[YS Learn] What the investor who backed OYO’s Ritesh Agarwal looks for in startups

In conversation with YourStory, Anirudh Damani, Managing Partner at Artha Venture Fund, says what he looks for in startups while investing.
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In the early days of OYO, when nobody was keen on looking at the idea of a hotel aggregator, Anirudh Damani, Managing Partner at Artha Venture Fund, saw a spark in the then 23-year-old Ritesh Agarwal and invested in him. 

Today, OYO is a unicorn. The small undisclosed investment Artha Ventures made in OYO fetched the Damani family a whopping 150x return. His investments in Purplle earned Artha 50x returns and in Exotel earned us 25x returns 

After working in Texas’ oil fields for over seven years and as a door-to-door sales man, Anirudh returned to India in 2013 to invest in startups that could shape a narrative for the future, and execute digital solutions for the problems faced in India. 

While the family office started investing way back in 2011, it transformed into a big business by 2015, with nearly 85 investments and Rs 30 crore in corpus invested.

In a conversation with YourStory, Anirudh Damani, Managing Partner at Artha Venture Fund, tells what he looks for in startups while investing in them. 

Anirudh Damani, of Artha Ventures

Edited excerpts of the interaction: 

YourStory (YS): What are you looking for in startups and their teams?

Anirudh Damani (AD): In so many years of investment, our principles on which we evaluate an investment have not changed. The simple things that we look for in the startups are that they:

  • Solve a real human problem
  • Deliver positive unit economics that can scale
  • Have a solid and defendable moat
  • Utilise tech as an enabler

Therefore, wherever we find the market in a boom or a recession, these four principles guide us during our investment decisions.

YS: What are your sector preferences and why? 

AD: Pre-COVID-19, we had a good outlook on D2C, and we were making several investments in the space, especially in the parenting/baby space. We announced investments in PiggyRide and Hobspace, and we have a couple more in the advanced pipeline. With the internet economy growing at pace and attracting global eyeballs, we are excited about our current and upcoming investments in the D2C space. 

However, I changed my mindset most significantly regarding previously grey-listed spaces like edtech, healthtech, and HRtech. The mass (and unprecedented) movement of imparting education and working from home has changed my thesis towards these sectors.

We've added many companies into our pipeline of investments, but we are cautiously optimistic about edtech. There has been a lot of funding in this space in a relatively short period. Therefore, it seems that the investors might have created a bit of a bubble.

While there is a massive market, I don't see many service providers surviving without consolidation. Eventually, this will become a four to five horse market, with the top taking 80-90 percent of the funding, visibility, and business. 

The remaining could survive and operate viable businesses, but the return for investors will be subdued. We've seen this before in the mobility, hospitality, and online classes space. Therefore, while I am optimistic about edtech than I was in the past, I am mindful of a bubble out there.

YS: What qualities do you look for in the founders? 

AD: I love investing in founders who:

  1. believe in positive unit economics
  2. track their numbers and make decisions backed by data
  3. prefer raising customer capital over venture capital but are responsible for investor cash

These are immortal qualities, but a black swan event like the lockdown reminded us that such founders are worth their weight in gold.

We noticed the economic impact of COVID-19 a few weeks before it hit the market because our founders were reporting a drop in demand well before the lockdowns hit us. 

Therefore, we formulated an action plan and supported our founders through the darkest periods, ensuring that not only our portfolio survives COVID-19 without a casualty – we are almost at our pre-COVID-19 revenues a full four months before we predicted.

YS: What are the key things you look at in a pitch? 

AD: I look for how simply the founder can explain their business to us regardless of how complex it is on the backend. Therefore, in many ways, I evaluate them from the lens of the customer more than the investor. 

If the founder sells me the idea as something I need and something that should be a no-brainer – that founder has my attention. The founder must also reach that point in the first 10-15 minutes because that is the average customer's attention span.

Therefore, if I find myself lost after the first 15 minutes, it usually means that the company's future customers will be lost – even when the founder selling me on the business! If they can't, who else will?

There is sheer genius in simplicity and conciseness, which drives my decision-making on investment – and not a 50-slide presentation filled with graphs and tons of prose. 

For example, we recently signed a term-sheet, and I knew I wanted to invest in the founder just from the way he presented his three-sided platform, but – he did that with a simple 15-slide deck. It was a crowded space, and he was amalgamating three distinct areas into one.

However, he was clear that this simplified platform was the hook, but he was genuinely going after the massive reservoir of data that become his moat once he achieved critical mass.

YS: What dos and dont's should founders keep in mind?

 AD: The founder must remember that as the market heats up, they will be flooded with investment offers. However, one can quickly lose sight of what is essential and raise more than what they need – by raising from the wrong source, or overpromising what they can achieve to increase their fundraising goal. 

These actions can quickly come back to bite you. All VC investments come with caveats due to expectations that the business will scale fast, become bigger, and raise the valuation. But if the company does not perform as expected or grows slower than the investor's expectations, then the founder might find themselves diluting or losing the business altogether. 

I have witnessed umpteen number of promising companies implode due to the pressure of growing fast and at all costs. These expectations are built by the founder by raising too much or getting too high a valuation.

 

On the flip side, the founder should be aware of 'deal fatigue' as well. When you have too many offers, you get enticed to negotiate as much as possible to derive maximum juice from your fundraising efforts. I am not discouraging founders from doing that, but they must know that there are limits to how much you can negotiate. 

Therefore, founders must learn the 'buying line' and close deals when investor interest is at its peak. Reinvigorating interest after it has dissipated is much more difficult.

YS: What is your investment philosophy? 

AD: We have always believed in investing against the strain of the market. In this time when everybody has been apprehensive about investing, that is when we invest our maximum. 

Our expectation is similar to our last two times when the market was highly volatile. The 12 months period from April 2020 to March 2021 will be our most productive investment period in our nine years as a VC investor. Looking at how our investments have performed in similar periods, we expect a 6-8x portfolio return for investments made in this period.

The valuations have tempered down, founders are more focused on unit economics, and the digital economy has taken off. All these aspects make it a great time to invest, and that is why we are investing very aggressively.

YS: What should founders keep in mind while raising funding in times of crisis? 

AD: That the investors they are pitching to are fearful about imparting their hard-earned cash. Therefore, it is the founder's job to provide them with comfort that they will utilise the capital with maturity and responsibility. Therefore, founders must keep outlandish expenses in check and give investors confidence that they will make each rupee count like it were two. The founder must showcase their flexibility to respond to any situation and display their tenacity to capitalise on opportunities.

The founder must recognise that India is home to one of the world's best-forming stock markets. Investors in India have a chance to make incredible returns in the stock market and compare it to what they would make in startups.

The opportunity cost for investors to allocate money into startups is relatively high. The responsibility of creating an irresistible offer, especially in the early-stage deals, lies on the founder.

Therefore, I strongly recommend founders first focus on getting the capital they need, second, on the investor they wanted it from, and third, on the valuation. Because and as Mark Cuban puts it best: “60 percent of a watermelon is a whole lot more than 100 percent of a grape".

Edited by Kanishk Singh