Become a Creator today!Start creating today - Share your story with the world!
Start for free
00:00:00
00:00:01
The entrepreneur who became a VC | Venkat Vallabhabeni @ Inflexor Ventures
267 Plays1 year ago
No one better than Venkat to explain how the Venture Funding ecosystem works! He's a seasoned entrepreneur who launched his first business in the US nearly 20 years ago. Since then, he has successfully built and sold multiple companies. As a Venture Capitalist (VC), he has provided support and funding to over a dozen Indian startups with ambitious goals of creating big companies.
Read the text version of the episode.
Read more about Inflexor Ventures:-
1.How Startups can Raise Funds from Inflexor Ventures
2.Overfunding is a dangerous trend regardless of market conditions, says Inflexor Ventures
3. LPs may wait for a few quarters before allocating capital to new GPs: Inflexor Ventures
Recommended
Transcript
Career Choices: Bell Labs vs Wall Street
00:00:00
Speaker
Hello, my name is Venkat. I'm the managing partner of FlexR Technology Fund. When you're in New Jersey, there's only two ways you can go, right? Either you go to Bell Labs, you know, AT&T Bell Labs, right? So then, or you go to Wall Street.
00:00:15
Speaker
Like that era, like the Bell Labs era, when Bell Labs was the dominant innovators in the world of computers. Wow. Inix operating system, pretty much everything at the time innovation was happening there. And then other option we had was go to
Wall Street Journey and Insights
00:00:30
Speaker
Wall Street.
00:00:30
Speaker
So which is New York City. So I chose the later. So I went to, I joined Wall Street. I joined in initially a couple of startups, which is a company called Seer Technologies, which was a joint venture of IBM and first Boston. And did that a couple of years there and then joined a company called Summit Systems. So these were developing software for banks, these companies.
00:00:52
Speaker
Yes. First one was the case tool, and they were working with the banks primarily. And the second one was the trading system, submit software. And they were first software to develop the swaps trading system, working with Lehman Brothers at the time. And they came out of Lehman Brothers and started this small outfit. I joined them for some time. Then I joined Merrill Lynch. So Merrill Lynch as a programmer, as a software developer on the trading desk, right?
00:01:19
Speaker
So that was starting my career on Wall Street in reality, right? Because that's when I saw the trading desk first time. When you go to trading desk in these firms, it's pretty overwhelming actually, right? So it was mind blowing when I went there first time because you see, I was on the fixed income trading desk pretty much, right? So so much happened and so much noise and such a high pressure environment. And it taught me a lot over the next few years.
00:01:45
Speaker
and surviving in that environment and working with the traders. It was amazing. And the kind of complex software you build in those investment banks is also not for the fate of the heart in my view, right? And so it kind of taught us a lot, right? And after that, I started my own company working
Entrepreneurial Ventures and Moving to India
00:02:03
Speaker
with... So I developed some contacts during that time and started my own company working for the same banks, same investment banks, working on the trading desks and building software for them, right?
00:02:15
Speaker
I've done that for a few years. This was software to execute trades, building custom software for, let's say, you're talking about fixed income trading, options trading desk, or building some models, that kind of software. I worked with them and I started my own company working with the same folks I built the relationships with. I've done that for a few years and grew that company.
00:02:38
Speaker
And our clients included Lehman Brothers, Merrill, at that time Macovia, and a few other banks. And then started Indian Outreach as well to do the software development here. So I've done that for a few years and sold that company to Canway, now part of the Capgemini.
00:02:56
Speaker
I sold that company in 2005. And after that, I have worked with Kanbei for an year or so to transition my role and then came back to India at the time, made a discuss with my wife and say, let's move to India. Because I had two boys at the time. One was 10 years and the other one was five years at the time, 2007. So sold my house and looked at the Indian potential and the Indian ecosystem. So came back here.
Business Challenges in India
00:03:20
Speaker
And once I came back here,
00:03:22
Speaker
So that acquisition by Kanbe, so you were the majority stakeholders in the business when it acquired. It could have given you enough money in the bank to run experiments and not worry about your next job anymore. I was at the crossroads and said, let's see what we can do, right?
00:03:39
Speaker
India was a compelling story at the time, right? And the whole Goldman Sachs coming out with all these reports and everything, right? So we thought, why not? And came back here. After coming back here, I didn't wait too long. Jumped into entrepreneurship again. That was into manufacturing and manufacturing the batteries, industrial batteries in India, right? Those industrial batteries were used in telecom towers and railways and other things. They used that in railway compartments and also large
00:04:07
Speaker
telecom covers and stuff like that. So those were the use cases. One of my friends who grew up with me at the time, he worked for a batteries industry and he met me as soon as I came back from the US and sold me that idea of potential in the batteries industry. I like the idea, I like the person, so why not jump in? And then we put in our money and also raise money from the banks.
00:04:27
Speaker
At the time, venture capital was not very active, very, very many people actually. PE was there to some extent, but venture capital was not there. Equity financing was not existing. And so we raised debt from the banks. It's about probably 150 crores kind of project out there to start with.
00:04:48
Speaker
We did that project, and it was tough, to be honest. When I look in the hindsight, I mean, had known it was going to be that difficult, I wouldn't have got into that. But that taught me so many things about India, how things work, how to get the permits, how to work with the banks, how to get things going. Because what it told me is why the labor and the workers are probably the labor achieve, but the total cost of transactions
00:05:17
Speaker
in India put together are either on par with the Western world are more expensive when you combine everything together. Can you explain that? So what it meant by that is when you employ a workforce, some workforce, that could be cheaper in India. But the total cost of any transaction, let's say setting up a unit, or getting a project done, when you combine, that's my experience. I could be wrong. It could have changed now.
00:05:44
Speaker
The amount of time it takes, the amount of permits and other things, other bureaucratic things you need to get through, and the effort it takes. If you put everything together, the total cost of transaction is more expensive actually compared to the developed countries is what I understood, right?
00:06:01
Speaker
How about my experience? Ease of doing business problem.
Exit Strategies and Telemedicine
00:06:06
Speaker
Ease of doing business is very poor. Therefore, you either need to spend a lot of time, or you need to spend money increasing to make things go faster, or you need to be connected. And also supply chain, because either being business is only part of it. And supply chain, infrastructure. At that time, infrastructure was very poor. Now it's getting better. But connectivity,
00:06:28
Speaker
infrastructure like logistics, electricity, electricity, backup. You got to combine everything, right? And on top of it, getting anything like PCB, like pollution control board, other approvals, and the way things happen is it was locked. It took time.
00:06:45
Speaker
Right? So when you put all those things together, time is value. I mean, time is money. You got to count as well. Right? So that's what I meant. But nevertheless, we built a great company and it was probably doing around 200, 250 crores revenue at the time and but not very profitable.
00:07:01
Speaker
to be candid, but a great company. It takes time, right? Because I'm talking within four to five years. It takes anywhere between five to seven years, in my view, especially the manufacturing company, if not more, to establish yourself. So we were in that process, and we are turning profitable and other things. And at the time, NRCS, which is a global company, and various industry companies, they were trying to set up a unit in India, and they came and acquired the company.
00:07:24
Speaker
which was good for us. And the returns were good and worked out very well for us. And after that, we set up another company called Onto Telemedicine Healthcare. Even that was ever in 2008 timeframe. So even that is a little bit early for telemedicine.
00:07:43
Speaker
because infrastructure was not there. So again, healthcare is a tough market in India, even if you ask me today. So nevertheless, even that company got acquired by Singapore and US consortium. So this early medicine company was for Indian audience. He was serving Indian patients in this. Initially, we were looking at commercial market, directly talking to the customers and trying to recruit the customers into our platform. That didn't work.
00:08:09
Speaker
right, because people want touch and feel, right, they need to go to the village, right, and then frozen there. And so then started working with the governments, state governments to work with their primary health centers with a specific use case that worked out reasonably well, right.
00:08:25
Speaker
So eventually, that company got acquired as well. So those were the two companies which I got exit in India, one company in the US. So that's my entrepreneurial journey.
Bank of America and Venture into Angel Investing
00:08:35
Speaker
So during that time, I also had some friends in Bank of America in the US. And they had presence in India, but they didn't have any technology presence.
00:08:47
Speaker
They asked me whether I would like to take up the challenge of setting up the technology division for them. Why not? Because it sounded interesting because it's like an entrepreneurial venture as well. They gave enough free hand to set it up. So I joined Bank of America as the first employee in technology and set up their tech division, also ran some operations as well as part of the journey. So by the time I quit Bank of America, the team was around, I would say 6,500 plus.
00:09:14
Speaker
team strength and very well-oiled. And they were like working as an offshore development center for US requirements. Okay. And they also have, Bank of America also have, they have presence in India as a business. So that's a different unit altogether, but we were working with the global teams. And once the team is set up, that started working well. So I thought it, my job is done and quit Bank of America and, and started investing in, in companies startups at the time.
00:09:43
Speaker
As an angel investor, I put my own money. When did you start investing? That was in 2014. They faced a couple of challenges. At that time, the venture capital started becoming a bit of a mainstream
00:10:02
Speaker
awareness came in. By the time Flipkart and some of these companies had raised their rounds, India had had one or two unicorns by that time. The challenge was, as angels, attracting good companies is always difficult in my view, because they look for institutional capital very quickly,
00:10:21
Speaker
And a lot of angels, family office are competing with that small window of opportunity at that time, because the ecosystem was not mature. So it's very hard to attract good companies. We thought, why not set up a fund, set up a team to source and set up a process to make sure that we offer reasonable help, required help to the companies. One is sourcing. Second is many of these companies in India required operational help.
00:10:49
Speaker
in my view. Because again, the ecosystem was maturing and the guidance they needed was coming from certain founders that are experienced, not many of them out there. So setting up a team with the right process, we thought was important for these companies. But we had a couple of concerns there because we wanted to focus on technology. And technology depth in India, we were not quite sure.
00:11:13
Speaker
Though there is a lot of technology in the services industry, but not the product and entrepreneur side of it. So let's start small. And also we are the first time fund managers. And all said and done, fund is like another startup for us. So when you start first time, you need to establish yourself, prove yourself and stuff like
Venture Fund Management and Challenges
00:11:32
Speaker
that.
00:11:32
Speaker
So we started with 100 crores as a first fund. So I put my own capital, good amount of capital, into the fund. And also at the time, two institutions joined us. One was CIDB, another was IDFC. IDFC was trying to get into venture capital at the time and the opportunity to.
00:11:49
Speaker
in our fund. And there are also very few known friends. They joined us as well. So it was a small fund. We did 12 companies, reasonably great portfolio, actually, to be honest, when you look at this now, that was in the end of 2015, 2016.
00:12:04
Speaker
I know it's a time frame. And so far, which were some of those companies? So I want to ask you two or three questions here. As most founders think that it is very hard to find angel investment. And like I'm talking of people who are just stepping into entrepreneurship. On the other side, as an angel investor, you felt that it's very hard to find good founders. Why the dichotomy? What is the, I mean, can you talk to me about that?
00:12:32
Speaker
Money changes good founders and good companies. There are many founders that are probably ambitious, but they're not completely there yet. And that requires a lot of mentoring to make them reach that stage.
00:12:48
Speaker
So, investable companies, per se, would take time, right? They would learn. It takes time. But investable companies are very few, and money was chasing them, and it was hard to find them. And how do you define an investable company? There are a few things we look at, right? A founder is the most important thing.
00:13:07
Speaker
founder maturity and how they look at, how they understand the ecosystem and how do they see the company growing. That understanding itself was lacking in many founders at that time. Right now, ecosystem has evolved in much faster pace. I'm quite happy about that. But when you talk about 2015 timeframe, it was probably a concept of evolution. And very few founders understood now how the ecosystem, what is, what, how do the equity financing work and dilution growth, those kinds of concepts were not there.
00:13:37
Speaker
Whoever understood, I mean, money was chasing them, right? And it was hard to get them into attract them, right? So there we need to, we had to have some process. And then the reason for setting up the fund is, you know, have the team. Do you also look for traction when you say that it's an investable company? Does it mean they should have revenues, growth, all of that? Yes. Two, two, three things, right? One is the foremost thing is founder. Second is the
00:14:02
Speaker
business model, whether the model itself, the potential, whether it's India for India, India for global, what kind of model they're talking about? Is it scalable? Sure. If you're talking about India alone, those things are the second thing we look for. The third one is obviously the team and the sales and marketing go-to-market plan. These kinds of things we look at, right? So, operations aspect.
00:14:25
Speaker
So, between all these things, very few companies at that time were able to push through. One thing I forgot to tell you, we wanted to see revenues. They don't need to make money, right? At least revenues, there are customers and model is proven. I'll give an example, right? Attenberg, I don't know whether they know the company or not, Attenberg fans. They make energy efficient fans.
00:14:46
Speaker
When they came to us from ID Mumbai, Bombay, so they were making around 15 lakhs a month kind of revenue. Now they are like 60 to 70 crores a month revenue. So kind of scale that happened from there to now is tremendous. So we were looking for probably that kind of small revenues, even where we could put the money in. So with these requirements, there were very few companies. So by setting up the team, what happened was even people lack operational experience.
00:15:14
Speaker
we're able to complement them, offer help with our experience. So a reason for setting up the fund and having a team and setting up a process of monthly revenue meetings and looking at what needs to be done, how do we connect the people, stuff like that in the same way. So that whole thing, even for us as a fund, was a startup and it took a while for us to establish
00:15:39
Speaker
those processes and mature them as well. So that's what it took, right? So, but now if you look at our portfolio, great companies, we had many good companies, Attenberg was one of the examples I told you, electric zero space is another company which is into space.
00:15:54
Speaker
No, entropic. These are all fund ones. These are all fund ones. There are many companies that we can discuss based on time availability. But I think at this point, we are quite happy with what we built in fund one and the returns and so forth. The multiples we got is
00:16:15
Speaker
Quite good. So can you also give like a venture fund 101? So when you say that you raised 100 curves, does that mean you had 100 curves in the bank? What is the way in which the fund itself earns? How do you pay salaries? You set up a team? How does all of that happen? How are the returns distributed? What is the economics of a venture fund?
00:16:34
Speaker
So again, as I told you, Winter Fund is no different from any other startup in my view. So when we set up the fund, we need to have minimum viable infrastructure or team. So one is the partners, either managing partners or general partners.
00:16:49
Speaker
Apart from that, we have principals, analysts and associates that can do sourcing. Once the company comes to us, how do we close the deal? Put the documentation and then that's a pre-deal. It takes around four months on an average to close a deal and to send the money to the bank of any
Focus on Top Performers in a Venture Fund
00:17:08
Speaker
company. Once the deal is closed... Because you spend time in due diligence and then there is some negotiation back and forth.
00:17:15
Speaker
What happens is once they come to us, initial meeting happens and then we are happy with the model and stuff like that, then we do business diligence just to check the potential bottom-up and top-down approach and all the numbers. Once we are happy with that, then we do the investment committee meeting, which is where the entrepreneur comes in and presents the case. Investment committee looks at different things and they have to approve the deal. Once the deal is approved, then we kick off the due diligence.
00:17:42
Speaker
And that could be legal, that could be financial, that could be more information, business plans and other things. Because once the bill is approved, we issue the Tom sheet. Tom sheet negotiation itself will take time because many other entrepreneurs will have some issues are here and there. We need to negotiate that. Then doing the due diligence will take some time.
00:18:02
Speaker
post the documentation to SHS, NSA, those things will take time. And identifying conditions precedent, conditions subsequent, what needs to be done, all those things will take time. So no matter what, it takes time. So that four months, we need to have team. Once the deal is done, post-deal, we need to have the conditions subsequent, closing that condition, and then making sure that operationally, there are certain processes put in place.
00:18:29
Speaker
And we need to identify where the company needs help from the investor. We cannot be breathing down their neck on everything. So we identify there's a gap, either it's in finance or sales or tech technology. We try to help in those areas by bringing in our contacts and venture partners and stuff like that.
00:18:49
Speaker
Once that happens, we have every month review meeting and figure out what happens. What's the target versus actuals? What did we miss? Is there is a variance? Where did it help? Those kinds of things happen very, very religiously. As part of this, any fund has got fund management fee and then carry. That's what is for the funds. Fund management fee typically from anywhere from 1.5 to 2 person, but to have this, now it's
00:19:17
Speaker
getting lower towards more to 1.5.
00:19:21
Speaker
What happens is you need to have the team in place. Without the team, you cannot function. So initially, you need to put your own capital. Because we did it, right? Because apart from investing in the fund, we need to have some money to set up the infrastructure before the fund management fear of the things kick in. And there has to be minimum size of the fund to be viable. 100 crores is not, is probably, you're barely touching it, right, in my view. It is like a startup.
00:19:50
Speaker
that 2% of 100 customers won't cover all the salaries, and no, it doesn't. But 100, of course, I think that's a minimum ticket size, and if you ask me to start a fund, anything lower than that, you would be cutting corners a little bit.
00:20:06
Speaker
Right, so that's a more break-even kind of scenario there. If you say, like, your fund was 100 curves, that means at time of inception, you had 100 curves in the bank, or what does that mean? That won't work that way, right? So you get the commitments, and then you invest that fund over four years, or four to five years.
00:20:25
Speaker
you call the capital as required, right? And then as you find, because you cannot keep the money in the bank because it is the ideal capital, right? And you need to call the capital and then as you find the companies and deploy the capital.
00:20:39
Speaker
That's one. And second is, as venture capital works on power loss, you focus on the top companies, a company that's written you fund. If you ask me, probably 15% to 20% is maximum, you can ask for the stars to be there. And our expectation is 15% to 20% will be the stars. That's a lot of high percentage. 40% would be mediocre, 4% to 5% x.
00:21:08
Speaker
and everything would be below par. It could be returning the money or some would go away. But that's the expectation for many of the funds in a way. So what do you focus on? You focus on these winners. The other companies that are losing wouldn't matter much for the companies. But you allocate capital
00:21:28
Speaker
you continue to maintain your pro-rata shares in these vendors. And that's where we allocate a lot of dry powder as well for these companies. So if you have, let's say our current fund is 620 crores, we allocate 45 to 50% for the follow-on capital.
00:21:44
Speaker
Okay. So you can keep supporting your portfolio companies. So I guess another thing to look for in investible companies also, then you need companies which actually give you outsized returns because only two out of 10 companies will give returns. So a business which is expecting to grow at 20-25% per year is not attractive enough. You would want a business which can double or triple each year. Like that exponential growth is something which would be a key requirement.
00:22:12
Speaker
Yes, absolutely. So when I said two out of 10, those would be the stars. That's an optimized return, as you rightly said. 10x plus, at least. And again, those alone may not be sufficient. They would return, good return. But you've got to combine that with the other four Xs and five Xs as well. And then you have non-performers, which continue to work with them, but not necessarily the focused effort. And these outsized returns are the key for anybody's success in my view. So
00:22:40
Speaker
Are there problems that you like? For example, if a company has this problem, then you'll say, yes, I would like to invest in it because I know that we can fix this problem. Yes and no. My view is as a second fund manager at this point, I learned my mistakes in fund month.
00:22:56
Speaker
No, because a couple of companies looked at it and said they have great technology, but founders may be a bit weak. We can fix it. But it never happens. Because founders are the key, in my view. We need to leave them alone, and you've got to help them where they're required. And then they would excel by giving them the freedom to run.
00:23:19
Speaker
the company, but help them, right? But if you feel that there's either in the cap table or something else, there's a weakness because classical mistake is capital is messed up as well. So many times what happens is by the time companies come to raise the funds,
00:23:35
Speaker
already below 50% ownership between founders. And that doesn't work, because that's something we also look at, by the way, right? Because founders should have enough skin in the game by the time they go to cities B, C. If they are below 50, when they raise a fee, that's a big no-no for us. And that's another thing we got to look at. So all these things are quite important. So
00:24:01
Speaker
We need to make sure, don't take operational burden onto you as a VC, because you can probably complement some of the skills and help them by providing help in terms of venture partners or some advice, but operationally, the companies should be self
Roles and Strategies in Fund Management
00:24:20
Speaker
-sufficient.
00:24:20
Speaker
So what is the difference between a managing partner, a general partner and a limited partner? Managing partners and general partners probably are interchangeable, right? Because general partners probably has got some skin in the game, right? That means they might get some part of the carry and some compensation and stuff like that. But managing partner is a general partner who is running
00:24:45
Speaker
you know, today, operations of the fund as well, who manages the fund, right? Like a CEO, basically. Yeah. No, it has the day-to-day operations, right, of the fund. Limited partners are the investor in the fund, right? There's always a fund management company and there is an actual fund. Limited partners are part of the fund, right? They put in required capital.
00:25:07
Speaker
So generally, the GPs and managing partners are also, they also invest into the fund. They run money as well. Different kinds of shares in the fund and stuff like that. Okay. So when you launched fund, when the problem you wanted to solve was access to good opportunities. So how did you scale that up? Like how did you scale up access to good quality opportunities or finding good companies to invest in? I mean, that's still it.
00:25:32
Speaker
a problem today, right? But it has gotten a lot better. And one thing that was very heartwarming is the kind of capability that exists in the development in Indian ecosystem. So in 2015 versus now, the quality of companies is probably very, very different and got a lot better. And the understanding of what needs to be done
00:25:58
Speaker
by entrepreneurs to access global markets has also changed. And there are enough case studies, enough mentors in the system today that can help these entrepreneurs. And the quality of innovation that's happening today has also improved.
00:26:15
Speaker
quite substantial. On the same note, the money coming into the country for equity participation, either venture capital, small or big, local domestic funds, and international funds coming in, and corporate venture capital, and PE funds also getting into early stage. I mean, so amount of capital chasing companies also has gone substantially high.
00:26:37
Speaker
Now, if you look at last year, 43 billion went into winter capital. I mean, unbelievable. And this year has gone down by 40, 50%, but it's fine. That's how many things are happening. But because of that, still finding good companies. Money is chasing good companies. I'll tell you, recently, we are looking at a couple of companies. The valuations have come down, probably 30% or so, compared to a few months ago.
00:27:03
Speaker
How do you know the valuation has come down? The same company comes to you again, ready to accept a lower valuation. Low valuation, yes. Because when we initially saw versus now, I know we're seeing correction of 25, but anyway, it's been 20 to 30%. There's no hard and fast number out there, but we're seeing that. But still, these good companies are being chased by a lot of funds. So while the valuations have come down,
00:27:29
Speaker
A little bit, no, but the money is still chasing them. So that's the way the system is today. So while the number of entrepreneurs and number of companies are gone up, number of funds and number of the amount of capital has also gone up. So having your brand and having your team getting experienced in sourcing is very important. And having the fund for the last few years, it gives us that experience at least compared to the new funds. Okay. Okay.
00:27:57
Speaker
In a way, this is like the classical go-to-market challenge for a startup. Like for you, the go-to-market challenge is getting good quality companies. Absolutely. And the reason this is probably the best profession I've done, I've been an entrepreneur, worked in manufacturing, worked in software, worked for large companies.
The Joys of Venture Capital
00:28:19
Speaker
The reason I enjoyed this day in and day out is one is the continuous learning you go through.
00:28:25
Speaker
Because you meet these entrepreneurs, and they may be very young, but they have different opinions. And you get to learn and learn from them, and the new verticals, new industries. That's amazing. That keeps you going on every day. That's something which I enjoy every day. Second thing is the kind of difference you can make. Even a $100 million fund, if you want to make 10x and with 10%, you can make the kind of leverage
00:28:52
Speaker
In fact, you can have an economy is unparalleled, right? I mean, so with the kind of money you have, kind of economic activity can create in the growth of the country or the entrepreneurship is phenomenal. In fact, there's like a multi-generational impact of creating these startups, which really experience that rocket ship kind of a growth, because a lot of the early employees will then become founders. The next generation of founders is kind of born in those startups only, like Flipkart has
00:29:21
Speaker
given birth to Flipkart Mitra, they've given birth to so many other startup stuff. Yeah, I mean, many of these founders, they become angel investors in other companies. I mean, that's phenomenal. When you see these successful founders are creating other companies, that's the way things work.
00:29:37
Speaker
So I want to kind of go back to the go-to-market challenge. Can you give me like tactical examples of how you solved it? Like, did you, for example, invest in content marketing or like, how did you really build that muscle, that go-to-market muscle in terms of sourcing you're talking about, right? Yes, yes, sourcing, yes.
00:29:56
Speaker
So there are multiple ways. One is when you go to the market, when you meet entrepreneurs, it works both ways. When an entrepreneur meets you, they also start assessing you as an investor while we are assessing them. So you have to create that goodwill. You meet lots of people and you work with them
00:30:16
Speaker
You create that goodwill, right? You be open and you try to help them as much as you can, whether you fund them or not. And that just creates so much brand. What a mouth out there. That's something which would help many of the masters. And second is spending time with incubators. There's Mumbai, Mumbai IT and Madras IT and
00:30:39
Speaker
Every premium institute has an entrepreneurial cell. You go work with them, establish a relationship with them day in and day out. I mean, it takes time and effort, right? And there are so many accelerators out there. So you've got to go meet them and establish the partnership out there. And the success rate is very low. Keep in mind, you've got to be patient out there. And the third one is there are bankers, the small boutique
00:31:05
Speaker
capital matching companies. We need to find some of those bankers and make them understand what you look for and work with them very closely. That's the third dimension. Fourth one is fund networking, which works very well. Co-investing, because you need to find like-minded funds and work with them very closely and share the deals among ourselves and also angel networks out there.
00:31:31
Speaker
It's a combination of all these things you need to establish and develop over the period of time. Okay. Okay. So in a way, your top of the funnel, you grow that by incubators, accelerators, bankers, and the co-investing partners. Those all give you a higher top of the funnel. And for conversion, you try to make sure that each interaction is adding value to the funnel, irrespective of whether you invest or not.
Sourcing Quality Startups
00:31:56
Speaker
So what is the business model for an accelerator or an incubator? Are these like social initiatives or do they also have a way of learning? For example, many of these educational institutes, they have the entrepreneurial cell. Typically what happens is they provide space
00:32:12
Speaker
in the early stages, and they provide some mentorship as required, but most of it is in front of other things, and the connects. And for that, they take some equity partnership, very nominal in my view, right? And as they grow, once they start growing, at some point, they come out of this incubator and get funded.
00:32:35
Speaker
And within one or two rounds, they exit their equity as well. That's their model. And I think social side of it, there is social funds as well, but not much in my view. Most of it is for profit. They take a partnership and stuff like that.
00:32:50
Speaker
Okay. I see a lot of funds doing a lot of online activity, building in a way for receiving applications in bulk. Whereas other funds, you need to know someone to get a meeting. What's your view on that? Say some funds will say, okay, fill out this detail form.
00:33:08
Speaker
We will come back to you within two weeks and it seems to be more of an automated workflow. Obviously, there'll be human beings on the back end who will evaluate, whereas other funds you will need to get a meeting through an introduction, a portfolio company or someone who knows them. Can you talk about that? What is the approach that you prefer and why?
00:33:27
Speaker
No, obviously, the reason second method is preferred is it comes to the referral. That means qualified lead. If somebody is referring you a company, it's qualified and it reduces your work in the pipeline. And that's definitely a preferred way. Obviously, that's not the only way. Even if you fill out
00:33:48
Speaker
online farm, which we have, every company that comes to us is looked at. What happens is every Monday, we meet as a team, let's say 50 opportunities came in the last week. We just go through them and then everybody votes and stuff like that. But the thing is we try to get back as many as possible. Sometimes we may miss one or two. It doesn't mean that your opportunity hasn't been looked at.
00:34:13
Speaker
Because for us, we just need to make sure, as I said, it's a goodwill building. Also, encouraging the entrepreneur as well, right? Not returning would not be the right thing for entrepreneurs when they receive something, either feedback negative or positive. Try to give them transparent feedback as much as possible.
00:34:30
Speaker
they need to implement stuff like that. But we may miss a few, right? It doesn't mean that we haven't done that for sure. But if you send an email asking feedback, we definitely will report. Got it. Okay. So VC as an industry has been around for
Automation and Fundraising in Venture Capital
00:34:44
Speaker
decades. I think maybe Sequoia must be like 50 years old or something like that. So what has been the technology disruption in the way the VC firm works?
00:34:54
Speaker
like say banks are getting disrupted with newer form, new age banks or neo-banks, which are orphan takes. So is something similar happening in the VC space, like technology disruption on how a traditional VC way of working used to be and what is it today?
00:35:09
Speaker
If you look at venture capital, it's not a high volume business. And it's more to do with analyzing and making sure that you're picking the right company. And automating would be the workflow. The regulatory side of it is something you can automate. The kind of documentation you need to maintain.
00:35:29
Speaker
for investment relationships, for regulators, for other things, that can be automated, the workflow, right? But the majority of the work that requires to be done for evaluating the company still requires manual attention and evaluation of gathering the data. I mean, some of the data gathering and other things can be done efficiently, but majority of the work still needs to be human intervention is required.
00:35:55
Speaker
So as the founder of a fund, are you also constantly raising money? Like, say, a lot of startup founders say that the fund raises a constant activity for them 24-7. Does that happen for you also? Like, when you raised the second fund, which is like six times more than your first fund, how difficult was it? Or was the track record already established so it was not so difficult? Can you tell me about the challenges of you yourself raising those funds which you invest further? Right.
00:36:23
Speaker
So startup is never easy, right? It requires a lot of effort, ability to stand your ground many times and raising money is one of it because you are asking somebody to trust your ability to give them returns on their money.
00:36:40
Speaker
which is not easy. And that only comes by you showing the required performance and the ability to identify and grow the companies, give them the returns as well. One good thing that's been happening in Indian ecosystem is the actual maturity of H&Is and family offices looking at the alternative investments, such as venture capital. So if you look 10 years ago, the appetite was not there.
00:37:06
Speaker
Today, many of the HMIs and family offices are looking at early stage investment as one of the alternative investments, their portfolio, diversification or alpha seeking, whatever that is. So, which is a great thing and the ability to understand the technology focus has also gone up significantly.
00:37:27
Speaker
I guess this would also serve as a potential acquisition funnel for them. Let's say they would participate in investments and eventually some of those might become acquisition targets for them or in terms of giving them more market knowledge and understanding the evolution of technology and the space and so on.
00:37:46
Speaker
Right. So many of the large family offices will look at it as a co-investment. They would look at if the company is doing well, they want to participate in the investment and stuff like that. There are also the large companies, corporate venture capital, their goal would be aligning their venture capital investments into potential acquisition in the future. So especially the corporate VCs, not necessarily the family offices. Family offices would look at probably
00:38:16
Speaker
Some alignment in the strategy, but mostly from the investment perspective, they would evaluate the funds and companies. But the corporate reasons are different. Got it. So most of your fundraisers from India or like all of it? Yeah.
00:38:31
Speaker
So we wanted to go to the Fundraze overseas, but we didn't need to because we closed the fund within India.
Importance of Lead Investors and Portfolio Highlights
00:38:39
Speaker
So normally Fundraze news announcement says that the lead investor is, what does that mean, the lead investor? How is the lead investor different from the other people who invested?
00:38:49
Speaker
Generally, what happens is you need to have the sponsor for the fund. Basically, that would be the initial major investor sponsor entity for the fund. It could be large family office, it could be an institution, preferably.
00:39:04
Speaker
Right. And for us, SBI was one of the issues that put in the money, as the anchor investor recalled it. I would say anchor, not the sponsor, anchor investor. So you need to have that. And CIDB has been very supportive in both fronts.
00:39:22
Speaker
For a startup, when a startup says that like say Sequoia was the lead investor, so that means Sequoia is giving the biggest share of funds and probably they're also supporting in finding co-investor. Right. That works a little differently because lead investor in a company would be, right, they would take obviously the higher share of the investment. Also, they would give the term sheet.
00:39:44
Speaker
in terms of what terms they would be offering. So once the company agrees for the term sheet, generally co-investors will follow the lead investor in terms of terms and other things. And due diligence will be taken up by the lead investor as well in many cases. And then co-investors will take that due diligence and feedback from them.
00:40:05
Speaker
So let's talk about some of your portfolio companies. What are some of the companies that you invested in? How did you discover them? What was the reason that you invested in them? So, I mean, the way we look at there are, you know, if you talk about fund one, there are obviously we invested 12 companies and we exited a couple of companies, right? And that was one thing called SQ, feature tech, that was in the construction technology. We exited that company very early in the game.
00:40:32
Speaker
And Attenberg is one company I mentioned in the past. That was our second investment, which is into energy-efficient appliances. Now, their initial focus was into fans, and they are one of the startup companies out there. And we continue to support the company. They are part of our fund one, and we also invested from fund two as well into that company.
00:40:55
Speaker
So when we looked at the company, again, our evaluation would be, if you look at India for India, like again, companies focusing on India, they're in it to have the right scale. So Attenberg, they focus on appliances starting with the fans. Fan is very scalable appliance actually, right? And they, them cutting down the energy consumption by, you know, by two thirds, right? And it takes one third of what other fans
00:41:20
Speaker
Energy consumption is and that's a no-brainer right from the years you perspective as well as scale perspective and the returns perspective and the founders are amazing right so by looking at all these things there was a no-brainer for us to invest and also written down they gone through very challenging scale growth as well right which they achieved.
00:41:39
Speaker
and the right quality, right? So something which is very good. And then there's a company called Play Shifu, which is the augmented reality based kits, right? For it's called, you know, fidget toys for kids. And like I use as a quite a small,
00:41:55
Speaker
These guys have similar kind of products. There's a globe, there's a few other platforms, and they're completely focused on global markets. So 90% of the revenues come from global markets and 10% is from India. They've done probably
00:42:11
Speaker
140, 150 crores last year. So that is something which is also a great company, which we looked at, which we invested in fund one and we also followed on in fund two. And there's one more company called Entropic, which is basically artificial intelligence based emotion recognition technology. So what they do is many companies have got this focus groups to identify
00:42:35
Speaker
Whether this product works or not, the feedback and stuff like that, they automated the whole thing with the headsets, taking the brainwaves and also facial expressions to identify the emotions and use the AI for converting that to datasets.
00:42:51
Speaker
doing very well as well. Other companies, Bellatrix Aerospace, they do the satellite propulsion. These are real rocket scientists out there, very gifted team. They have these propulsion systems, which are the heart of any satellite. So they have two value propositions. One is green and the other is actual weight of the propulsion system. So they're also extremely talented team. We're very bullish on that as well, on the space technology.
00:43:18
Speaker
So like this, there are many other companies, there are a couple of companies in cyber security, cloud second data resolve, and there's one company in chip manufacturing testing. Those are all the, these are the fun, some companies we invested in fund one. Coming to fund two, right, we have done color logistics, which is a cargo management platform for airports and seaports.
Founders' Qualities and Team Dynamics
00:43:40
Speaker
They are also doing very well and very mature company and
00:43:44
Speaker
We invested in a company called Gram Cover, an insurance platform, an issue tech company, right? And secure things is another company we invested in, in fund too, right? Which is again, as there is a EV, so our electric vehicles are coming into the play and any car today you pick, right? There are tons of devices in there and chips in there, right? So providing the cybersecurity security for them is key as well. So secure things does cybersecurity for them.
00:44:09
Speaker
Another company called Withdrought.ai, which is an artificial intelligence-based video translation platform. You can give any video or any image, and you click on the button, it translates all the audio and the content as well into different languages.
00:44:25
Speaker
artificial intelligence very intelligently out there, right? So we are bullish on that as well. So these are some of the companies we have, right? So you would mostly be looking for founders who are technologists because your focus is on finding tech first businesses where tech is the disruption. So like tell me about the founders of some of these companies. Like what, what made you feel that this is a great founder to back?
00:44:48
Speaker
That's a great question, actually. So tech first is key. Obviously, we are a technology focused one, but the founder should have business inclination. I mean, their capability to understand business and grow the business is key as well. And without that, just the technology focus will not work. So generally, we look for
00:45:08
Speaker
more than one founder, if for at least two to three would be ideal, right? Because they should be tech, technology-focused CTO could be one person, right? Who speaks technology, who walks technology, right? Who lives technology. But there is a CEO who should be the person, understands technology well, but also should be able to come up with a duty, go to market, execution, providing their motivation, recruiting the team, keeping the team together, right?
00:45:35
Speaker
I think that's something we look for now. Without that, we won't be able to invest in a company. Second thing is it takes, as I said, four months for us to invest in any company, approximately, give and take, from the initial contact. What happens is during that time, it works both ways, as I said, right? They start evaluating us. We evaluate them as well. We watch them. We meet them many, many times. And their body language, their ability to work together, ability to lead the
00:46:05
Speaker
team answered the tricky questions and tricky situation. All these things will be evaluated and we allocate a lot of time looking at these founders. If the founder is founders, we feel that I'm not going to cut it, that will be off. And just technology won't be enough. I would say it would be secondary in my view, if you ask me. Interesting.
00:46:28
Speaker
So I want to understand why single founders companies are not preferred. I mean, there are a lot of famous examples of single founder companies, like say Facebook being one, obviously that's it. I mean, that's like an outlier, but, or even Amazon. So, I mean, one could say that a single founder has that singularity of vision and less chance of founder conflict and so on.
00:46:50
Speaker
I'm sure even the large companies such as Amazon and Facebook, when they started, the founder has the vision, but he or she recruited the team very early on. It could be a lower percentage of the ownership. We're not talking about how much percentage each one owns. The team should be having different roles.
00:47:09
Speaker
So it's hard to expect one person to do everything, what requests for a startup. They do wear multiple hats, but one person to do everything is probably next to impossible. He or she needs to have the team. So I'm talking about the team. And you want the team to have skin in the game, right? Yeah, without skin in the game, right? It's like employment, right? I mean, that won't work. Okay, got it. Interesting. Okay.
00:47:35
Speaker
Okay. So what kind of people do you need to have in your team to really be able to do this kind of thorough due diligence?
Building a Venture Fund Team
00:47:45
Speaker
Like you said, you meet them multiple times over a four month period and you're constantly picking up signals. And I mean, it seems like a very specialized kind of a skill set. How do you build your own team?
00:47:56
Speaker
Just like any other company, we have different roles. So we have managing partners, principals, associates, analysts, and probably interns. That's how that is. And they grow into different roles in the hierarchy. And what happens to you? Because we became partners over two of having the experience as an entrepreneur. We learned
00:48:20
Speaker
the whole thing in the last few years as well. We kept telling our founders, you need to find the A players, otherwise you'll end up with the algae players. Similar to that, we need to find A players, we need to do what we preach, and we need to recruit the right people,
00:48:35
Speaker
give them the opportunity to grow, and also have the right succession for us in the future. This, as a fund, is like a company. You'll continue to grow. As you rightly said, Sequoia is probably a guru of every other fund, and hasn't been built in a few years. They existed for so long. And like many other funds, comparable to Sequoia, we have so many examples we can follow, and we can learn from one, create one of the best funds in the technology fund in India for us.
00:49:03
Speaker
What would you advise aspiring founders who are looking to build a venture backed startup?
Advice for New Founders and Evaluating Startup Ideas
00:49:10
Speaker
I think first and foremost, I've said that many times, having the right mindset is a key. That means, let's say you identified an opportunity, do your homework and make sure that you are convinced and have complete conviction on that opportunity. Once you have that, you should set yourself a goal, multi-year goal, and think
00:49:32
Speaker
That is done, right? And once you have that mindset, you know where you're going to get to. And there would be uncertainty on the way. You should have ability to pave the way as you go along, especially in uncertain conditions. But you have to have that mindset of winning mindset and ability to have the rolling plan and pave the way as you go along.
00:49:53
Speaker
That's the key. And second thing is don't give up too early, right? What happens is people tend to first year when you start any company would be honeymoon period. And either you raise the fund through your friends and family, you put in all effort and you focus too much on the product and whatever. And then first year would be honeymoon. Second year is where the things started becoming tough. And from that point onwards, having the right go-to market, finding the customers,
00:50:20
Speaker
those things become paramount importance and then you need to focus on that. Don't lose hope, stand the ground. And if you have the winning mindset and enough effort, things will happen. I'm telling you on my own experience and I've gone through many of these situations as well myself and not standing your ground and be confident about what you can achieve is important as well. And third one is do your homework when you go to
00:50:44
Speaker
with your capital. Understand the ecosystem, as I told you. There are enough examples, enough mentors out there. Take help from bankers if you want, but make sure that you understand where you want to get to and how you want to evolve your company and how much equity you want to give up. Don't give up too much equity right up front to angels and other things as well.
00:51:03
Speaker
So understand this, come up with the right plans, and then many times also understanding the market size is key as well. Don't be too optimistic and put the opinions and billions of dollars. And the other one is, this is a mistake I've seen most of the founders do. They undermine the competition. That means when they do their homework, they think they're
00:51:24
Speaker
product is the best. And that's what you hear. But the reality is there are many others thinking the same way. And there's always a competition out there doing better than what you do. And you need to find a way to have the differentiation and an entry barrier. There will be competition for sure. But having that early more advantage and an entry barrier is the key. Don't undermine the competition and go to market
00:51:50
Speaker
quickly don't focus on perfection. Let me like kind of try and build a case study. So I often talk to listeners of the show. One of the listeners of the show told me about his idea that all founders need a good EA. A lot of corporates have people at various positions who need good EA. So there is an opportunity to build a company which is providing an EA as a service, which is remotely and then you can scale that up, make it global also and all that. So what would you tell this person? He's currently employed in a job. So what would be your advice to him?
00:52:20
Speaker
I'm assuming that the person is looking at focusing on startups and offering them EAs. Is that what I heard? EAs is a service also. And to a startup. Could be to corporate also. I don't know if corporate should agree to outsource it versus just hire somebody on their payroll. But I'm assuming startups would be a adopters.
00:52:40
Speaker
Yeah, ES for the large companies, enterprises, that is well-traveled path, and there are many recruiting companies do that anyway. When you talk about the startups, I think there's no one job that can say, this is what I need. This is what I need the E8 to do. And I'm telling you, that's what they call it as a people call it chief of staff, people call it chief administrative officer, waste many hats. And startups cannot define, this is what I need for an EA. I think that's going to be tough.
00:53:08
Speaker
define the boundaries for this kind of job. And the kind of skill you need is very different for startups. Interesting. One more, I want to put across an idea from a listener. So he is building a SaaS product for interior designers. Basic team in India, interior designers have a lot of back and forth with clients who want some interior design work done. And so he's built a
00:53:31
Speaker
complete SaaS product where every interaction can be documented. They can share design plans and clients can say, I like this color or whatever. So what would be your suggestion for him? Like how can he scale this up? And do you see this as an investable business?
00:53:45
Speaker
No, I mean, this is also a well-traveled path actually, right? There are a few companies, I don't want to name them right now, but which have done this and has an initial success they have had, but didn't have too much success scaling up. Right. Because you're talking about like a live space, which takes the whole turnkey. Right. I mean, if you're talking about working with architects and making sure that they can render the whole thing and stuff like that.
00:54:08
Speaker
It is definitely a good model. A few companies tried that model and it depends on your person's ability to develop the market, do the sales and do the value proposition. But companies have tried to do that but had scaling issues in India.
00:54:26
Speaker
So he's doing a Shopify approach where he's saying that I will provide them with the tools instead of trying to acquire the customers. It's not a B2C play that he's looking at where I say like a live space and all are like B2C where they're directly acquiring the customers. Possible. I mean there is definitely a need right most of these self-serve tools
00:54:44
Speaker
are also tough, right? You need to make sure that initial onboarding and people are using it the right way till things become stable is something the entrepreneur needs to focus on. But the market space is there, but it is. Many companies have tried that as well.