Founding a Company – When?

I don’t think that I am a born entrepreneur. I think that I can see opportunity and potential, and have some ideas but I’ve not yet taken the plunge to start my own business. The truth is that I am pretty risk averse. I have been interested in technology for a while now, but only been considering the entrepreneurial path for the past 2-3 years.

There are lots of schools of thought about what stage in your personal and professional career to start a venture but I think that the two most important things are:

  • Market Opportunity – You need to have spent some time with your target market and understand where significant gaps lie. Finding a solution for these gaps is the next step, but it’s likely that your original idea will evolve significantly as your try and address these gaps. The balance of having a strong vision for your product yet knowing when you need to change direction is a key skill for successful entrepreneurs.
  • Being Ready – You have got to feel like you are ready to start your own company and have faith in your skills and and abilities. And whatever you lack, you need to have the faith that you’ll be able to figure it out or surround yourself with people you trust that can figure it out for you..
I have really not felt ready yet, and it’s a function of not finding the right market opportunity but also not having enough faith in myself yet. I feel that I need to build a successful product under the guidance of someone who has proven themselves before I do it on my own. 
In the end everyone has their own threshold for risk and when to start a company is a very personal call, but I hope to build some awesome products at my current company (Pocket Gems) which are profitable businesses too. I really hope it works out, but regardless, I’m super excited about the journey.

Socially responsible & For profit capital for emerging markets – a better model?

The inspiration for this post was my Business at the Base of the Pyramid class at Harvard Business School and it’s something that I have been pondering as I consider being an early stage investor in East African technology businesses.

There are two main kinds of capital deployed to emerging markets to stimulate economic activity for small businesses:
  •  Social(Not for Profit) Capital – This kind of capital is usually issued by governments, charitable foundations or entities like the World Bank/IFC and makes up the majority of investment capital to small businesses from abroad
  • For Profit Capital – Investors looking for returns which are as high as possible from emerging markets to compensate them for the high risk of their investments
I think the best model for emerging markets is a hybrid form of for profit capital from socially responsible investors. i.e. Investors who are looking to make a reasonable return on their investment without exploiting the recipients of their capital. 

One of the key problems of investing in social (not for profit) enterprises is that it does not create the incentives for these businesses to scale into self-sustaining entities. If businesses are accountable to their investors to yield positive unit economics and positive returns they are less likely to operate in a lean and efficient manner. Commerical enterprises are just better designed to create long term value for their shareholders, employees and (hopefully) customers provided they are ethically run.
I think that initiatives such as Root Capital and the Grass Roots Business Fund are trying some extremely interesting innovative models and hopefully we’ll see some positive results from them.

Figuring out a more effective way to deploy capital to emerging markets is a huge problem and I really hope that such innovations make strides towards solving it.

Alleviating poverty through education and entrepreneurship

I’m a believer in two key methods to alleviate poverty and stimulate long-term economic growth for developing countries:
  •  Education – Out of all children in Kenya about 85% of children attend primary school (but <50% finish), 24% of children attend secondary school, and 2% attend higher institutions. At this level of attrition more than half the population has not even completed primary school, which is typical of developing African countries. Access to knowledge and information is a critical part of opportunity creation for people in Africa.
  • Entrepreneurship – This is Africa’s (and Kenya in particular) ticket to stimulating the economy from the ground up. Governments are corrupt and policy is extremely slow and ineffective. Creating and facilitating an entrepreneurial mindset and ecosystem for people in these countries with the drive to create businesses which solve fundamental issues has got to be the way to sustainably get these countries out of poverty.
This is such huge topic and my paragraph above does not really even scratch the surface, but I want to write more often, in bite sized chunks going forward. For each of these issues, work needs to be done at both an infrastructural/country level and at a grass roots level. I believe that we will see quicker more effective results through bottom up initiatives so long as we are able to find and fund the scaleable and effective solutions at this level.

Next post will be about what type of investment could work for developing countries at this level.

Kenya – Silicon Safari

San Francisco has Silicon Valley, New York has Silicon Alley, London has Silicon Round and Tel-Aviv has Silicon Wadi. I think Kenya could have Silicon Safari*, and I’d love to be part of making that happen.

I never really thought I would go back to Kenya, but when I was back home this summer I had a strong feeling that it could be the forefront of innovation and entrepreneurship in Africa.

A little about where Kenya is today…
Kenya has about 30M people and a GDP per capita of $1,600 ppp Kenya is a leader in mobile innovation in the developing world. Kenya currently has a mobile penetration rate of ~ 50% and is forecasted to hit 90%+ by 2013. M-Pesa (mobile-to-mobile money transfer through text) was created here by Safaricom (part owned by Vodafone) and now almost $30M are transacted every day. This model has been replicated in many emerging markets which look to Kenya as a leader in emerging mobile products – particularly in banking and payments.

In October 2010, Barclays started offering M-Pesa to it’s clients and we are not far from a place where mobile phone ‘bank accounts’ can offer most services provided by traditional banks which have a far lower penetration rate than mobile phones in Kenya. In September 2010, a major carrier (Zain) cut all call costs by 75% and all the other major carriers followed suit. With infrastructure capital costs already paid off, the market is highly competitive and consumers are getting excellent quality of service at constantly decreasing prices.

I’m not the only one who sees potential in Kenya… 
(work in progress)
  • Techcrunch, Sarah Lacy in particular, did a piece in August 2010 about the possibilities of mobile in Kenya 
  • Google opened their first non-sales office in Kenya in 2007 and is tasked with figuring out their entire Africa strategy
The Entrepreneurial Ecosystem is underdeveloped…
  • Talent – Classic brain drain coupled with an underdeveloped local education system particularly in for technical talent is a HUGE issue. 
  • Capital – There is little capital for early stage ventures and few investors on the ground who have the appetite and expertise to invest in entrepreneurs. The path to exit is also unclear with underdeveloped capital markets and low M&A volume.
  • Community – We need to build a community for entrepreneurs and investors to find each other and share ideas and best practices. This is starting with initiatives like vc4africa, and Nairobi’s IHub but these are still in their very early stages
What I’m hoping to do…
I moved to Silicon Valley to see how the most sophisticated entrepreneurial ecosystem in the world works. I am about to start working for an early stage start up, and am going to try and be as involved in the start-up community as possible. I want to learn as much as I can so when I do go home, I know what could be possible for Kenya.

I don’t know exactly what I’m going to do or how I’m going to do it when I do return to Kenya, but what I do know is that I want to build technology businesses as both an entrepreneur and an investor (maybe some sort of hybrid incubation model would work best). The country needs pioneers for the field and I hope to be one of the people to build the bricks of the entrepreneurial ecosystem.

* Silicon Safari is a term that I made up! Hope it catches on 🙂 Silicon Savannah was something else I was toying with..

Digital Sky Technologies – The Mini Exit

Digital Sky Technologies (DST) have created a new class of investment in the western world that has caught both the entrepreneurial community and investment community by surprise. They have purchesed significant minority stakes in extremely high profile pre-IPO technology companies such as Zynga, Facebook and Groupon.

They take long positions on these companies by buying large amounts ($100M+) of common stock at relatively high valuations. Traditional investors (venture capital and private equity) would look to invest for preferential equity, board representation and sometimes controlling stakes but DST seem to be happy to take minority common stock with no board representation. Basically, they trust the market leaders with capital to keep doing what they’ve been doing and it’s working out well for them so far. Their $200M investment in Facebook at a $10Bn valuation is already up by 4x, and their $180M investment in Zynga is probably between 2-3x up as well.

I think that the key benefit they are providing to the founders and early employees of these companies is the option to partially cash out without having to prematurely exit or IPO. This has never really been an option for the founders and early employees of these successful technology businesses and it seems to have been mutually beneficial for both DST and the early stage founders.

Blogging: It’s the right thing to do

I was initially skeptical about starting my own blog. I did not really see the point – who would read it and care what I had to say? I’ve actually found it to be a pretty interesting outlet for crystalizing my viewpoints on subject matter that is interesting or topical to me (and probably many MBA students in my position). I feel it’ll pay off at some point in a way that I would not expect – and for now i’m just enjoying expressing my thoughts.

I’m taking a class this semester with Misiek Piskorski called ‘Competing with Social Networks (CSN)’ and it’s got me to think about my online ‘brand’. I think that a blog is simply another outlet to help re-enforce this brand together with your Linkedin, facebook, twitter, Digg etc profiles – all content that you can control about yourself. A blog can also serve as a way to meet new people who are interested in your thoughts / content and also deepen relationships you have with your current network. I think it would be awesome to have a case on blogging in our CSN course…

Fred Wilson posted a few weeks ago about a blog being a very important part of your online brand and that Union Square Ventures have hired their junior investment staff on the basis of their blogs. Is a blog really more important or useful as a hiring tool than a resume? I see a resume as a collection of brands which leads to a yes/no decision on meeting the candidate. A blog is a much more powerful way of understanding how someone thinks. Resume’s and blogs serve different purposes but I can definitely see the value from a recruiting perspective of having your own blog.

I’ve also been kind of obsessing about the analytics for the site – there are a bunch of free sources that give you loads of information – I use Google Analytics and Sitemeter I’ve been tracking are the details of people who come to the site – Location, Entry Pages, Source of Click. I generally post new blog entries on twitter, facebook and Google Buzz. Facebook seems to get me the most clicks, followed by twitter and then Buzz.

I’ve had old friends reach out to me about businesses they are starting or working on, and I’ve picked up some followers on twitter who are not in my immediate network. It’s been really cool to see the effect of my blog on these old, ill maintained relationships and also in making new relationships and I am looking forward to seeing how blogging will continue to enrich my personal and professional life.

Metrics – The Online Advantage

I believe that online businesses have a key edge over offline businesses – they are able to easily gather data on customers, the purchase funnel and conduct iterative A/B testing. Harnessing this data and using it to drive decisions for customer acquisition, product development and generally having excellent management information (MI) is critical to executing a successful internet business.

There are three things that I want to touch on in this post:

Using Metrics to raise financing: While I was working in VC last summer, I encountered many entrepreneurs and it was interesting to see how they all thought about and ran their businesses. It was significantly more impressive and informative when the entrepreneurs understood the right metrics for their business. It allowed them to educate us on the important variables and what the implications were for their business and it also made it easier to compare the business against other models that we were familiar with. I think that it shows professionalism and credibility to be on top of this information and it was definitely something we used to screen entrepreneurs.

Segmenting customer base – yield optimal unit economics: Once the product has been launched and the customer base starts to expand I think it’s really important to start to segment the customer base and understand the motivations and unit economics of each segment. I think you should start by understanding what attributes that you can use to segment customers – demographic information, source of click, etc and then measure these attributes against engagement metrics, revenue per user, social metrics etc. This will allow you to identify different user groups, understand what motivates them (potentially through qualitative studies) and plot their evolution over time. This data would be extremely useful to drive product changes as well as acquire specific types of customers.

For example: I was recently talking to Pasha Sadri at Polyvore (a social fashion site where people create sets or outfits which are shared with the community) and a handful of talented “creators” drive 80% of the traffic to the site (approx. 6M monthly users). If they were able to identify patterns about where these creators come from / demographic it would be easier to acquire more creators and they would drive significantly more traffic to the site.

Product changes – A/B testing: This is a pretty heavily blogged about topic but I think you should use data and metrics to drive and measure incremental product changes. It’s especially efficient when you have a suite of products with similar features and you can leverage learnings from one product change and apply it to the family of products. Zynga are especially good at A/B testing and they have learnt best practice in monetisation/virality and roll out their learnings to new and existing social games very effectively.