Disclaimer: YourStory.in is a media partner and hosted this session
As the weather stayed a tad chill at Bangalore, Kalaari Capital, a $160 million early-stage venture capital fund, hosted a meet and greet with entrepreneurs on January 24 at their office, which saw over 90 entrepreneurs making it. The entrepreneurs were looking for tips and Kalaari’s philosophy, and the Kalaari team spent time explaining its funding philosophy, and answering just about anything that entrepreneurs wanted to know. This exercise provided an opportunity for entrepreneurs to understand Kalaari’s investment outlook and its broad expectations from the business it would invest in.
A volley of questions were served at the Kalaari’s MDs and Principals and they responded with as much clarity. The questions were as basic and as fundamental as how much stake the VC will take to how to address the SME market in India. Below are some key pointers from the discussions:
Investment size and Kalaari’s role
Kumar Shiralagi, MD of Kalaari Capital, explained the basics. “We typically invest $3 to $5 million in the first round and acquire usually 20-40% of stake,” he explained. This investment is for a 5 to 6 year horizon. Idea-level funding is agreeable for a cutting-edge technology or a unique business idea. But for competing with an existing set of businesses, proving the business model and profits are a must before Kalaari can take a call. “If you are looking to raise funds, you should be sure of what you are looking for from the investors. Do your homework,” he emphasized.
Kumar said that their team helps the invested company with hiring, strategy, and raising subsequent rounds of funding but does not participate in operations. Answering a question on go-to-market, Kumar said, “Most companies in India spend too much energy in creating the product/service and don't think about go-to-market approach in the beginning.” He advised entrepreneurs to look at what has worked for successful go-to-market in the past and replicate them at a smaller scale. If the ROI is good, it can be continued. “Viral marketing is the buzzword today,” he added.
Find your space and cash is king
To another question on market size as a qualification for an investment, Kumar said the market size is not a determinant of investment decisions per se. It is important to define the segment of the market the entrepreneur is pursuing and where does the product or service fit in.
Quoting a saying, "Revenue is vanity, Profit is sanity, Cash flow is reality," Kumar said that execution is key in any type of business. More than a short-term profit, cash flow is important in Kumar’s view. He provided a good piece of advice: “Sometimes, especially if the risk in your business is low, it may be good to go for debt rather than equity. If risk is high, then you obviously want to get equity.”
For an online B2C business, “rate of customer acquisition is key,” according to Kumar. He added that “cash flow is critical and you should also know your competition.” There should be a constant focus on profitability. For businesses with an untested market seeking an investment, Kumar said, “We would make phased investments so that we are mitigating the risk at every stage.”
SMB market is challenging in India
Rajesh Raju, Managing Director of Kalaari Capital, provided an overview of challenges in SMB market in India in responses to a question. He said, “In general, B2C is more in your control; data is available and you can track consumption. B2B has long sales cycles and the customer may even decide not to buy after discussing with you for months. SMB segment is even tougher because of smaller ticket sizes and more number of customers, who are very price sensitive. Hence, you need a large sales force. In developed markets like USA, you can easily hire people with the right experience and contacts. But in India, the entrepreneur is the best salesperson in most cases! Direct sales force is the most expensive but also the most effective. Try to look for different models of engaging your sales force to keep costs under check and maximize effectiveness.”
For due diligence by an investor, Rajesh asked the entrepreneur to “be honest, ethical and keep your records clean! This is actually advice for any stage of your business.”
Karthik Nageswaran, CFO of Kalaari Capital, stressed on entrepreneurs mindset when it comes to diluting stake. He said, “As an entrepreneur looking to scale, you must get comfortable with dilution. As you bring investors onboard, you will be diluted, But, imagine you build a multibillion dollar business, and even if you own 10% of that, it is a lot of money and value. You must aspire to build such businesses.” He felt that in the West people are comfortable with diluting, but entrepreneurs in India are not open to diluting shares with investors and employees.
Sampath Kumar, Principal at Kalaari Capital, strongly refuted an entrepreneur who asked if IIT is a criterion for investment. He said, “In fact, if you look at our portfolio most entrepreneurs are not from IITs. It really doesn’t matter. If you have got something amazing to show, none of that matters.”
Kalaari does not tell an entrepreneur when to pivot
Sumit Jain, Vice President at Kalaari Capital, explained that board meetings in invested companies are held once a month and if not, at least once in two months in case of early stage companies. Once every three months, Kalaari team meets the mature companies. The team is available on call any time to all the portfolio entrepreneurs.
Asked if the Kalaari team advises an entrepreneur when to pivot, Sumit was emphatic that pivot is a decision that an entrepreneur and his team should decide upon. He added, “We can’t as investors walk in and say that this is not working, so pivot. Maybe the team at hand is not the right one to execute on the pivot. Hence, we trust on the entrepreneur and his team to decide and execute on the pivot.”
These were some really amazing insights that came out of the informal meet and greet session with the Kalaari Capital team! Stay tuned, as we shall keep you posted about such future events in Bangalore and other cities as well.
How has the coronavirus outbreak disrupted your life? And how are you dealing with it? Write to us or send us a video with subject line 'Coronavirus Disruption' to firstname.lastname@example.org