ITworld's Dan Blacharski recently spoke with Bing Fund's general manager Rahul Sood about what the angel investment fund and incubator can offer early startups, how it plans to partner with VCs, and how crowdfunding changes the game.
Following is an edited transcript of that conversation.
Dan Blacharski: Tell me more about Bing Fund, and what you're trying to accomplish there.
Rahul Sood: I would say that there's never been a time in our history where the barriers for entry for startups have been so low, and the accelerant so high. And since the accelerant is so high we thought that the Bing Fund would be a great way for us to connect with startups, help them reach critical mass, and bring the best of what Microsoft can bring to really help them with their later stage acceleration. You know, help them get access to technology, to experts, and exposure to users. And really the most interesting piece is the technology that we would offer them. And we would do this in such an entrepreneur-friendly way, i.e., we put skin in the game to demonstrate that we're not just here to just partner with companies, we're here to say, look, we believe in you and we're going to invest in you both with people and technology. And ultimately what we'd like to do is build these relationships with a select group of startups. We can only work with a limited number at a time. And then, help them get to their Series A or their next point of graduation. And then bring in another startup. And eventually, a win for us would be to turn it into a potential partnership or acquisition.
DB: Do you think that needing less money to start, especially for an Internet company, is that going to in some cases eliminate the need for a full-on venture round later on? Can you start it for $50,000 or $100,000 and have a flourishing company?
RS: Well, it's rare, but it's entirely possible. The first company I started with was completely bootstrapped with a $3000 credit card. And it turned out to be a viable business. But it took a long time to get there. To grow a business organically is difficult. And the other thing is, I'm always interested in companies that bootstrap. I'm interested in entrepreneurs that are scrappy, that want to raise less because they truly believe in capital growth. And so, if you find companies that are burning money all the time, and they're on a Series D and they have lots of people, and there's really no path to profitability, that's always a problem. So I think it's possible to do it.
But Bing Fund is not about eliminating venture capital, in fact, Bing Fund is really an opportunity for VCs to work with us in partnership. We're going to come in, we're going to put skin in the game, money, and then we're going to give access to technology, exposure, customers, help build their network, things that you just can't get anywhere else. And we're going to participate in your investments and help your investments really yield a big return.
DB: Yes, and I think with your background too, with bootstrapping VooDooPC, that gives you special insight into this and you can help these new companies be good stewards of the smaller amounts of money that they're starting out with.
RS: Yes, exactly. And not only that, but even just help them think about how they raise money and valuation. I just met with another really interesting startup based in Chicago, just before I met you, and we really liked them. They were telling us about a pending raise they're doing, and it was at this insanely low valuation with a lot of money. It was almost like a shark feeding frenzy. And we said, look, you don't need to do that. There's better ways to do this, you don't need to go out and raise money just for the sake of paying yourself an income. That's just not the way to go. Certainly, I think, my history and the fact that, I've done this before and spent time in as an entrepreneur in multiple small ventures and have failed in many and have succeeded in others, I can give some good credible insight on that.
DB: So with Bing Fund, besides providing some money, there'll be that extended support that's so important to early startups.
RS: That's right, and I think that's the most compelling part of it.
There are very few places on earth where you can be surrounded by some of the greatest minds in the world on any given subject. And at Microsoft that's really what it's all about. There are so many brilliant people here. And being able to tap their minds, not for entrepreneurial experience, but more for them being experts in certain areas like experts in advertising monetization, or machine learning, or conversational understanding. We have those experts and they're very supportive of what we're doing.
DB: Ten, twenty years ago, the dotcoms back in Silicon Valley, they had to spend a lot of money just on capital expenditures, infrastructure, data centers, and that's a lot different today. So what do you see as the major expense that a startup company in the tech business today is going to face? What's the main thing they're going to need to be spending money on?
RS: I think for the most part, most online startups, it's just about the talent. They have to find people that are willing to take a bit of a pay cut for the hopes that they're going to get some capital growth upside if this company is successful. Finding those types of risk-takers is not easy, but it's certainly easier than it was five, ten years ago when everybody wanted to go to big companies and get a job. So it's really just a matter of mindset trying to find those people. So I think again for the most part it's going to be talent, and then it's things like infrastructure and space and access to technology, like data, making connections, having deep customer connections, and partnership connections and stuff like that. Having the backing of a smart angel or an angel with connections, such as Bing Fund, we can make those things happen very quickly. And they don't have to spend money on that sort of stuff.
DB: I suspect today that the marketing spend is going to be more, just because the marketplace is a lot more crowded than it used to be and it's going to take a lot more effort to get noticed.
RS: I always believe that if you build a really great product that people start to use, there's lots of ways to generate demand based on word of mouth versus going out and spending a ton of money on market awareness. You can build partnerships, you can get users interested and users talk to other users. I mean, really at the end of the day the formula for startups is if they have a good prototype or early stage product and they're solving a big problem, and then they get user acquisition, once they have users and they're solving a big problem that basically equals money. So getting users is really just about solving a problem big enough to gather those users.
DB: So the marketing spend is going to be more in facilitating that word of mouth promotion rather than spending a lot of money on slick magazine ads and television commercials?
RS: That's right. That could always come later but if you recall in early 2000 when the dotcom time was, TV was still a big part of advertising and people were spending all their money on advertising. Pets.com and all the other dotcoms. And that was a massive bubble. And the companies that survived were the ones that actually focused on their product. Look at Amazon. They just did a great job focusing on what they do, and they survived, right? And eBay. They solved a big problem. They were in a blue ocean area. But you know, nowadays you're going to see more startups actually doing more red ocean stuff. And they're going to be in areas where there's already a lot of people. So how do they differentiate themselves, how do they stand out from the competition? And that's where our group can really help them.
DB: What types of businesses are getting venture money now, and what types of businesses will get it one or two years from now?
RS: I think if you talk to any seasoned investor, anyone who has invested in companies on their own or angels, or whatever, they'll tell you that it's less about the company, it's more about the team to start. If the team is a good team, and they have a really good focus and a good vision of what they want to achieve, and they know the problem that they want to solve, it's those types of companies that are getting the funding. It's companies where they have a clear value proposition, they have a clear vision, they have a team that's willing and capable of executing. Those are the types of businesses that will get funding. You can basically sell anything, as long as you convince people that here's the value, here's how big the market is, that sort of thing. I think the companies that don't get funding are the ones where you have a bunch of businesspeople in the room, maybe they're contracting work, maybe they're outsourcing a lot of the development and there's not as many do-ers as they are just sellers and biz-dev people. We like deals where the founders are people who really live, breathe, understand, develop the product.
DB: So you like visionaries, who've already built a good strong team of people who believe in the concept. Somebody who has already taken the time to go out and build a good strong team of people that have buy-in.
RS: Yes, exactly. Those types of founders are hard to find. It's hard to find founders who not only have a clear, compelling vision, they know how to communicate it and they have people who are willing to buy into their vision. If you have that as a leader, you can pretty much go anywhere. But as far as the industries go, I wouldn't say we have any bias. Personally I'm not a fan of the healthcare industry, only because I had a startup that was in it and it ended up going from a small investment into a massive investment before we ever got a return. But we're not dismissing any industry. As long as it's an online space that we think is disruptive and they're working on something that we could potentially partner with or acquire down the road. This is the kind of thing we'll look at.
DB: So, I was reading that you were looking at initial angel investment range of $50,000 to $100,000.
RS: If you think about the money that we're putting into these things, the cash itself is merely just a gesture of saying we're putting skin in the game. It's more of an investment to say, yes, Microsoft has invested in this company. But you know, it's a very strategic investment because the resources we're putting in far outweigh the value of the note that we put in. So we're doing convertible notes. They're flexible convertible notes. I gave those numbers as examples of some of the notes that we're doing. But they're flexible, convertible notes. Because of the engagement level of my team, we're working with a dozen companies at a time and we work with them for 4-8 months until we get them to a certain point and then we'll bring on another company. So it's a rolling fund.
DB: That's an exciting proposition.
RS: Here's the thing. You can get money from anywhere. It's very easy to raise money these days. What's really hard is raising smart money. And surrounding yourself with people who can really add value to the company you're building. One of the things I set out to do when we started this thing is to say rather than competing with angels and trying to get them to go and do this thing on their own, why don't we partner with them? Why don't we find angels who love to invest their money in different things and say, "hey, we'll be an angel with you." Just think of us as an archangel. And they love it. They love the fact that we're willing to do that.
DB: So in talking about how easy it is to raise money, let's talk about crowdfunding for a minute. Probably in December or January, the SEC will put the final rules in place and we can have equity-based crowdfunding rather than just the product-based Kickstarter thing. Once that gets into place, how do you think that will change things for startups?
RS: I think it will open them up to being able to get more money from different places. The challenge is that you're going to be getting money in from the general public. And I think what you're going to find is that it's going to have an acceleration ramp and then it's going to sort of fade off. I think there's a couple of things we have to look out for. We have to look out for the election and see what happens. I think you know, President Obama really likes crowdfunding, I'm not sure if Mitt Romney does. But those are the things we have to look out for. Even though it's been signed into a bill, it still is a little up in the air. What I will say though is that we are very open to partnering with crowdfunders and helping them bring in quality companies and being a smart angel investor as well.
We're absolutely open to partnering with crowdfunding platforms. I do think it's going to change the way people think about investing but I also think it's going to bring in a new level of complexity and potential problems that need to be addressed. Some kinks will need to be worked out of the system.
DB: And that leads to my last question. Do you think crowdfunding will be something that angels and VCs and other traditional investors would look at as something to go into?
RS: I think they have to look at it. I think angels will be more open to it. I think some of the older VCs will be apprehensive and will do what they can to dissuade it. It's hard to make money as a VC. That's why Bing Fund is so special, because if you think about it, if we go out and partner with our VC companies and say, "Look, we're going to bring in a massive technology component to your startups and our startups, and you can come and invest with us in those deals," they're really excited about that. Because we're bringing in a new level of credibility and a new level of expertise that they just don't have and they can't afford to build. So I think if I were working at a VC I would find ways to partner and embrace it and not try to ignore it or avoid it.