Contributed By: Vidusi Saraf
In today’s pecuniary setup, Venture Capitalists give hope to entrepreneurs to believe in their ideas and create value. To throw light on intricacies of fund raising; functionality and psychic of venture capitalists, Mr. Vipin Agarwal addressed a curious gathering at Holiday Inn, Aerocity on 19th October 2019. Key highlights of the session are as below-
Part 1: From the past decade that went by
The tone of the session was set around deal making and investor types. To start with, Vipin talked about VC investments in Tech in the last decade.
During the era of “India Shine” in 2004, financial institutions in India led the VC investments in India. The earliest bets in private equity were taken in technology and infrastructure – logistics, power, real estate, telecom etc. This era closed with Reliance Power IPO in 2008 which was also the time for the global slowdown.
Next phase of upsurge came in after UPA took charge of their second term in 2009. “India Digitizing” saw the rise of e-commerce culture in the country. With names like Snapdeal, Flipkart, Jabong etc., classic VC deal making embarked the stage. Around that time, more than 50 investments were done in this space which started to consolidate in 2013.
2014 saw a sudden change in landscape with “Mobile Hopes.” Lot of global players entered this sector which led to drastic fall in mobile prices. Multiple round of funding was followed by a quick round of consolidation in 2016, leading to another downcycle.
Concluding the first part of the session, Vipin presented the “Bharat Arriving” theme popular in the VC community across the country today. It’s a period nursing Indianisation of investments with focus on tier 2 and tier 3 cities. He believes that India follows the Chinese way of building a business ecosystem, that 3-4 year cyclical trend in VC industry followed by a period of stillness has been in tandem with global giants like US and China.
Part 2: How to identify the investor?
One of the explanations for fading rounds of funding for a start-up is conflict of interest amid the founders and investors. Vipin emphasizes on the fact that “Investor wishes should always match start-up’s aspirations”. How the investor examines the business of the entrepreneur plays an imperative role in making an entrepreneur strike the deal.
To throw more light on this, he divided the type of investors in 4 broad categories based on their venture outlook:
- Are you targeting a billion users?
This category comprises of those who solely look at the massive opportunities in the market, at how distinctive an idea is, at the expanse of people who will use the technology. Likes of investors in players like Facebook, Twitter and other B2C type products. Investors of this group are risk lovers and have the potential to go all-in at the very beginning, if they see the potential. They are not so moved by revenue and profit numbers but, rather by the quantum of audience targeted.
- Where’s the money, honey?
They are the ones who make decisions based on critical analysis of the business model, revenue drivers, profitability metrics and other such variables. They love B2B technologies, and B2C with clear monetization. Unlike type 1 investors, they will only come in when the revenue drivers are in place. In such cases, multiple rounds of funding with the same investor is more likely. These late stage investors, are reasonably more challenging to deal with.
- Did you disrupt anything?
These investors have, in most cases, tasted the flavour of entrepreneurship earlier and are now sitting on the other side of the table. They are always on the look out for innovative technology – newer ways of disrupting the conventional practices. Their razor-sharp focus is on the product idea. Unlike type 1 investors, they will only come in when the revenue drivers are in place. Hey are often negligent about monetization. Investors in this group, will bring in their own capital and pitch the product further to their network of investors. They are equipped to provide a support system if they are swayed by the idea.
- Change the world, please!
It’s an emerging group of investors whose idea is to make a social impact yet also earn money. This interesting dynamic is yet to be established and explored in our country. The amalgamation of an idea which brings a positive change in the society with a sound profitability model is challenging. There are some case studies which can be the stimulus to delve into the space.
Part 3 – How to value a company?
The last part of the presentation dealt with striking a deal with the investor. The ultimate goal of an entrepreneur is to persuade the party on the other side of the table to accept the offer. To be able to do this, an entrepreneur needs to understand the psychic of the investor and their style of investing. Entrepreneur should be able gauge what attracted him the most and the category (discussed above) he falls in from the first few conversations. The idea is to determine the KPIs that the investor is looking for in your company.
However, while presenting a case; using jargons, name throwing, ample charts and terms are certain details that Vipin recommended entrepreneurs should be wary of.
Largely, the session focussed on various behavioural and fundamental factors that an entrepreneur needs to contemplate upon during the deal making process. Certainly, emotional elements are as vital as the financials in a deal making process.
Link to session ppt –CFA-Lecture-Vipin-Agarwal-Oct-2019