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Tag Archive : early stage startups

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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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

What will you discuss if valuation is not a variable?

I spent most of my Sunday at IIT Bombay as one of the 14 investors in the Ten Minute Miillion event. In its 3rd edition the format is inspired by Shark Tank insomuch that a selected group of investors (and there is a beeline to be part of this panel) hear a 5 minute pitch and are given 5 minutes to do a Q&A with the founders. After which they make a decision to invest between 100k to 1.5 million rupees into the startup. All the investors display their bids on a placard and the organisers total up the bids to announce whether the startup has received enough bids to fulfill the 1.5 million investing round. If the startup gets bids below the 1.5 million minimum the round has failed and they do not get any money.The event is held during IIT Bombay’s E Summit and judging by the presence of well known angel investors, the excellent pitches to a room for 300 that was packed to overcapacity and they received raucous applause when a successful funding went through – it pointed out that this was definitely the place to be on Sunday at the E Summit.

To ensure that the deals committed to, go through, there are number of the investment cycle steps that were completed prior to the pitch namely, the valuation, the share-holders agreement, the amount of the raise and a basic level of DD. The only thing left for the founders and investors to do post the successful raise, is to complete the execution and to adhere to an honor code between the founder and investor to complete this process or risk being black-listed from next year’s edition.

Much of the investors on the panel have been in attendance at this event for the last 2 years, so there was a lot of learning on the best practices and the common pitfalls which an investor should be careful of.

The event went off very well. I saw 6 pitches, bid on 4 startups and 3 of them were successfully oversubscribed. The format is quick and the energy levels remained high throughout the 3.5 hours we were there. The stories from the event will be remembered for months to come and the 3 companies we are investing in are promising startups with excellent potential.

When the valuation is not a variable the quality of interaction between the founders and investors changed dramatically. The investors ask “smarter” & insightful questions to better understand the business and to better understand whether the team can deliver on its execution promise. The event also debunked a common misconception that investors are interested in low share prices and one can entice them by giving them low prices for shares. The words of Sage of Omaha, Warren Buffet, “Price is what you pay and value is what you get” rang true yesterday when on level playing field, all startups that had agreed to the same valuation and the same amount of raise, there were startups that failed in raising even 20% of the 1.5 million rupee mark!

In my personal experience, startups that put up high valuation expectations in their presentations, chop off their own feet by diverting the focus of the investor from “is this startup worth investing in?” to “is this startup worth that much?”. The first scenario it is future potential of the business that is under scrutiny but in the second scenario it is the performance of the startup/founder until today under investigation. For early stage companies the second scenario puts them at a significant disadvantage and it may make sense for early stage platforms to bring deals that have pre-agreed terms (like the kind that existed at VentureNursery) and focus the attention of the investor on the business than on the valuation.