25 Lessons after Investing into 25 Start-ups â€“ Part One
Artha Venture Partners recently closed on its 25th investment, Interview Master. We have since then committed to investing into a number of startups that will raise the total shortly.
So far we have seen:
- 1 exit (soon to be 2)
- 8 2nd round of raises
- 5 startups gearing for 2nd round of investment
- 2 failed investments
So while most of our investments are under 3 years old, it is still early days for me to assess the performance of our portfolio based on cold hard cash returns. Meanwhile we have made several adjustments from investments that have grown and from investments that have gone bust. I will share my learning’s over a 5 part series.. this is part one.
Filter the duds
In our experience, the most important learning lesson is to learn how to say “no” in a firm yet constructive manner. We received a number of business plans per month and we have invested in just 27. Even our most conservative estimates puts that at a closing ratio of 1% or even below that.
Don’t Make Assumptions
In a world where total generation of knowledge and the rate of evolution of technology are kissing the clouds it can be a tough job to understand all the business plans that come to you. While the business itself may not be completely understood by you, if you find a “business case” and like the model then you may be interested in investing after all.
However to understand the deep intricacies of a business case, the model, the plan, etc. it is important that you make as little of an assumption as possible. It is better to have asked a question than to have not because later you will be kicking yourself for not having asked the question that you should have to get better understanding.
There was a deal two years ago that was on the verge of being invested into by over 40 angels. Then one of the members asked founder about the holding structure and the founder was looking for investment into a subsidiary with the parent company holding firmly with him (along with the tech and IP which was to be developed with our money). This was unfair for the investing group and they sought investment into the parent. The founder however refused investment into the parent… and we rejected the kid.
Buy the Team
The team is what will decide the success or failure of a venture so it is very important to thoroughly do your research on the team prior to investment. Spend time with the whole team and with the individual team members to understand their relationship with each other and with the company. How long are they looking to be involved into the venture? How long do they expect their co-founder to be involved? Does answer one match with answer two? If not, why not?
Get the team analysed by experts in areas of your own weakness and share the findings with the team and gauge their willingness to make the required changes as suggested by the experts. They may not need to change but being open to discuss a change is an important trait to notice and appreciate.
Go with your Gut
“Hey! But you just said don’t make assumptions!”
Yes, I said it! There are times when you just cannot get the required amount of information to satisfy all your questions. This happens more at a seed stage investment when you are dealing with a business model that hasn’t been seen until today (Twitter, Dropbox for instance!) and while you may be tempted not to move ahead due to the lack of information.
But if you have #3 working for you and there is enough confidence in you to take the leap of faith, then do it! I just recommend that you make that leap with a smaller allocation than you normally would for a business model you do understand.
A classic case for us was the investment into Oravel. It was a business model that is still being developed abroad and the business case for India was quite grim considering the fragmented B&B market. However, we were willing to bet that Ritesh would do something great with his determination and energy and so far we have been proved right J
Choose the Investee Director… Choose Wisely
Yes it is your money and your fore-fathers told you to be in total control of the money and the people that are using it. But does that mean that you have to be the one leading the team you bought? Are you the best person to approve critical decisions that the team has to make for its tech or business needs?This is a common misconception that the Investee Director is the only one who can push the team to do something. An investor has rights (by law and otherwise) that he can exercise to get his voice heard. The Investee Director is representing the voice of the investors and a query raised by an investor, if not answered, directly by the management (yes, you can email them directly) has to be taken up and answered by the Investee Director.Therefore instead of keeping all the power to yourself, it is prudent that you choose the best person for the job and come to an agreement on how you can all work together under his/her representation. The Investee Director should ideally be someone that knows the space and has the time to lead the team.
To be continued….