Amid funding boom in Indian startup ecosystem, how VCs can help beyond capital contribution

The year 2021 has been a busy one for both venture capitalists as well as startups in India. It panned out to be much better than expected, with record investments in the startup ecosystem, and VCs across the spectrum expressing their confidence in the Indian growth story.

How 2022 will pan out in terms of investments is anybody’s guess. With many uncertainties, including the third COVID-19 wave, it’s very hard to predict whether the acceleration in investments will continue in 2022. However, the VC ecosystem is visibly maturing alongside the technology landscape.

Capital helps quality companies accelerate their growth and supports them in entering the next phase of maturity. However, in the absence of ruthless discipline, it can also make businesses complacent, causing expensive, and sometimes fatal, delays in course correction.

The spike in investments in 2021 will allow several businesses to change their growth dynamics and enter a new trajectory. Founders need to align themselves with the new stage of their venture’s evolution. They must continue to focus on all inputs needed to build a successful venture, of which capital is just one part.

From a VC perspective, providing capital is just the starting point of the relationship between the VC and the portfolio company. They have their post-investment task cut out after a heartening 2021.

The role of VCs keeps changing as their investee companies mature from one stage to the next. The first stage, which is generally called 0 to 1, is when the company is in an experimentation phase.

The founder is trying to give their problem statement a better definition, while executing, learning, and establishing the organisation at the same time. This stage typically requires the brute force of the founder’s passion to solve problems and to achieve product-market fit.

It will not be inappropriate to say that this is a stage of chaos and disruption. In our view, there might not be a set template for VCs to support the portfolio companies in this stage. They can just operate as a sounding board, provide advice, and bring in the right relationships where required.

Several businesses, partially due to the spike in investments, will or have entered the next phase of evolution in 2021-22 i.e., moving from the 0-1 to the 1-10 stage. The role of VCs in the 1-10 stage tends to be quite different. While pure passion and hustle allow ventures to get from 0 to 1, a method to the madness is required in the 1 to 10 stages.

In this early-growth stage, VCs can bring in a lot more value in addition to capital. The business needs to now start having structure, better systems, and defined processes to ensure scalability.

The role of the second layer of management becomes much more important, and founders are required to design the organisation such that roles take on meaning and delegation becomes possible at multiple levels. This is easier said than done.

The business is in the momentum of the previous phase and the inherent inertia brings discomfort in changing gears. Hence, the VC’s role here is to support founders in providing a slightly distant, unemotional view.

There are several areas where VCs will likely play an incrementally important role this year. The first one will likely be organisation building and hiring. The organisation structure needs to be decentralised to some extent, and accountability needs to be established to ensure better scalability.

An experienced investor partner can contribute significantly to building the organogram. Then, manning this organisation, i.e., hiring for critical roles, is where a VC can leverage their network to build a strong second layer of management.

The second area where VCs can provide an advantage is in digital marketing and branding. They can support the founding team in setting up branding and performance marketing budgets to ensure sufficient longer-term brand-building investments without compromising near-term growth spending.

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They can also support the organisation in getting better deals and bring in synergistic partners from within their portfolio companies or outside.

Another way in which VCs can add considerable value is by helping the organisation bring in deeptech capabilities, drive efficiency, establish systems and processes, etc.

The learnings from other portfolio companies can be cross-replicated here. Effectively, VCs can help the venture stabilise for the next phase of growth.

The final area where a VC can contribute, in our view, is international expansion support, in case there is potential for the portfolio company to build a multi-geography business. VCs can leverage their network to get the right partners to enter new markets and support the founders in setting up an efficient go-to-market strategy based on their experience/learnings.

Obviously, the domestic core needs to be strengthened prior to venturing into international markets. However, VCs can support the founders in figuring out the right timing and strategy to enter the most remunerative markets.

These are some of the areas where VCs will likely play an incrementally important role in 2022. Obviously, in addition to supporting fundraising, bringing in learnings from their experience and helping in building the right network are some of the things VCs have been doing consistently. In our view, VCs will be a critical support factor for their companies, enabling them to accelerate their growth traction this year.