Advertisements

Category Archive : aDisms

Discovering the true cost of acquring a new customer

Earlier this week, I wrote an email in which I explained the reasons why I was passing on a deal that my team and I had tracked for more than three months.

The eventual reason for letting go of this deal finally dawned on me when I re-did the calculations for the cost it took for this venture to acquire a new customer (or a unit of “new” sales). When I completed this exercise, I could finally appreciate the vast disconnect in the way the founder and I saw the same traction numbers and the valuation for the company.

First, this is how I recalculated the cost of new customer acquisition, starting with a net gross sales number which was done by:

The NGSn number must be positive, and only when if the Gross Sales / NGSn > 2x it piques my interest.

Next is how I calculated Net Sales (new) or NSn:

The NSn number is usually and understandably, negative – profoundly negative when a start-up is experimenting with different marketing strategies early in their development. However, NSn must turn positive before raising your pre-Series A round as it is a clear indicator of achieving product-market fit.

Those preparing for Series A rounds should get to NSn / NGSn > 0.5x as a clear indicator that each rupee invested in marketing delivers an ROI of 2x or more.

Unfortunately for the founder in my example, the NSn number was deeply negative, i.e. in the -0.5x range. I concluded that this start-up was raking in less than the amount of money and effort invested in marketing, i.e. product-market is not yet achieved. The fact that the NSn / NGSn ratio was touching almost -1x in their best sales month made it difficult for me to assign any positive value their traction.   

*I say new sales or new customers because usually any returning customers do not (and should not) cost the company marketing rupees. In the case that returning customers cost the company marketing money, then the budget for that should be kept separate. Remove these returning customer costs from each line item from the formula, to ensure that the ratios are accurate with correct data.

Advertisements

The art of how much to raise

In the past several weeks, I have been astonished at the size of seed rounds that founders expect to raise in their first round. My jaw hits the table when a founder blindsides me with requests to raise seed rounds of $1 million to as high as $3-4 million!*

These are the start-ups that have

  • Opened their doors for business within the previous 12-18 months.
  • Have an ARR of less than two crore rupees ($300k).

Surprised at the massive requirement of capital, we go through their financial model. Within a few minutes of looking through the model, the spreadsheet would give out a chilling fact:

The founders first decided the amount they were raising; then, they decided how to utilise the amount that is raised!

It may seem like smart scheme when pitched to novice investors, but it is a foolhardy attempt to do that to an investor with experience.

For instance, to show full utilization of the amount the founders pad certain numbers. So, a close inspection of the fund utilization plan exposes the founder’s true intentions, i.e. that they wanted a reverse calculated an ego-boosting valuation for themselves. To achieve that goal they were willing to misrepresent facts. How does a founder come back from that image?

The good news is that – there is a better way.

My advice for founders that are creating their fundraising plans is to start with a well thought out answer to a famous Peter Thiel question

What is the one thing you know to be correct but very few agree with you?

In simple words, what do you need to prove to your team, your advisors, investors, etc. to elevate their belief in your idea? Whatever you need to do to gain their confidence that is the goal of your fundraising efforts.

For example, if everyone in your inner circle does not think that your company cannot sell x number of your whacky widgets in a specified period – then that is precisely the thing you must prove! Your goal must be specific, measurable, attainable, and realistic, and time-bound so that you aren’t on a wild goose chase.

Second, estimate the time and the resources (servers, people, space, travel, etc) required to achieve your goal. Pay close attention that your estimations do not have un-utilized or under-utilized resources. In fact, I advocate allocating 20% fewer resources than your start-up needs. It forces your team to innovate, after all – scarcity is the mother of innovation!

Third, figure out the exact cost of your resources over the period of their requirements. This exercise is a crucial step. Because if you had correctly estimated the resources and the time they’re required, you will (now) have the EXACT amount you must raise to achieve your goal.  

Fourth, add 25% top of the number you had in the previous step. The extra amount is your buffer, i.e. it is the extra cushion you’ve kept to account for any mistakes you may have made in your calculations. The extra cushion gives you the breathing room to commit errors – an essential fail-safe for an early-stage startup.

Now you have the exact amount your start-up needs, not a paisa more and not a paisa less. Next, go out there and raise this amount!

This proper prior preparation will give you the confidence to answer questions about the “why” behind your fundraising efforts. Your confidence will impress your prospective investors as you come off as a professional founder instead of a novice founder who thought they could pull the wool over the eyes of a seasoned investor.

As an investor that has sat on the other side of the table for almost eight years, this level of preparation and maturity from a founder is rare. But, when I meet a prepared founder it invokes confidence that the founders will utilize my precious and expensive capital judiciously. In fact, I may be swayed to give a premium valuation to such well-prepared founders – exactly what the founder wanted but now he/she earns it with respect!

* – Oddly enough, the high expectations were from founders who spoke in millions of dollars instead of crores of rupees. It ignites the patriotic fervor residing in Vinod – a sight to watch!

My atrocious car buying experience is a lesson in after sales treatment for all founders!

I am re-reading How to Sell Anything to Anybody by Joe Girard (book review coming soon).

Earlier today, I finished his chapter on Winning After the Close wherein Joe talks about the importance of ensuring customer satisfaction AFTER completing a sale. He gives examples of how he goes out of his way to ensure that his customers sing his praises to their friends and family. He links the importance of satisfying his customer to the Girard’s Law of 250, i.e., each person has a direct connect to 250 people; therefore, an unhappy customer can directly influence 250 people. Consequently a salesperson or a business that disappoints two customers a week will have 26,000 negative influence every year!

Why is it important to follow what Joe Girard says? For starters, the man still holds the Guinness Book of World Records for being the most successful car salesman in history. This man was selling six cars a day (on average) while the average salesman struggled to sell one. He was out making $500,000 a year selling cars in the 1970s, i.e., eight times the per capita income in the US of A – TODAY!

So yes, when that man says something – it is worth our time and attention.

I am coming back to my point for the post today.

I just bought my first car in India. It was an important moment for my team and me. We were ecstatic on getting the car delivered on Tuesday evening. However, instead of reveling that moment and remembering it for the years to come, all we cannot forget is how the salespeople delivered the car with just enough fuel to get the vehicle to the closest petrol pump!

The saleswoman blamed the empty fuel tank on some dealership policy of ensuring that customers get a bone dry fuel tank. I could not disagree more with her firm, her firm’s strategy, and finally with the saleswoman herself. If she was so embarrassed about her firm’s stingy policy, she could have ensured a happy customer by filling up the tank herself – she would make more than the Rs. 2200 it cost me to fill the tank.

Buying a car is one of the most important purchases in one’s life. I can still remember, like yesterday, the first car I bought with the money I earned by working during the first summer semester in college – a 1996 Mercury Sable with a v6 engine. I was so proud of the car even though it was six years old at the time of purchase. The moment gives me goosebumps even today.

Then 17 years later I buy my first car in India, a Honda Civic, and it is an expensive car (for my standards), but it was delivered as though the dealership was running out of money. It left a sour taste and you won’t have to think hard whether this dealership (Arya Honda) will be recommended by me to anyone. The answer is no.

I must re-emphasize that a happy customer is the best salesperson. He/she will boast about his/her positive experiences to their closest network. On the other hand, an unhappy customer will tell anyone that would like to hear him/her of their negative experiences and feeling cheated by a car dealership. Unfortunately, these car dealerships operate under old maxims therefore continue to misread their customers. Any start-up founder that is reading this post should not.

Your customer whether they are B2C, B2B, B2B2C or B2B2B or B2B2B2C (and so on) must be happy with their purchase of your goods or services. To hide behind the veil of corporate policies is the old way of doing business, and you must ensure that your salespeople are sufficiently empowered to ensure post-sales customer satisfaction, at all costs! It is just as important that those negative experiences are corrected by changing policies and processes.

The process in which the company acquires a customer, gives them lousy experience, and allows the salespeople to blame an insane corporate policy is a sure indication of a deeper rot settled in that organisation.

A rot that every entrepreneur should guard their companies against the cost of all their corporate policies.

When Should I Pull the Plug?

When is the right time for an investor to give up working with a venture? 

As an entrepreneur turned investor and very competitive person, I have had to grapple with this question many times in my seven-year career as a startup investor. There have been instances when the decision was as clear as night and day, instances when I have clearly held on for too long and instances where I have given up too early. My team and I have learnt from those experiences and incorporated those lessons in our future investment endeavors. 

However, there is a grey area wherein the venture is doing well, numbers are trending positively, the total addressable market huge but there are certain factors that prevent the venture from achieving the “escape velocity” that separates a good venture from a fantastic one. Some scenarios include businesses that have transformed into a lifestyle business for the founder, the sector becoming heavily regulated, the inability of the founding team to pitch their business well to new investors or invoke the confidence that can drive bigger cheques. It is these ventures that cause the most heartburn because they have all the ingredients to make a great company but just a few factors make them plateau.  

There may not be a 10-point checklist for an investor to decide whether it is time to pull the plug or not, but I’ll leave you with this insightful piece of advice from AVF’s CFO/Growth Partner that helped me seal the fate for a venture that I have been rolling over hot coals for, for the past 2 years. He said, “if after 2 years, this is how they speak to you, how will they speak to future investors 2+ years from now?” and my decision after that, was just that easy.  

58/2018

How Did You Die

Siri tells me that it took 1,347 days from my first blog post, Dropping Out Of The Rat Race… to my 100th blog post. Thereby, on an average taking 13.5 days to write each blog post. If I remove the 31 blog posts written in 66 days of this year, the average will shoot up to 18.5 days per post, therefore making it evident that things are already looking up for my blog.

In the journey to a 100 blog posts, I have had many interesting & challenging moments. There was a post defending an investee company against a much larger competitor that made it to the Economic Times (without my knowledge). The reaction to this was a screwball approach from their legal advisor who tried to pose as though they were trying to make us their client. That whole experience that was blown out of proportion led to a writer’s block, that made me stop writing for almost 2 months. There have also been times where I wasn’t confidant if what I was writing was meaningful enough for people to read. While reading the Bhagavad Gita over the course of the last 2 years however, I have come to the realization that it isn’t worth stressing over whether people like what I write or not. All I am responsible for, is writing and expressing my thoughts and the way it is perceived isn’t under my control. That lesson (albeit difficult) is something I am starting to imbibe as a motto for all the things that I do in life and hopefully inspire the people around me to pick it up too.

Which is why I think this poem from Edmund Vance Cooke is the best way to express what I have learnt from the journey to 100th blog post, a target that I did not believe I could achieve when I started (my goal was 50).

Now my goal is to just write every week day (my goal is 260 blogs for the year) with no particular number of blogs in mind. The only goal is to write and to keep on writing, come what may cause in the end it is the journey that counts.

How Did you Die

by Edmund Vance Cooke

Did you tackle that trouble that came your way

With a resolute heart and cheerful?

Or hide your face from the light of day

With a craven soul and fearful?

Oh, a trouble’s a ton, or a trouble’s an ounce,

Or a trouble is what you make it,

And it isn’t the fact that you’re hurt that counts,

But only how did you take it? You are beaten to earth?

Well, well, what’s that!

Come up with a smiling face.

It’s nothing against you to fall down flat,

But to lie there–that’s disgrace.

The harder you’re thrown, why the higher you bounce

Be proud of your blackened eye!

It isn’t the fact that you’re licked that counts;

It’s how did you fight–and why?

And though you be done to the death, what then?

If you battled the best you could,

If you played your part in the world of men,

Why, the Critic will call it good.

Death comes with a crawl, or comes with a pounce,

And whether he’s slow or spry,

It isn’t the fact that you’re dead that counts,

But only how did you die?

 31/2018

The Funded Entrepreneurs Group

I just got back from my trip to Kolkata which was planned in order to introduce the founding team of an upcoming investment to Mr. Aditya Ladsaria of Chaibreak (an Artha investee) and Mr. Miftaur Rahman of Wow Momos (a fantastic venture that I deeply respect but unfortunately didn’t get a chance to invest in). The objective of the trip was to give the new founders the chance to learn from two sets of successful founders that had no previous background in food, yet managed to fund their respective successful food startups from customer capital before raising venture capital. I especially admire Aditya & Miftaur’s razor-sharp focus towards addressing the customer’s needs through constant innovation in both, the product and operations.

I was a mute spectator (for the most part) in the conversation between the new founders and the experienced ones, but thoroughly enjoyed listening to their detailed discussions about operations, product innovations, customer loyalty management, HR, etc and all the other topics that concern building a business, except “how to raise money from VCs”. This experience gave legs to an initiative that I have wanted to launch for the last 8-12 months i.e. the Funded Entrepreneurs Group.

The idea is to put a group of founders that have already raised money (seed, angel, pre-series A, series A, etc) into a conference room for a couple of hours every 4-6 weeks to talk about matters that only another founder that has raised money can relate to – ‘how to build the venture!’ The discussion shall take place behind closed doors with no recording so that any founder from any stage of the business growth cycle can ask questions – no gyaan sessions only mutually beneficial universal learning.

I strongly believe that when a founder learns the solution to a problem from a fellow founder who has faced a similar issue and managed to overcome it, the solution seems more do-able and the problem less enigmatic. This will also help form a stronger and more cohesive ecosystem for all entrepreneurs. Going forward, the group can also share business leads or transact with each other and the possibilities remain endless, but for now, lets stick to getting a first meeting done.

Artha helped organise a meeting in an open discussion format for angel investors under the age of 50, with a minimum of 5 investments with a similar objective of learning from each other’s experiences. Those meetings have successfully been going on for the past 11 months with beneficial results for all the participants. Currently, the discussion has graduated to deal sharing and evaluating each other’s investments.

My team and I are excited to be able to organise the first Funded Entrepreneur Group meeting for the founders of our ecosystem. The meetings won’t be sponsored by anyone so that the attendees’ independence will be maintained, but there will be a thorough scrutiny of each person that attends to ensure the sanctity of the event. The exact costs of the event shall be shared between the attendees but I do not expect the cost to exceed 500-1000 per attendee inclusive of tea/coffee and a snack.

So, if you are an entrepreneur who

  1. Has raised outside capital
  2. Are willing to share your experiences to help another founder
  3. Are interested in meeting other founders to build your business

Then email us on feg@artha.ventures with

  1. Your full name
  2. The name of your venture
  3. Link to the article announcing your latest funding round
  4. Your mobile phone number(s)

If there is enough interest, I would love to organise the first FEG meeting in 2-3 weeks (based on everyone’s ability). Email us as soon as possible!

30/2018

Desperation is the Name of the Game

If all things are equal between two candidates that want me to be their mentor, what would be the difference, that would make all the difference? No, it’s not how equity you will give me or how much respect you have for me… The correct answer is – desperation.

I am not referring to the desperation to get time, money or references, but the desperation that burns through the eyes and words of the prospective mentee to succeed. The desperation that cannot be dissuaded by failure, drowned out by rejection or simply because they didn’t get an immediate response from someone they attempted reaching out to for help. I am referring to that desperation that will make a person turn the world upside down to get what they want – yes that desperation.

In a world of unlimited opportunity, this is the kind of desperation I look for, to decide who I should devote my limited time (a precious resource) to. A person must innately want to achieve the skill he is seeking my mentorship for, and not only be attempting to achieve it because he ‘has to’. This distinction leads to a visible difference in the amount of passion and desperation a person exudes.

The lack of this type of desperation and conviction in the importance of achieving that skill doesn’t bode well for my ROTI (Return on Time Invested).

So, if you think I’m being arrogant, standoffish or aloof to your call for help, I am only checking to see if you are as desperate as you are making it out to be.

29/2018

Magnum Ice-cream Ingredients!

As I pulled open the wrapper for an essential part of my movie-going experience ie the Almond Magnum ice-cream, the whiff of chemicals that went up my nose almost made me vomit. Surprised that my innocuous ice-cream smelt like a chemical lab I investigated the ingredients that made this marvel – they induced a second vomiting episode.  

Ever since I read The Wild Diet by Abel James I have started an inquisition into the foods I regularly consumed. What I have found out is nothing less than startling. The more I read into I regularly eat, the less I have been eating of them. The “empty calories” consumption has been replaced with nutrient-dense foods and has led to remarkable improvement in my energy, metabolism, attention span and (most importantly) my waistline. However, I did not expect the Magnum bar to disappoint me as it just has 

Here is the list of ingredients in an Almond Magnum Bar from their website: 

Screen Shot 2018-03-04 at 5.29.37 PM.png

On first look, many of these ingredients look harmless. However, when I started researching each item I realised how creative writing has made the dangerous look harmless.  

Take for example the “permitted natural colour (beta-carotene)”. WebMD explains that Beta-carotene is one of a group of red, orange, and yellow pigments called carotenoids. Beta-carotene and other carotenoids provide approximately 50% of the vitamin A needed in the American diet. Beta-carotene can be found in fruits, vegetables, and whole grains. It can also be made in a laboratory 

The explanation taken at face value made it appears that beta-carotene was good for health. However, there is a catch. The beta-carotene in this ice-cream bar was used to make the almonds appear redder than they are therefore this beta-carotene was lab produced and did not occur “naturally”. So, what are the side-effects of this lab produced supplement?  

There is growing concern that taking high doses of antioxidant supplements such as beta-carotene might do more harm than good. Some research shows that taking high doses of beta-carotene supplements might increase the chance of death from all causes, increase the risk of certain cancers, and possibly other serious side effects. In addition, there is also concern that taking large amounts of a multivitamin plus a separate beta-carotene supplement increases the chance of developing advanced prostate cancer in men. 

And if you are a smoker you should be reading this:  

In people who smoke, beta-carotene supplements might increase the risk of colon, lung, and prostate cancer. Don’t take beta-carotene supplements if you smoke. 

All this just from the colouring used to make the almonds look better! 

To go through all the other ingredients in detail would take up 3-4 pages so I made this table explaining the ingredients in that single stick of ice-cream. 

Ingredient  What is it made of?  Side effects  Source 
Vanillin  A petrochemical i.e. phenolic aldehyde, which is an organic compound with the molecular formula C8H8O3  Allergic reactions, digestive disorders and migraine headaches  
  1. Melt Organic 
  1. U.S. National Library of Medicine  
E322 – Lecithin  Lecithin is a fat that is essential in the cells of the body. It can be found in many foods, including soybeans and egg yolks  Lecithin is LIKELY SAFE for most people. It can cause some side effects including diarrhoea, nausea, abdominal pain, or fullness. 
  1. WebMD 
  1. CureZone 
E471 – Monoglycerides & Diglycerides   Monoglycerides and diglycerides are food additives commonly used to combine ingredients containing fats with those containing water, two types of ingredients that don’t ordinarily combine well.  They are similar to triglycerides, the predominant fat in food according to the Harvard School of Public Health, except they are classified as emulsifiers rather than lipids 
  1. CureZone 
  1. LiveStrong 
E410 – Locust Bean Gum (Carob Gum)  Locust bean gum is a galactomannan vegetable gum extracted from the seeds of the carob tree, mostly found in the Mediterranean region. 

 

It is a thickening agent and a gelling agent used in food technology 

Carob is LIKELY SAFE for most people when taken by mouth in food amounts or as a medicine. There don’t seem to be any unwanted side effects. 

 

Pregnancy and breastfeeding: There is not enough reliable information about the safety of taking carob if you are pregnant or breastfeeding. Stay on the safe side and avoid use in greater than food amounts. 

  1. WebMD 
E407 – Carrageenan   Carrageenan is a common food additive that is extracted from a red seaweed, Chondrus crispus, which is popularly known as Irish moss. 
  1. Research has shown that exposure to carrageenan causes inflammation and that when we consume processed foods containing it, we ingest enough to cause inflammation in our bodies 
  1. Drug investigators used carrageenan to cause inflammation in tissues to test the anti-inflammatory properties of new drugs 
  1. CureZone 
  1. Dr Weil 

 

E412 – Guar Gum  Guar gum comes from the seeds of the guar or cluster bean plant. About 20 percent to 40 percent of the guar seed consists of galactomannan gum, which forms a thick gel when mixed with water  Guar gum is LIKELY SAFE for most people when taken by mouth with at least 8 ounces of liquid. The water is important because it reduces the chance of choking or developing a blockage in the intestine. 

 

Side effects include increased gas production, diarrhoea, and loose stools. These side effects usually decrease or disappear after several days of use. High doses of guar gum or not drinking enough fluid with the dose of guar gum can cause blockage of the oesophagus and the intestines. 

  1. CureZone 
  1. LiveStrong 
  1. WebMD 

 In a nutshell, my ice-cream included petrochemicals, thickening agents, seaweed extracts and so many things that I shouldn’t be in an ice-cream. I couldn’t bring it upon myself to put that chemical experiment in my mouth, so I threw it away. I suggest you do too.  

28/2018 

The One Thing I Couldn’t Relate to in Padman!

I finally saw Padman on Thursday night and I’ve got to confess, I absolutely loved it! I identify with the struggles and humiliation that Laxmikant Chauhan, the protagonist, goes through as he attempts to improve female hygiene practices ie convince the females in his home and village to use sanitary pads instead of a rag during periods. Even though his wife, mother, sisters and entire community abandon him, forcing him to leave his village, the fire within him continues to burn, driving him to achieve the improbable. Down and out on luck, Laxmikant encounters a lady who resurrects him and joins his fight. Her help transforms Laxmikant from a failed entrepreneur about to be beaten to pulp by his creditors, to one that receives international acclaim and success.  To thank her for all the help and support, he named his product after her. Then, when things were looking up for him his entire community, family, and even his wife wanted him back and he left the hand that took him to the peak to go back to the people who were fairweather friends. This is betrayal or to put it more crassly, spit in the face of those that stand by you and support you when you’re down.

This made me think about how in my own journey, I have encountered several such fairweather friends and colleagues. These people who I thought were my near & dear friends, didn’t take a moment to think before throwing me down the well when I was struggling, but when I seemed to be doing well, these same people touted that “they always knew I’d make it large.” I keep these fairweather friends at a very safe distance because their next attempt to bury me is awaiting the next trough in the long journey of success.

I keep close and regard those friends, family members and even colleagues who stood with me when I was struggling the most. People like Laxmikant Biyani who let me use his office rent-free when I didn’t have the capital to pay rent (and he has refused to take rent even now), my Chacha, Ramesh Damani who provided endless moral support over and above his investments in/with me and finally my team that started Artha when it was just a dream and stuck around when that dream struggled to breakthrough. Whenever I write my memoirs (and I will), they will feature prominently in it.

So, that was my peeve with Padman, why leave those that support you at your worst and go back to those that will be with you only when you are doing well? What lesson does the movie impart to the other Laxmikant Chauhan’s have been vilified by their own support system for doing things that are out of the box but continue the fight? What is the lesson to those people that have the heart & courage to support someone else in their fight?

I loved the movie until this plot twist occurred… the writers should have had the courage to script a new ending instead of opting for a Suraj Barjatiya type of impossible, unrealistic happy ending.

I wouldn’t go back, in the movie and in real life.

27/2018

A Sunday Treasure Hunt, for a Good Cause

I am the Vice-Chairman of Mumbai One Round Table 221 (M1RT221) which is part of Round Table India. One of the objectives for our table this year is to host an enjoyable philanthropic event that while contributing to a noble cause will provide an interactive and enjoyable Sunday afternoon with family and friends.

Our first such fun event for 2018 is the “Carwars: Treasure Hunt” that is taking place on March 11th, 2018 from 9 am to 12 noon at National Sports Club of India (NSCI). Participants will be given a set of clues to decipher, which will take them around Mumbai to parts of the city that they haven’t been to in a while or never before. The last time we hosted a similar treasure hunt in 2015, it was a resounding success. We have a ton of memorable pictures of participants posing as statues at Hanging Gardens or hidden signboards around Fort. I am sure that this year will be better than the last one J

The entire proceeds from this event will go to Reevive of Cancer Charity Trust. Reevive an organisation that helps financially challenged cancer patients to fight this horrible disease by giving them access to quality treatment. Their zero administration cost policy is what sets them apart. The organization supports patients from the Tata Memorial Hospital and the money that is donated to them gets directly deposited into the Hospital’s treatment account so that it can only be used towards the treatment costs and medicinal expenses of patients. This ensures that any money contacted to Reevive directly reaches the hands that need it the most.

This event will be a Sunday well spent with family & friends for a cause to help those in need.

Breakfast will be provided at the venue before you go off on your hunt so get there early! There will also be lunch after the hunt (so make sure you make it back!)

To register for this event click here: http://imojo.in/6t6gzz

If you would like to be a sponsor for this event or donate (because you’re an awesome person) email me by clicking here

This event is supported by the Young Volunteers Organisation.

26/2018