Anyone even remotely interested in the startup space has at least wondered sometime - ‘what do VCs really invest in?’
This has to be one of the most asked questions to VCs. The fact that they have answered it multiple times does not stop people asking the same question over and over again.
According to our interactions with startup founders and VCs, the most common denominators for investments are team, market and potential to scale. You may wonder, what do VCs really mean when they say they invest in teams? How do they judge a startup’s potential to scale and bet on it? How large is a market actually large enough to generate any interest from a VC?
Today, we set out to explore what a large market really means, when does it get saturated from a VC’s point of view, and can all large markets have multiple winners or are there some that will only see a single winner emerging?
To understand the market better and provide things a little perspective, let’s take an example of the real estate sector. The Indian real estate market size is expected to touch US $ 180 billion by 2020. The housing sector alone contributes five/six per cent to the country's gross domestic product (GDP). Real estate also emerged as the second most active sector, raising US $ 1.2 billion from private equity investors in a period of 10 months, between May 2014 and February 2015.
As the market has matured, the services in this market have evolved too. There are newer, well-defined segments opening up in addition to the traditional rental and purchase market – for PG accommodation, for student accommodation, for flat sharing and so on.
In a huge market with players like 99acres, MagicBricks, and Sulekha etc, two comparatively younger players, CommonFloor and Housing.com, have created a well-defined niche for themselves. The next set of entrants in this market includes the likes of Flat.to (acquired by CommonFloor), Roomys, and GrabHouse etc.
Have a look at some of the startups in the real estate sector funded by VCs:amp;quot;#,##0.00",1]">$62.9 Million</td><td data-sheets-value="[null,2,"Accel Partners, Tiger Global Management, Google Capital"]" data-sheets-numberformat="[null,2,"#,##0",1]">Accel Partners, Tiger Global Management, Google Capital</td></tr><tr><td data-sheets-value="[null,2,"Grabhouse"]">Grabhouse</td><td data-sheets-value="[null,3,null,2013]">2013</td><td data-sheets-value="[null,2,"Rental & PGs"]">Rental & PGs</td><td data-sheets-value="[null,2,"$5 Million"]">$5 Million</td><td data-sheets-value="[null,2,"Kalaari Capital, Sequoia Capital, India Quotient"]">Kalaari Capital, Sequoia Capital, India Quotient</td></tr><tr><td data-sheets-value="[null,2,"Housing"]">Housing</td><td data-sheets-value="[null,3,null,2012]">2012</td><td data-sheets-value="[null,2,"Rental, PGs, Hostels, Buying"]">Rental, PGs, Hostels, Buying</td><td data-sheets-value="[null,2,"$139.5 Million"]">$139.5 Million</td><td data-sheets-value="[null,2,"Qualcomm VP, Nexus VP, DST Global, Falcon Edge, Softbank, Digital Nirvana, Helion VP"]">Qualcomm VP, Nexus VP, DST Global, Falcon Edge, Softbank, Digital Nirvana, Helion VP</td></tr><tr><td data-sheets-value="[null,2,"Indiahomes"]">Indiahomes</td><td data-sheets-value="[null,3,null,2008]">2008</td><td data-sheets-value="[null,2,"Rental & Buying"]">Rental & Buying</td><td data-sheets-value="[null,2,"$74.8 Million"]">$74.8 Million</td><td data-sheets-value="[null,2,"Foundation Capital, Helion VP, New Enterprise Associates"]">Foundation Capital, Helion VP, New Enterprise Associates</td></tr><tr><td data-sheets-value="[null,2,"PropTiger & Makaan (merged)"]">PropTiger & Makaan (merged in 2015)</td><td data-sheets-value="[null,2,"2011 & 2007"]">2011 & 2007</td><td data-sheets-value="[null,2,"Buying"]">Buying</td><td data-sheets-value="[null,2,"$30 Million (PropTiger)"]">$30 Million (PropTiger)</td><td data-sheets-value="[null,2,"News Corp"]">News Corp</td></tr></tbody></table>">
|Startup Name||Founded In||Category||Total funding received||Investors|
|CommonFloor||2007||Rental & Buying||quot;#,##0.00",1]">$62.9 Million||Accel Partners, Tiger Global Management, Google Capital|
|Grabhouse||2013||Rental & PGs||$5 Million||Kalaari Capital, Sequoia Capital, India Quotient|
|Housing||2012||Rental, PGs, Hostels, Buying||$139.5 Million||Qualcomm VP, Nexus VP, DST Global, Falcon Edge, Softbank, Digital Nirvana, Helion VP|
|Indiahomes||2008||Rental & Buying||$74.8 Million||Foundation Capital, Helion VP, New Enterprise Associates|
|PropTiger & Makaan (merged in 2015)||2011 & 2007||Buying||$30 Million (PropTiger)||News Corp|
To understand investor interest in sectors that are already so well funded, we got in touch with Vani Kola, Managing Director of Kalaari Capital. (Kalaari Capital is an investor in Grabhouse.)
YourStory: Kalaari Capital recently invested in Grabhouse. With other older companies already making their mark in the real estate sector, do you think it is a large enough sector in India to accommodate multiple players?
Vani Kola: If we look at the top 25 cities in India, a total of 12.04 million houses are on rent. As of last year, the total real estate rental market size is approximately USD 4.5 billion. Assuming only 4% of this is online, the online real estate rental market stands at USD 180 million market.
Even if a portion of the total USD 4.5 billion market moves online, and we know it will, this sector can be a pretty large one to be addressed by technology companies. The offline market is a very large services sector but it is highly fragmented. The quality of service is not consistent and it doesn’t have facets that really delight the customers and create a memorable experience. And it is something as important as the home you are going to live in. Given that, we really think that there is plenty of room for innovation and multiple companies can focus on solving this multi-faceted problem and succeed in this sector.
YS: Large investments have happened in this sector. Isn’t it already a saturated market to invest in?
VK: This market still doesn’t have any clear category leader who has grabbed significant market share. I think the market is open for innovation and new companies will potentially emerge. Until saturation is measured as market share, I think investments will continue to happen in companies that innovate.
YS: What are your apprehensions in investing in sectors that have heavily funded startup competitors?
VK: When Google got funded, there were tens of search companies that were heavily funded already. As an investor, you are always funding on the ability to disrupt the market. And you have to carve out the right startups in the market that might seem unconventional. In any sector, however heavily funded, until no clear winners are established, we have no reservations about funding.
YS: Would you still fund e-commerce companies?
VK: We will not fund horizontal e-commerce companies; we are fortunately shareholders in both Snapdeal and Flipkart. In horizontal e-commerce, clear category leadership has already been established. However, we have invested in vertical e-commerce like Zivame, BlueStone, and UrbanLadder. We will look for niche e-commerce players and we will continue to fund them.
YS: What parameters change for you as an investor while funding a startup in such a heavily funded sector?
VK: Our parameters are a disruptive idea, founders’ deep insight into the problem, the innovation founders are bringing to solve this problem and a high quality team.
YS: From your experience, how do you think entrepreneurs feel while raising capital in such markets?
VK: If entrepreneurs are very confident about their power of disruption, I don’t see why they should feel anything other than bold and passionate about their dreams to disrupt a market.
YS: What do entrepreneurs need to focus on while pitching to VCs when they are raising funds in a heavily funded sector?
VK: If a lot of funding has happened in a sector, assume that most investors you meet are already familiar with the sector. You need to quickly capture their interest by establishing that you are bringing a new disruption and that you are not a me-too company. It is one of the most important things and must be established upfront.
YS: What do you think should be a part of the pitch that many entrepreneurs miss while raising funds in a well-invested sector?
VK: Companies that don’t show a clear advantage to why they can win, that only offer incremental improvement to what already exists and not a radical new thinking are unable to raise funds even if the sector is hot.
YS: How can startups succeed in building big companies where the competition has heavy financing and more experience in the sector?
VK: Entrepreneurs need to clearly identify what is the slice of white space they are capturing that the big guys are not focusing on. They must focus on how they will be better and faster than anyone else in capturing this slice. They must seek laser sharp focus and rapidly become known for that value proposition and become the market leader. They have to be nimble, have an extremely clear thought process and stellar execution.
We also spoke to Pankhuri Shrivastava, Founder & CMO of Grabhouse, to know her views on the same:
YS: Pankhuri, we were talking about starting up in markets where there are already established and heavily funded competitors. When you were starting Grabhouse, didn’t you feel pressurized by the competition sitting on piles of cash?
Pankhuri Shrivastava: We were very cognizant of the fact that there are a lot of players already in the market, not just startups but also many larger companies that have been there for a long time. I don’t think this is a metric upon which one should decide whether an industry needs a new product or not. One thing that we believed in - and I am sure founders starting up in many other industries where bigger players exist in the market also believe in – was that a problem in the market is yet to be solved. We started because we faced a lot of problems personally in this space and we believed that this gap can be filled. In the industry we are in, technology has not reached to that level and we believed that we had the capability to execute the technology in an innovative way and make the process easier, the industry more seamless and that’s when you decide that you have to fill this gap.
YS: Did anyone ever tell you that you were starting up in a wrong sector?
PS: People didn’t say that we are starting in a wrong sector but yes they definitely asked us why we were starting in this sector where there are already so many competitors. We would tell them that the problem yet remains to be solved and ask them, ‘would you find a solution to rent a house without going through a broker?’ and their answer would always be a no. Their answer answered their question of why we were starting in this sector.
YS: What were some of the things you included in your pitch that you think worked for you while raising capital?
PS: One of the things that worked for us was that we understood the problem really well. We are young founders and we have gone through the same problem we had set out to solve. Thus, we connected to the problem really well. We listed down the 10 pain points that we absolutely needed to solve and decided that the measure of success for our company would be the solutions to these problems. You should explain to investors the problem that you are set out solve and why. Thankfully, we found investors who related to these problems. Investors understood why no one has been able to solve it yet and why we have the necessary skills to perhaps solve this problem. We knew the core problem we were addressing and that really helped us.
YS: Isn't building a team in such a sector challenging as potential hires have an option to join similar work profiles in competitors’ companies that have built a brand for themselves in the past years? Even while marketing and talking to customers, don’t people ask why they should come on another new platform?
PS: We face these problems every day. Founders as well as company employees hear these conversations day in and day out.
When we are promoting our product and getting customers on board then it becomes a challenge for us to explain why the product like ours is needed. While hiring too, we have to explain why a potential hire should not join a bigger firm but join us. When we are thinking of marketing, people may think that it is just another startup in an already crowded sector -- we tackle these situations on a daily basis. We have spent one and a half year in building a very good product which speaks for itself and we provide a great service.
Once we explain ourselves and attract people to come on the platform, there is no looking back. People see the value and stay. In the last one and a half years, we have not spent even a penny on marketing. Word of mouth has worked well for us.
Whether you start in an industry which has not seen a lot of companies or investment or be it an industry like ours where there are a lot of competitors, there are going to be challenges. The kind of challenges will differ but quantity of these challenges will remain the same.
Industry should be the last thing on mind while starting up. If you faced a problem for a really long time and it pushes you hard enough to start, do it. Then being the first entrant or the last entrant in the market doesn’t matter.
Image credit: Shutterstock
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- Kalaari Capital
- Venture capital
- real estate sector