Blume Ventures Wants To See More Capital-Efficient Startups
Good investors know when to push, probe, nudge but also when to step back and are self-aware when mentoring borders on interference.
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Sanjay Nath, Managing Partner and Co-founder, Blume Ventures says that apart from the entrepreneur's passion and execution skills, he and his colleagues ("Blumiers' as they call themselves) also look for traction before placing bets on a startup.
How to pick a startup for investment?
It depends on stage of the investor; a late-stage investor (e.g. hedge funds, Series C onwards growth capital funds) track companies over years, waiting for a leader to emerge before they place a heavy bet. That's a very different level of risk-return curve when compared to early stage VC. As a late-stage investor you often bet on the "last man standing', for example a Practo in the healthcare-tech space.
In our case, apart from looking for the founding team's passion, drive and execution, whats also important is curated validation and traction.
The growth curve on a relative basis is more important than the absolute level of traction. All entrepreneurs love to talk about their product (as they should), it's our task as the investor to probe deeper and test how potential customers and the market-at-large will value their product/solution.
We usually make 3-4 introductions after every meeting; there's no better validation than constructive user feedback. Such validation is the missing link, helping us evaluate the difference between what the entrepreneur says about the product and how it's actually perceived. We'd also like to see more capital- efficient startups that are not burning cash rapidly and are on a path to sustainability and profitability.
According to Sanjay startups in general should possess the following qualities-
- Just focus obsessively on a unique customer/user pain point that has remained unsolved
- Focus on developing a solution to target this, with an early and distinct competitive advantage
- There's nothing like customer validation (via pilots, paying users, real B2B/enterprise customers) - if there is real customer growth, money will follow
- Build a team before you pitch to investors – it's rare and difficult for single founders to get funded (put yourself in our shoes - if you can't convince others to leave their careers and join your vision, how will you convince your customers? Or Investors like us?)
However, with 2016 being a period of valuation markdowns and restrained funding, Sanjay said startups should additionally focus on being capital efficient. Money is going to be tight (it already is).
That said, what's interesting is most large VCs have all raised new funds, even larger than their earlier ones (including Blume). So there is indeed money - but it will be deployed under greater scrutiny. Given this, stretch whatever capital you raise well past 2016.
Earlier, we'd advise our portfolio companies to raise for a runway of 9-12 months. Today that advice has changed to 12-15 months, even 15-18 months. A focus on sustainability (+ve net margins, path to profitability, +ve unit economics) are no longer a nice-to-have, they are a must-have criterias. Don't over stress about the "perfect" valuation. Given the tight markets, its far more important to find a longterm investor rather than go with an investor who just gives you the highest valuation.
An ideal investor-founder relationship
The ecosystem that an entrepreneur is trying to build is like a jigsaw puzzle, where an investor is important, but is only one stakeholder. There are customers/users, business partners, employees, suppliers/vendors, and that's the complete ecosystem.
The well known Sun Microsystems founder-turned VC Vinod Khosla has said it well "my job is simply to be a coach, a type of venture assistant that guides entrepreneurs". The most important aspect for entrepreneurs to realize is this is a very long-term relationship. Good founders know when to reach out to their investors. Similarly, good investors know when to push, probe, nudge but also when to step back and are self-aware when mentoring borders on interference.
In India, founders generally speaking find it difficult to share bad news, as we're all used to mainly delivering (and like to hear) good news. One of our fund investors had an interesting observation "Only good news travels up the elevator, while bad news is always banished to the basement!".
The best partnerships are defined when investors can go upto the founder and say "listen, we know what's going right, tell me whats going wrong, where your gaps and red flags are, and lets focus on fixing those". This openness defines a good investor-founder relationship.
Qualities entrepreneurs should ideally possess
The first and foremost quality is the passion that is the motivating factor for the entrepreneur in the first place. You can hire top talent, recruit outside domain expertise…. But you can't "hire passion" if the founding team itself doesn't have it!
Domain expertise that helps the startup prove product/market fit and helps drive a competitive advantage is also important.
Third, founders should the ability to inspire and drive others to join their bandwagon. They have to be able to persuade talent around them to leave their careers and believe in the core idea.
Finally, going back to the central point of traction – the ability to execute consistently and deliver on goals (and promises) is vital. Ideas and strategy without execution are like that hyped-up Bollywood movie that despite a star cast and starting with a big bang, ultimately ends in a whimper.
I'd like to summarize by saying the best entrepreneurs are self-confident but also very self-aware – they have a deep awareness of their strengths but more importantly of their gaps, seek out help to fill them and complete that jigsaw puzzle necessary for success.