TiE Event: How Exit Potential Drives Investment Decisions in Startups

I confess I forgot to take a pic during the event. It was so awesome. All the good people sitting on the stage, talking business, cracking business jokes, smart witty early stage VC sharks being awesome. I’d the opportunity of attending one of the latest TiE events: “How Exit Potential Drives Investment Decisions in Startups”. Click here for more events. The pic is what I could find the closest to the TiE-Entrepreneur effect. A thin notepad, thin wallet, BlackBerry for quick emails (and lighter on the thin wallet) and a basic Vostro (decent laptop before you get rich and buy a Mac).

Who sat on the stage?

• Anand Lunia (IndiaQuotient)

• Paula Mariwala (Seedfund)

• Karthik Reddy (Blume Ventures)

• Rajan Mehra (Nirvana Venture Advisors)

• Rehan Yar Khan (Orios Venture Partners)

India as a Market

There was a unanimous agreement that India is a challenging market. Silicon Valley rules (build a great product, cash flow can be ignored) do not apply here. We see around 2/3 exits every year, which is not exactly great. And companies like Google/Facebook do not come fishing for acquisitions (for product/team) yet. These factors hamper the exit potential of startups, that has an effect on investment decisions.

Karthik on comparing Silicon Valley and Indian exit culture

“The 70s-80s in the Valley saw companies building great IP and beating others at it. They managed to get an edge over giants because larger companies tend to focus more on sales and less on innovation. Often, when the founding team left the merged/acquired startup, the innovation stopped. Culture of building the product ground up, building it for sale is non existent in India. There is a lot of M&A happening in the small scale non-tech industry though, who prefer raising institutional capital. Many of the exited entrepreneurs today made money by exiting their non-tech businesses.”

Rajan on how to anticipate exits

“Is there a way we can create a culture of building value without harping about cash flow? When Baazee was acquired by eBay, it was valued on the base of market reach, not cash flow. The number of customers they acquired mattered more. We often get in touch with global majors to understand their requirements, their parameters. This helps us build a startup (by implementing the necessary changes) which is designed to be acquired by them. Most VCs do prefer global majors acquiring their portfolio startups.”

Paula on raising money & exits

“We didn’t calculate exits at the start, but focused on the team and the product at hand. A startup should have enough capital to accelerate growth. Slower growth due to less capital does affect long term prospects. Silicon Valley has seen exits after 18 months due to their focus on IP, there is still time before we see that culture here in India.”

Rajan (with unanimous agreement by all) on why startups are invested in & acquired

• Entrepreneur and the team are the reason why anyone would invest in and buy a company.

• Has the entrepreneur built a team that is scalable? Are they open to learn, to develop certain skills? Can they unlearn and learn again? That is a ‘scalable’ team.

• Is the operating leverage high or low?

• How do they communicate? Mature enough? Internal team communication? Communication with the customer?

• Do they focus on customer delight? On service standards?

Paula on what VCs do after investing in startups

• Bet on the team (the reason why we’ve invested in the first place)

• Handhold them through tough situations, help them put proper business practices in place

• Help them think beyond technology, beyond sales

• Build a brand. If they don’t get it, handhold them into building one (Vikram Vora often talks about investor Seedfund guiding his company MyDentist into brand building)

• Focus on the speed of implementation. Scalable teams listen, grasp crucial concepts and implement immediately. This enables the startup to grow.

• Focus on customer experience, customer service. Is the startup delighting their customers consistently? Quality service helps the company go global.

Paula & Karthik on companies that grew to a certain extent, became profitable but had no buyer

For an Angel Investor, it is a mental write-off. It is sad, but working on them takes away bandwidth. Writing them off is the only way early stage funds can survive.

Paula & Rajan on companies not fit for Venture Funding

There are cash-flow focused businesses that are not fit for Venture Funding, because VCs need to see exponential growth and an exit, not healthy dividends. There are numerous HNI’s in the market willing to fund cash flow businesses. If the startup has no IPO or a strategic sale in mind, it ought not to apply for VF. This remains the main reason behind rejecting startups that apply. It is essential for startups to understand how VF works.

Paula, Rehan & Karthik on companies that fail

Lovable sharks did clarify that the role of the VC is not just related to the exit. They are emotional and compassionate people (too) who want to see the founding team doing well. In case the business fails, they often work on providing the startup with a decent deal where they lose minimum amount of money. They do their best to make it work, and exit graciously, by making the right efforts.

What do VCs look for?

• High Gross Margin

• High Growth

• Great Teams

VCs on acquisition of startups by Indian giants

The problem is they still assess the startups on the basis of their cash flow. However, they need innovation and it is inevitable for the culture to begin here.

Thank you, TiE Mumbai, for everything.

Dear fellow entrepreneurs, the world wants us to work hard and make tons of money by creating and delivering value for the right audience. Love and peace.