Startup Funding: Early-Stage Investment Finds Investor Interest

Recently, VC Circle reported Flipkart’s valuation at $1 billion (Rs. 4400 crore) and General Atlanic planning a $150 million investment in Flipkart. Then followed a range of debate including one on VC Circle’s blog that called for not hyping e-commerce valuations. An important take away from the Flipkart report is “The seed capital was provided by early stage fund Accel Partners whose investment in Flipkart is likely to become one of the best returns in the Indian venture capital industry, sources said.” Flipkart has not confirmed the investment and valuation though as yet.Sequoia made a grand exit from TutorVista after Pearson picked up a majority stake for Rs. 577 crore valuing TutorVista at Rs. 960 crore ($213 million) not long ago.

The media has of late been consistently reporting investor interest in early-stage ventures. Sequoia’s bet on early-stage investments spans a range of industries and it is still hungry for more. As observers of this startup space, we look at factors why investors have picked up interest in early-stage ventures.

1. Investor under pressure. Recently, major VC funds in India saw executive exits even from the topmost level. The reasons ascribed to that were not enough returns on their investment in growth companies or their failing to spot opportunities in the growth sector. Mature companies needing capital perhaps has dwindled down or the present investments did not fetch expected returns for VCs.

The startup space is bustling with activity. Increasingly, smaller deal sizes are in demand and there is a lack of investors in this space. Many early-stage ventures with good potential need seed money or for moving to the next stage. Their requirements may not be the order of Rs. 100 crores or so that VCs are looking at, but maybe 10% of that. Investors have sensed opportunity in this space to create better returns on their investment.

2. Vibrant startup activity spawning revenue-generating business models. Startup activity in India is on a high. There is a never-before population of entrepreneurs and wannabe entrepreneurs willing to risk it in entrepreneurship. The new breed of entrepreneurs are agile, risk-willing, and aggressive. Some of them have had experience of running companies too. In the din, some are really made up for success. There is really good opportunity in many of the business models that are capable of generating a reasonable amount of return on investment and if enabled by investment could scale to give the kind of returns investors would want (say 7 to 10 times).

If you think investors are high fliers, you are slightly off the mark. In fact, they are the most intelligent of people in the startup space. They are keenly watching trends and returns. Perhaps they too are willing to take a plunge into this nascent early-stage venture funding space to see if they can make a decent exit at some point in time.

3. Investors-turned-entrepreneurs + e-commerce. There are several entrepreneurs who are now turning to become angel investors. Sanjeev Bikchandani, Deep Kalra, Alok Kejriwal, Vishal Gondal, and many more. Their investment is small and more of passion-driven. That kind of an activity generally gets investors also thinking as to where they can put in their money. So if these angel investors find a sector as hot, VCs naturally flock there. There is a big gap, say, for ventures needing Rs. 10–50 crore. Adding to this is the inevitable hype that normally happens when a sector shows promising growth. And that sector is e-commerce. So for an investor now, startup in an e-commerce space is a prize catch. But still the fundamentals have to be strong. The environment is good and that doesn’t mean all businesses in e-commerce will succeed. It is just that probability of success is high.

4. Startup events. Initiatives like TechSparks organized to identify promising startups in the emerging technologies send positive vibes to the investor community. The VCs who were only looking at larger deal sizes perhaps sense that it would make even more sense to look at smaller deal sizes with proportionate returns.

For nascent companies, bootstrapping is still the way to go. After gaining traction and showing validity of the business model, it is good to go for funding so that scaling is faster. Fundamentals work here. There is no shortcut to success. Funding may be available but still many of the pitches get rejected and they form the majority compared to successful pitches that resulted in investments.

It’s simple. Your value proposition to the investor should be in terms of what mutual benefit the investment is going to give both of you. The investor is looking for returns and you for growth. If both can synergistically take place, getting investor money is not difficult.

–Venkatesh Krishnamoorthy, chief evangelist