Xconomist of the Week: Sramana Mitra Combats Infant Entrepreneur Mortality

Investor Stewart Alsop has called San Francisco Xconomist Sramana Mitra “a symbol of everything that is great about America: a geek, an entrepreneur, an immigrant, a leader.” He could have added “prolific writer”: Mitra is the author of a blog and five books, as well as three years’ worth of Forbes columns.

Throughout these writings, her focus has been on entrepreneurs and how they can find capital-efficient ways to get their ideas to market. And these days, she’s offering startups capital-efficient ways to get access to consulting advice.

For almost a decade, Mitra was a management consultant in the old-fashioned vein, lending her problem-solving acumen to big companies like SAP and Best Buy for upwards of $5,000 a day. But she says she wants to democratize management consulting and make it something that startups can afford. That’s the essence of One Million by One Million, a for-profit educational program aimed at helping a million entrepreneurs reach a million dollars in annual revenue by 2020.

Program members pay $1,000 per year for access to a case study library, video lectures, online strategy consulting, and private roundtable discussions run by Mitra. And where appropriate, she provides introductions to angel or venture investors. But Mitra has an interesting philosophy about investors: she thinks entrepreneurs should not approach them until they know they’ll have the upper hand in negotiations, and perhaps not even then. “We need to help [entrepreneurs] understand…that there are other ways of building successful, viable, self-sustaining businesses,” Mitra wrote in an Xconomy essay last November.

In a five-question interview yesterday, I asked Mitra to talk about her history as a consultant and writer, how she works with entrepreneurs, when fundraising does make sense for a startup, and Silicon Valley’s blind spots. Here’s an edited version of the conversation.

Xconomy: How did you decide to go into startup management consulting?

Sramana Mitra: I started my first company while I was still in graduate school in computer science at MIT in 1994. I did three startups through the 1990s, and when the market crashed in 2000, that is when I started doing strategy consulting. I hadn’t planned on it—I just had no energy left to do another startup. But as I started doing consulting, it became interesting. It’s an intellectual challenge to be able to insert yourself, assess a situation, and very quickly figure out solutions to problems. I realized as I started doing it that I had a real gift for it.

I had a successful consulting career for almost a decade. In the middle of that, I started writing. I started a blog in 2005, and wrote five books including four volumes in the Entrepreneur Journeys series. I wrote a column for Forbes for three years, all in parallel to my consulting. But as a consultant I made all my money working for very large companies like SAP, Best Buy, and Cadence. That kind of money, startups cannot afford to pay. But as an entrepreneur, I had a huge emotional connection with the startup world, and more and more, this world was coming to me, through the blogs, through Forbes, through the books, asking for mentoring. I had no business model to support me in this, but I could see that [startups] were making the same mistakes over and over again, and a methodology was emerging in my head on how to check what I call “infant entrepreneur mortality.” Every year, 600,000 businesses in the United States shut down. The good news is that 600,000 businesses startup every year as well, so there is a lot of dying and regeneration going on. But why do so many businesses need to die? I came up with some very definite answers to those questions, and that was the genesis of One Million by One Million.

X: Before we talk about that—you’re also known for the public roundtable discussions you host, where startups pitch and you critique. How do those help early-stage companies?

SM: The roundtables are part of my experimentation with this notion of democratizing startup management consulting. I was getting so many requests, and I wanted to help them, but I had no business model to do that. So I wanted to create a forum where, at least on a weekly basis, people who wanted my advice could come and get it. That’s how it started in 2008, and now we are on our 119th session tomorrow morning. In a very quick few minutes, 10 minutes basically, entrepreneurs are able to come and explain what they are working on, give a very quick preview of their issues, and then we give them a reality check.

But 10 minutes is a very limited amount of time. What we are able to do in the private roundtables, which are part of the One Million by One Million program, is give them a lot more. We have an extensive curriculum that has been developed using what we have learned by doing the public roundtables. Using the more than 100 hours of lectures and case studies, startups can come to me at the private roundtables with a much more sophisticated understanding of the issues, and the conversations are much more specific. Although at the private roundtables we will see a tremendous amount of naivete on basic stuff, on things like the difference between an exit strategy and a business model. We have produced a series of cartoons on that, that are totally rooted in our experiences at the roundtables. [We’ve embedded one of these cartoons at the end of this interview.–Ed.]

X: Okay, back to the One Million by One Million initiative, then. What’s the core idea, how does the business model work, and what kinds of things are being achieved through the initiative so far?

SM: The idea is to help a million entrepreneurs reach a million dollars in revenue by the year 2020. That addresses the most vulnerable period of an entrepreneurs’ journey. Once you reach $1 million, you have many options for bank or venture financing. The world becomes a much more accessible place, because you are more robust and you have validated your business. As I have said in my writing, the entire startup funding ecosystem is focused on just one percent of the players, the cream of the crop, while the other 99 percent gets basically ignored. I wanted to create something more comprehensive.

I went to MIT, and the “MIT mafia” in Silicon Valley is very strong, so when I came here in 1996 I was able to navigate my way into the inner circles of the valley, and I am very connected. But I fully appreciate how difficult it is for people just coming to Silicon Valley or trying to connect to Silicon Valley from other parts of the world. It is very much a tribal, knowledge-based environment where nothing has been institutionalized and everything is inside people’s heads. The network is a very elitist, closed network. My thought was to try to democratize and institutionalize the tribal knowledge and make it portable and accessible to anyone anywhere in the world.

The business model is very simple. We charge a $1,000 annual membership fee for unlimited access to the resources of the program. Those resources include the curriculum, the private roundtables, and network access, whether that means introductions to channel partners or introductions to investors. All of that is included. We are effectively a virtual incubator. But we make a very specific distinction from the equity-based incubators like Y Combinator. For their model to succeed, they have to pick only the cream of the crop. Our philosophy is that we want to help anybody who wants to learn. As long as you are willing to pay your $1,000 annual membership, you can access as much of the program as you want. You can even think of us as “pre-incubation.” Some of members are going on to other incubators where there is investment involved.

We are very excited about the number of companies and the kinds of businesses we are seeing [in the One Million by One Million program]. One of our entrepreneurs was at stage zero when he started, and now he’s doing $30,000 a month in revenues, so he’s a third of the way to $1 million a year. The most exciting part of it is that we have been able to contribute to the growth of multiple enterprises, and that has allowed us to fine-tune the program, improve our curriculum, and get a rich network effect going on. This morning one of our entrepreneurs came to me in a private roundtable and said she needed $40,000 for inventory financing to deliver on her sales business. Another member was in the room, and right after we finished he reached out to her and offered to finance her. So it’s very exciting.

X: You’ve argued that there’s too much emphasis in Silicon Valley on fundraising. But aren’t there limits to how far as startup can go without raising outside capital? When is raising outside capital a good idea?

SM: I am not against equity-based financing. One of our very successful companies, Freshdesk, was funded last year by Accel Partners. They compete with Zendesk in SaaS-based customer service for small businesses. What I am saying is that the bar for getting financed is getting raised higher and higher. In 1999 you could get financing with just a PowerPoint presentation. Today, the only businesses that get financing are businesses that already have traction, meaning they have customers, validated business models, validated pricing models. That takes time and you have to bootstrap through the various phases to get there.

We want to mitigate your changes of getting rejected by VCs because you went out too soon. In the case of Freshdesk, they did a very nice job of getting customers using a free version of their product and converting a portion of those free users to paying customers, therefore validating both their business model and their pricing model. When you go to investors with a sufficiently large market opportunity, that is a financeable situation.

X: When it comes to nourishing early stage startups, what do you think the Silicon Valley establishment is doing right? What is it doing wrong?

SM: Let’s start with what the valley is doing right. I do a lot of case studies of companies that have made it all the way to $5 million in annual revenue, and in the process I see companies that are fabulous, high-powered companies, not just in Silicon Valley but from other parts of the world. Last week I spoke with a company called Fine Art America. When I did a piece on them for Forbes in 2010 they were at $1 million in revenue, and today they are over $5 million. Guess how many employees they have? Three. To do $5 million in revenue with three people is an immensely complicated task, but the reason this is an important case study is that we have created compelling models for using outsourcing and various other ways of pulling resources together that are highly capital-efficient.

It’s not so much Silicon Valley as it’s the entrepreneurs of the world who are figuring out ways of building companies in very capital-efficient ways. We teach companies how to do this, and it gives them negotiating power. If you are three people and you have revenue of $5 million a year, when you sit down with a VC the negotiating power is in your hands. I’m very much in favor of putting the leverage in the entrepreneurs’ hands, as opposed to the investors’.

Now, there are gaps, and one of them is this: Not everything can be done in a capital-efficient manner. If you are trying to do certain kinds of R&D and technology development, it requires some up-front investment. Silicon Valley is not doing as good a job with these kinds of companies. I was talking to a VC friend the other day and he said he was seeing a lot of interesting things in nanomaterials. I said, “At what point do you invest in a nanomaterial company?” This is very difficult to validate. There has to be some investment in the R&D to get the physics right. He said, “Our assumption is that these technologies are incubated inside university labs and that by the time it hits the investment circuit, all of those risk of R&D are taken out.” Okay, that is a reasonable answer, but it puts all the burden of R&D and core technology development outside the VC industry. And you can talk to healthcare entrepreneurs, biotech and life science entrepreneurs, cleantech entrepreneurs, and a lot of them are really struggling.

This is a real gap. I talked about this in the fourth volume of my Entrepreneur Journeys series, Innovation: Need of the Hour. There is no long-term thinking in Silicon Valley about investing in real innovation. There are some investors who do take such risks, but they are very few and far between.

Wade Roush is the producer and host of the podcast Soonish and a contributing editor at Xconomy. Follow @soonishpodcast

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