Inside Ideaspring Capital's pragmatic approach to funding B2B startups

Ideaspring Capital’s investment focus is clear as day: help as many startups in its portfolio to reach $10 million in revenues so that they can either get an exit or go for an initial public offering (IPO).

While the investment firm aids founders in other spheres as well to reach that milestone, financial backing is paramount.

Over the last six years, the Bengaluru-headquartered early-stage venture capital firm’s purse has swelled. It started in 2016 with a fund size of Rs 118 crore—investing in 16 startups, with four exits. Now, it is in the final stage of closing its second fund—estimated to be in the range of Rs 250-300 crore. The VC firm has already raised Rs 210 crore from existing and new backers.

“Our second fund will not go beyond Rs 300 crore in size, as anything above this we do not know how to give back the returns to our investors,” remarks Naganand Doraswamy, Founder of Ideaspring Capital, in a candid conversation with YourStory.

Ideaspring Capital remains focused on investing in business-to-business (B2B) startups, looking at key metrics like revenue, profitability, customer acquisition, and growth, among others.

The VC firm has already returned 40% of the capital raised from the first fund. According to Naganand, Ideaspring Capital is targeting a minimum return of 2X from the first fund, with the potential to generate 5X returns.

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Experience counts

Around 80% of Ideaspring’s investors and limited partners who participated in the first fund returned for the second fund as well, Naganand says, attributing the confidence of financial backers to the experience and profile of the founders, including Arihant Patni (Managing Director) and Suryaprakash Konanuru (CTO).

Naganand started his career as a technologist, armed with an engineering degree from Bengaluru and later, an MS from the US. He later turned to entrepreneurship and founded three B2B startups—PhotonEx, Lexar Networks, and Span Systems, which were largely in the telecom domain. He tasted success at the age of 45 when Span was bought by a Norwegian company.

Naganand capitalised on this experience while noticing certain shifts taking place in the Indian startup landscape. Global MNCs were establishing numerous technology centres in India, which had the potential to fuel entrepreneurship to build innovative software which can be primarily used by large enterprise clients. 

This led to the birth of Ideaspring Capital, with the aim of backing entrepreneurs who come with work experience and have deep domain expertise.

Ideaspring’s average ticket size from the first fund was about Rs 8-9 crore, while the VC firm plans to take this a notch higher to Rs 15-18 crore. It typically completes about four investments in a year.

Focus on B2B

When Ideaspring was founded in 2016, B2C startups were attracting most of the investment inflow while B2B startups received little support, Naganand says.

“B2C startups are initially operationally intensive and later become tech-intensive, but it is the opposite for B2B startups,” he notes.

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B2B startups have to not just build the product, but also talk to potential customers, receive feedback, ensure the right messaging etc. The VC firm says it doesn’t limit its support to just financial assistance but extends to other spheres as well.

“I strongly believe that mentoring without capital is useless as much as capital without mentoring,” remarks Naganand.

Ideaspring allows the founders to have full control of their team and product building, while it brings its expertise to other domains, such as helping startups get their first set of customers, getting the right messaging in the market, defining the future roadmap, and helping them raise their next round of funding.

Ideaspring invests in only those startups which have proof of concept or have an ongoing pilot project, and show the potential of earning $500,000-700,000 in revenue within a year of operation. Its investment thesis requires startups to have a strategy in place to reach $8-10 million in revenue in four to seven years post-investment.

“I call my entrepreneurs every week and talk to them very often, particularly in the first 18 months. We are very close to them, know all issues so in the monthly meeting there are no surprises,” Naganand says.

Ideaspring has backed startups including Lavelle Networks, SimYog, Nimesa, Beagle, Peritus etc. It had successfully exited from Whodat, Zapty, Spanugo, and Numocity.

According to Naganand, Numocity, which was acquired by ABB Sweden, gave them a 10X return. While some of the startups did not receive much headway in the market, Naganand says they found buyers largely on the strength of their products.

“We want to get a decent exit and remain invested till startups get a $10 million revenue, and a valuation anywhere between $60-100 million,” he adds.

Advice to entrepreneurs

Taking a nugget out of Ideaspring’s wealth of experience, Naganand says any founder who has reached $10 million in revenue should take a call on whether they want another round of funding or get an exit, but if they want an IPO, they must prepare for another 5-7 years of hard grind.

“That growth can be very different where it is about building the company and not about the idea anymore,” he remarks.

Over the last six years, the investment firm had to transition from an entrepreneurial mindset to one that of an investor. Naganand says sometimes the team feels very empathetic when a founder struggles and takes them back to their entrepreneurial days, but they have no choice other than tightening the screws by giving honest feedback or telling them that there was no way forward.

“We are practical in our thought process and have fabulous relationships with all our founders. Although we invest with the right intention, it is not possible that everyone clicks,” says Naganand.

Ideaspring’s measurement of success depends on the ability of the startups to generate revenues and have a profit. “It is these metrics that help you with an IPO or getting acquired,” he signs off.