Startups often get quizzed by potential investors about the selling process – questions like – “Who is the decision maker for your products”, “How do you locate them?”, “What is the length of the sales cycle” “Where do you get your leads and how much does each lead cost” and so on.
While this might appear as being a bit too onerous, there is a sound (at least from an investor standpoint) reason for doing this. The investor is trying to determine if the startup has mastered the art and science of making a sales deal, and has the organizational structure and discipline to replicate this model to thousands of such deals. In other words, they have a proven repeatable sales cycle.
Having a repeatable sales model is one good indicator of startup maturity because it often implies that they have gotten some key data points right. These startups can exude more confidence about their predictability of their business model – as an investors it’s really encouraging to hear something like this:
“We sell to VP of Marketing at SMEs globally. We attract them through Google Adwords with an effective CPL of $100. A typical sales cycle is 3 months and we compete against Company A and B in 90% of the deals. We beat A on price and B on easier customization of features and integrations with existing systems. Lifetime value of customer is $600”
It’s encouraging because it’s easier to see how a startup like this would ingest a funding round to get a predictable number of leads, and by extension customers. While not perfect, having a repeatable sales model is far better than building a product that is searching for a market, of having to navigate org structures to locate decision makers, of having revenue lumped at different times in the year, and other uncertainties.
A new, and rather Welcome addition to the PE asset class in India is the rise of working capital financing. Alok Mittal wrote a nice, concise article explaining the benefits of this type of financing.
Invoice Financing is an extremely handy tool in the hands of B2B startups especially in India where payments, at least in certain verticals, are notoriously late. I have met many startups (where the product involves a hardware component) that are very leery of taking upon big orders – specifically because they are not confident of handling the working capital flow inherent in addressing a large incoming order. Indeed, many of them raise a round of financing just to be better-prepared to address a larger market with confidence.
I believe that this asset class with do well as long as the interest rates do not outweigh the benefits of getting financing. Remember, Equity financing typically does not involve any explicit cost – Preferred dividends/Buybacks are often paid out only in ‘adverse’ situations – but during the early years post-financing the proceeds are used to build the business. In success scenarios this equity merely changes hands — with just administrative expenses being the only explicit cost borne by the startup.
A recently article rightly points out how India (and the rest of the world) can reap huge rewards by leveraging modern age technology into virtually any HR process: hiring, predicting performance, retention, choosing optimal benefits, among others.
The explosion in data on virtually every person and corporation on the planet combined with state-of-the art technologies (including the latest wave of machine and deep learning) ensures that no one has to be ‘dumb’ about any HR process. Nor do HR managers have to follow cookie-cutter approaches to any of the processes outlines above. Rigorous data analytics can help identify ideal candidates and in less time, to predict a person’s performance in a job function with good accuracy, and provide us with a variety of tools and dashboards to make optimal use of a person’s capabilities.
I predict that a wave of cloud-based startups will emerge in the HR technology space that will fundamentally alter how we look at traditional processes. I also suspect that forward-thinking companies like Linkedin will invest fairly heavily, organically or inorganically, to maintain bleeding-edge skills for both recruiters and candidates.
I interact with a good amount of startups that are specifically attacking the hiring problem by developing technologies dedicated towards making hiring easier and more efficient – using data to ascertain a certain candidate’s suitability for a position – by using predictive models that ingest data from a variety of sources: social media, corporate profiles, and more.
There is constant chatter in the startup/VC ecosystem on the practice of later stage (Series B or later) investors buying out ‘early’ investors (Seed, Angels, etc).
Later stage investors come in with larger rounds of financing ($10m or more) with often eclipses the investments of earlier entities which often range from $10k and up. For good or for bad, these early investors have influence on the startup’s future direction from voting rights, vetoes and more. This often acts as an irritant to later-stage investors that need a direct decision making process between themselves and founders on all strategic matters. Therefore, the need to ‘clean out the cap table’ and purchase shares from all early investors.
Of course, this practice violates a basic tenet of capital efficiency – that is the need for each Rupee to go towards growing operations – marketing, sales, hiring, office space and more. Buying out early investors ends up being a ‘necessary evil’ – kinda similar to paying investment banker fees. In other words – frown on it – and then grudgingly agree.
Like most things in the VC world, there is not much publicly available data and information is largely anecdotal. My take is that there is an increasing number of such deals happening at ticket sizes > $10m, where the existing cap tables is fairly crowded and the existing investor base is unusually vocal (thereby creating significant nuisance value).
Travelling to the Silicon Valley (that’s what I’m doing right now) and interacting with investors and other key actors in the ecosystem here is the best opportunity to get abreast of the latest trends, developments, anecdotes and the rhetoric from the Tech industry. Some of the learning from the past couple of weeks;
- Everyone is doing or aspiring to do account-based marketing. The “me-too” phenomenon is rife in ABM
- Even pure Software companies are raising hundreds of millions of dollars for expansion. Gainsight is one well-known example, but there are others too..
- Gaining users, usually unprofitably, with the goal to exit in a couple of years is still a viable strategy. In other words, kick the “monetize can” down the road and let the acquiring company figure out how to do it.
- Going to India-based VCs is also a viable option — especially in scenarios where their local connects can be put to good use to set up engineering and development centers in India.
- Expanding to the US markets still remains a significant, if not formidable, challenge for B2B Enterprise Software companies coming out of India. The aspiration remains to emulate the business models of Israeli companies that manage to market into the US geography with relative ease.
Will update this post as I learn more. Stay tuned..
aH! Ventures is a premier crowdfunding platform in the Indian startup ecosystem. This past weekend they held StarUp 17 – a wonderful event for the startup ecosystem in Bangalore.
True to form, the event attracted numerous people – founders, bankers, investors, lawyers, students, and more. These events are a great way to get a pulse on all the exciting innovations in the industry, as well as to get the latest news (and more from the grapevine) on who is raising the next round, which ones are holding fire sales, which investors are raising new funds etc..
The highlight, for me, was a most wonderful and inspiring presentation by Dr Velumani – founder of Thyrocare. His is a quintessential success story – leaving a small city (Coimbatore) for Mumbai, founding a company and then slogging his way (the trend term today is ‘growth hacking’) to the top. His mantra – make profits by establishing the lowest cost base and pass benefits on to end-consumers. In other words, be the best at volume plays in markets. For a nice read on his success story, check out this article from rediff.
Other noticeable trends – a fair amount of startups facilitating better pet -management: social networks around pets, healthcare for pets and such. Also a few startups focused on making business communication less “noise-free” and more meaningful – that is, trying to be the Linkedin or WhatsApp for businesses. And a few others in the EdTech sector – adding layers of gamification to traditional learning to make it more meaningful, engaging and profitable.
Pat on the back to the aH! Ventures Team..
Inc 42 recently summarized, in excellent fashion, the steady uptick in Investment activity in 2017.
While some of these numbers can get skewed by the sheer quantum of the Flipkart investment and also by the fact that 2016 was indeed a rough year, there is little doubt that the ecosystem is enjoying a fresh dose of optimism. The reasons are largely political – and amazingly this can be read in a good way – but some positive signals from the annual Union Budget, further clarifications from SEBI on treatment of capital gains on preferred equity, the setting up of an Nse ITP, and the ruling party (BJP) win a crucial state election have positively contributed to the sentiment.
The last of these deserves special mention: Uttar Pradesh (UP) is the largest and by far, the most political important state in India. A UP election win often paves the way for a strong showing in the national elections – and thereby is expected to significantly strengthen PM Modi in his re-election bid. His party’s victory, in spite of tough (in the short term) decisions like demonetization is likely to embolden him to take bold economic decisions that are expected to help the economy in numerous positive ways.
Looks like some of that VC dry powder is finally getting deployed!