What do investors look at when they invest in a startup? How do they form their pipeline? How much importance do they place on the team? What is their due diligence process? – are some questions that every startup asks.
CIIE spoke with investors in both the early and mid to late stages. For this piece, we wanted to draw specific attention to three leading investors – Hari from Astarc Ventures, Padmaja Ruparel from Indian Angel Network and Nitin Sharma from Lightbox – to answer some of these questions and gain insights into their investment philosophy.
Early Stage Funding
Seed capital as the name suggests, refers to the initial round of investment required in setting up a company, one that would help get your idea off the ground. Seed funding is particularly useful in developing the initial prototype for your product/offering, and getting that first round of traction with potential customers. If establishing a company was to be compared to growing a tree, the seed investment could be compared to the first input of fertilizer and water added after a seed or seedling is planted. This provides with a conducive ecosystem necessary for nurturing the seedling until it is big enough to grow on its own. Acquiring seed funding is one of the many initial challenges that entrepreneurs face in establishing a startup, primarily because the funding comes with much more risk than those available at later stages. Let’s hear from Astarc Ventures and Indian Angel Network, to know more.
Astarc Ventures is an early stage fund looking at investments in technology and technology enabled startups at very early stages. Launched recently, the fund has a corpus of $2m with typical target investment ticket sizes upto 1 Cr. We spoke to Hari Krishnan, fund manager at Astarc to get more insights. Excerpts from the interview:
- Sourcing startups
We are a new fund started by the promoters of Astarc Group based in Mumbai. We have built businesses in various industries over the last 3 decades. We started our fund with an aim to help entrepreneurs with our business building expertise.
We source our startups through various means including references, networking events, startups reaching out to us and we reaching out to startups directly.. We look for very early stage startups. while sourcing a startup, we look for product and market validation which means a prototype should be ready and should have good consumer traction, like there are a 100 odd users using the product on regular basis to give proper reviews. Past Revenue is not a major criterion. Team is very important. By team I mean it should be a very passionate team about what they are doing, there should be cohesiveness among co-founders, have an unfair advantage on what they are doing, and they should also have some business acumen.
- Due Diligence
For due diligence, we talk to the team and gauge their understanding of the sector. We also talk to their users in the case of B2C startups, suppliers and large companies in that same space in case of B2B startups to help the startup explore potential partnerships, business opportunities, etc.
Since we have built large global businesses, apart from investing, we strive to add value operationally as well in addition to refining business models, helping them with sales, hiring, building partnerships with other companies and future fund raising.
Indian Angel Network (IAN)
Indian Angel Network (IAN) is one of Asia’s leading business angel investors’ networks, with about 225 business angels investing in start-up and early-stage ventures. IAN has funded 47 startups across multiple sectors such as IT, mobile, healthcare, and education. The network is operational in six cities and perhaps the only network that has set up operations outside their home country in London. The network looks at sectors such as agriculture, banking and financial services, education and even healthcare for investment. Padmaja Ruparel is the president of the Indian Angel Network and shares her experience about investing in startups for over two decades now. Excerpts from the interview:
- Best ways to approach IAN
Entrepreneurs can write to us directly or submit their plan through our website. (Our contact information is on the website.) As soon as it comes, we pick it up and take it from there. Our investor members recommend a lot of deals as individual startups keep reaching out to them. We have done some very large business plan competitions which makes it easier for startups to send in their plans. For example, last year we did about two and that brought us about 12,000 entrepreneurs in 30 days. The other brought us 7,500 in less than a month.
- Engagement Model
That’s fairly simple. We have investors directly investing in as board members and we also have our larger group of team members helping the companies with access to customers, markets, help them build teams, help them next round investing and all of that is required to help startup become a growth enterprise.
- Exit Strategies
It depends on deal to deal basis. In one, we had a VC coming in as our next round funding. The angels’ got an exit option. In another, there was a strategic investor who came in, so the angels decided to exit in cash and still hold on to equity or a part of it. That’s a partial exit, in some ways. In a third, there was a complete takeover of a company by somebody, so it’s a takeover exit. An IPO is too far off because the companies are too young. To my mind, angel-invested companies have to up a few other rungs on the ladder. Maybe we can someday see a management buyout. We haven’t seen that, as yet.
We are very active investors and we have done about 13 deals last calendar and raised 70 crores. We are here to actively help entrepreneurs. So, if you are a startup looking for high quality money – think about IAN.
Mid to Late stage funding
Venture capital (VC) is usually financing that comes in handy during the growth and/or scale-up stages of a venture. This kind of growth capital is often invested through multiple financing “rounds”, such as Series A, B, C and so on. These investments are generally characterized as high-risk/high-return opportunities and often involved high amounts of equity. These funds are used to scale the business from a marketing, sales, distribution, and operations perspective, and to take the business from its first $1 million of revenue to a scaled result of greater than $10 million of sales, thus approaching the cash-flow break-even point.
Lightbox is a $100MM tech venture fund in India focused on consumer technology businesses. The team behind Lightbox represents one of the most successful track records in VC in India. Operating as Sherpalo, past investments include InMobi, Cleartrip, Naukri and GreenDust. A mix of entrepreneurs, technologists and investors, the team has global operational experience in consumer tech. Underpinning the operational approach, almost everyone at Lightbox has co-founded startups including Cleartrip, Newhoo (purchased by Netscape), Half.com (purchased by eBay) and Evolv (purchased by NIIT) and have also led functions at Google, eBay, Komli, IAC, Yahoo, Sony, Cleartrip, InMobi and NIIT. Nitin Sharma is a Principal at Lightbox. For this piece, Nitin talks about how they are different from other VC funds.
- Funding strategies
We like to be deeply involved operationally in the startups we invest in. We are passionate about company-building and like to support entrepreneurs in areas ranging from product, strategy, hiring, branding and digital marketing, fundraising, etc. This cannot be done effectively if we follow the typical VC strategy of taking a high number of bets (20+) in a given fund; hence, we plan to invest our most recent $100 million fund across only 8-9 investments. We are very selective and once we invest, we are betting that working together with the entrepreneur, we are going to navigate various challenges to make the venture a success. We start with an investment of $3-6 million in Series A funding, and also continue investing in follow-on rounds. We look for technology-driven businesses where data, product and the user experience are a source of competitive differentiation. We spend a lot of time – in some cases, as many as 2-3 days a week with a given company – to strengthen our relationships with our startups and bring tangible value to the table. Talent is especially a key area, and we also love to hear from highly driven, high caliber professionals who are looking to be part of disruptive startups. We are not shy about taking larger Series A bets very early – in rare cases, even a concept – if we believe in the entrepreneur and the idea.
- Major Learnings
The two biggest lessons have been that (a) it’s all about the right entrepreneur, and (b) actually putting oneself in the shoes of an operator and appreciating (hands-on) the day-to-day struggles makes one a much better investor, versus just playing with powerpoints and spreadsheets.
I recently heard one of my colleagues in the industry say that this business is not about billion-dollar companies but about looking for the billion-dollar entrepreneur. We’ve talked about Snapdeal as a “deal that got away”. When Kunal Bahl (co-founder, Snapdeal) first came to Sandeep Murthy (who I work with), Snapdeal was a very different idea, which pivoted from a couponing business to a daily deal business to inventory owned e-commerce, finally to a marketplace. Kunal’s agility and tenacity was a key factor in continuously adapting that got him this far. Similarly, InMobi’s Naveen Tewari, who we backed early on to create the world’s largest independent mobile ad network, is a billion-dollar entrepreneur who could aggressively expand internationally and maintain a culture of product excellence.
- Finding Investments and Diligence Process
We like to be quite informal and approachable, and can be reached through our website. We like to be active on social media. Most of the serious opportunities come through our networks. We spend a lot of time building a genuine relationship with the founding team. We do a lot of independent work on each market, also pooling in our global experience and networks. We talk to customers, suppliers, employees, etc. as we judge the scalability and long-term value in a business. The actual formal process is short and simple, since we are a relatively small and flat team.
It’s the golden age of tech startups in India. The whole theme of creating tech-enabled brands is appealing to us whilst owning the end-to-end experience. We are excited about a whole category we call “engagement apps”, which are seeing exponential growth. This includes mobile-first models in gaming, dating, video, news, reviews. We’ve also looked at healthcare and financial services quite extensively.