Do You Have The Right Capital Mix?

One of my favourites from all the meetings I have, is my monthly morning coffee with Mr Narendra Karnavat. Mr Karnavat is one of the most active and passionate angel investors based out of India. Moreover, he is an entrepreneur turned investor, which gives him the privilege of looking at investment opportunities from the entrepreneur’s perspective. For obvious reasons, I also feel like this quality makes him more admirable and charismatic to me.  He quickly identifies if an entrepreneur understands the true meaning of dhanda and debunks the “wannabe” entrepreneur or as my favourite shark calls it, wantrepreneur.

His entrepreneurial zeal and energy are such that every meeting with him is a lesson in itself. We have invested in multiple companies together and he was also one of the first people to come onboard as an LP in Artha Venture Fund-I.

Yesterday, we met at my office to discuss some deals that AVF has in its pipeline. One of the topics that came up during our discussion was ‘how entrepreneurs usually make the mistake of misallocating venture capital’. Since the utilisation (and mis-utilisation) of venture capital has been a topic that I love to write about we ended up discussing this at length. 

Venture capital is expensive $$$ and can be measured from its high expectations of returns. It is (or should be) the first lesson in finance: one should deploy capital only when the returns from that deployment will exceed the cost of deployed capital. In simpler terms, it does not make sense to take a loan at a 10% interest rate to put it into a fixed deposit yielding 7% interest, does it? Similarly, a smart founder should not be deploying venture capital in areas that cannot provide disproportionate returns.

In my opinion the 2 worst places to deploy venture capital are:

  • Heavy capital expenditures like constructing a factory etc.
  • Working capital requirements

Capital for these requirements is best borrowed from banks and NBFCs and that too, only if the interest rate is below the ROI/IRR that the deployment is offering. This would be a prudent financial decision even if the interest rates were substantially higher than what is generally available but only until it is below the ROI/IRR that that capital deployment is offering.

It is imperative for founders with start-ups in execution/capex heavy spaces to do a crash course in finance and bring a finance professional onto the team early. This professional would help match the right type of capital to its deployment purposes and protect the erosion of the founder’s equity holding due to a mis-allocation.   

As for Narendraji, until next time! 😊                 


To Banker or Not To Banker

There is a worrying trend that is growing in my email & linkedIn inbox i.e. the rise of “boutique” investment bankers representing startups that are raising their first round of investment capital.

What use does a banker serve at seed stage?

I am not against the idea of hiring investment bankers to facilitate transactions (Artha has its inhouse renewable IB, Artha Energy Resources) but it is the use of bankers to raise the first round of capital that is worrisome. A banker is useful when the transaction is large enough or complicated enough to requisite the use of their expertise in finding the target investors and facilitating the smooth closure of the transaction. What use does a banker serve at seed stage?
When I see, a banker representing a seed startup it tells me one of five scenarios is in play:

  1. The entrepreneur does not know how to represent his/her venture
  2. The entrepreneur does not know how to negotiate
  3. The entrepreneur has been around the block and no one will fund him/her
  4. The entrepreneur is desperate
  5. The entrepreneur isn’t full time on the venture

As you can imagine not one or even a combination of these reasons is good for the startup and its founding team. The encouragement of getting a banker to represent your startup will quickly dissipate when the experienced and leading early stage investors shun the startup. Today many investors are questioning the role played by angel networks in deal facilitation so the questions for the role of a banker are exponentially bigger.

My own experience with early stage investment bankers has not been encouraging.

My own experience with early stage investment bankers has not been encouraging. First I don’t think any banker worth their weight will pursue the miniscule transaction sizes in early stage fundraising. The effort (fortunately) remains the same for the banker so it makes infinitely better business sense for the banker to pursue larger transaction sizes. As banker’s remuneration is typically a percentage of the transaction, they have an incentive to increase the size of the transaction to increase their fees. However, this does not work well for early stage ventures as the need the funds and network of angel investors as of yesterday and the banker muddies the water in their own pursuit of profit.
Most discouragingly early stage bankers don’t come from the early stage space so they do not understand the valuation ranges for early stage deals, the typical deal sizes, the psyche of early stage investors and even how the entire system works. Their modus operandi as I have seen it is to promise an unearthly raise at a beastly valuation for the startup (yahoo!), draw up a mandate at the valuation, charge a small commitment fee and then start investor hunting with gusto. There is initial success with investors who are new to the early stage ecosystem. Unfortunately, those investors are new but aren’t gullible so they forward these deals to the us and we outright reject the proposition when we see what the banker has done. Eventually the banker runs out of steam (and money) and gives up on the deal blaming the investors who don’t understand the value of the entrepreneur.

There is initial success with investors who are new to the early stage ecosystem.

Unfortunately, what the entrepreneur does not know is that they created a barrier between them and use with an unrequired banker whose own motivation killed the transaction.

Failing at Explaining Scaling – The Investor Fights Back

Founders are funny people.
The good founder will prepare elaborate excel charts, aggregate research reports and prepare polished decks and executive summaries to show that their venture exists in a niche space with a large target audience and they can become viral to the level of a unicorn. Great!
The better ones will go a step further in preparing diligently for answers that the peskiest of investors that delves deeper than any human has dived before in inferences in the presentation. The founder is prepared for any stress test on the intelligence behind the blueprint of the business. Awesome!
The best ones will conduct research on the investor, understand their investment style, read their blog posts and media mentions. They will answer questions with references from what the investor or a thought leader that that investors admires has said in the past. Superlative! Bravo!
Fortunately, it is my job to get down to the meat of business that looks beyond the song & dance that is well rehearsed and full of anecdotal evidence. I want to understand our fit with the business model and the founder’s fit into our portfolio. However, I have noticed that the founders will dig into their positions when challenged and the discussion about the business disintegrates quickly.
Therefore, when the founders upped their game it is imperative that so should I. Taking inspiration from an Aesop fable that the best way to get the coat off someone’s back is to make them warm.
I serendipitously ask founders to stop in the middle of their well-prepared presentation (which I have studied in advance) and ask them to describe how their company will function when they become viral to the point of bursting at the seams as mentioned in their presentation.
The bewilderment written on the faces of the founder is like that of a deer in the headlights. They scramble their brains to describe what they have not dreamed except as devised by the pulling the little plus sign from one cell on the right hand of the Excel to the left. Finally, in a feeble attempt, they come up with an unprepared rendition of a company that functions in the founder’s head but falls apart to the slightest push of inquisition.
With all their defences exposed, the founders come out in the open and I get the opportunity to see the business plans for what they truly are. Thankfully most of the founders will sigh and open their minds for some real discussion and I get the opportunity to assess the business and the founding team in their natural habitat to make an unbiased decision.

Mission accomplished!

How Long Does It Take To Exit From An Angel Investment?

Many angel investors have asked me, how long does it take after an investment to exit from it? While there are some very inaccurate theories floating around about the range being from 6 months to 3 years to 10 years, let’s look at the data that we have been collecting for the last few months for our upcoming foray into the venture capital fund space.

Usually, an angel investor invests in the early stages of the company, the angel/seed round and typical exit scenario for an angel investor is in Series B or C round. Looking at the data that has been collected by us from Tracxn, it is pretty clear that while a company takes about 11 months to raise a Seed round, they take about 5 years to raise their Series C round on an average.

As a safe bet, I would say Series C in the timeline of a company is where the investor can get maximum value for his investment.

This is because typically at Series A the valuation multiple is quite low, in the range of 4x to 5x of the angel round. While at Series B you’re at something like 20 – 25x, which can be good, but if the company has a strong venture capitalist like Sequoia capital or Lightspeed or Axiom, the kind of  investors who would continue to invest large sum in the Series C and Series D rounds, it makes sense to continue to hold on to that investment through Series B until a Series C or Series D.


You can take a look at this chart which shows that the timeline for a company to raise a Series C round from inception has come down dramatically and continues to probably fall.

Even though, there is a glut right now in Series A scenario, there will eventually be an uptick and the timeline of around 60 to 72 months is what I would say is a safe bet for an angel investor to expect a return on his investment that will commensurate with the risk that he has taken by investing in startups.

I like to cover one thought a week that I can answer through my blogs. If there are any questions that investors have, you can email at and I will look at choosing the most commonly asked questions and answer them through this blog.

25 Lessons after Investing into 25 Start-ups – 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.

  1. 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.

  2. 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.

  3. 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.

  4. 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

  5. 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….