Why the HR industry is ripe for classical disruption

A recently article rightly points out how India (and the rest of the world) can reap huge rewards by leveraging modern age technology into virtually any HR process: hiring, predicting performance, retention, choosing optimal benefits, among others.

The explosion in data on virtually every person and corporation on the planet combined with state-of-the art technologies (including the latest wave of machine and deep learning) ensures that no one has to be ‘dumb’ about any HR process. Nor do HR managers have to follow cookie-cutter approaches to any of the processes outlines above. Rigorous data analytics can help identify ideal candidates and in less time, to predict a person’s performance in a job function with good accuracy, and provide us with a variety of tools and dashboards to make optimal use of a person’s capabilities.

I predict that a wave of cloud-based startups will emerge in the HR technology space that will fundamentally alter how we look at traditional processes. I also suspect that forward-thinking companies like Linkedin will invest fairly heavily, organically or inorganically, to maintain bleeding-edge skills for both recruiters and candidates.

I interact with a good amount of startups that are specifically attacking the hiring problem by developing technologies dedicated towards making hiring easier and more efficient – using data to ascertain a certain candidate’s suitability for a position – by using predictive models that ingest data from a variety of sources: social media, corporate profiles, and more.

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Why later stage VCs buyout early investors

There is constant chatter in the startup/VC ecosystem on the practice of later stage (Series B or later) investors buying out ‘early’ investors (Seed, Angels, etc).

Later stage investors come in with larger rounds of financing ($10m or more) with often eclipses the investments of earlier entities which often range from $10k and up. For good or for bad, these early investors have influence on the startup’s future direction from voting rights, vetoes and more. This often acts as an irritant to later-stage investors that need a direct decision making process between themselves and founders on all strategic matters. Therefore, the need to ‘clean out the cap table’ and purchase shares from all early investors.

Of course, this practice violates a basic tenet of capital efficiency – that is the need for each Rupee to go towards growing operations – marketing, sales, hiring, office space and more. Buying out early investors ends up being a ‘necessary evil’ – kinda similar to paying investment banker fees. In other words – frown on it – and then grudgingly agree.

Like most things in the VC world, there is not much publicly available data and information is largely anecdotal. My take is that there is an increasing number of such deals happening at ticket sizes > $10m, where the existing cap tables is fairly crowded and the existing investor base is unusually vocal (thereby creating significant nuisance value).

 

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From the US Vantage point

Travelling to the Silicon Valley (that’s what I’m doing right now) and interacting with investors and other key actors in the ecosystem here is the best opportunity to get abreast of the latest trends, developments, anecdotes and the rhetoric from the Tech industry. Some of the learning from the past couple of weeks;

  • Everyone is doing or aspiring to do account-based marketing.  The “me-too” phenomenon is rife in ABM
  • Even pure Software companies are raising hundreds of millions of dollars for expansion. Gainsight is one well-known example, but there are others too..
  • Gaining users, usually unprofitably, with the goal to exit in a couple of years is still a viable strategy. In other words, kick the “monetize can” down the road and let the acquiring company figure out how to do it.
  • Going to India-based VCs is also a viable option — especially in scenarios where their local connects can be put to good use to set up engineering and development centers in India.
  • Expanding to the US markets still remains a significant, if not formidable, challenge for B2B Enterprise Software companies coming out of India. The aspiration remains to emulate the business models of Israeli companies that manage to market into the US geography with relative ease.

Will update this post as I learn more. Stay tuned..

 

 

 

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StarUp 2017

aH! Ventures is a premier crowdfunding platform in the Indian startup ecosystem. This past weekend they held StarUp 17 – a wonderful event for the startup ecosystem in Bangalore.

True to form, the event attracted numerous people – founders, bankers, investors, lawyers, students, and more.  These events are a great way to get a pulse on all the exciting innovations in the industry, as well as to get the latest news (and more from the grapevine) on who is raising the next round, which ones are holding fire sales, which investors are raising new funds etc..

The highlight, for me, was a most wonderful and inspiring presentation by Dr Velumani – founder of Thyrocare.  His is a quintessential success story – leaving a small city (Coimbatore) for Mumbai, founding a company and then slogging his way (the trend term today is ‘growth hacking’) to the top. His mantra – make profits by establishing the lowest cost base and pass benefits on to end-consumers. In other words, be the best at volume plays in markets. For a nice read on his success story, check out this article from rediff.

Other noticeable trends – a fair amount of startups facilitating better pet -management: social networks around pets, healthcare for pets and such. Also a few startups focused on making business communication less “noise-free” and more meaningful – that is, trying to be the Linkedin or WhatsApp for businesses. And a few others in the EdTech sector – adding layers of gamification to traditional learning to make it more meaningful, engaging and profitable.

Pat on the back to the aH! Ventures Team..

 

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Putting VC dry powder to good use

Inc 42 recently summarized, in excellent fashion, the steady uptick in Investment activity in 2017.

While some of these numbers can get skewed by the sheer quantum of the Flipkart investment and also by the fact that 2016 was indeed a rough year, there is little doubt that the ecosystem is enjoying a fresh dose of optimism. The reasons are largely political – and amazingly this can be read in a good way – but some positive signals from the annual Union Budget, further clarifications from SEBI on treatment of capital gains on preferred equity, the setting up of an Nse ITP, and the ruling party (BJP) win a crucial state election have positively contributed to the sentiment.

The last of these deserves special mention: Uttar Pradesh (UP) is the largest and by far, the most political important state in India. A UP election win often paves the way for a strong showing in the national elections – and thereby is expected to significantly strengthen PM Modi in his re-election bid. His party’s victory, in spite of tough (in the short term) decisions like demonetization is likely to embolden him to take bold economic decisions that are expected to help the economy in numerous positive ways.

Looks like some of that VC dry powder is finally getting deployed!

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Should a startup pay equity to advisers?

A colorfully worded post by Blossom Street Ventures found it’s way to my Inbox earlier today. The author explains his rationale for not giving equity to advisers.

I think he oversimplifies the point a bit. Not all advisers are created equal. In many cases they come on to the Board as advisers as a result of a funding event – and as a result they are ‘free’ anyways – since term sheets often mandate that the VC brings in one of it’s members on the Board.’

I agree that bringing on advisers just for namedropping is a bit “VC 1.0” – it has happened so often that most people can see through it. Rarely, if at all, does it influence a customer, funding, or strategic decision. Many advisers tend to be passive and often enough, try to leverage past reputation to negotiate equity in startups. Founders should definitely avoid such situations.

I’ve seen situations where advisers tend to complement founder strengths and truly earn their keep.  For example, adding deep technical expertise – designing next gen product architectures to founders that are ‘MBA-heavy’ and not having the funding to hire a full-time CTO. In such situations it is definitely worthwhile to offer equity as an inexpensive way to attract and retain talent. I say inexpensive because there is no explicit cost and there is a payout only when an exit occurs – at which point the pie typically grows big enough for everyone to be satisfied with the outcome – at least happy enough not to fret about paying equity to advisers.

Finally, another area where startups err is accelerating the vesting for advisers. Theory being that these are senior hires and as such, should be treated like C-level executives whereby a good portion of the equity vests at an accelerated schedule if ‘things don’t work out’ and the adviser leaves for any reason. Advisers should be offered similar vesting schedules as key employees as a way to align their time, motivation and efforts with that of the company they are advising.

 

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The Flipkart saga continues

Rumor has it, that Flipkart is in the midst of yet another large ($1.5 billion) round of funding from eBay and Tencent – at a valuation of $10-$12 billion.

$12 billion, impressive as it may sounds, is still a discount to the latest round of $15 billion – which qualifies it as a ‘down round’. A down round usually implies that for previous investors, ratchets trigger in – in other words they get additional shares as compensation for the fact that the value of their investment has fallen. All in all, seems like a good new chunk of shares getting issues and a whole lot of dilution taking place.

What is interesting is that strategic investors – in other words not only financial institutions – but corporations that have deep synergies with Flipkart’s strategy are jumping into the fray. What that typically does (as opposed to pure VC investments) is that core operations of Flipkart – like product roadmap – might get influenced by these strategic investors. Who knows – this could even be a prelude to a much -awaited big bang M&A transaction that I’m sure a lot of their investors have been waiting for.

Remember Flipkart has a new CEO – an ex-eBay exec that was hired (at the behest of Flipkart’s lead investors, Tiger Global) to shore up the functioning of the faltering e-Commerce giant.  Seems apparent now, that getting a sizeable infusion of cash from eBay was probably one of his key early mandates. Let’s see what pans out next

 

 

 

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