Note: Our fascination with the Indian start up ecosystem leads to us having regular conversations with most of the major players in it, including VCs and founders. We usually publish these as FreeFlowing podcasts, but there is also merit in distilling the lessons in text form, which is what we will be doing through a series of such articles.
Early-stage investing is a tricky game.
During the early phase, investors need to be able to spot promising ventures before they’ve been validated by the market or sometimes even before they are product ready. Vaibhav Domkundwar, the CEO of Better Capital, is somebody who has pulled that feat off with panache. Better invests in innovative ideas and teams in their formative years and has been an early backer in stellar ventures like Open, Khatabook, Airmeet, TeachMint, and many more.
We have pulled together some key takeaways from Gurudev’s chat with Vaibhav as part of the FreeFlowing podcast series:
How to spot greatness in early stage startups
1. Bullish on the Idea of India
Our India thesis at Better Capital is formed with the goal of finding, nurturing and helping build large companies that cater to the Indian market, and to ultimately create global companies that can make a worldwide impression.
When we talk about market size and India in the same sentence there is always a lot to be excited about. Jio’s affordable data plans have made an earlier segment of erratically connected users come together, for the benefit of both consumers and providers.
This is not to say that overnight all those smartphone owners will suddenly have money to spend. But one way I look at it is – it is highly unlikely that India’s per capita income is going to go down, or is going to remain flat. The pace of this growth is debatable and may not be the way we want it to grow, but there is no doubt about its optimistic future.
2. India Startup Inc is at a Point of Inflection
The best news, according to me, is a whole set of people who have worked at Flipkart, Ola and other start up pioneers now building their own ventures. The success that is Silicon Valley was built the same way, on the back of the knowledge and experience of people who learned how to build businesses from the first and the best, and then went on to create their own successes.
Having said that the Indian ecosystem is much younger. We have the talent to execute fantastic products, and a bevy of ideas and solutions for our unsolved problems. All in all, this is a very exciting time to be in the venture and the startup spaces.
3. Funding Early Stage Ventures
I have always been passionate about building companies from the ground up, taking them from 0 to 1, so to speak. At Better Capital, we have chosen to fund ventures in the early stages for two reasons:
- The venture ecosystem is still evolving, and capital is a constraint. Venture capital available at pre-seed and seed level is way lower than series A and later stages
- Funding a company at the pre-seed stage is a shot in the dark. Among other challenges, there may not be a large enough proof of concept. Specifically, my contribution is more than just writing a cheque. I will sit on the same side as the founders to try and figure out how to make things work.
4. The Reality of Starting up
I encourage founding teams to think deeply about the problem they are trying to solve, what unique insights they have about their consumers and how the combination that is the team and the product is going to solve for this.
A startup can take up to 10 years of working life. These are likely to be the most productive of working years, and it would involve several sacrifices, only one of them being monetary. As founders, if they are prepared for the long haul from the start it will make some things easier to do and other things easier to decide to do.
It is also very likely that the trajectory of both the problem and the solution the founders started with will change as time and circumstances change. Continuous sanity and market checks are invaluable towards early course correction. Most importantly, value checks with the self to understand if this is what the dream was all about, can also help with deciding which path to take when there is a fork in the road.
5. Standing out in the Crowd of Funding Requests
I pride myself in being approachable and am always on the lookout for new ideas and new founders, first time or otherwise. However, I appreciate a certain amount of preparation before I am approached, because I get a lot of requests and time is limited. I am more likely to respond to referrals I receive through a common network connection than a standalone request; a referral implies credibility from someone who knows me.
In my opinion, good writing and articulate communication are one of the most underrated skills in the industry today. Both these are invaluable in expressing the power of an idea and its proposed, or working, solution. In this vein, a pitch deck is very important to me.
One of the other things I always look for in the founding team is a bias for action. If a founder comes to me with a pitch deck and says that they will start building after raising money I am unlikely to take this deal.
Nothing talks like a proof of concept, however small. A working business with paying customers, who don’t know the founders and have bought based on the merit of the offering is a very compelling showcase for the product.
6. Key Ingredients of an Outstanding Pitch Deck
There is a lot of information out there on all that needs to be there in a pitch deck. I will instead cover what I look for, over and above everything else.
What catches my eye is a fantastic articulation of the context and the problem that the startup is looking to solve. What every deck also needs is unique insights – on markets, and how the team intends to get the market to understand and buy into the solution. And the useful information about the team that is building it. This will create that synergy, that unique combination for success.
7. Dealing with entrenched biases
The venture and the startup network in India has specific preferences in founders and founding teams. For one, academic and some amount of professional pedigree can open more doors than for those without these. Also, second time founders may find it easier to approach investors and raise money than first time founders. Many VCs also prefer two or three-member founding teams over single founders. Women founders and husband-wife founding teams may have also been asked questions that others wouldn’t.
Like the saying that there is no smoke without fire, there is some wisdom towards these preferences and it’s important to be aware of them. Those who have worked in large, successful companies and then startup in the same field may find easier and faster traction in terms of funding opportunities. Being an alumni of premier institutes points to a certain rigour and an achievement so the probability of success is higher.
This is not to say that those from non-premier institutes don’t succeed; it means that such founders would need to put more effort to stand out and make themselves heard.
8. How is valuation determined? Is there a formula, a framework or any resource available to help calculate this?
Resources are always useful when there is a definite answer to something. When there is no definitive answer, you need to go one layer below. There is no framework or formula or resource to justify why somebody is valued at a certain valuation. However, when you zoom out you start to see some sort of patterns, and these patterns will differ from ecosystem to ecosystem, India to the US, to Europe to Australia.
In India, if you are a second time founder, you will always get a higher valuation or a larger round than a first time founder. Secondly, if you are coming out of a large, successful company and doing something in the same segment you will be chased because you have the experience of how it works. Pedigree, in an ecosystem like India – there is just no way to fight about it.
If you are a founder who is trying to raise a pre-seed, seed, Series A, all these factors play a role. It is important to think how you can optimize who you are. Thinking about “How do I maximise my perceived value and reduce my perceived risk?” can help you raise at a stronger valuation within the range you are considering.
9. Dealing with Curveballs like Covid
Pre-covid, if investors hadn’t met the founders in person there was no way they would have thought about investing. The past year has been about breaking these supposedly iron-clad rules of interaction and engagement. We have all come to accept that work, deals and the big picture can be equally well covered on zoom.
In terms of investing opportunities, covid and the associated restriction of outdoor movement has intensified digital usage, so this period is a big chance to try and do everything online.
From an entrepreneur’s perspective, the past year was a great time to get feedback from users of digital products and services. Tele health, for example, didn’t go beyond being a buzz word for many years. Now it has become commonplace. Covid has made us redefine a lot of our usual behaviour and approaches.
The post covid world will not be the same as the pre-covid world. Understanding this shift and applying it to ourselves and our businesses is where the opportunity lies for founders and startups.
10. We are in a post resume world
Others’ perceptions of us have never been more easily formed or broken like in our times. We live in a post resume world, in the sense that everyone is looking for the personal, human touch in the profiles.
At the end of the day, it’s about people doing business with people, and people interacting with people. A resume tells us what we did, but reading what another person has published online tells us more about that person.
I write to paint a picture of our vision, and convey my intent and conviction while investing in businesses in their early stage. This defines what I and Better Capital stands for, and I believe it helps founders understand if we are a right fit for them.
In the context of early stage investing, my writing about entrepreneurship and investing can help break the ice between me and those who read my writing. They now know more about me than just what I have done. They know my views on funding or building businesses. They know what I think about failure, education, community and other topics.
Writing and publishing online is an expression of your personality, it shows how you think, what you stand for.
I think in the future all of us are going to use content in one or more forms – podcasts, YouTube videos, articles or posts to create a connection between us and the world. It’s our continually evolving resume.
