• Customers continue to buy: Not unlike the 1999-2000 experience, customers seem unaffected by all the kolaveri around. Keep the focus on customers and deliver a great consumer experience — that is the essence of building a great business
• Build a business, not transactions: The only currency of a good ecommerce business till now has been transaction volume. Now is the opportunity to answer more fundamental questions — why would customers buy from you (apart from getting products below your cost price)? What really differentiates your business from the guy next door (no, really!)? What will drive profitability in your business? Which customers do you want to target and who do you want not to? ‘Internet is cheaper than retail stores’ is not enough anymore.
• Time for innovation: Premium will shift back to great teams with the propensity to innovate, rather than the best search engine marketer. If you do have a customer proposition that goes beyond discounting, can you run the business at 25 per cent plus gross margins (including logistics costs)? How can you build a business without investing $100 million in inventory, and still ensure great consumer experience? What’s uniquely Indian about ecommerce?
• Investment is still available: Ecommerce in India is not a space that investors can ignore (even Mahesh) is investing in ecommerce now – they just seem to be correcting themselves to look at the right things.

Lets get back on the roller coster. The party has just begun!

About the columnist: Alok Mittal leads venture capital investments at Canaan Partners India. Mittal earlier co-founded jobs portal Jobsahead which was acquired by Monster.com. This post originally appeared on Mittal’s blog VentureWoods.

Image Courtesy: Canaan Partners

Canaan Partners

Making Angel Investing Work

By Alok Mittal

Canaan Partners hosted a roundtable discussion with over 30 angel investors. This note summarizes the key discussion items.

Individuals & Groups

The participants included members from angel groups (Indian Angel Network and Mumbai Angels, each of which have made 18 investments till date) as well as individual angel investors. Many participants also reported that they invest both individually and through these groups. Members of the groups pointed out to several advantages of organizing themselves, including:

• • Ensuring adequate capital availability through syndication
• • Sharing the effort involved in making investments as well as managing them
• • Availability of wider domain knowledge within the investing group

Time, Not Just Money

Most participants agreed that angel investments entail high level of involvement and time commitment. While there was consensus that the operating team needs to be given enough operating freedom, investors mentioned a wide range of involvement from finding office space, to recruiting talent, to helping find customers. Some of the investors emphasized on the need to define concrete value-add before making the investment, such as a specific list of customer contacts that could be useful to the company. Some participants reported spending as much as two full days a week with investees.

There was emphasis on defining and working towards milestones that can be achieved with the often meager angel capital. Some of the suggested milestones were towards business progress; others towards ensuring that the next round of financing can be secured.

More Than Just IT

While the earlier stages of angel investing witnessed a bias towards information technology oriented investments, angel investors are now looking at a wide range of sectors. There was a view that sometimes brick-and-mortar businesses have a wider set of potential acquirers. At the same time, many participants pointed out that since angel investee companies need to raise their next round of financing from venture capitalists, the sectors are limited by where follow-on investments are expected to be available.

Profile of Entrepreneurs

Majority of the group indicated a growing preference for entrepreneurs with strong domain expertise and operating background. Both the lack of compelling differentiation in ideas, as well as the difficulty in building strong operating teams under inexperienced entrepreneurs were cited as reasons.

There were differing views on the importance of pedigree of the entrepreneurs. While principally most people agreed that there was a lot more talent than just from top engineering and business schools, there was also a view that entrepreneurs with pedigree stood a better chance of raising follow-on venture capital, hence being better bets for angel investors.

Suggestions for the Development of Angel Capital

There was consensus that there is very little seed stage capital available, and there were several suggestions that could be taken up on a collective basis, and in collaboration with organizations such as TiE:

• • Tax breaks for accredited investors, similar to those prevalent in other countries
• • Devise investment structures that allow for returns even when the investment turns into a lifestyle business, with no acquisition or initial public offering in sight, and with lower dependence on future rounds of financing.
• Expand the themes and geographic spread of angel investment, perhaps by attracting local capital. Case studies of successful angel investments, as well as training on investing and portfolio management could be useful.
• Devise management structures to allow distinct roles for passive investors and active members, to allow maximum leverage to engaged investors.

Singhal is a man on a mission. He wants to set up a platform, under the Canaan umbrella, that will help entrepreneurs to get in touch with angels more effectively. The first step to that is to get a fix on the angel community itself. There are a few organized angel investor networks, such as Mumbai Angels, Indian Angel Network and so on, but clearly, not enough. Singhal thinks that the angel communty is much larger than the already known pool of serial entrepreneurs, big corporate honchos and other high networth individuals. “There are many people in the (corporate) operating environment, at the middle-senior levels who make decent money and wants to invest as angels. They need to be brought into the system,” he says. Most of these folks never get into the system because either they don’t know how to or don’t want to join an angel investor group.

Instead, Singhal thinks, if there is a platform that allows potential angels to interact with entrepreneurs, figure out their needs and eventually do deals, the angel capital pool available to startups would grow exponentially. It would also allow people who have regular corporate jobs to get involved with a startup. As angel investors, apart from investing, they also get to bring some of their operating skills to the table. “Several people I know don’t want to quit their jobs but want to be involved with startups in some way,” he says. And of course, venture capital firms such as Canaan benefit in terms of potential deal flow being created.

I’m not surprised to see this initative come from Canaan. The India team, notably Alok Mittal, Singhal and Harish Gandhi, is among the more active within the venture capitalist community here in terms of their involvement with the startup eco-system. Mittal is a regular grassroots worker — he’s been an entrepreneur with Jobsahead (acquired by Monster) — and spends a lot of time with entrepreneurs formally at forums such as Proto.in and informally. He’s also the driving force behind Venturewoods — probably India’s best startup and venture capital blog.  Canaan also runs the very successful annual TiE Canaan Entrepreneurial Challenge. I’m sure this new initiative will also be a big success. Will be tracking it closely.

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