View the image in a new window for better readability.

Notes:

1. This post is written keeping the market conditions of India in mind and may not apply to other geographies.

2. The table shows somewhat ideal scenarios just for understanding, in real world there are many more variations.

3. Don’t mistake table as set of fixed rules, these are just some possible combinations to enable you to create your own scenarios

4. Most of the times these things are function of the main investors subjective opinion, competition for the deal

5. This is not description of what my firm The Morpheus follows. Methods followed by The Morpheus could be different depending on the exact scenario

Update: (answers to the questions that have come on the post)

What percent of equity that will be diluted to the investors at each step?

This can be calculated fairly easily

• Equity given to the investors =  Total money invested / Post-money valuation of the company
• Post money valuation = Pre-money valuation + Total money invested
• Pre-money valution = Valution of your company before taking the investment
• Example:
  • Pre-money valuation = 1 Cr
  • Money being invested = 15 L
  • Post-money valuation = 1Cr + 15 L = 1.15 Cr
  • Equity given to the investors = 15 L / 1.15 Cr = 13.04 %

How did you come up with the pre-money calculations?

• Startup valuations are essentially an art, end of the day valuation of a company  on which both the startup and the investor agree on
• I have based these numbers on my observations and understanding of the preferences of Indian startups and Indian investors operating at different stages
  • I have been directly / indirectly involved in a good number of funding deals  / discussions
  • Also there are deals in which I was not involved but i have the information about them
• I have a personal bias towards revenue generating / cash flow positive startups

Most founders start companies to achieve things like : financial freedom, creative freedom, change the world, make a difference, do something different, be the master of their own fate, be known for their work, be respected by friends & family, lead people, create jobs and the list goes on.

A surprisingly a large number of folks who start companies expect these glamorous  things to start happening automatically the day they leave their job and become entrepreneurs. And since the reality is very different, very soon they start complaining and eventually quit. Here is a little secret you should know:

“Things don’t happen automatically, u have to make them happen. You have to endure and enjoy the pain. Successful entrepreneurs know it instinctively & that’s what makes them tick.”

First 2 years (or more) of a startup are extremely demanding on you as the founder of the startup. You have to endure a lot of pain before you can even get a glimpse of some of these nice things. And there is always a high probability of not making it. Its kind of being pregnant for 2 years while knowing that probability of giving birth to a healthy child at the end of it is a mere 10-15%.  People who go through this period of pregnancy and deliver successfully are the ones who enjoy the journey and the pain more than the outcomes; ones who are prepared to do what ever it takes. You should ask the same question of yourself – are you ready to endure the pain? Or are you better off in your job?

Here is the list of some the things that you should be prepared to go through at a personal/ emotional level during your entrepreneurial journey.

• Unless you plan to live with  your parents, be prepared to move out of your comfortable flat in Versova  with rent of 20k a month and  move to Dahisar to maintain the size of the flat but reduce the rental bill to 10k a month.
• Flights won’t be the default mode of travel between cities (surely not kingfisher).  Every time you’ll travel you will evaluate train vs flight, usually the trains win and mostly sleeper class fare.
• Cabs are no more allowed for travel within the cities. You gotta be using auto rickshaws,  ride buses / trains / metros or even hop on the shared cabs (yeah I have done that)
• No staying in hotels, not even budget hotels. Make a list of friends / relatives in all cities and starting piling on. Or checkout  www.couchsurfing.org
• Can not eat in any fancy restaurant – get a list of affordable but clean food joints – McD is a great option. Cooking at home is even better.
• No more drinking out in pubs. If you wanna drink bring it home.
• No movies in multiplexes. In fact no time to watch TV.
• No phone upgrades / No laptop upgrades. Manage with what ever you have.
• No bank will give you loan. Not even a credit card.
• When we were doing our first venture madhouse – did not buy new clothes for 3 years. Only bought when an investor asked me come to the next meeting in formals.
• There is nothing called a work-life balance in first 2 years of a startup. It’s only work, work and more work. So get used to it and tell your family also.
• You are doing to work (or should I say slog) 18-20 hrs a day everyday for the whole 2 years. And in your 4-6 hrs sleep you will keep dreaming about work anyways
• And a lot of your work time will be spent doing small things, which are not exactly intellectually stimulating  - kinda stuff you always took for granted – cleaning the loo, mopping the floor, making tea, opening your office, buying food, going to banks, dealing with govt officials, starting the generator
• You won’t have much time with family or friends. You will regularly face – angry parents, angry wife, angry kids and angry girlfriends/ boy friends.
• No going to family functions or weddings. Even if they drag you to the function – you will be sitting a corner on your laptop or iPhone and that would leave your relatives angry with you.
• No holidays. No weekends. And if you really want a vacation - Use Google earth to enjoy your imaginary vacations. Feel happy when google earth has higher resolution imagery for your vacation spots. They have recently added high imagery for Kashmir region, especially gulmarg and Amarnath.
• No time to take care of your health. Running, exercises, gyms – all go for a toss
• Don’t expect any recognition for your efforts from friends and relatives – they wont get it – for them you are still a moron – who quit his fancy job with a big company and fat paycheck to do some thing as mundane as SELLING DVDS
• Be prepared to a lot negative talk – all most all people around you will keeping tell you how big a looser you are and many more things.
• Totally get used to failing. Infact failing is not bad – that’s the way to make progress. If you are building anything from scratch – you have to fail 20-50-100 times before you get it right. That’s how evolution works. That’s what happens when you try to solve hard problems.
• Be ready, most people will reject you : customers, investors, employees you try to hire, organizers of startup showcases. You have to keep looking for the ones who will accept you.
• Employee retention will be a pain. You will spend a lot of time finding and training freshers to find they have been poached by biggies with just 1.5x or 2x the salary as soon as training is completed.
• Your girlfriend’s / boyfriend’s parents may tell you that they are not too keen to marry their son/ daughter to an entrepreneur
• And if you plan to close an arrange marriage deal you can forget about it. Entrepreneurs are a total flop in arranged marriage scenarios
• Your co-founder will chicken out and will create a bitter scene. People who seem super committed and ready to give their life for the cause would suddenly find out reality and bail on you.
• Be ready to max your cards / pledge your Personal Assets/Share certificates to give fuel to your Business.

Lot of startups fail / shutdown, just because founders were expecting too much too soon and were not prepared for some of the hard things. I believe being aware of what is in store; can help you prepare for it. If you are prepared for the pain, it will not come as a surprise and I promise at the end of it – all the nice things that you started out for are eagerly awaiting you.

Thanks to Ashutosh Upadhyay , Ankit Maheshwari, Robin Moses, Indus Khaitan, Pankaj Guglani, Sahil Parikh and Nandini Hirianniah for reviewing the draft of the article.

We have started a twitter account called “Friends of Morpheus (@fom_morpheus). This is a community of folks who are either working with us formally or have a good informal friendship with Morpheus or are just interested in startups. The idea is to share / discuss / publish – news, articles, wisdom and thoughts about startups,  more engagement activities will be added overtime.  Sometimes we will also share updates from Morpheus and from portfolio companies

If you have something to share please tweet it with @fom_morpheus and we can further share it with all the fom_morpheus followers.

Click here to follow Friends of Morpheus –  http://twitter.com/fom_morpheus

Don’t forget to spread the word and feel free to send us suggestions on what more can be done or should be changed.

Recently I met with parents of the founder of one of our portfolio companies. They asked me about their son’s venture , how do I think its doing and what will be  the outcome etc. Here was my answer to them:

• Your son worked for 1 year as a SW engineer with a big company before starting his venture
• Now the venture is 4 months old and is already seeing some good traction
• Lets say he works on this venture for 2-3 years, at the end of it one of the two outcomes will be seen
  • Good case outcome: He continues with the venture. It has become successful – not necessarily an IPO but at the minimum its growing steadily and makes enough money to sustain itself and pay him a salary
  • Worst case outcome: The venture shuts down
• When your son started this venture he auto promoted himself from SW engineer to the CEO / CXO
  • A level he may have never achieved or achieved after a very long time period in a regular career with big SW companies
• Since he is  CEO / CXO – he would need to work  & network  with CEOs / Founders / Owners / Senior management folks of other companies
  • As a matter of fact this person I am talking about has already met CEOs / owners of more than 10 established / funded companies which are from the similar domain as his own company
• In case of shutdown of his venture it is certain that with the right efforts your son will:
  • Find a senior management position – VP / AVP / Director / Head of department with a company in the same domain
  • Get very good salary to go with these positions
  • And he would have switched from writing code to a domain of his choice
  • And if he has another venture in him, he can save enough to start it
• This will happen because 2-3 years as an entrepreneur will give the two things needed to get a senior position:
  • Network of decision makers at good companies who have seen him run his own company
  • 3 years of intense learning you get as as a start up founder, is worth more than 10 – 12 years in regular job
• These days people in the industry are very happy to hire X-entrepreneurs, since they know these guys can get work done
• Not all companies would be open to hiring him. But there are lot of funded, growing, young, dynamic companies who would be happy to consider him seriously
• Your son will be way ahead, both in salary and position, as compared to most of his classmates / colleagues who will never go out of the SW industry and become Senior SW engineer or at best a team lead in these 2-3 years. Some of these guys may have gone to top B-Schools to do MBAs and after 2 years will be doing entry level jobs in companies
• So if in the worst case spending two years passionately working on your startup can him chance to switch his job profile and domain, a very good jump in both and salary, and in good case he may be running a successful venture – doing a start up is a great investment in career, and not at all a risk
• They understood my point since it was quite logical, but still did not seem fully convinced . I don’t blame them. They are from a different generation

I also shared with them my personal example:

• In August 2004, when I left my job to start madhouse, I was Principal SW engineer in a telecom startup in California, two levels below a manager
• I started madhouse and promoted myself to be the CEO
• During my three years with madhouse I worked and networked with lot of other CEOs / VPs / Owners / Partners of other companies
• After three years madhouse was acquired by Seventymm and I joined as Vice President – Corporate Strategy
• So in three years I went from being two level below manager to the topmost layer of a well known company and with quite a good salary package
• Now while I was at Seventymm I had access to senior management jobs across domains like retail, consumer products, media. I had an offer to join as president of strategy at one of the leading public entertainment companies in India and the annual package was more than 50L
• But I turned that offer down and decided to start the next stint of entrepreneurship – MVP
• Other two founders of madhouse (Ankur and Nandini) saw a similar result as well. Nandini became AVP @ Seventymm and Ankur joined as VP @ Travelguru
• I am aware of many more similar cases

Business Ideas may fail, but Entrepreneurship is risk free

No opportunity comes with surety.  Even an MBA from a top B-School might not get the best returns. There are lots of bright ideas which never reap fruits. What is important is that you should be able to separate failure of your idea from your personal failure. Its very clear, if you choose to become an entrepreneur for the right reasons, have the right approach and are determined to give it your best shot for 2-3 years and create value in your venture, chances of failure are near zero. You will learn so much and get to know so many people that even in case of the worst outcome, you will come out way ahead and will be a much wanted resource.h

The journey of entrepreneurship is the real value add for the entrepreneur. The result is a by product.

So where is the risk in entrepreneurship?

Note: Thanks for Robin Moses, AshutoshUpadhyay, Ankit Maheswari, Nandini Hirianniah and Sunil for reviewing the post.

Dead poets anthem

Recently I watched the movie Dead poets society. The movie hit me hard,  I had tears in my eyes during the last 20-25 minutes. After the movie got over I was numb for sometime and my mind wouldn’t get away from it.  Its been 3 days since I watched it but the movie is with me. I can close my eyes and play the whole movie for myself.  So I guess its not a bad idea to write a post about it.

It teaches some of the most important lessons of life and delivers them in quite a hard hitting way.

• Be a free thinker
• Don’t conform; create your own identity
• Suck out all the marrow of life
• View things from a different perspective
• Be loyal
• (Most important) Carpe diem – Seize the day

Most institutions and influencers around us discourage us from following these lessons and sometimes even force us,  “to conform, to follow, to accept established views & methods, and to be safe”. These include – schools, colleges, parents, govt., relatives & more.

The movie is set in Welton Academy, shown as USAs most prestigious preparatory school, after finishing the school 90% of students  get into Ivy League. The school is run by a headmaster (and management) who is proud to continue the traditional, conformist ways of learning and wants to maintain absolute discipline. Mr. Keating (played by Robin Williams), an graduate of the same Welton Academy, comes into the school to teach English Literature – which is given pretty much a step-motherly treatment since the school wants to only produce – Doctors, Lawyers, Engineers, MBAs.

Keating on other hand has different ideas. He starts his first class with “Carpe Diem” – a latin word that means “Seize the day” and Carpe Diem is the central philosophy of his teachings. He wants the students to be free thinkers, to create their own identities – he wants to them to “Seize the day” – Carpe Diem.

As per him English poetry has all the things we stay alive for – beauty, love, romance. His style of teaching is very fresh and totally out-of-the-box. Some of the boys go look up the yearbook for the year in which Keating had graduated from Welton and among other things they find the mention of Dead Poet Society. They ask Keating about it, at first he doesn’t want to talk about it. But when the boys push him he tells them about it but asks them to keep it a secret. During his school days, members of Dead Poet Society met in the Indian Cave which was away in the jungle by the river after dinners, read poetry and sucked the marrow of life. A group of boys lead by Neil like the idea, re-form the Dead Poet’s Society and start the meetings. These boys also start becoming free thinkers and start to create their own identities. One track of the movie is about the teaching methods of Keating – where he uses poetry to teach them some important lessons of life. Second track shows stories of  all current members of Dead Poets Society who are influenced by Keating’s teachings and decide to “be thinkers and find there own destiny”, instead of just doing what their parents and headmasters are telling them to do. As expected the school management does not appreciate his endeavor of making real thinking citizens out of the students and they decide to throw him out. The movie has an amazing ending, but I wont spoil the movie for you by telling the end. But let me tell you – it is the ending that is the most hard hitting. Watch the movie – you will enjoy it.

One of the reasons India has not realized its entrepreneurial potential and not produced the googles is that our kids continue to grow up in a conformist environment, risk averse society, surrounded by schools, colleges, parents and other influencing forces telling the kids to just follow, to conform and not to try new things. All of us admire and respect people like – JRD, Dhirubhai, Sunil Mittal, LN Mittal, Sanjiv Bhikchandani, Subhash Chandra, Narayan Murthy and many more, the entrepreneurs who have made a difference. Ironically, these guys were anything but conformist, all of them traveled the ‘road less traveled’, took the risk , trusted their guts and pursued opportunities which looked stupid to others. When Nandan Nikeleni decided to join Infosys as a young engineer from IIT Mumbai – his friends and family thought he was crazy and today he is one of the most respected guys in India.

The lessons of Dead Poet Society are cardinal to the success of an entreprenuer and I would strongly urge all entrepreneurs (current and would be) to watch the movie and internalize the lessons.  Get your parents to watch the movie as well.

Lessons once more:

• Be a free thinker
• Don’t conform; create your own identity
• Suck out all the marrow of life
• View things from a different perspective
• Be loyal
• and

Carpe Diem – Seize The Day

Credit: The image was taken from a blog post about Dead poets society

The startup ecosystem in Chandigarh, the city beautiful, is buzzing with activity. On 12 November the results of Business plan competition, Enterprize – organized by TIE Chandigarh & Chandigarh Administration,  were announced. The winners got place in the EDC setup by the Chandigarh Administration, in the IT park.

Continuing the good news for start-up folks, Fountainhead School of Business is organizing BarCamp Chandigarh – an extreme popular unconference, on 22 November. It will be a day long event that provides you the opportunity to attend some interesting sessions, meet like-minded folks, network and peek into the startup scene here.  Barcamp Chandigarh is also inviting folks who would like to conduct a session. Go ahead and signup to attend the event or to conduct a session at the Barcamp.

MVP is a supporting partner for the the event and we are doing our bit to make the event a good one.

I have signed up to do a session @ Barcamp, but have not decided on what all should I cover in the session. I am looking for some good suggestions from you on that, please leave your thoughts in comments or send a message to me on twitter @guglanisam.

What would you like me to cover during my session at the BarCamp Chandigarh?

“Mediocrities I absolve you” – these are the last lines in the master piece movie Amadeus. The movie tells the life-story of  the prolific and influential composer of the Classical era- Wolfgang Amadeus Mozart. The story is narrated from the point of view of a mediocre Italian composer Antonio Salieri – who also lived and worked in Vienna during Mozart’s Vienna years. (The story of the movie is part truth & part fiction, do watch it)

Story of Amadeus

Mozart was a gifted musician, the best of his time and one of the best mankind has produced. But during his lifetime he never really achieved financial success.  In the movie, the story is narrated by Salieri – who is a mediocre composer but was quite a success in Vienna before Mozart arrived from Salzburg.  Salieri hates Mozart, only because Mozart is a far better composer than him. From the time Mozart appears on the scene – Salieri sphttp://sameer.madhouse.in/wp-admin/post.php?action=edit&post=763ends all his life trying to defame, destroy, derail, humiliate and kill Mozart. But in the process he himself stays mediocre – he makes no attempt to improve his composing skills, to collaborate with Mozart or to discover another art in which he can excel and be the best. He choose to stay mediocre and became saint of all mediocrities and hence the last lines of the movie “Mediocrities I absolve you”.

Observe the difference – once he discovered his calling, Mozart chose to stay true to his music, gave all his life to it, he never compromised, always fought for his music – for his operas, he didn’t do things to please people, didn’t do politics – even though he stayed financially challenged most of his life.

Salieri on the other hand also discovered that music was his calling, worked for it, reached a certain level, joined the Emperor’s services at first given chance, became rich and stopped working on his music or his composing skills. He saw that he had enough skills to make the emperor happy. He chose to stay mediocre, chose to stop growing musically. And later he chose to hate Mozart. Why? Because Mozart did not stop at mediocrity, he went on to achieve mastery – he was the best, he was everything Salieri wanted to become – but without the efforts and without the sacrifices.

Discover your calling

“Find a job you love and you will never spend a day working” – its a old cliche, but still relevant. One can only excel in things they absolutely love to do. So the first step towards achieving excellence and not becoming or staying mediocre is to discover your calling. What is that you can do for hours and never get tired? What is that job in which quality of work matters far more to you than the money you get paid?

If you are one of the few lucky ones you will stumble upon your calling early in your life and after that the job will be to stay on course. But if you are like most of us, the answer wont be obvious, it is there – but it just needs to be discovered.  The problem is that for most of us even the fact that we should be looking for the answer is not obvious.  If you are one of those who is looking for the answer or wants to look – the only way is to keep trying new things – be restless, be fearless. Give-up things if you don’t like doing them and use that learning intelligently to start afresh. You must keep looking – you will automatically know when you find it. Something will click inside you. That is what happened with me.

I was restless all my life – moving from one thing to another, getting bored, moving again – never settled for something I did not love to do – made efforts to get out, took my chances. In August 2004, I moved to India to from San Francisco and had to find a new job. I thought why not try doing something on my own for 3 months and if it doesnt workout I will go find a job. That’s how I started madhouse; accidentally. But the day I became an entrepreneur – something clicked inside me.  I had discovered my calling.  Just that I had spent 27 years looking for it  and tried quite a large number of things.

Everyone has a calling (infact a person can have more than one calling!) – but we have to look for it – either consciously or unconsciously. Most people fall short when it comes to leave what they are doing right now and start again from zero – they want to keep clinging to what they are doing, safety of job, big salary, the home town comforts, etc. The ability to start from zero is the most crucial element. You must have this ability or  develop it if you want to complete the  journey to your calling.  Give yourself a chance, start that company, take that trip, quit that job, make that movie – whatever it is, do it. If you are not doing what you love to do – YOU ARE AN IDIOT.

At the end of the day if you do not discover your calling – you are assured mediocrity.

Staying on the course to mastery

The next step, after you have discovered your calling, is to get on the path to mastery and to stay on course. It could be music , entrepreneurship, sports, belly dancing or something entirely different. It takes many long years to simply be on the path to mastery. These years are sometimes dark, years filled with hard work,  where many mediocres around you are trying to make you one of them, and they will make you some tempting offers.

But if you want to achieve excellence you have to turn down these offers; continue to learn and grow. With every hurdle you cross, the terrain becomes more difficult , but going thru tough times and solving tough problems is the only way to grow.

Remember:

• You will fail
• You will face problems
• You will fall
• You will run out of resources
• You will reach dead-ends
• People will leave your side
• Many people will hate your guts
• People will humiliate you
• At times things will not move at all
• People will break their promises
• You will fight, get hurt, lose morale and fight again

Amongst all of this, you have to stay true to your journey and be on the path to mastery. Nothing worthy of achieving is easy. So hang in there!

Credits: Thanks to Indus and Nandini for helping me refine the article

The MVP gang just got bigger with the addition of 10 new startups and 20 new founders , taking the total to 20 companies and 40 founders. Read the official media release here.

Personally I am very excited with this new batch, already been learning a lot of stuff.

• How are high-quality designers t-shirts made? Starting right from the thread (Scopial)
• How do you help a second hand car buyer make his decision? (veriCAR)
• Insider’s view on how do doctors manage their clinics (Naabo)
• How to create measurable out of home media? (AdScoot)
• How can you apply the Easy Cab model to the real estate industry? (EasySquareFeet)
• How good is the “customer experience” at Food & Grocery departmental stores with special focus on juices section? (Retail Vector)
• Is India going to see a Robotics Revolution? How hip are the girls of NID (Robots Alive – they are incubated @ National Institute of Design. We visited them last month)
• What do final year students need to prepare well for campus interviews? (InterviewStreet)
• The only reason Small business Owners in India file tax returns is to get bank loans. (ReachTax)