My Favourite Funding News from Last Week (w20)

There is a slow recovery in the funding of early-stage startups. We are still a long way away from the heydays of 2018-19, but the growing pace of activity in angel networks & early-stage funds are promising signs.

After shortlisting the early-stage deals for week 20 from Traxcn, Inc42, and YourStory, we picked out the following as the best funding picks for the last week:

 

Name: Vernacular.ai

Amount Raised: USD 5.1 mn led by Exfinity Ventures and Kalaari Capital

What does Vernacular.ai do?

Edited from Traxcn: Vernacular.ai is an AI platform to manage customer engagement and call center automation solutions. It provides multi-lingual chatbots for automating customer service operations of enterprises using natural language processing and deep learning. Natural language processing helps the bots to extract meaning, context, and entities of incoming messages, thereby enabling companies to interact and engage in any language with customers.

Deep learning helps in pre-training the bot with domain corpus and augmenting with enterprise-specific data to achieve maximum accuracy for the same. The bots developed using the platform can be deployed to multiple omnichannel platforms, including Facebook Messenger, Twitter, Website, Mobile, among others. Some of the supported languages include Hindi, Gujarati, English, to name a few. Clients include Vistaar, Shriram General Insurance, Exide Life Insurance, and Barbeque Nation.

Why do I like Vernacular.ai?

Voice AI has enormous applications in a world where customer service standards aren’t keeping up with the expectations of customers. Customers want to get personalized treatment and in a language that they are comfortable conversing in. As an early investor in vPhrase, I have seen the vast revenue potential of applying artificial intelligence for customer communication.

 

Name: Mintoak

Amount Raised: USD 2 mn led by Pravega Ventures

What does Mintoak do?

Edited from Traxcn: Mintoak offers a POS solution called DOV that enables merchants to accept digital payments. The solution involves a POS hardware device along with software solutions. Merchants can accept various types of card payments, such as magstripe, EMV, NFC, and secure PIN. It also enables the acceptance of UPI payments. Merchants can also accept payments without internet connectivity through their patent-pending technology that allows a POS to the transaction to be completed using the voice channel, thereby improving transaction completion rates. It also offers a consolidated view of all transactions handled by the device.

Why do I like Mintoak?

Except-Jio, most mobile operators operate on seriously inadequate infrastructure to handle the bandwidth demands of India fintech companies in urban centers. I shudder to imagine how vendors in Bharat, where the network infrastructure is weaker, would cope up. Mintoak attempts to use a data-light technology to process transactions, thereby decreasing costs and improving efficiency – an actual Bharat-focussed tech play.

 

Name: MetaMorphoSys

Amount Raised: Undisclosed amount led by Good Capital

What does MetaMorphoSys do?

Edited from Traxcn: MetaMorphoSys Technologies provides a software suite for the insurance industry. It offers solutions for product development, claims management, risk management, and more. It also features software for insurance quoting, sales & marketing, underwriting, and more.

Why do I like MetaMorphoSys?

Insure-tech will be one of the biggest beneficiaries of the post-COVID environment. A CRM focussed on increasing the sales & marketing ability of insurance agents will be a need-to-have utility. Hitting a ₹50 lakh monthly SaaS revenue will be the first port-of-validation for MetaMorphoSys!

My funding picks of last week (w18)

Fundraising activity continues to slow down; therefore, my team and I had a tough time shortlisting our favorite picks with just a handful of deals to choose from. After shortlisting all early-stage deals activity for week 18 from Traxcn, Inc42, and YourStory, we jointly picked out the following as the best funding picks for the last week:

 

Name: QuillBot

Amount Raised: $4 Mn in a round led by GSV Ventures and Sierra Ventures

What does QuillBot do?

Edited from Traxcn: Millions trust QuillBot’s full-sentence thesaurus to get creative suggestions, rewrite content, and get over writer’s block. QuillBot uses state-of-the-art AI to rewrite any sentence or article you give it.

Why do I like QuillBot?

My team and I are Grammarly power users processing tens of thousands of words for our investment notes, meeting minutes, emails, blogs, private chats, and more. I believe that there is space for a Grammarly competitor, especially one that understands the Indianized English – also, can Quillbot (or Grammarly) build a plugin for PowerPoint, please!

 

Name: YAP

Amount Raised: $4.5 Mn led by BEENEXT

What does YAP do?

Edited from Traxcn: YAP offers a white label program management platform. They also issue a Yap Tatkal wallet, which allows their clients to provide their customers physical or virtual prepaid cards linked to their products. They also offer a QR payment solution in the mobile wallet.

Why do I like YAP?

The lockdown caught the banks with their pants down due to unpreparedness to go digital. The post-lockdown scenario is bleak for physical banking, and banks must prepare themselves to fully service their customers from the palm of their hands. YAP is building APIs to bridge that gap hence one to look out for.

 

Name: Mindhouse

Amount Raised: ~$680K from BTB Ventures, GGV Capital, Aartieca Family Trust, and Angels

What does Mindhouse do?

Edited from Traxcn: Standalone mental fitness and wellness center brand

Why do I like Mindhouse?

The COVID19 virus reserves it’s worst for those with weakened immune systems. Therefore I expect that fitness (physical or mental) will be on the priority list of most in the post-virus era. Mindhouse attempts to enter the space that mind.fit is operating in. Will it succeed?

Flashback Friday: CarveNiche Technologies

As I approach my personal goal of personally investing in 100 startups within 10 years, it was time to reminisce. Each new investment gave me a new experience, sometimes good, sometimes bad and sometimes ugly. Last week I wrote about my first angel investment, United Mobile Apps. This week is its investment #2!

CarveNiche is an innovative EdTech startup. They developed advanced EdTech products such as beGalileo (India’s largest personalized after school math learning program for K-12 education), Wisdom Leap (free online source for K-12 education), and Concept Tutors (personalized 1:1 tutoring focussed on the international market).

CarveNiche created a niche in the EdTech space. It is the first to develop a product using the latest technology, such as Artificial Intelligence (AI), to teach a subject like Maths. The flagship brand, beGalileo, recently became India’s first after school Math learning program to be available as a Windows App.

At present, they have over 750 women entrepreneurs who are running their centers through CarveNiche. The renewal rates exceed 90 percent, which shows the value they provide to the students and parents.

Founder: Avneet Makkar Total funding raised INR 5.5 crore
2020 status: Operational with HQ in Bengaluru Number of rounds 3
Co-investors: Lead Angels, Mumbai Angels, Calcutta Angels

 

  1. Why did we invest in CarveNiche?

CarveNiche’s initial business model was to deliver a superior classroom experience for the school students by utilizing the latest digital hardware with a customized software platform. The platform provided instructors the ability to track the progress of each student and personalize the student’s teaching plan based on how well the student grasped the subject. The platform also offered a messaging service to connect parents & teachers so that they could track the progress of their students at school & home.

I liked the founders. It was a known fact that Indian schools lacked modern equipment to upgrade the delivery of instruction in the classroom. Looking at the massive size of the market, I decided to invest based on the broad target market, solid team, and their clear understanding of the problem and its solution.

 

  1. What were the risks involved with an investment in CarveNiche?

The risks presented themselves in three ways.

    • Long sales cycles: The company had a tiny window to sell its offering to school administrators, their boards, and their trustees. Next, their team must negotiate contracts, find financing to help the school purchase the required equipment. After that, CarveNiche would implement the solution and train the instructors on how to use their platform. If the company could not complete all these steps before the start of the school (academic) year, the sales decision, the invoicing, and the revenues from it would get postponed to the following year. The company must continue to fund its sales team for long periods before they could see the results of their efforts or get feedback to innovate on the product.
    • Providing subprime debt: Most Indian schools do not have a profitable business model. They must regularly fundraise to meet their budgetary needs. Therefore, most schools could not afford the hardware for CarveNiche’s solution – unless provided with equipment financing.

With most of these schools running operating deficits funded by government grants, donations, and trustees, these schools had an inferior debt profile.

To survive, the company had to come up with an equipment leasing/purchasing plan, and they approached us for that financing. We gave subprime debt to a few schools to evaluate their ability to repay, but most of the schools defaulted on their obligations to CarveNiche and us. That experience burned a severe hole in CarveNiche’s bank account, forcing them to abandon this product offering and the selling to schools’ business model.

 

  1. How long did you plan to invest in CarveNiche?

At the time of the investment, it seemed like CarveNiche would scale quickly and get acquired by a larger player like Educomp. However, our investment coincided with the start of the demise of Educomp, and even though the company raised a couple of follow-on funding rounds, they had to (thankfully) pivot to a B2C business model.

 

  1. Would you invest in a similar startup today?

I learned from CarveNiche’s experience that trying to build a massive business that sells to institutions that possess inherently unprofitable business models is like living in a fool’s paradise. The Modi government invests 4.6% of GDP in education, so I know there is money to be made in EdTech.

However, I find that the B2C plays must spend a lot to acquire a customer, and their LTV / CAC ratios stay <1.

In B2B, I have not found a group of founders that understand the pain that CarveNiche went through and have developed a business model that addresses those issues; therefore, we have cautiously stayed out of this space.

CarveNiche’s new business model providing online tutoring has promised, even if it was a bit niche. However, it has scaled beautifully in the COVID19 era. The company has turned around and raised a new round to aid its growth. Avneet has stayed the course despite several setbacks, so she deserves every bit of the luck that comes her way.

In conclusion, I would not invest in the original CarveNiche business model – but I would invest in Avneet.

 

  1. What are your learnings from the pivots that CarveNiche has made over the years?

CarveNiche was my 2nd angel investment, and it taught me many lessons that continue to guide me today. I’ll share a couple of them:

    • Follow-the-money: It is essential to understand how long it will take a business to convert billed revenue into money in its bank account. If the path to getting the money is long and fuzzy – avoid that business model. As a founder or an investor.
    • Avoid investments in long working capital plays: If it takes a long time to close a sale, then a long time for to invoice for sale, and an even longer wait to get the money from that invoice into your bank account – what is getting utilized to keep the lights on today?

If the answer is venture capital, then I would not invest in that business.

My funding picks from last week (w03)

There were a lot of excellent deals last week for me to choose my picks. After shortlisting 15 deals from Traxcn, Inc42, and YourStory, I sat with our funding team, and after a lot of enlighting discussions, I have shortlisted my picks to:

Name: Numocity Technologies
Amount Raised: undisclosed
Investors: Ideaspring Capital, Rebright Partners, and ABB Technology Ventures

What does Numocity do?
Edited from Traxcn: Numocity Technologies is an early-age tech enterprise focused on providing digital solutions for electric mobility infrastructure. The company offers products for EV fleets like fleet chargers, central management systems, and battery swap programs.
Why do I like Numocity?
EVs are the future. I have a sizeable exposure to mobility tech through Everest Fleet, Rapido, and Oneway Cabs. I want us to grow our portfolio in EV, especially in the charging infrastructure space, which should do exceptionally well in the times to come – especially for large EV fleets like the one Numocity is targeting.

Name: Instoried
Amount Raised: Undisclosed
Investors: SOSV

What does Instoried do?
Edited from Traxcn: Instoried is an AI-based content optimization tool that evaluates writing standards. The platform analyses your written content provides a scorecard and feedback on how you can improve their written communication. The platform aims to monetize this through paid subscriptions.
Why do I like Instoried?
I am a Grammarly power-user, and I will refuse to write an email, blog post, or media article until Grammarly will approve it. Grammary offers a contextual scanner telling me whether my written post is information, official, negative, positive, or casual. What I like about Instoried (from its explainer video) is that it goes one step ahead and points out which words the scanner is getting its context from and how that can be improved. It is an intelligent tool but will have to see if it can be an intelligent company too!
 
Name: GoFloat Technologies
Amount Raised: 9 lakhs
Investors: Jito Angel Network
 
What does GoFloat do?
Edited from Traxcn: Manufactures and exports flotation and other water safety devices for emergency rescue situations. Their tools are compact, portable, and cost-efficient in comparison to life jackets.
Why do I like GoFloat?
Since there isn’t a demo product or video available on their website, the idea could be pre-product, and with the small funding round, I should have kept this deal out of this week’s list. But I can see a market for a GoFloat due to my love for water sports, liveaboards, and cruises as an avid scuba diver.
 

Family & Friends – Please Save Your Capital!

A couple of months ago, I found my jaw hitting the floor during a start-up pitch. The founder of an early-stage B2C startup revealed that he had previously raised a family and friends’ round of the princely sum of 5+ crores (~$900k). That capital was exhausted in less than 18 months; the monthly burn was over 50L per month with a double-digit staff strength. All this effort was delivered less than 25 lakhs in sales – since inception!
Runaway spending, low traction, running out of cash are situations that I regularly encounter as an early-stage investor. What worried me was the lack of oversight the family and friends had on how the founder invested their capital and their lack of experience steering the founder from avoidable expenses.
For example, precious and expensive capital found itself funneled into:

  • A massive PR & Branding campaign which wasn’t delivery but continued to burn a hole every month
  • Lobbying for international “paid awards” that cost a bomb but did not deliver results.
  • Massive allocation on R&D, but it was a ruse. The money got spent on traveling to different countries to find manufacturers to white label their products to the company
    • I have seen others do it at 1/10th the cost & time

I cannot hold the founding team entirely at fault here too – part of the blame should be on the investor class. They infused excess capital into the business, thereby encouraging the founder to burn the money on things that don’t matter, ultimately setting up things to fail.
My presentation of these entrepreneurial misadventures is not an attempt to rub salt on the wounds of the family and friends’ investors or the founders.
I want to point out something fundamental. Except for unusual situations* family and friends must limit the amount of capital they commit to an entrepreneur. Leave the larger rounds of capital to the professionals. Not only will it save capital for generous family and friends, but it will also save founders from committing hara-kiri with their startup ambitions.
If this were a one-off situation, I would not have written about it, but I am witnessing a marked increase in the number of ventures backed by family and friends and coming to us for a seed round. We like family and friends supported investments because it shows that those closest to the founder also believe in them, but like healthy foods – too much green can be injurious to health.
Most of the time, family and friends judiciously put in a small amount of capital, just enough to get the venture started. However, there were many examples where family & friends have drowned a lean start-up culture with a deluge of capital – killing the enterprise and blowing away the capital.

So, the obvious question that arises is, how much should a family or friend commit to an entrepreneurial family member or friend?
The good news is that a family or friend need not look too far.

The best accelerator programs in the world, i.e., Y-Combinator or TechStars, commit $150,000 (~₹1 crore) for a 7-10% equity stake in pre-seed ventures. Similar programs in India like 100x.vc, Indian Angel Network accelerator, or VentureNursery (in the past) invested between 25-75 lakhs for a similar equity position.
All the branded investors mentioned above have many good and bad investments; therefore, with their experience, they can guide founders on promoting the right and shunning wrong behaviors in their start-ups. So, for inexperienced family and friends’ teams, the correct amount of capital would be between 50% to 75% of what these guys invest, i.e. anything in 40-75 lakh range.
Family and friends can decide where to invest in this range based on the domicile of the venture but ensuring that the founder has 6-9 months to find a professional investor while they continue to grow their start-up. It is the founders’ responsibility to consistently update their investors whether things are going well (or not). Developing this habit is vital but critical in case things are going well, but finding a professional investor is taking time. Family and friends could opt to put in some more capital IF they are comfortable with the start-up’s progress and are objectively taking the additional risk.
However, the family & friends’ capital tap must end at that.
 
* While It is still advisable to leave the more giant cheques to a professional but in certain situations, it makes sense for a more significant allocation from family and friends. These are exceptional situations, not the norm.

  1. If the family and/or friends have in-depth domain knowledge and are objectively backing one of their own
  2. In Meditech or Healthtech like start-ups that require more massive upfront investments and the family and friends’ investors have in-depth domain knowledge

Two Graphs for the Indian Start-up Ecosystem to Celebrate and Fear

There are two graphs that will define how 2018 was for the start-up ecosystem in India.

This telling graph that I took from a CNBCTV18 article shows that the amount of money raised by Indian start-ups in 2018 exceeded the amount of money raised by companies on the stock exchange. It is a rare occasion to see investors pour more money into unlisted investments over listed ones. This can be attributed to the recent market volatility that has hit pause on the number of IPOs in the last 3-4 months. The IL&FS fiasco led to credit crunch and the uncertainty over the results of the Lok Sabha polls next year also acted as catalysts for dampening investor sentiments.

However, this is an important moment for our young start-up ecosystem and I will be the first person to state that the recent spate of $1 billion+ rounds is a harbinger of the good times that lie ahead.

However, these summed-up funding numbers are hiding a very important fact that the number of start-ups raising early stage rounds has dropped 39% from its 2016 peak and the amounts raised is down by 52% from its 2015 zenith. Apart from the large SoftBank led funding rounds, we have had a seriously down year.

A major reason for this slowdown in early-stage funding is the exit of many small cheque angel investors that were blindly pouring in capital into early-stage companies. These avoidable angels (as I would call them) barely spend a few hours with start-up founders during the period of their investment and expect disproportionate returns on the sweat and blood of founders alone, a rare occurrence. Now as many of these start-ups have finished their funding runway, haven’t reached their promised goals and therefore unable to raise new money; they are starting to shut down.

An early stage start-up shutting down is a normal occurrence but these types of angel investors have usually dabbled in mid-cap and small-cap stocks too and their portfolios had swelled up spectacularly until the volatility that eroded the gains, and the principals in many cases. Faced with this double whammy many small angels have stopped writing angel cheques or (thankfully!) sworn off angel investing altogether. The recently advertised angel tax fiasco only helped hasten this decision.

I categorically blame angel networks for mis-advertising this investment class to these investors. Using examples of how small cheques led to massive returns they signed up tons of wannabe (read: avoidable) angels without having explained to them the effort that went into helping those founding teams and – how many failures it took to get one success. The result of these lax policies is the vacuum of early stage capital we face today.

101/2018