Sramana Mitra: There are a few issues with what you said. At a 30,000 foot level, what you said is true. When you start peeling the onion and poking in the guts of that statement, there are lots of issues. One is, if you are looking for somebody to write you a check based on which you’re going to develop a concept, people are looking for serial entrepreneurs. They’re looking to see a track record. First time entrepreneurs’ lives are very difficult in that sense.
Asheem Chandna: I would say yes and no. Certainly repeat entrepreneurs have the credibility and you will quickly get meetings. If somebody has a success behind them and email a bunch of VCs, they’re likely to get a meeting very quickly. The majority of the work we do is we fund first-time entrepreneurs.
I’ll give you an example of a couple of guys who were in our office last week. One of them was ex-Facebook. The other was ex-Google. They were very smart guys. We chose not to do it in this particular stage. They were funded by somebody else.
Another example is a company called Instart Logic. It’s a very interesting company. We were fortunate we got introduced to some very young engineers several years ago.
On the spot, we committed half a million dollars to them. I feel so fortunate we did that. They were bright people. The primary founder is a young Indian engineer. He has turned out to be a superb CEO. He’s got a rapidly growing company. We’re just looking at the caliber of the person. We’re looking for the precision of that thought. The other thing I found is many of the very best people can be very precise in their thinking as well as in the way they write.
One of the things I do look for when people email me ahead is I’d typically request an executive summary. I just look for the precision in which they’re communicating. When they come into the meeting, there are many smart people who don’t have rational world views. In that case, we may not want to fund them. It’s true for many other VCs where you don’t have to be a repeat entrepreneur, but you do have to be at the top of your game.
Sramana Mitra: That’s domain expertise. That precision comes from very deep domain knowledge, especially when you are trying to do something that is technically deep and heuristically deep. It has to be coming out of something that has very deep domain knowledge. I was talking to a guy last week. It’s a company called Leo Software.
This guy had a very deep understanding of tax regulations. About seven years ago, he put together a company, the first customer that he went to was Brocade. That’s a sizable customer that was willing to write a $300,000 check for this product. He sold the concept to the customer, got the customer to pay for it, and built the product. The first customer he sold to, he provided a discount. He got the understanding of the product.
The second and third customers started selling at $300,000. It allowed him to bootstrap this company. If you have something that is that high gross margin and that solves a very sharp pain point, you can do something for relatively cheap from a financing point of view. Whether you’re self-financing or doing it with seed-financing, that precision and domain knowledge is what wins eventually.
Asheem Chandna: You want people on the technical side who can also get out there and talk to customers.
Sramana Mitra: One method that we are seeing a lot of first-time entrepreneurs in particular using to successfully manage that capital gap in early stage startups is bootstrapping using services. They would do contract software development, achieve that level of customer intimacy and really get to understand the problem, develop the domain knowledge, and then bootstrap a product company based on services, revenues, and that customer understanding. How do you view this method?
Asheem Chandna: Time is nobody’s friend. If I’m an entrepreneur and have an idea and think the idea is significant for a software offering, the best thing I can do is get going with that as quickly as possible. Any of my work time I spend not focused on that, somebody else is going to capitalize on that. I should quickly get going with that as quickly as possible. There may be a couple of reasons to go on the path you mentioned. One is, if I can’t raise the financing I need to build that product.
Sramana Mitra: That is the truth the majority of first-time entrepreneurs. You have the privilege of sitting there and choosing whom you want to invest in. If you look at the bulk of the entrepreneur community, they don’t have that privilege.
Asheem Chandna: Yes, that’s viable. But the moment you get to the level where there is no evidence behind your software offering that you can raise the financing you need to focus on that offering, you should get to that as quickly as possible. The other thing is, different people have different views on dilution and ownership. Some people have the point of view of taking it slower and owning the whole business.