From the US Vantage point

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..

 

 

 

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StarUp 2017

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..

 

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Putting VC dry powder to good use

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!

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Should a startup pay equity to advisers?

A colorfully worded post by Blossom Street Ventures found it’s way to my Inbox earlier today. The author explains his rationale for not giving equity to advisers.

I think he oversimplifies the point a bit. Not all advisers are created equal. In many cases they come on to the Board as advisers as a result of a funding event – and as a result they are ‘free’ anyways – since term sheets often mandate that the VC brings in one of it’s members on the Board.’

I agree that bringing on advisers just for namedropping is a bit “VC 1.0” – it has happened so often that most people can see through it. Rarely, if at all, does it influence a customer, funding, or strategic decision. Many advisers tend to be passive and often enough, try to leverage past reputation to negotiate equity in startups. Founders should definitely avoid such situations.

I’ve seen situations where advisers tend to complement founder strengths and truly earn their keep.  For example, adding deep technical expertise – designing next gen product architectures to founders that are ‘MBA-heavy’ and not having the funding to hire a full-time CTO. In such situations it is definitely worthwhile to offer equity as an inexpensive way to attract and retain talent. I say inexpensive because there is no explicit cost and there is a payout only when an exit occurs – at which point the pie typically grows big enough for everyone to be satisfied with the outcome – at least happy enough not to fret about paying equity to advisers.

Finally, another area where startups err is accelerating the vesting for advisers. Theory being that these are senior hires and as such, should be treated like C-level executives whereby a good portion of the equity vests at an accelerated schedule if ‘things don’t work out’ and the adviser leaves for any reason. Advisers should be offered similar vesting schedules as key employees as a way to align their time, motivation and efforts with that of the company they are advising.

 

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The Flipkart saga continues

Rumor has it, that Flipkart is in the midst of yet another large ($1.5 billion) round of funding from eBay and Tencent – at a valuation of $10-$12 billion.

$12 billion, impressive as it may sounds, is still a discount to the latest round of $15 billion – which qualifies it as a ‘down round’. A down round usually implies that for previous investors, ratchets trigger in – in other words they get additional shares as compensation for the fact that the value of their investment has fallen. All in all, seems like a good new chunk of shares getting issues and a whole lot of dilution taking place.

What is interesting is that strategic investors – in other words not only financial institutions – but corporations that have deep synergies with Flipkart’s strategy are jumping into the fray. What that typically does (as opposed to pure VC investments) is that core operations of Flipkart – like product roadmap – might get influenced by these strategic investors. Who knows – this could even be a prelude to a much -awaited big bang M&A transaction that I’m sure a lot of their investors have been waiting for.

Remember Flipkart has a new CEO – an ex-eBay exec that was hired (at the behest of Flipkart’s lead investors, Tiger Global) to shore up the functioning of the faltering e-Commerce giant.  Seems apparent now, that getting a sizeable infusion of cash from eBay was probably one of his key early mandates. Let’s see what pans out next

 

 

 

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Kudos VcCircle

VcCircle (a NewsCorp company) held its annual LP Summit at the epicurean-styled Taj Lands End in Mumbai earlier this week.  Have to admit, this was truly a wonderful event – the best I’ve attended in my 9-odd months in India.

The participants came in from all part of the India PE ecosystems – LPs, GPs, lawyers, CAs, CFAs, Consultant, Bankers etc. What impressed me most was the quality of the panelists and the compelling discussion topics – ranging from LP-GP relationships to Exit options to Advice for debutant fund managers.

What was also striking was the generally sanguine tone of people I met when it came to articulating their forecast for the PE industry in India. The mood was definitely positive – largely driven up by an uptick in the M&A environment, an increase in the number of secondary transactions (both at a portfolio and company level), a significant increase in the amount of Corporate Venture Capital flowing into the country, and the advent of new exchanges like NSEITP that make it astonishingly easy even for a 1-year old SME to list on a public exchange. (Yes! just 1 year of audited finances). Further, a  lot of strategic investors, especially from outside of India are partaking in acquisitions of B2B (specifically profitable B2B SaaS companies) companies and thereby greatly improving the investment climate.  There was also general consensus that in 5 odd years institutions like PFRDA, LIC, DFID and more would be active LPS into technology funds and ushering in a new era in India’s VC ecosystem.

 

 

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Products over Services, but with a caveat

TechinAsia recently articulated reasons why India should focus more on products versus Services.  The article went on to bemoan some factors that prevent the full growth of product companies in India.

The article, and a lot of the chatter I hear, is a wee bit short-sighted. After all Software exports form a decent chunk of our economy and serve as a good job creation engine. Software Services brought India to the world IT pantheon. So, its importance should not be underestimated.

The growth of a product ecosystem is most relevant and important for the VC and angel ecosystem in India. And that is probably what the drift of the article was in the first place. It is no secret that product companies get funded more often on account of the favorable economics of their business models and typically more exit options. Product companies, at least good product companies, are rightly perceived to have “inherent value” – that is significant value in the product and the embedded IP.

Services firms often are not perceived as being “fundable” because a good chunk of their business is turnkey in nature and does not lend itself to favorable economics or IP-building activity. Also, exits are less frequent – Services companies typically acquire, or get acquired, to facilitate geographical expansion or entry into new verticals (eg Government, Manufacturing etc).

Product companies can also expand pretty seamlessly to geographies outside of their home country without necessarily encountering politically-charged issues like work visas and H-1 Bs. Since these companies can market, sell and disseminate their products through Web-based interfaces, they can easily accrue revenues without incremental people hiring. And that simply adds to the allure!

 

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