Investment is a serious business and I take it seriously. After spending nearly 35 years being an entrepreneur, an angel investor, and a venture capitalist (VC), I understand that all that glitters is not gold. So, I prefer to stay away from me-too Indian ventures like Ola, Flipkart, and Snapdeal that are more froth and less milk. As early-stage investors we use the same approach in the US and India. Though there are no set rules for success but few things are good to follow.
Read Your Market Correctly
I never invest in sectors, I invest in entrepreneurs. I need to know whether an entrepreneur understands how to solve the given problem. India has massive and unlimited opportunities in different sectors but it is a very unproductive society compared to China and the US. India needs start-ups everywhere and need to do it in the right way. Half of the start-ups do not have technology components. However, the entrepreneurs are good here and the market is maturing. The only problem in India is exits, we do not have too many of them yet.
When you start a company, it has no value, you only start with an idea. So you go to a VC or an angel investor and you say hey, I’ll sell you 20 per cent for X million dollars. What you have sold to him is a risk by diversifying 20 per cent of your risk.
If you can’t create value of more than two million dollars then you have wasted that money. Now, when you go back and raise more money, you are going to dilute it even more. So what happens in this environment is that capital efficiency, which is the heart of a successful startup, goes down. Your valuation goes up only when you can make money and along with it chance of raising capital also goes up. We stayed away from all those hyper high-tech companies like Snapdeal, and Ola. We just did not believe that their valuations were real. They are selling stuff below cost, so we stay away from them. We are very fundamental investors.
Learn Investment Discipline
The way these me-too e-commerce companies are working is truly bad; they have no cost margins like Flipkart. Its founders were trying to do something which was sort of undoable and were throwing money in it. They have wasted billions of dollars and have failed in the marketplace. Now they are looking for protection. That’s not the right way to think.
It is very hard to imagine that these guys can have discipline, the whole organization is indisciplined. They were not start-ups that started lean and mean and now suddenly they have become that. Start-ups have to be lean and mean from the start, it is very hard to transform later. It is like a big fat and flabby person who needs to do lot of exercise to actually become fit.
Ownership stays with you only when you don’t waste capital and think of capital as the life blood. When you start to raise billions of dollars of venture capital, you can burn that money in a wrong way. In this case, tell me why should the ownership stay with you. We are early investors and we have small funds and there is no need to invest in later rounds.
Accept Failures and Start When Everyone Leaves
Failure of start-ups is absolutely required. Companies see why they failed as learning comes from failures. If everything works well, there is no learning. The best time to start a company is when everyone else is leaving the marketplace. Recessions are absolutely required in a start-up ecosystem.
I never ever have any regrets; you miss opportunities all the time and that is the nature.
(This article was first published in the February issue of Entrepreneur Magazine. To subscribe, click here)