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Category Archive : Analysis

Navigating the Indian Seed Landscape

No one can doubt that the Indian PE/VC ecosystem is going through a golden run. The amount of money flowing into the ecosystem is breaking records –records set just the previous year! If I narrow the PE/VC down to just “start-ups” then Indian start-ups have raised $11.3 billion this year – up from $10.5 billion raised last year – the good times are truly here.

This massive influx of money and strong tailwinds make it seem as though raising capital is getting easier. But, with the number of start-ups growing as fast (if not faster) than the money supply, the real picture for a start-up raising money today is – disconcertingly different. The discussion of what metrics does it take to raise a round, what the different stage VCs focus on when you raise, etc. is a polarizing topic. One that I regularly have now with founders who are raising, founders who have raised and with funders of all stages – but there isn’t a silver bullet.

Therefore, when Yuki Kawamura shared Pear VC’s report, aptly titled, Navigating the New Seed Landscape, he could not have sent it at a more opportune time. Mar Hershenson, Managing Partner of Pear VC, created this report analyzing the US VC ecosystem but there are several parallels we can draw for our ecosystem here. For example:  

  • It confirms something that seed investors have long known, i.e., the time, amount and metrics required to raise a Series A round has increased, therefore;
    • The money needed to get a venture ready for Series A has also increased
    • Series A investors want to see positive unit economics and traction before putting in growth rounds
  • Traction has a direct correlation to valuation
  • Second time and successful founders get a premium valuation
  • Where you locate your start-up does affect its initial valuation

There are several other learnings in the report, but the one slide that stuck with me is:

Just replace the names of columns (from the left) with Seed, Pre-Series A (or Angel), Series A, and Public to translate this to our ecosystem’s lingo. However, the vertical order in those columns stays the same
  • A seed investor (like me) backs the team
  • The angel investor backs the traction, and
  • The Series A investor backs the market.

The report then gets into further details as to what your start-up must emphasize when you are raising a new round. It provides a founder the VC view on where your venture must be before attempting to raise that the Seed, Angel, or Series A round. I believe that this presentation is manna for founders. I Whatsapp’d it to my founders in the morning. Now I share it with you!

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Let’s talk about entrepreneurial stress

It has been fourteen days since VG Siddhartha took his life. In that time, the entrepreneurial ecosystem has heard arguments from several vantage points to understand the cause of the stress that led to his untimely demise. It is stomach-churning and thought-provoking stuff.

Various arguments attempted to place the cause of VG’s entrepreneurial distress onto a multitude of issues. His close political affiliations, the stress that different business bailouts had put on his balance sheet and even his battles with the income tax department. His balance sheet was funded using debt and private equity; therefore, the private equity guys were to blame as well. However, to place the blame on any one person or phenomenon is to oversimplify a very complex issue i.e., the effects of entrepreneurial stress. 

The one silver lining of this somber episode is that it has got us all talking about entrepreneurial stress. It is a real thing, and there is an excellent chance that an entrepreneur close to you is under this stress right now. Yes, even the most successful ones.

In the Indian ecosystem, a successful start-up founder is treated as a demi-god. The media can quickly relate that entrepreneur into a Tony Stark-type invincible personality – capable of resolving any situation and turning almost anything they touch into gold. The price of this success is steep because the lens of failure is brutal. Ask any of the high-flying entrepreneurs that witness a reversal of fate – the fall from grace can be cruel and lonely. 

The truth is that an entrepreneur undergoes the same level of stress as that of a high-performance athlete. Another reality is that this stress will not vanish. 

The first step to dealing with entrepreneurial stress is to admit its existence. This step is most difficult because it hacks away the cloak of invincibility that entrepreneurs take painstaking effort to build. However, unless we admit that this stress exists, we cannot act on its causes. Ray Zinn wrote a great post on Stress and the Entrepreneur that delves deeper into this.

The next step is to identify the factors causing stress. There are internal factors that the entrepreneur can control and external ones that they cannot. It could be the nature of the business (like running a stockbroking platform), an environmental factor (like the transit time from home to office) or a personality trait (like procrastination and putting off decisions). The factors that can be addressed, should be acted on immediately and earnestly. The factors that cannot be addressed can be overcome through several methods, which high-performance entrepreneurs utilize to channelize their stress positively.

Lastly, once the stress factors have been identified and dealt with, an entrepreneur needs to build a core group of people to fall back on. The people invited to this core (aka inner circle) play a critical role, and they need to be educated on the things not to do.  

This post is one of the toughest blogs I have written because I have had my personal experiences with entrepreneurial stress, which kept clouding my arguments. I kept reverting to the times in my career when I stared from the cliff of despair into the depths of failure. I know today what I did not back then. Even then, I sometimes find myself feeling overwhelmed, overworked, and slightly burnt out. It usually shows up with the burning sensation in my eyes, persistent pain in my back and a marked drop in my physical stamina. 

Initially, I did not know that it was stress. When I could self-diagnose, I took a short vacation, reduced my meetings load or delegated more. The awareness helped with resolution. However, the VG Siddhartha episode has awakened me to change my stance from a reactive one to a proactive one.

So should you.

Catching Dragons

An LP who had read AVF’s monthly newsletter inquired why we had rejected one of the deals based on the fact that the founders were raising 12 crores. He asked why we didn’t co-invest or take a small chunk of a larger round if the deal was good. This is a common and frequently asked question not only by our LPs but also by founders, their advisors, our advisors, our investment committee and almost every employee. Despite the overwhelming number of times we reject deals based on their valuation or the size of their raise, I continue to stick my neck out on the line for our investment strategy. It has been devised with an important mathematical, strategic and logical reason.

While later stage funds invest at a time when the business has achieved a product market fit, positive unit economics, solid revenue streams, etc. we, as an early stage fund invest when the founder is still contemplating the answers to these questions. Therefore, I stay grounded to reality in expecting that 90% of the early investments we make will fail and return nothing, and the remaining 10% should:

  • Return the total corpus of the fund
  • Deliver a return to the fund’s investors

This is difficult unless there is a clear strategy and discipline while investing.

A fund makes money for its investors by selling its ownership stake in what is called a ‘liquidity event’. This liquidity event can take place in many ways; by selling our ownership to buyout funds, to an acquirer or to the public during an IPO. But how much we make from a liquidity event is decided by two numbers

how much stake we own * how much the company is valued at = size of exit

Considering the small percentage of successes I expect, it is important for each successful investment to have the capacity to return the whole corpus of the fund or be what Kanwal Rekhi calls a “dragon” exit. To figure out at what valuation an investment becomes a dragon for the fund, you can use the same formula

20% X 1000 crore valuation = 200 crores

10% X 2000 crore valuation = 200 crores

5% X 4000 crore valuation = 200 crores

2.5% X 8000 crore valuation = 200 crores

The chances of an early stage fund getting an 8,000-crore exit are slim but if the fund team has picked and worked on such a winner, they should ensure that the exit will have a significant return i.e. multiple times the fund’s corpus and not just the corpus. Therefore, holding a 2.5% stake in such a winner will only return the corpus and I would need 4 such investments to return 4X of my fund – the odds of which are far and wide.

I have modelled our portfolio on an exit ownership between 15-20% with exit scenarios of 1,000 to 2,000 crores over 4-6 years. One such exit will return the fund’s corpus and the rest is just the icing on the cake.

Such a portfolio construct is good for the founders as well. Chasing $1 billion exits promotes behaviour like excessive marketing spends, massive hiring, multiple (and massive) fundraises, lots of founder dilution and an overall impatience to deliver results which cause long term issues. It is simply not sustainable.

Therefore, while I regularly review our investment strategy and thesis, changing the portfolio construct to have lower average ownership just doesn’t make mathematical sense to me. And while numbers can tell a story, they cannot lie.

33/2019

Can a Good Leader be a Good Friend?

I wanted to write a follow-on to my article on the interview of Confirmtkt founders, but the events of Feb 14th  were too much to stay quiet about and I couldn’t stop myself from writing an open letter to the PM. Post that, my travel plans stole my focus for a couple of days, so here is the follow-on article as promised.

In their interview, Dinesh and Sripad recount how difficult it was to fire underperformers or team members that did not suit the role they were in. Their personal equations interfered with professional judgement and the venture faced the consequences. I believe that this is a key lesson in every founder’s journey to become a leader i.e. a moment where he/she has to reflect and ask themselves ‘can I be a good leader & a good friend to the same person?’

Discovering the answer to this question could be one of the most difficult experiences a leader might endure.

I have seen several leaders (read: founders) get too close to their followers (read: team members) and lose all objectivity (due to the close nature of the relationship). In all the examples, (including my own experiences), this is a disservice to their role as leader, the team and most importantly, the venture. In many cases it has led to the termination or a permanent alteration in a friendship.

This reminds me of a scene from the superhit movie Dangal wherein Aamir Khan plays the role of a strict wrestling coach (Mahavir Singh Phogat) to his daughters. In the scene, he is massaging his tired and sleeping daughters’ feet. His wife exhorts him that he is too tough on their daughters when they are awake but massages their worn-out feet while they’re asleep. He explains that he can either be a good father to his daughters or a good guru (read: coach), not both.  

Similarly, I believe that a person can either be a good leader or a good friend, not both. A leader has to utilize many tools to get the best out of his/her people, but those tools could fail at the altar of friendship. Therefore, before hiring a friend I always make it clear that our friendship would be over until the time we become partners because until then I would be doing a grave disservice to my friend.

26/2019

My Angle on the Union Budget 2019

I would rate the budget presented by FM Piyush Goyal, a solid 4 out of 5. The budget managed to do the difficult dance between fiscal prudence and a sustainable, stable but progressive tax policy. More importantly, it provided security to two of the weakest links in India’s growth story i.e. the unorganised work force and the marginal farmers.

It is a common gripe amongst taxpayers that they do not get the benefits of paying taxes which they pay honestly (or otherwise) but various data sources suggest that we have one of the lowest tax revenues to GDP ratios in the world at ~11%. Compare that to Mexico who at 16% was the lowest amongst the OECD countries and most of these countries in this list are developed economies unlike India, where even the most basic infrastructure is being developed. The developing and growing economy is being supported by 6.8 crore taxpayers paying 120+ crores, which is dismal. Until we get to 30% tax revenues to GDP, we as tax payers will continue to bear this burden.

Unlike previous governments, I am happy with the way this governemnt has invested and spent my tax rupees and the change it has brought is visible. In the last 12 months, I visited at least 15 cities that can be classified as Tier 2 or beyond and I travelled to these places by planes, trains and automobiles. I have witnessed the benefits that these infrastructure investments have brought for the people who live in Bharat. Some of the areas that have seen the biggest ROIs are:

  • Connecting North East India with the rest of the country via rail & highways
  • The massive highway construction program
  • Upgrading the intra-city railway network, cleaner and better-equipped railway stations
  • Faster, more efficient and punctual intra-city railway services
  • Sanitation, electricity and home construction coverages

No money has been spent mindlessly. Almost all major urban centres are set to have intercity metro services, the defence spending has improved our security infrastructure and we now have a space programme that will put an Indian in space, with technology that will be developed within the country. These are all developments that I, as a taxpayer, am extremely proud and shall continue to support, with my tax rupees.

In the same vein, the Rs. 6,000 rupee direct cash transfer to farmers should be looked at as the start of an experiment that has its roots in the immortal words of late Rajiv Gandhi who had inferred that only 15% of the money given for welfare of the poorest and weakest sections of society actually received those benefits. This statement was made in 1985 and since then, the situation has barely gotten better.  In fact, the elected representatives have looted everything from seeds, urea and fertilisers that were meant for farmers. So a direct deposit of Rs. 6,000 would actually be equal to Rs. 40,000 benefit that the government would’ve had to dole out in order to achieve the same outcome. The only people that are making the most hue and cry about this are those that have made a living on such ill-gotten gains. However, this time the money will not be fattening the pockets of middlemen who have stolen my tax rupees. Instead, this will be the beginning of the process of plugging the gap. I am supportive of the initiative because the direct benefit transfer has saved us over Rs 90,000 crores according to UIDAI as well as the ancillary gains of the accurate welfare amounts reaching the intended recipients have been significant. Therefore, with this direct income support, it will be yet another nail in the coffin of the middlemen.

My only real grouch with the budget was the lack of support to the VC ecosystem, especially the VC funds. Other than the Rs.10,000 Crore fund of fund allotment (which is extremely difficult and complicated to avail) there hasn’t been any incentive for investors to put money into VCFs. Investing in VC funds is a new phenomenon for most investors, therefore, a tax incentive like offsetting tax on capital gains from real estate or listed securities by investing into SEBI registered VCFs would have provided a boost for investors. Secondly, reducing the tax on gains from VC funds to those from listed equity funds or even lower would have been a positive move.

However, in the end, the government did it’s best to support the ones that needed it most and modestly rewarded those who have contributed to the nation. There was a clear message that the government will encourage consumption but in a way that it directly benefits the targeted beneficiaries. I (as a taxpayer) am extremely satisfied and hope that the successive governments learn and follow the same path.

Lobbying for lower taxes can wait.

20/2019

A VC’s Analysis of the 2018 Box Office Results

The Indian Television industry is undergoing a massive change. Except for Shark Tank & Suits that are available on Indian TV, the best content is now being displayed on platforms like Netflix, Amazon Prime, Voot etc. These platforms are providing writers, directors, actors, producers, etc. the freedom to create or participate in content that they are inspired by. Recently, many bankable movie stars have done Netflix/Amazon Prime shows; Saif Ali Khan, R Madhavan, Nawazuddin Siddiqui, Radhika Apte, Bhumi Pednekar to name a few. These avenues give talented character artists that are confined to supporting roles in mainstream Bollywood movies the chance to get meaty roles and display their talents in Netflix/Amazon original series. The stellar success of these web series indicate a change in the preferences of the viewing audience and it got me thinking if this applies to the big screen as well.   

This morning I looked up the Bollywood movies that did well at the box office in the year 2018. Although there is a lack of information on the financial performance of Indian movies, a quick search revealed this imdb post to be the best source of aggregated information for the box office performance. Despite the math in this post is off, I found most of the numbers to be believable. I cleaned up the list to remove non-hindimovies and removed Hichki as the numbers didn’t add up (and I didn’t quite believethem). I was unable to find a credible source to cross verify the worldwide collections data, but for now, we’ll rely on this. Below are the top 20 grossers for 2018:

Rank Name Domestic Worldwide Total Budget
1 Sanju 340 234 574 100
2 Padmaavat 293 224 517 190
3 Race 3 166 121 287 150
4 Baaghi 2 161 100 261 65
5 Simmba* 151 99 249 75
7 Badhaai Ho 136 90 226 30
6 Thugs of Hindustan 130 96 226 275
8 Stree 128 74 202 20
9 Raazi 121 77 198 30
10 Zero 96 73 169 200
11 Gold 105 60 165 85
12 Sonu Ke Titu Ki Sweety 102 59 161 15
13 Raid 100 59 159 35
14 Veere Di Wedding 80 56 136 20
15 Sui Dhaaga: Made in India 79 50 129 30
16 Padman 75 47 122 30
17 Dhadak  75 47 122 25
18 Satyameva Jayate  78 44 122 50
19 Andhadhun  73 47 120 25
20 Parmanu: The Story of Pokhran 64 37 101 30

This list does not provide an accurate picture as to the profitability of the movies, therefore, I added a column for the movie budget sourced from the same post. Then, I divided the total collections by the budget to come up with the total X’s the movies made. This derived data tells a whole new story.

New Rank Previous Rank Name Domestic Worldwide Total Budget Returns
1 12 Sonu Ke Titu Ki Sweety 102 59 161 15 10.73
2 8 Stree 128 74 202 20 10.10
3 7 Badhaai Ho 136 90 226 30 7.54
4 14 Veere Di Wedding 80 56 136 20 6.78
5 9 Raazi 121 77 198 30 6.61
6 1 Sanju 340 234 574 100 5.74
7 17 Dhadak  75 47 122 25 4.87
8 19 Andhadhun  73 47 120 25 4.79
9 13 Raid 100 59 159 35 4.55
10 15 Sui Dhaaga: Made in India 79 50 129 30 4.28
11 16 Padman 75 47 122 30 4.06
12 4 Baaghi 2 161 100 261 65 4.02
13 20 Parmanu: The Story of Pokhran 64 37 101 30 3.36
14 5 Simmba* 151 99 249 75 3.32
15 2 Padmaavat 293 224 517 190 2.72
16 18 Satyameva Jayate  78 44 122 50 2.43
17 11 Gold 105 60 165 85 1.94
18 3 Race 3 166 121 287 150 1.91
19 10 Zero 96 73 169 200 0.85
20 6 Thugs of Hindostan 130 96 226 275 0.82

Here are my insights from the second list:

  • A big budget does not equate to big success
    • 9 out of top 10 profitable movies had a budget under 50 crores
    • 12 movies with a budget of less than 50 crores returned 5.28x of budget
      • 1797 crores on a 340 crore budget
    • In contrast, the top 5 budgeted movies returned 1.94x of budget
      • 1773 crores on a 915 crore budget
  • Female actors’ rule!
    • 4 out of the top 5 profitable movies were based on strong female lead(s) characters
  • The end of the Khan rule?
    • They took up 42% of the budget (of the top 20) but contributed only 16% of the revenues
    • Collectively the Khan’s returned 1.09x of budget

This entire exercise reminded me to continue to pick entrepreneurs/ partners/ employees based on their ability to perform and not the weight of the names on their resumes. Secondly, it reinforced my belief that picking dark horses, keeping low budgets and focussing on quality is the key to investment success – in both movies and venture investing.

6/2019