Archive for September, 2017

If You Think VCs Create Bubbles, Meet ICOs

Friday, September 22nd, 2017

In When A Business Is VC Funded, VC Is The Business, we saw how VCs – though not the startups in their portfolio of investments – are driven by traditional business metrics like profitability and ROI.

Contrary to common wisdom, the VC industry has a stellar track record on these conventional KPIs. In this post, I’ll explain why I say that.

First, let’s take profitability.

SoftBank is adequate testimony of the VC industry’s profitability. It’s no secret that many portfolio companies of the leading Japanese VC / PE company are running at a huge loss.


Despite that, SoftBank itself is the 19th most profitable company in the world (Source: 2017 FORTUNE GLOBAL 500).

Now let’s come to ROI.

In a traditional business, an investor earns steady returns on most of their investments. Whereas, in a VC business, 50% of investments are written off on startups that fail to scale. VCs recover 30% of their investments and, unlike in a traditional business, they make multibagger returns on the remaining 20% of their investments. As a result, a VC fund delivers an overall return of ~20% per year (Source: Steve Blank). This well exceeds the hurdle rate of hardnose investors like hedge funds and pension funds who have pumped in record sums of money into VC funds last year.

Given below are a few examples of the multibagger returns earned by VCs:

  • SAIF Partners’ $70M seed investment in PayTM, India’s #1 mobile wallet company, is now worth $2B  – despite the thousands of crores of losses made by PayTM (Source: Economic Times)
  • Leading Silicon Valley VC Sequoia made 50X return from its $60M investment in WhatsApp when the latter was acquired by Facebook for $19B – despite the fact that WhatsApp had measly revenues of $36M at the time (Source: Techcrunch)
  • For all the blame that Tiger Global Management gets for causing the cash burn in Indian ecommerce, the New York VC’s $1B investment in Flipkart is currently worth $3B (Source: Economic Times)
  • Altimeter Capital, General Atlantic, and the remaining Series F investors took only 15 months to double their investments in AppDynamics. When Cisco acquired AppDynamics for $3.7B, the Silicon Valley application monitoring startup had posted whopping losses on sales of $130M (Source: CNBC)
  • And, in what is perhaps the mother of all investments at any stage of the VC investment model, angel investors earned 250X of their seed investment in Oyo Rooms (Source: Economic Times).

As you can see, multibagger returns span all stages of VC investments viz. Seed, Angel, Venture Capital (Series A, B and C), and Private Equity (Series D and E through to IPO). From this, it would appear that the critical success factor of the VC investment model lies in its ability to constanly pump up valuations over time and encash from the higher valuations from time to time. Wags call this approach “pump and dump”.

As Geoffrey Moore says in his article titled A Quantum Theory of Venture Capital Valuations, “The purpose of a round of venture funding is to get your company from one valuation state to the next.” When they see how the VC investment model pours money to drive up valuation, the man on the street tends to believe that it creates bubbles waiting to burst. While that belief is not misplaced, fact is:

  1. Valuations of VC-funded startups have remained fairly stable so far
  2. After doing down-rounds in the past, Flipkart and Zomato have enjoyed an uptick in their valuations in recent times
  3. Once a startup does an IPO, the parcel is passed on to the common man
  4. Even if the music stops eventually, lots of people in the VC ecosystem will have made tons of money by then.

Not surprisingly, the VC investment model has stood the test of time and attracted a record amount of investment from Limited Partners in recent times.

Not just globally but also in India. According to Times of India, “nearly $15 billion of funds is lying as dry powder, the highest amount of free cash to date sitting and waiting to be invested in Indian ventures.”

If you’re still skeptical about the VC model, meet Initial Coin Offering.

This new kid on the blockchain allows startups to raise funds without even a product, let alone pageviews, installs, bookings and other vanity metrics. Investors plonk down millions to buy digital tokens sold by a startup on the basis of a white paper that explains its vision of a futuristic product.

If you thought VC was speculative, ICOs take speculation to the next level.


When I titled the first post in this series “When A Business Is VC Funded, VC Is The Business”, I paraphrased the famous saying “When a product is free, the user is the product” to the VC world.

You may ask, “What happens to the startup in this world?”

Well, the startup becomes an asset class.

This was implicit in the VC world. ICO makes it obvious.

When A Business Is VC Funded, VC Is The Business

Friday, September 15th, 2017

A couple of years ago, virtually every driver of my Uber and Ola taxi rides used to praise the two cab aggregators to high heavens for paying them huge incentives. Many of them would ask me how these startups could afford to shell out that kind of money when they were collecting less than half of that amount in fares. I used to tell them that they got oodles of cash from VCs and explain how the venture capital model was driven more by bookings than revenues or profits.

Cue to the present day. There’s still a lot of mystery shrouding VC funding.

I regularly come across hordes of people during events and on social media accusing VCs of ruining the market by promoting discounts and cash burn. Some of the haters have even gone so far as to suggest that the government should ban VCs.

In this post, I’ll share my thoughts on why this belief is wrong and explain my understanding of how the VC investment model works.

Much of the angst about VCs arises because people wrongly apply the yardstick of a traditional business to VC investments.

Let’s take a traditional business like cement. Promoters and shareholders make a large upfront investment to set up a factory, develop a distribution network and employ staff. While a plant is under construction – which can easily take 3-5 years – there’s no revenue. After production commences, sales begin, hopefully profits and dividends follow, share price goes up and shareholders start seeing a return on their investment. For the first five years or so, investors get no return on their investments. Therefore, there’s a lot of time burn in a traditional business.

On the contrary, there’s very little time burn in the VC funding model. The way it works, revenues start from Day One in the case of cab aggregation, ecommerce and many other VC-funded categories. Once they achieve product market fit, startups use the funds raised from VCs to achieve explosive – aka “hockey stick – growth in Pageviews, App Installs and Gross Merchandise Value. In a favorable market, growth on these so-called “vanity metrics” translates into a manifold jump in the valuation of startups. Angels investing in startups at the early stage can sell their to VCs, PEs and other late stage investors for a tidy profit even if the startup hasn’t started making profits.

Many people find it unreasonable that valuations keep raising when a startup’s losses are mounting.

They shouldn’t. In what’s one of the cardinal principles of investing, valuation is what the buyer and seller mutually agree upon – there’s nothing reasonable or unreasonable about it.

Not that there aren’t theories about estimating valuation or practical applications of the theoretical models.

In his blog post titled Valuation For Startups?—?9 Methods Explained, the author Stéphane Nasser explains several methods of arriving at a startup’s valuation.

According to a study cited by FORTUNE in Tech Unicorn Valuations Are In Trouble, “half the unicorns were worth less than $1 billion, and more than a dozen were overvalued by 100%”.

While these models and studies sound logical on the surface, they tend to break down when you probe them deeply.

Models use thumb rules like “P/E ratio of 30 is a bargain for a consumer internet startup”, “P/E ratio of 20 is too high for an IT services company”, and so on. There’s nothing intrinsically scientific about these rules of thumb.

By concluding that WhatsApp was overvalued by 60%, the aforementioned study cited by FORTUNE implies that the right value of WhatsApp is 40% of the $19B paid by Facebook for it. Well, if you think $7.6B (40% of $19B) is a reasonable valuation for WhatsApp – a company that posted sales of $36M when it was acquired by Facebook – you shouldn’t have a problem accepting the actual $19B figure.

Then, there are other scientific-sounding articles like Behind the global tech investing tsunami that justify exploding valuations for VC-funded startups.

But these models have limited use. They can be applied to objectify the discussion around valuation before doing a deal. However, after a transaction happens, all that matters is the price at which the deal was struck.

It’s not only me. As Stéphane Nasser concludes his aforementioned article, valuation models “are just the theoretical introduction to a more significant game of supply and demand.” In plain English, you decide on a valuation and then use a scientific model to rationalize the figure.

And, this is not just true of VC-funded startups.

As Joseph Heller wrote decades ago in his bestseller Picture This, “‘Aristotle Contemplating The Bust of Homer’ is the most valuable painting because it’s the most costly painting; it’s the most costly painting because it’s the most valuable painting”. He was referring to the Rembrandt masterpiece that was the first painting in the world to sell for more than a million dollars.

Bottomline is, as long as somebody is willing to buy shares of a startup at a certain valuation, it’s immaterial what third parties think about the valuation.

The success of the VC funding model lies in its ability to find and deliver profits to many such “somebodies”.

Early stage investors (“Angels”), who get into a startup early, make money by selling their stake to late stage investors (“VCs”). Late stage investors, who enter when the startup has started making revenues (but not profits), make money by selling their stake to later stage investors (“PEs”). Rinse and repeat until the last stage where private equity investors, who get into the startup once it makes significant revenues (but not necessarily profits), sell their stake to the man on the street via IPOs.

To be clear, “profit” does not refer to excess of the startup’s revenues over costs but the increase in the value of the investor’s stake in the startup from one round of funding to another.

While there’s cash burn, shareholders make money right from the inception of the startup. So, there’s no time burn in the VC funding model.

In the world, there are some people who are time rich and money poor and there are others who are money rich and time poor. Shareholders in traditional businesses are in the first category, so they prefer time burn to cash burn. VCs are in the second category, so they prefer cash burn to time burn.

Each to his own way. There’s no reason for the government to ban VCs for belonging to the second cohort.

That said, metrics of a conventional business like ROI are relevant in the VC model. Just that they apply to VCs, not their portfolio companies. That’s what I meant by the “VC is the Business” part of this post’s title.

VCs have a great track record on those metrics. That will be subject of a follow on post. Watch this space.

A Few UX Hacks

Friday, September 8th, 2017

Like everyone, I come across many usability-related pain areas in the software, websites and devices that I use regularly. Some of these are caused by bugs and others, by basic design flaws. Over the years, I’ve used some tools and techniques to overcome these problems and improve my UX.

Here’s a collection of my UX hacks, in no specific order.


Problem: Painful to read core content on cluttered websites.


Read these webpages via Mercury Reader. This nifty Chrome Extension strips a webpage of banners, ads and other distractions, thus enhancing the reading experience.

Have a look at Times of India. As you can see, the webpage is very busy (Exhibit 1).

Exhibit 1

Now, click the Mercury Reader button on the Chrome Extensions panel. You can see a clean version of the page with all the distracting material stripped off (Exhibit 2).

Exhibit 2

You can send the cleaned-up page to Kindle or share it on Facebook, Twitter and Email. If you want to save it as a PDF file, follow these steps:

  • Click inside Mercury Reader frame
  • Right click and select Print, or type Ctrl+P, to open the Chrome Print menu
  • Set Destination to Save as PDF.
  • Click the Save button.

Voilà. You now have a clean PDF of the webpage.

#ProTip: In my experience, the clutter on many pages is not merely restricted to the left and right hand sides of the page – it can extend for many pages after the core content has ended. To avoid saving all the junk in your PDF file, scroll through the Preview window on the Chrome Print menu, spot the last page of the core content (say 7), enter “1-7” in the Pages box instead of leaving it at the default value of All, and click Save. This will save only the first seven pages – i.e. core content – to the PDF file.


Problem: Many people find it hard to read long articles onscreen without having a pen and paper beside them to take notes.


While there’s nothing wrong with pen and paper, there are some advantages of “going digital” while taking notes. LINER is a Chrome Extension that lets you highlight passages on a webpage and attach notes to them. Unlike good old bookmarking tools like that let you only bookmark a full page, Liner allows you to highlight a specific portion of a webpage in which you’re interested (“Highlight”).

Liner works as follows: Select one or more paragraphs on a webpage (example) and click the Liner button on the Chrome Extensions Panel. This will change the color of your selection to yellow (by default, but you can change it to your favorite color).

You can add a note to your Highlight (see Exhibit 3).

Exhibit 3

Apart from online notes, Liner has another great feature, which is especially useful for content marketing professionals: It gives you a URL for your Highlight within a webpage e.g. This is unlike a standard page URL that drops you at the top of a webpage.

To collect the Liner URL, click the Copy Link button displayed on the Liner box that pops up as soon as you click the Liner button (see Exhibit 4).

Exhibit 4

You can share the Liner URL via Email and Social Networks. When your recipient clicks it, they will reach your highlight on the given webpage.

By sending a Liner URL to someone, you can draw their attention to the specific portion on a webpage that is relevant to a given context – instead of dumping the URL of the webpage on them and expecting them to take the trouble of finding the proverbial needle in the haystack.

You can also export your Highlights to popular apps like Word, Email, Google Drive, Evernote, and so on.

All your Highlights are stored in the Liner Dashboard, from where you can access a specific Highlight via browse or search (premium feature).

#ProTip: If you want a tool for annotating and adding notes to PDFs in your local hard drive, I recommend Adobe Acrobat Reader DC, a free desktop software from Adobe Systems Inc.



Phantom names of MP3 files copied from a Laptop to a Smartphone.

I started listening to music on my mobile phone well before smartphones and streaming sites came into existence. As I wrote in How Mobile Phone MP3 Players Have Changed Lifestyles over a decade ago, I’ve accumulated a sizeable collection of songs on my Laptop, from where I sideload a bunch of them to my smartphone. While smartphones have kept pace with laptops with respect to RAM capacities (e.g. 4GB on both), they still lag laptops by a mile when it comes to storage (e.g. 32GB on Smartphone versus 1TB on Laptop). As a result, the hard disk on my Laptop continues to be my “Single Source of Truth” for my digital music collection and I continue to copy songs from my Laptop to my Smartphone periodically to this day.

While assembling my collection of digital music on the Laptop, I take the trouble to name MP3 files by their song names (e.g. PF Wish You Were Here.mp3). As a result, when I play them using (say) Windows Media Player, the song names display correctly on the Laptop. However, once I sideload them to the Smartphone, these songs lose their original filenames and show up under phantom names (e.g. TRACK03) while I listen to them on the Smartphone’s Music Player app. This mars the music-listening experience and makes it painful to create Playlists on the Smartphone.


Use MP3TAG software to process the MP3 files on the Laptop before copying them to the Smartphone.


  1. Exhibit 5

    Open mp3tag app on the Laptop

  2. Select the Source Folder on the Laptop containing the song collection you want to copy to the Smartphone
  3. Drag the Source Folder and drop on the RHS pane of mp3tag’s dashboard
  4. Click Ctrl-A to select all files displayed in the mp3tag pane
  5. Right Click to open conversion menu, then click Convert > Tag-Tag (Exhibit 5)
  6. Set “Field” = TITLE
  7. Click small right arrow next to “Format string:” field
  8. From next screen, select “Information Fields” > filename
  9. Click OK
  10. All files will be “renamed”. The file names themselves won’t change but the TITLE of each file will be corrected from the spurious one (e.g. TRACK03) to the proper song name
  11. Sideload the songs from the Laptop to the Smartphone via USB cable / Bluetooth.
  12. When you open the Music Player app on the Smartphone and tap Refresh, you will see all songs appearing by their name. Mission accomplished!
  13. As a housekeeping step, right click the file selection on mp3tag RHS pane and click Remove. This cleans up mp3tag and makes it ready for the next conversion session. Don’t worry, this command does not delete the files in the Source Folder.

This hack is courtesy my friend Gunwant Suryawanshi.

#FunFact: mp3tag works in-situ i.e. it processes files in their original location. This is unlike Dropbox and many other desktop applications that copy files into a proprietary folder, which is a waste of storage space and a cause of version management headaches.

I hope you find these hacks useful.

If you have any UX hacks of your own, please share them in the comments. Thanks in advance.

With The Bar Raising, FORTUNE GLOBAL 500 Eludes The Indian IT Industry

Friday, September 1st, 2017

The company ranked #500 in this year’s FORTUNE GLOBAL 500 generated revenues of US$ 21.609 billion compared to US$ 20.923 billion posted by its counterpart last year. In other words, the Global 500 Qualifying Revenue increased this year. This is a constant trend except for last year, when the Global 500 entry bar actually fell from the previous year’s level.

Before we deep-dive into how this impacts the Indian IT industry, here’s a quick overview of the list published by Fortune magazine on 1 August 2017:

  • WAL-MART STORES (USA) continues its reign at the top spot. AUTONATION (USA) closes out the list at the last position. Their financials are shown below:

  • For all the talk of disruption by fintechs for the past several years, financials continues to be the most profitable sector in the world, with seven out of 10 most profitable companies in the world belonging to financial services. If this is what wannabe disruption can do, many other sectors must be dying to get disrupted!
  • The rise of China is unbelievable. A decade ago, the country had 29 companies on Global 500. Now it has 109. The #2, 3 and 4 companies in this year’s list are all Chinese. Fortune predicts that China may soon overtake USA, which has the most number of companies on the list (132).
  • In the 20+ years that I’ve been tracking this list, India’s GDP has nearly quadrupled but the number of Indian entries in Global 500 has stagnated at around 5-8 companies. This year’s list has just seven Indian companies. I don’t know whether it implies that the country’s GDP has grown by virtue of the big companies getting bigger or small companies becoming midsized but not big enough to enter Global 500 or something else. If you have any thoughts, please share them in the comments below.

  • After debuting at #285 in 2012, STATE BANK OF INDIA (India) has inched up to #217 in the latest Global 500. SBI is now larger than many more-well known global financial powerhouses like ANZ, BARCLAYS, NAB, UBS, et al.
  • Just one year after entering the list at #423, RAJESH EXPORTS (India) has zoomed up to #295, with 43.1% revenue growth.

Now, coming to the Indian IT industry.

When the Global 500 entry barrier went down last year, I predicted that one or two Indian IT companies would enter the Global 500 as early as 2018. Alas, that’s not to be. Not because their growth has slowed down but because the Qualifying Revenue has gone up. I’ve reworked my model to reflect the latest figures. This is how it looks:

(Click here to download my Excel model).

Based on the revised figures:

  • TCS will become a FORTUNE GLOBAL 500 corporation in 2025
  • None of the other four featured companies are likely to enter the hallowed list within the 10 year horizon of my model
  • The next rung of Indian IT companies stand virtually no chance of entering Global 500, so I haven’t introduced them into my model.

As before, my model is based on the assumption that future CAGRs will mirror the latest year-on-year growth rate. This assumption has held up well so far but I expect it to be challenged in the near future because of two reasons. As you’ll see shortly, that’s not a bad thing.

The first challenge to the assumption comes from the behavior of the Global 500 Qualifying Revenue. As you can see from the following chart, it has been spinning like a yo-yo during the last five years.

Therefore, it’s too simplistic to use the latest y-o-y growth rate to predict future Qualifying Revenues. If Qualifying Revenue continues to behave in such a volatile manner, I’ll start using 5-year moving averages in my predictions from next year.

The bigger challenge to the CAGR assumption will come from the high level of inorganic growth expected in the Indian IT industry. Beset with digital, AI, automation and other growth impediments, industry leaders are under increasing pressure from their shareholders to use their huge cash hoard to buy up new-age companies to get a jumpstart on emerging growth opportunities.

During the recent fracas at Infosys, there were strong rumors that Infosys attempted to sell itself to TCS, which is India’s largest IT company. Had this deal happened, the merged entity would have entered the Global 500 at #400, with a combined revenue of over US$ 27 billion.

While nothing seems to have come out of this specific overture, the general M&A buzz is too loud to be ignored any longer. When – not if – the inevitable happens, revenues of some Indian IT companies will go through the roof. CAGR of acquiring companies will be way above the figures assumed in my model.

Here’s my bold prediction: In a year or two, at least one of the logos in my present model will be gone, and at least one of the remaining logos will appear on that year’s FORTUNE GLOBAL 500 list. And that’s surely a good thing!