2016 has been a story about funding – from corporate funding, to markdowns and government-backed money coming into the picture. Another interesting facet of funding that one got to see this year was the coming together of multiple investors for a single round.
Though this phenomenon isn’t for the ecosystem, it’s definitely a breather at a time wherein we’ve seen the wrath of a list of big league start-ups getting marked down by big-league funds.
A COCKTAIL OF IDEAS, KNOWLEDGE AND ENTREPRENEURS!
Investors believe that the coming together of different power houses helps in collaboration of a wide range of knowledge under one roof. “The main reason is to diversify the portfolio by collaborating with others. Fund A may have more in-depth experience and understanding of a particular sector, while Fund B may be trying to spread the
risk across many companies and bringing more capital to this sector, that in turn will improve the success and valuations,”said Jaspal Sarai, Co-founder of Jaarvis Group. For a cocktail like this to work, it’s very important for like-minded investors to come together and there should be a lot of transparency between the investors and the start-up.
“Collaborating with a fund is similar to collaborating with an entrepreneur. In order to build a business in a constructive manner it is important that everyone around the table be aligned on the vision and objectives of the company. Investors spend time with both entrepreneurs and co-investors to understand motivations, values and timelines before collaborating. If there is alignment on the long-term objectives, then everyone can work together to navigate the short-term bumps on the road,” Sandeep Murthy, Partner at Lightbox, said.
WHEN INVESTORS COLLABORATE
The industry has seen an apparent slowdown in funding, hence many believe that this has triggered a slew of incidents wherein investors have flocked together to raise one single round of funds. However, sometimes many believe that it is a practice of the past that has become more prominent today. Pankaj Jain of 500 Startups said that most investors like to collaborate with other investors regularly because it is a great way to bring additional experts, opinions and networks into a deal.
“It’s also a great way to get access to validated deal flow,” he adds. He further went on to add that the most common things investors look for are past success, reputation with other
investors and founders, complimentary areas of support, check sizes that fit with the norms already negotiated with the entrepreneur for the round.
Talking about the benefits, Pranav Pai, Founding Partner at 3one4 Capital, said “The funds might recognize that there are complementary effects of having each other on the cap table, such as potential client connections, a track record in the category, portfolio synergies, strategic interests, and so on. These are some of the components of the overall trend of cooperative competition.”
V Sivaramakrishnan, Finance Director, Venture Factory, says that for co-investing to work it is important for funds to have somewhat similar expectations in terms of returns, growth and investment horizon as well. According to data from startup research firm, Tracxn, there have been 198 instances last year when two or more funds have
participated in a funding round.
MORE MIXING AND MATCHING IN 2017
With investors gradually becoming choosy about whom they wish to fund, money will not come easy to those big and small in 2017. Investors believe that they are going to see more of these collaborations happen in the New Year, as it will improve chances of the company succeeding and also de-risking each individual investment. Co-investing will also enable funds to expand their portfolio acrossdomains within a short period of time, giving them a chance to have the best of every sector.
(The article was first published in the January issue of Entrepreneuer Magazine 2017. Click here to subscribe)