Category Archives: VC

Competition in China

I recently sat down with a VC who invests across the US and China. We were talking about the geographic expansion possibilities of a tech company that currently operates successfully in a single geography, Turkey.

I focused on the company’s core value proposition and business model to suggest that there would be greater demand for what the company is doing in China than in the US, and that it would be able to operate with superior unit economics in China. I therefore shared that I was in favor of entering China rather than the US.

My counterpart shared that, while the factors I had pointed out were important, I was overlooking the most important variable that the company needs to consider when deciding which geography to enter. That’s competition, and when it comes to competition, doing business in the US is a walk in the park compared to doing business in China. He therefore recommended that the company expand to the US.

I have yet to do business in China, so, until I experience it for myself, I need to take the investor at his word.

I will, however, be visiting China soon. Although a visit is far from enough to understand the true extent of competition in the country, I look forward to getting my first glimpse.

Introduction requests and relationship strength on LinkedIn

LinkedIn is a useful tool when reaching out to people you don’t know but would like to meet. Specifically, its display of who among your contacts can introduce you to the person you’re looking to meet (a second degree connection in LinkedIn terminology) is very valuable.

However, what’s missing from the tool is a display of the strength of the connection between the person you’re requesting the introduction from and the person you’re looking to meet. As a result, you don’t know whether you’re requesting an introduction from someone who knows the person you’re looking to meet sufficiently well. This often leads to requesting introductions from multiple people which is inefficient for the requester and a hassle for many request recipients.

Since relationships are dynamic and LinkedIn doesn’t have access to the offline developments which impact a relationship, it’s very challenging for LinkedIn to show the real-time strength of the relationship between two people. However, it could still improve on the current approach of not displaying any indication of the strength of the relationship.

One idea is to highlight relationships where people have been part of the same organization, like working at the same company or studying at the same school, during the same period of time. Such people are more likely to have a stronger relationship.

The benefit of this approach is that it doesn’t require any active user input. LinkedIn can generate these insights by simply analyzing the profile data of pairs of users.

Another idea is to establish relationship tiers whereby users can self-declare the strength of their relationship with someone. For example, they can self-declare whether they have a strong, medium, or weak relationship.

The terminology would need to be carefully chosen to not hurt users’ feelings, and the statements of two users who declare that their relationship is of different strengths would need to be reconciled. However, this approach would save time for both requesters and request recipients by making it easier to request introductions from the right people.

Menlo Park

I’m flying from Istanbul to San Francisco today.

I usually stay in the city to visit our portfolio companies which are overwhelmingly based there. However, this time around, I’ll be meeting primarily with other investors. Since most investors are based in the Bay Area, I’ll be staying in Menlo Park.

I enjoy the suburbs more than the city, so that’s an additional reason why I’m looking forward to the trip.

Due to the 10 hour time difference between Istanbul and the Bay Area, my daily blog posts will be published about 10 hours later than usual each day.

When to prioritize investors during your fundraising process

I was recently speaking with a Turkish entrepreneur about the company’s fundraising when he asked which funds he should prioritize. The company has started discussions but has yet to receive a term sheet from any fund.

In a market where capital is plenty and there are many funds, you’re unlikely to have the time to have deep discussions with each. As a result, you need to prioritize who you reach out to and have deep dives with, even before receiving a term sheet.

However, in a market like Turkey where there are less than a dozen tech startup investors with the capacity to invest a sizable amount in your company, you can actually have deep dives with each interested investor. In fact, you should until you receive a term sheet.

The reason is that if you prioritize before receiving a term sheet and the funds you prioritized don’t come through, you’ll have to start from scratch with the unprioritized funds. This means, at best, a delay in closing the funding which will grow your business, and, at worst, not enough time to close the funding necessary for your business to survive.

Once you hopefully have multiple term sheets in hand, that’s when you should prioritize. Not before.

The challenges of an umbrella-sharing startup

This article about the challenges faced by an umbrella-sharing startup was the funniest piece of content I read this week.

I wanted to check whether the story is true or just a parody and, although I couldn’t find the company’s website, the number of credible news sources that covered the story suggest that it’s likely true.

It’s a useful reminder that X for Y startups, where X is a category-defining startup in a very large category and Y is a new category where company X’s model is applied, don’t work unless there’s a real customer need for X’s model to be applied to Y.

It’s also a reminder of the beauty of capitalism.

Here’s the article.

Failing gracefully

In a recent talk with a fellow investor, I shared how, the more data points I see, the more I believe that people who work together (for example as employees, partners, or investors) end up having a good relationship if their work together is successful and a bad relationship if they fail together.

Ideally, this shouldn’t be the case. Ideally, we should evaluate one another on the basis of the actions we take, that is what’s in our control, rather than the outcome of those actions, where external forces also influence the outcome. Doing so would mean that you should have a good relationship with someone with whom you experience a failure as long as you believe that they took the right actions during your time working together.

Following my remark, my fellow investor gave a great example of exactly that. Despite not being part of a successful outcome, the person in the example did indeed do what’s necessary to preserve a good relationship. And although this won’t always be the case, this graceful behavior laid the foundation for the two parties working together again in the future.

It’s easy to be graceful when you succeed together and everyone is happy. Celebrating is a better term for this than grace.

Grace is what you do when things go wrong. For example, it’s what you do when you fail together.

Although failing gracefully is rare, as my fellow investor pointed out, it does occur.

Comprehensive and piecemeal data sharing

There are two ways in which companies share their data with their existing investors. They either do so in a comprehensive or a piecemeal manner.

An example can help demonstrate what I mean by each. The P&L of an e-commerce company is relatively straightforward to understand so let’s use that as an example. The same argument holds for the KPI data of companies as well as companies with other business models.

A comprehensive approach to sharing an e-commerce company’s P&L data is to start off with gross revenue, subtract contra revenue items, state the net revenue, subtract the cost of goods sold, state the product margin, subtract variable expenses, state the gross margin, subtract marketing costs, state the contribution margin, subtract operating costs, state EBİTDA, subtract depreciation and amortization, net interest expenses, and taxes, and arrive at net income. This historical data is then presented on a monthly basis since the company’s launch.

A piecemeal approach is to state net revenue in a particular month, the growth of net revenue during a specific time period, the gross margin in the final month, and the EBITDA in that same final month. This naturally leads to the question of why these data points are being presented and not the others. Why is the company giving the investor specific pieces of a puzzle to solve rather than the complete picture?

The answer is very often that the solved puzzle doesn’t paint a great picture.

Waiting for the right team

Sometimes an investor comes across a team in a large market that they believe is likely to change in an important way, thereby presenting an attractive market opportunity.

However, the team isn’t just right. There’s something off which prevents you from getting comfortable making an investment.

On the other hand, it’s tempting to invest because you don’t want to miss out on the disruption that you foresee taking place in a big category.

At times like this, you need to remind yourself that, if the opportunity turns out to be as big as you believe it is, it will also attract the interest of other teams. And the eventual winner will be the team with the smart and hard working mover advantage, not the first mover advantage.

So you have to patiently wait to find the right team.

Managing for profitability rather than growth

When a startup with a history of growing with external funding finds that it is unable to raise a new round in its expected timeframe, many founders’ initial reaction is to panic. Since the company’s growth so far has been fueled by external capital, they can’t imagine how to survive, let alone grow, without it.

In reality, there are several options available for a company to generate the cash necessary to either break-even or significantly increase its runway while accepting a lower level of growth. These include:

  1. Raising prices or commission rates
  2. Renegotiating the terms of variable cost sources
  3. Cutting less effective marketing channels
  4. Renegotiating employment contracts or downsizing
  5. Moving to a cheaper office
  6. Ending external consultant and agency contracts
  7. Improving the company’s cash cycle by collecting sooner and paying later
  8. Improving the company’s cash position by selling fixed assets and inventory

The availability of each of these sources of cash depends on the context of the company. But, very often they are available.

And sometimes these measures aren’t enough to save the company. But, often they are.

Rather than panic, or more accurately after you’ve panicked for a while, you have to take the painful short-term actions that are necessary for your company’s long-term survival. You have to manage for short-term profitability so that you can hope to have another chance at long-term growth.

Iyzico’s first investor presentation

Iyzico, a leading online payment service provider in Turkey, is one of the country’s most successful tech startups.

In April of this year, Iyzico raised a $15M Series C round of funding from both international and local investors. This is the largest fundraise completed by a Turkish tech startup so far this year.

But like all startups, Iyzico didn’t achieve its current success overnight. It comes from humble beginnings and after 5 years of hard work.

Here’s the investor presentation from 2012 that Iyzico used to secure its first round of funding. The company’s founder Barbaros Ozbugutu generously shared the presentation as part of a blog post which he wrote to inspire and guide the fundraising efforts of other entrepreneurs in Turkey.