Do the recent markdowns have any impact on seed funding today? What are investors asking before raising new funds in today’s scenario?
Prime Venture invests in nascent stage startups and also helps them scale their businesses post the investment. The firm’s portfolio includes companies such as EzeTap, Lovecycles, Synup, Nimble Wireless, SmartOwner, KredEx, Happay and HackerEarth.
Amit Somani, Managing Partner at Prime Venture Partners, was part of the leadership team that took MakeMyTrip public in 2010. A huge fan of Warren Buffet, Amit said that the markdowns that are happening today have very little to no impact on early stages of funding.
When asked on the impact of the markdowns on early-stage funding Amit said, “If you are looking at seed to some degree even series A, these are companies that are just beginning to get built out and get some growth. It has a much more impact on the much later stage companies.” However, Amit agreed to the fact that markdowns leave some impact on the overall market sentiment.
Quoting Buffet’s famous quote, he said that one should only invest in things you still want to hold on to, even if the stock market shuts down for five years and there was no way to determine valuations. “If somebody is bullish on a Zomato or a Flipkart or Ola, if they really believe in their business models, it doesn’t matter what the stock price is today.”
Amit said companies have to be built on real revenue numbers, unit economics and real customers. If the company sustains these metrics it will continue to remain valuable and customers will still trust their business model. Citing Linkedin as an example, which lost $15 billion of market capital recently, Customers have not stopped using Linkedin as a product due to its stock market performance, he added.
Attributes Prime Venture seeks in a startup before raising seed funding
“A seed stage company can just be two guys, a dog in a garage. We have invested in companies that have had their idea on a paper napkin and also in companies that had 2-3 crore of real revenue. The very first thing we look for is the market size – it has to be a big market which is inherently capable of monetization. We have a lot of investments in the fintech space because there is a lot of happening in that domain.”
“Second factor that matters is whether the startup has an outstanding rockstar team. Does that team has the founder market fit, which means are those the right founders for that market,” he said.
“Third is whether technology could be used in the right way in some form of disruptive thinking. We as a firm don’t like to invest in copy cat ideas. All of our investments we look for ideas that are one of a kind.”
Assuming the startup has based all the three benchmarks, after Prime Venture invests in a startup it closely works with them and gets deeply involved in their building process.
Pitch and other questions
Some of the key things the firm looks for in a pitch are- what are the core problems that you are solving, what is the size of the market, how will you measure success, what is unique about you, why is your timing right and who are your target customer segments.
Amit said that he often asks entrepreneurs what inspired them to start that particular business. An idea which is inspired from an ongoing trend is very different from starting something due to some personal experience and inspiration.
Scrutiny prior to funding has increased today
Amit said that 2015 was a year of aberration and this has led to a lot more questions and scrutiny before at fund raising sessions today. Questions like month-on-month growth, analytics data, unit economics and more customer surveys are done today. There is a lot more diligence in the market today and it takes a little longer to sign a new round of funds.
This level of scrutiny has not curbed the amount of interest in VCs with regards to investment. "Every day after I come to office, apart from working with my portfolio, the other thing I think about is what am I going to invest in today?", Amit said.
Amit said that Prime Venture’s preferred areas of investments today are fintech, health, global SaaS and interesting new models around mobile. They are however not agnostic to other domains and would invest in interesting ideas that come to them.