(*The Morpheus = TM)
Why this article?
This article is a part of our efforts to transparently share the thought process inside TM. This forces us to write down our philosophies, concepts, processes, methods & frameworks. Things which otherwise would continue to exist largely in our heads & in our conversations with founders. The process of writing gets us to focus, think clearly about these concepts & write them down. This is also immensely helpful as a way to get feedback from smart folks & improve everything we do.
This particular article attempts to explain why at TM we decide to work with certain startup teams & not with others. It details the selection process that we go through & brings out the reasoning behind why we make certain decisions.
All kinds of feedback is welcome. If you have anything to say to us, please send us a mail – neoATthemorpheusDOTcom
The founder bias
Over the last 4 years we have learnt that the only thing which matters in a startup is “the founders”. Everything else can either be ignored or used as an input to better understand the founders. Hence, all our filters are around founders. Below is the list of all filters we can think of right now. The list is in no particular order or priority. We keep these in mind across all rounds of the selection process.
Filters (things we really care about)
- Was the application form filled up completely & with all honesty?
- Are all founders full-time?
- Do they have a clear thought process?
- Do they have the ability to think through & understand problems?
- Do they keep coming up with possible solutions to the problems they are working on?
- Do the founders have skills to hand create products or solutions? For example: If the startup idea is tech focussed, does the team have at least one good techie to execute it.
- Do they have a strong bias toward execution vis-a-vis things like “planning, discussions, analysis, research etc”?
- Are they flexible & open to inputs from outside?
- Do they have the stamina to complete the long (5-8 yrs) & brutal start up journey?
- Will the partnership between co-founders last during the long & brutal journey?
- Do they have the ability to build and sell together? (does not apply for single founder companies)
- Do they have the right combination of two important qualities – humility & arrogance?
- Are they willing to start without external capital?
- Do they suffer from ‘funding mania’ ? Are they the type of founders who believe fund raising is the primary need for their startup to succeed & that is pretty much all they need, rest all is figured out. (Read more: Investor / Entrepreneur – Who is the horse and who is the cart?)
- Are they over confident / delusional?
- Are they honest / ethical / transparent?
- Are they looking to join TM for the right reasons or just looking for a way to raise funding?
- Will they have enough trust in TM? (by this we don’t mean they should not question what we say, by all means they should – this is about basic trust for an important relationship)
- Are they looking for mentors, advisers, partners to guide, push & support them? Or are they looking for part time senior employees to do day to day work for them?
- Will they fit into the ‘morpheus gang’ & add value to it?
- Can TM add significant value to their business at the current stage?
- Can TM meet the expectations with which they have applied for the program?
Anti-filters (things we do not bother too much about)
- Number of founders : Although having a co-founder makes it a bit easy to build a startup, we love to work with single founders. Some of our most successful companies are by single-founders
- Education: As long you know your stuff, we don’t care how for many years went to school or college. We don’t care about name of college you went to or the type of degree you have or don’t have.
- Gender: We would love to work with women founder(s) only teams, so far we have some teams where one of the founders is female
- Sexual orientation: does not matter
- City: As long you can move to one of the main cities, we don’t care which city the startup comes from (we love folks from smaller towns, they just have more fire)
- Domain: We are open to all domains as long as the team knows what it is doing & can build the product / solution with their own hands. Apart from things like tech / internet / mobile ; we have worked with startups that do: automobile electronics, robotics, food delivery, organic clothing line, retail services & more
- Stage of business: We have worked with companies of all stages, although majority of the companies we have worked with tend to be birth / early stage. As long you have not raised a large round of funding, we can still help you
- Quality of initial idea: We do not attach too much weight-age to the idea you apply with. If it is good, you can keep working on it otherwise a good team can always find stuff to build
- Family teams: Most people wont work with teams made of “husband-wife, bf-gf, two brothers etc” we have no such problems, in fact we have worked with all such teams and belong to one such category ourselves
- Age: Large majority of the teams we have worked with have younger founders 25-26 or below, but have no issues with older folks who are still young at heart & full of energy. One of our senior founder is 39 years
- Nationality: As long as the company is incorporated in India, you can be of any nationality. In batch 6 we had a team from Nepal, which moved to Bangalore
If anything we have a bias to work with folks who most other people would not work with. We love diversity in founder profiles, we love people who walk on their own tracks & dance to their own beats.
- We have defined a framework for reviewing applications which allows us to make decisions based on certain guidelines & our gut feel / experience / subconscious thoughts
- We stick to certain timelines to ensure we follow it for the process to be completed
- We use a SaaS tool, f6s that is designed for accelerators like ours & is really helpful in managing applications, the review process & offers a whole lot of deals for startups
- At every stage TM partners who review the applications, mark their preferences & add their comments against the application
- To make things easy the comments are divided into two categories
- Green : list of positive observations
- Red : list of the areas of concern or filters that the startup may fail
- We review our complete process every 6 months & have made substantial changes to the process based on our learnings
- Basic philosophy behind what we are looking for remains the same but the method gets refined & our thoughts get clearer every time we go through it
- So far we have looked at 750-800 applications of all sorts across 6 batches
Various stages of the process (if you are in a hurry just look through the diagram):
0. Application Submission
We do not accept or read business plans. All teams who want to apply to TM are required to fill up the online application form on our website. We accept new applications, 2 times every year. The dates for applications are announced on our website & for the rest of the time we like to focus on working with our existing portfolio.
- The process starts when the teams start by signing up on our website to apply & fill up a fairly long online application form
- The purpose of the intentionally long form is:
- To act as a tough barrier & eliminate teams who do not have enough interest / patience to complete the form
- To provide an opportunity to teams filling out the form to realize that TM may not be the right fit for them and drop out at this stage
- To provide an opportunity for the right kind of teams to share important & interesting stuff about themselves
- To gather the information that we will need to be able to quickly and accurately make decisions
- Long written forms helps them review their own traits
In case of Batch 6 that started in June 2011, 300 teams signed up to apply but only a few more than 100 teams submitted the form. Which is a big time saver for us, otherwise we would have wasted our time reviewing 200 applications from non-serious folks.
1. First Review (FR)
All applications are divided between the partners at TM. Each submitted application is reviewed by one partner. We start reading an application with the mindset that each application is good & will pass all filters. As we review the application, we may come across reasons why the application will fail one or more filters. If that does not happen, the application moves to the next stage. As an outcome of the First Review we assign one of the three statuses to each application.
- FR-Move: Moved to next stage FC (First Call) – which will be a call or face2face meeting with one of the partners
- The partner who reviewed feels, this application is likely to pass all our filters. TM would like to look deeper into this team
- FR-Drop: Dropped after first review
- The partner felt that this team does not pass one or more filters and hence would like to drop them at this stage
- FR-Hold: On hold after first review
- This means that the partner who reviewed feels 50-50 between Drop / Move. They saw some negatives but also some promise
- This application will now be reviewed by one more partner before we decide between Move or Drop
- Historically, most applications which go into hold get “Dropped”. But we still look at each one very carefully
2. First Call (FC)
Teams that reach this stage are invited for a 30-60 minutes call or face to to face meeting with one of the partners @ TM. We like to speak to all founders during this call. If some founder(s) are missing during FC, that is seen as a sign of lack of seriousness. We go deeper into learning about the founders- who are they, how well do they know each other, why are they building a company, what problem do they want to solve, whose life are they looking to improve and how to they plan to do it . Again, we start every call with a mindset that the application will move to the next stage. During the calls, we may come across reasons why the team will fail one filter or the other. If that does not happen, the team moves to next stage. As an additional exercise, before or after the call / meeting, we may also talk to some domain experts to get their opinion. This would happen either when we have an expert in our close network or when we are looking at deals from a domain we do not understand that well, like biotech, solar, organic foods, security etc. As an outcome of the First Call we assign one of the three statuses to each team.
- FC-Move: Moved to next stage, Second Call & recommended for next stage Live-in
- This means that the partner who talked to the team continues to feel this application is likely to pass all our filters and would like to recommend this team for the Live-in stage
- FC is the primary stage & the second call will be more of a confirmatory call
- Most teams that we feel are good for Live-in after FC are usually those that make it to the Live-in stage after SC
- FC-Drop: Dropped after first call
- This means that the partner felt that this team does not pass one or more filters and hence would like to drop them at this stage
- FC-Hold: On hold after first call
- This means that the partner feels 50-50 between Drop / Move. He / she saw some negatives but also some promise
- One more partner will talk to this team before we decide between Move or Hold
- Historically, most teams which go into hold get “Dropped”. But we still look at each one very carefully
3. Second Call (SC)
Second call is very similar to the first call but the purpose is more to re-confirm the recommendation made after FC to move this team to the Live-in stage. As an outcome of the SC, we again assign one of the three statuses to each team.
- SC-Move: Moved to next stage, Live-in
- SC-Drop: Dropped after second call
- This does not happen very often but for teams it means that the partner, who had the second call, has some definitive reason to think that the team does not pass all filters
- Since this is an advanced stage and one partner liked this team, all the drops at this stage are discussed again before finally letting it go
- This means that the partner feels 50-50 between Drop / Move
- The partners will have an internal discussion before deciding the final out come
4. Live-in (LI)
Based on all the previous stages, we brought down the 100+ founding teams to about 20. Before reaching this stage TM team has spent 2-3 hrs talking to them & may be another 1-2 hrs reading the application / talking to experts / researching the domain, playing around with their product, etc. By this stage, we have taken a good look at them & their ideas, we feel strongly that they will pass all filters, so dropping teams after this is a tough call. Live-in is most crucial stage, things were easy before this but this stage includes fair amount of heavy lifting.
- Live-in is a 2 week trial engagement modeled on the real TM engagement
- The goal is to spend 4-5 hrs a week with each team
- Both sides should work together like the deal is already on
- We expect the team to transparently share information
- We start understanding them & their business in more detail, start providing our opinions / advice / help / connections etc
- During the live in, we ensure that each partner spends substantial time with every team
- Most teams will also interact with at least one of our LPs (limited partners who have invested funds in TM)
- Teams will interact with one or more founders of startups in our portfolio via meetings arranged by TM
- We also encourage teams to talk to as many TM portfolio founders as possible, most of them are very helpful and are happy to share their thoughts
- Two new (part-time) partners have joined our team recently- they commit 15 hours every week to TM. One of them is a tech guru & the other is a design guru. They spend time with teams as well
- We use the feedback from all the interactions in our decision & assume the same happens at the end of the founders
- Basic idea is that if both sides actually spend intense 4-5 hrs a week working with each other & experience various aspects of the real engagement, they will get all required perspectives that they would need to make a good “subconscious decision”
- These “subconscious decisions” are usually much better in quality as compared to decisions based on conscious analysis of some sort
- With every batch our belief in the “subconscious decision making” is increasing
While working on this post, we had a very interesting observation, based on which we made a new filter. The subconscious filter – we look for founders & teams who primarily function in a subconscious manner, their decisions are “blink decisions”, for almost all their decisions rely on their gut instincts instead of a conscious analysis.
So far this has turned out to be a very important filter for identifying founders who can build “best in world” companies. We used this as the primary filter, while deciding on the final set of 12 companies that are part of TM Batch 6 & the results have been amazing- batch 6 has been the best batch so far. ”
At the end of Live-in, partners add their observations about Live-in teams to the application management tool. This is followed by a discussion between the partners to come out with the final “go / no go” on each Live-in team.
Here we would like to explain one more concept “Equity Range” which is a very important aspect of making final offers at TM.
- We do not make an offer with number. Example: “We would like to work with you & take 9% equity.”
- We always make an offer with a range. Example: “We would like to work with you & take equity in the range of 8.5 % – 9.5%.”
- The team can pick the final number in that range
- This allows both sides to discover a comfortable number within the range
- At the time of final offer, both sides ( TM & startup) are looking for a very long term relation & it is important that both sides feel that they are getting a fair deal
- As we propose a range, the team gets a choice to pick a number. This avoids any negotiations that may have taken place over the equity
- We come up with the range after a lot of thinking and always err on the side of offering a good deal to the founders
- If the team does not find this range comfortable they can decline the deal
- We do not negotiate outside of that range
How do we decide the equity range?
- The published range, on our website, is 7–12 % but have always stayed between 7-10% in our offers
- Anything above 10% seems too much to us (Note to TM: update the website)
- The logic here is pretty simple, for teams early in the cycle the range is more towards 10% and for teams who have been doing for some time & have results it goes towards 7%
- Great team / no idea
- Great team / promising idea
- Great team / prototype
- Great team / live alpha or beta with initial traction for B2C & some late stage pipeline for B2B
- Typically these are 0 – 12 month old startups
- Great team / beta version released getting good user traction for B2C & getting trial customers for B2B
- Not achieved clear product – market fit
- Business model is being discovered
- Typically these are 6-18 months old startups
- Great team / stable product, live & happy customers
- Customer base growing organically
- Initial business model in place
- Experimenting with customer acquisition channels to scale
- 18 month – 36 month (or more at times)
- Many times this also includes teams which have done pretty well building one type of business for 2 or more years but found it non-scaling & they are looking to change track / pivot
- Disclaimer: These are general guidelines. Final decision is taken subconsciously on case to case basis, we make exceptions when we think it makes sense
- End of the day, we are not too hung up on the equity number. If the team is great, chemistry with TM is good & both sides sincerely want to make it work – things always work out – “Where there is a will, there is a way”
- Finally here is a good article, by Paul Graham,on how to think about equity: The Equity Equation
Share the deal documents
This is something which we have wanted to do for a long time & will finally do it during the batch 7 selection. The live-in teams will get to see the deal documents which they will be expected to sign if we make them an offer and they choose to accept it. These are standard docs & extremely entrepreneur friendly. We do not negotiate the terms in these documents, the idea of sharing them in advance is that if a team does not like the deal documents they can reject the offer to work with us if we do make them an offer.
As an outcome of the LI we assign one of the three statuses to each team.
- LI-Move: Lets go ahead & make an offer to this team
- One of the partners will call the team, make the offer & explain our thought process
- Teams are also informed about the “equity range”
- The team gets 24-48 hrs to get back to us with the final decision via an email
- If we do not hear back in 48 hrs, we change the status to “LI-Drop”
- LI-Hold: There are no Hold decisions at this stage
- LI-Drop: TM has decided to drop the deal post LI
For all teams dropped before this stage, we send out a standard email & may not be able to spend time providing feedback. But for teams that are dropped at live-in stage, we would be open to providing detailed feedback if the team would like us to. This is also something which we have only done informally so far but will be doing in a more structured manner, batch 7 onwards.
5. Offer Stage
- Once we communicate offers to all teams in LI-Move stage, their status is changed to “Offer-made”
- Upon receiving an email confirmation email the status is changed to “Offer-Accepted”
- If the team tells us via phone / email that they would like to decline the offer the status is changed to “Offer-Rejected”
- If we do not hear from a team for 48 hrs after we made an offer, the status is changed to “Offer-Rejected”
This is where the selection process ends & we start the on-boarding phase which includes legal agreements, light weight due diligence & incorporation for startups who are not yet incorporated. We will do a post on that process as well.
Communicating decisions to teams which applied
- We wait till the beginning of the live-in before we communicate the decision to teams that we have decided to drop at earlier stages – FR / FC / SC
- After completing Live in & our decision making, we communicate the decision to teams dropped post Live-In
Understanding our decision
- If you are one of the teams which received the mail communicating that TM would like to pass on the deal, you are the main reader we kept in mind while writing this post
- Do not let our decision in any way stop you from believing that you are not capable of build a great business. If anything, take it as a challenge, keep following your path, prove us wrong & make us feel sorry for having missed the opportunity to work with you
- To learn from the process, look at the list of filters in all honesty & see if you feel you may have not passed any of those
- If you do identify such filters, figure out if you would also care about fixing them
- If yes, please work on that aspect
- If not, no big deal
- If you had a chance to interact with partners at TM in the FC / SC / LI stage, you would have surely received honest / candid / upfront feedback and heard views on various aspects about the team & the business. Please consider those carefully
- Of course our opinions are based on a very limited understanding of you & your business, so a lot of it may be inaccurate.
- But at the same time, since, over last 4 years we have had an opportunity to closely work with 45+ startups & look at 750+ applications, we have developed a big repository of ideas / thoughts / concepts which allows us to make quick and, in most cases, accurate assessments & suggestions.
- The end of day outcome of everything in life is function of your & only your efforts. TM or anyone else doesn’t really matter
- We fundamentally believe that “founders” are the only thing that have maximum impact on the outcome of a business. So as long you are committed to not giving up but keep on learning & improving, you will end up build a great business
- In most cases, we are open to giving you more detailed feedback via email / call – so feel free to reach out
- IMPORTANT: Also, we welcome folks to apply again in future batches, having interacted once always serves as a positive sign. In Batch 6, 2 out of 12 companies are the ones who had applied for Batch 4
- We also encourage folks to interact / engage with us informally much before they apply. Prior constructive interactions are really helpful, as it would have given us a chance to know you in depth & provide feedbacks on various filters in advance as well.
- 7 out 12 companies in Batch 6 are where we knew founders for more than 6 months
If you have come this far, you really have the patience to build a large business. Thanks for reading. Please share your thoughts / feedback with us : neoATthemorpheusDOTcom
Thanks: Big thanks to these folks for reviewing this process document, sharing inputs & catching all the typos: Ankur, Tarun, Rudhir, Aditya, Vivek, Nitin, Rabi, Pushkar, Abheek, Maha, Abhishek, Ashish, Venky