agree with what u hv said. i hv been doing VC rounds for a while and am a lot wiser than what I was some time back. My observations are the following:

1. Sometimes, VCs ask questions just to cover the bases. Also, they would like to see how an entrepreneur reacts to sudden situations.

2. After founding a company and running it for 3 years, I have realised one important thing: Technology startups is not about just technolgy. It is also about execution and monetising the technology. This is where the most difficulty is and will always be. If someone is willing to pay for your product, it does not matter what technology it has. However, an entrepreneur is so passionate about their technology and idea that any question on the business side of things irritates them. VCs have been there, seen great ideas and products not able to be monetised for wierd reasons.

In summary, IMHO, it is the prioritization of the entrepreneur (which is their technology/idea) vs. the prioritization of the VC (which is monetization) which is at cross roads in the earlier stages. If the entrepreneur understands this, they will be much better prepared.

just my thoughts and i would like to hear yours on this.

Rajesh said...

The problem is that not many people understand that before an idea can RACE, it needs CARE. Just a play of words, but is it?

Anonymous said...

Dear Sahad
it was a very interesting piece of work that really depicts the relationship between the VC and the entrepreneur.
thanks for the article

regards
Naseeb Ahmad

Anonymous said...

Hey,

Great post.

@rajan: it would be really great if you can share more about your experiences with the rest of us

rajan said...

I would be more than happy to share my experience. pls send an email to rajankvn2@yahoo.com if you have any specific questions.

Balaji Sowmyanarayanan said...

Dear Prashant,
Good rant.
Why don't you keep your metaphor to the ground? Why move into space?
More like prospecting for C-list minerals( unlike A-list minerals like precious metals or Oil). You and your team are team are good at finding it and extracting it economically. The big mining co are welcome to bring in their heavy infra and add velocity/mass to the momentum.
The VC arrange for the basic implements and get a share in the spoil if and when the prospecting is successful. And the material will move from C-list to A-list in the process etc.

Now from metaphor to reality: There is always a time lag in funding. You will not get funding when you need it: This is a reality. Perhaps you will get more funding latter, but you will not get funding when you need it. Factoring this time is the most interesting challenge for each venture.

Balaji Sowmyanarayanan said...

Or better still keep the metaphor to something much more mundane like agriculture:Trying out a new high gestation cash crop.

Just thought simplification at metaphorical level will help.

Regards.
-Balaji S.

PRASHANT SINGH said...

Thanks for your response guys . it is really helping to develop a clear picture .

@RK :I agree with you .incedent of such Investor friendly companies are common . A leading serial enterprenuer based in bangalore is said to be in business just because he has a good network among investors . all of his 4 venture tanked but he is still able to make an exit and make some easy money .BusinessToday once called him Poster Boy of Greater Fool Theory :)

@Siddharth : Thanks for you affirmation . I agree with you that one should do a research on potential Vc before approaching them
but there is very little authentic ifo availble about it in public domain . one good way is to meet the top brassof companies where they have invested in past .

@ Rajan : thanks for stopping by and taking tiem to comment

I too love to believe that VC do it for testing the steel and logic of enterprenuer but even with this most plans are rejected on this ground alone . What should be the biggest opprtunity is potrated as biggest threat .


the point about monetization is very true in indian context . but no enterprenuer want to be next rediff or indiatimes.com we idiolize yahoo and google of world. even VCs are also looking for next Google .

but as we know that at the time of launch google was not having a viable business model. for thier investors Mortiz ,Shriram,Doeer it was a bet not on biz model but on a tech which was solving a fundamental problem/defficiency with search .
working rule here is :If you create soemthing which ppl love to use , you will eventually figure out a way to monetize it .

Trend is still the same in Valley look at Plexa,meebo,youtube,
what are the chances on getting these ideas funded here in india ? your guessis as good as mine :)

Rejecting a good idea ,which everyone wants , which serves a need just because you can't see a revenue stream right now is "Premature Optimization " but thats what most ppl do .

@RAJESH: Thanks for RACE-CARE example. it's more than a play of word . It shows how can you compress a 300+ word post in to one line without loosing the impact .

@Nasseeb: Thanks

@ Anonymus :thanks for the great idea ,Rajan i would liek to know it too . please blog about it . Rajan's blog is

@ Balaji : thanks

rajan said...

@Prashanth
I agree with what you have said about the general opinion of what VCs look for and what entrepreneurs strive for. IMHO, the reality is far from that and it is a complex set of dynamics. The following are my views from the perspective of an entrepreneur and I am not a VC.

Even though VCs look for the next google or yahoo, they also know that they are few and far between. So, if in the first shot, they are not convinced about the potential of something to be the next google or yahoo (gut feel), they start evaluating it for the next level. In this case, it is monetization.

Every fund has criterias based on which they invest. These may prohibit some VCs and funds at certain stages of their existence to not take certain kinds of risks. VCs may not agree to this and this info will never be available in public domain. But, it is true IMO.

Everything has two sides (I am working on this topic of "two sides to everything in a startup"). Looking at it from a risk perspective, a VC will be willing to NOT take risk in the following order.
1) Market risk - monetization
2) People risk - Team
3) Technology risk

In other words, a VC will take a technology risk as opposed to a market risk. This is one of the reasons for the "clash of opinion" between a VC and an entrepreneur.

To address the analogy of how google got funded: IT would not have been funded but for their contacts, profs and their Stanford pedigree. Truth is, Sitting in the valley makes a huge difference when it comes to raising funds.

Just my experience.

rajAT said...

Good one prashant.
The analogy of astronomer and astronaut do struck some chord but may not be the right one .. As both of them dont own up the thing. They are working for an organization .. So the relationship takes a whole different meaning bcos of that.

PRASHANT SINGH said...

@Rajan
Thanks for the follow up . I am looking forward to your views on
"Two sides to everything in a startup"
. Please ping us when you publish it.

@ Rajat
Thanks for the compliment Buddy . i agree that it might not be the best analogy . actually as a kid i was obssesd with idea of becoming an astronaut . i talked about it in past here.

still i am satisfied that this metaphor is able to convey the message. that's whats important . isn't it ?

rajan said...

@prashanth
sure will do so. meanwhile, i have posted a problem i have been mulling over regarding Online payment at http://technology-musing.blogspot.com

if any of u have any interesting thoughts, i would be interested in hearing it.

cheers

Rajiv said...

funny story actually. never knew that people end up fighting with the vc.

Karthik said...

Hi Prashant,
You have maintained in-depth points even in a marathon post. The analogy is fine.
Finally it all must boil down to some kind of truly symbiotic relationship between the money obsessive VC and the tech obsessive entrepreneur.
All through the history if the idea is clonable, sure Big B's will come hunting down. Replication is a major issue to be thought upon even with much of patent bindings.
As Rajan has said, tech/disruptive idea apart implementaion is that matters & will really matter when we are in front of a VC. I am all ears to hear more.

Navjot Kashyap said...

Nice reading your blog. There is an article in BusinessWorld about BarCamps and while reading about BarCamps, I reached your blog.
Have you started on your own?
I liked reading your post.
Your Astronaut and Astronomer analogy is good.

Navjot Kashyap said...

I was thinking about your post - something stuck me. You can stop a google, yahoo or MS from copying you - you can always get a patent for your innovation, which can forbid anyone else from doing the same thing. Getting a patent in US, India, Europe, Japan, South Korea etc would be easy. Only exception would be China I think. You, you can tell your VC that you can rule the world except china.