Indian start-up ecosystem is not unknown to Amit Somani. The former Google executive and a great fan of billionaire investor Warren Buffet, Somani was part of the online travel company, MakeMyTrip’s leadership team that took it public with Nasdaq listing in 2010.
For the current dry spell in funding and valuation, what Somani says, coheading Bengaluru-based seed fund Prime Venture Partners (formerly known as AngelPrime), largely echoes the broader sentiments in the ecosystem, that early stage dealmaking will more or less remain unaffected.
“If you are looking at companies raising seed to some extent series A round of funding, these companies are just beginning to get some growth. Current slowdown has greater impact on the much later stage companies,” says Somani. However, he agrees to the fact that valuation markdowns leave some impact on the overall market sentiment.
The Buffet fanboy quoting him opines that investors should only invest in businesses they still want to hold on to, even if let’s say stock market shuts down for five years and there is no way to determine valuations. “If somebody is bullish on a Zomato or a Flipkart or Ola, it shouldn’t matter what the stock price is today.”
Companies have to be built on real revenue numbers, unit economics, and real customers, adds Somani
citing LinkedIn’s example of losing $10 billion of its market capitalization in February 2016 that, “Customers have not stopped using LinkedIn as a product due to its stock market performance.”
Getting it Right
Somani categorically points out the important of the market size the start-up is operating in and the quality of its team. For him, the best bet can be any one, right from just an idea on the paper or few crore in revenue, provided it isn’t a copycat of an existing one. “A seed stage company can just be two guys and a dog in a garage. We have invested in companies that had their idea on a paper napkin, and also in the ones that had Rs two-three crore revenue. The very first thing we look before investing 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 a lot is happening in that domain,” maintains Somani.
“Second thing that matters is whether the start-up has an outstanding team. The other important thing is whether technology could be used in some form of disruptive thinking. We as a firm doesn’t like to invest in copy cat ideas,” adds Somani. Some of Prime Venture Partners prominent start-ups include EzeTap, and HackerEarth. The fund scout deals primarily in fintech, healthcare, software as a service and mobile space.
Some of the key areas the fund looks for in a startup’s investor pitch are, core problems that it is solving, its ways to measure success, its uniqueness, whether its timing is right and the target customer segments. Somani says that he often questions entrepreneur’s inspiration of coming up with the idea.
Somani clearly sees 2015 as a year of aberration with focus on metrics including month-on-month growth, unit economics etc., coupled with more customer surveys being done today. However, that hasn’t curbed the venture capitalists’ interest in backing promising start-ups.
This article first appeared in the Indian edition of Entrepreneur magazine (August 2016 Issue).