Getting innovative with risk: When VCs think like start-ups
In these times, which 'are a-Changin', phones are getting bigger again, and computers are getting smaller. In the innovate-or-perish world, start up investors are acting like start ups.
Venture capital is investing in a trial mode. It's trying test-driving as much as you would in a new highway, to decide which speed and gear suits it the best.
While entrepreneurs are still jostling for the innovation space after getting funded because they know that with great capital comes great control, VCs want to wear the 'cool' cap.
Firstpost spoke to some VCs to understand the true grain of this transformation.
Show me the world
While India-specific problems like connectivity and poor healthcare systems have attracted entrepreneurs and capital in the past few years, there are many investors who believe that India is not a mass market for cutting-edge technology. Mukund Mohan, CEO of Microsoft Accelerator is one of them.
His strategy right now is to only invest in companies that are targeting the US. He says that for the sort of companies he is interested in, India is not a market yet. "India is not a market unless it is a mass market, especially for the companies I invest in."
Milestone-based investment refers to phasing out the committed amount of capital. Say, an investor has committed an amount of Rs 1 crore to an entrepreneur, instead of writing a cheque for the amount at once, it's phased out in installments. This, according to Mohan helps entrepreneurs function better and use funds effectively. For the investors, this helps them manage their rate of return better. It also helps in avoiding clashes between founders of the company.
Mohan consciously looks for teams which are dynamic, where at least one founder has some sales and marketing experience. And not just engineers. "I make sure I fund teams that are rounded and not just engineers," Mohan said.
Convertible notes are debt instruments which can be converted into either equity or cash at a later point of time for a pre-determined price. While globally, using convertible notes for start up investing is been a subject of wide debate, Pankaj Jain, Partner at 500 Start Ups thinks it is much easier, quicker and it helps with return at a certain valuation. "Investors stay away from convertible notes because of the lack of understanding. Our philosophy is that we don't know much about your business, hence, determining valuation is a problem," said Jain.
Convertible notes are being considered because the entrepreneur's view of the company's valuation is different from the investor's view of valuation. Jain believes that this instrument is designed to be founder friendly and the entrepreneurs do not have to negotiate for control. So investors are beginning to opt for debt rather than equity, when they strongly disagree on valuation but believe in the fundamental idea.
The network effect
One of the most important distinction between banks and VCs is that, latter provide entrepreneurs with more than just money. They introduce them to important stakeholders in the ecosystem, mentor them and help them with decision making. 'Geeks On a Plane' by 500 Start Ups is an allegory. Initiated by 500 Start Ups, investors, entrepreneurs and executives travel to a country to meet start-ups and entrepreneurs in that city and gain insight on the entrepreneurship ecosystem present there. "GOAP is a way to give people exposure to different markets and companies in a structured way. We are trying to build a bridge between entrepreneurs, investors across borders," said Jain.
Let's go founder-hunting
There is as much competition among investors to find the best start-ups as there is among start-ups to get funding. Jain believes that there is a power shift that is happening in the entrepreneurship ecosystems globally. Entrepreneurs realise that there is a lot of capital available, which means more power to them. "We are finding start-ups throughout the world, we are going on the road to find them. We build relationships with them and connect them with the right people," said Jain.
Share the risk with me, won't you?
Co-investing is a popular practice in venture capital. But for early-stage investor, Blume Ventures, it's more like the norm. Karthik Reddy, co-founder, Blume Ventures believes that the only way to grow is by sharing risks. That, as well as proximity with the start-ups they invest it. " We are too small to be fragmented," Reddy thinks.
Single promoters? No, thanks
Funding strong teams has become a mandate for most investors. For Blume, companies backed by single promoters is a red signal. "Even at seed stage, we are very sure that we want to back developed teams. We will put them in touch with folks to help them, but we are generally wary of companies backed by single-promoters, it's going to hurt," said Reddy.
Entrepreneurs think that this is more out of necessity than out of the will to innovate. " This is like the need of the hour. There is a lot of competition among venture capitalists as well. Which is why we see VCs investing even in seed rounds," said Mohit Garg, co-founder, MindTickle, a gamification start-up.
It can be argued that investors opt for innovation, partly for an image change. To come out of their silos and approach their business with new glasses.
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