When Sunil Nagaraj built his first software—an applicant tracking system—as a computer science student at the University of North Carolina, his only option, it seemed, was to sell it to the university upon graduation.
He knew of no resources for engineers and entrepreneurs back then. "I could have productized it if there was an HQ Raleigh, or Citrix Accelerator or Startup Factory," says the now vice president at Bessemer Venture Partners in Silicon Valley.
Nagaraj admits he hardly recognizes his hometown from when he graduated in 2004 and moved to Boston to work in management consulting—eventually to attend Harvard Business School. "There's enough people and noise that I think entrepreneurs know where to go. They know a path," he says.
In a talk before an audience of hundreds at yesterday's CED Tech Venture Conference, Nagaraj acknowledged the infrastructure and capital that has built up in the Triangle. He shared why he's bullish on mobile and Internet of Things startups, and explained the untapped potential in those burgeoning industries (see my wrap-up below). His two pieces of advice specific to entrepreneurs in the Triangle were to talk more freely about failure and to be generous. But Nagaraj and I sat down after his presentation to talk in depth about the 1,000 or so deals he considers each year at Bessemer, the firm he joined after his venture-backed social dating startup, Triangulate, shut down in 2011. (Its investments include Skype, Yelp, Pinterest, Box and LinkedIn.)
We started with the biggest mistake entrepreneurs tend to make at the early stage—they don't figure out if people actually want the product they're building, Nagaraj says.
He's a fan of Kickstarter and Indiegogo for the customer validation. In fact, he expects any IoT or hardware startup to go this route before seeking investment. For software startups, Nagaraj recommends a fake landing page for people to sign up for a waiting list. "Any sense of customer demand is valuable to me as a VC," he says.
Entrepreneurs also fail to address defensibility. Nagaraj wants to know why they are better suited to build the business than anyone else. Is it an amazing team that executes so rapidly competition can't keep up? Or, perhaps there's a proprietary partnership that keeps competitors out. Or, deep intellectual property?
"It's not easy, but competitors will emerge and pricing pressure and customer churn makes the business fall apart," he says.
Nagaraj has yet to make an investment in the Triangle, though he'd like to. Each of Bessemer's 30 or so VCs make one or two seed stage to series D investments a year. Nagaraj more frequently invests in early-stage companies.
A key criteria for Bessemer is the size of addressable market. And because most Triangle startups aren't targeting consumers—a major focus of his investments—market sizes can be too small. But the Triangle may not be as positioned to have a huge consumer app company, he says. The number of startups tied to universities and intellectual property may be disproportionately high.
Plus, consumer startups are incredibly difficult.
"The issue with consumer is a lot of folks don’t monetize and so you either cross your fingers that you get acquired like Instagram without turning on revenue or you believe you are building a mass of users, then you turn on revenue," Nagaraj says. "But for a lot of consumer ideas, it can seem like a stretch that they can ever turn on revenue." His example—photo sharing apps.
Nagaraj is also focused on security startups—just yesterday, he announced an investment in Auth0, which builds software for developers to make apps more secure. And, lucky for us, B2B is sometimes a target. His favorites from the two-day conference were InMotionNow and nCino, two companies offering a cloud-based solution to real problems of a specific customer base and with customers to prove its working, something all too rare in Silicon Valley, he says.
He's also a fan of Windsor Circle's Matt Williamson: "I continue to be impressed by how much hustle that guy has."
And if Citrix Sharefile's Jess Lipson ever starts another company, Nagaraj will be watching.
"Jess is really quite a role model. I'm impressed with his commitment to give back to the community that supported him and not in a hands-off way. With time, energy and money all at the same time."
Nagaraj's tips for mobile and IoT startups:
- Reimagine workflow for mobile. Pick an industry skipped by desktop computing and even software-as-a-service. Study a day in the life of a worker and find solutions to make that person's activities more efficient on mobile. Think nurses, cab drivers, plumbers.
- Rethink, rather than force-fit, the desktop experience for mobile. Example: Circa, which redesigns news consumption for mobile.
- Imagine anything around you with a sensor in it. Make old hardware smart. Consider what data could be collected from that item and how it might be useful to a person or business.
- Consider hardware beyond wearable devices like the Fitbit, like iBeacons that track the activity of a fleet of trucks or an elderly person's pill box. Examples from his portfolio: Estimote, which puts iBeacons in retail stores to deliver coupons to a customer's mobile phone when she enters; and Tile, a Bluetooth tracking device to put on your keys or other items that could get lost.
- Differentiate in the software, not the hardware. That's how to be most interesting to investors.