Picks for 2017, wait shouldn’t it be picks for 2025?

 

It is that time of the year when VCs are asked about what sectors are they betting on in 2017? It’s become a game of “hot or not” for the last few years. Sectors seem to change as frequent as the years if not seasons. Food tech was hot a couple of years ago, no one seems to mention it anymore. AI and chat bots are probably still hot.

Investing cycle in venture is typically 10 years. The first 2-3 years is when the investments are made, over the next 5-6 years they are nurtured and then it’s time for exit and returning the money to the limited partners. To make stellar returns the portfolio companies and the sector they address need to be attractive even at the time of exit. The VC not only has the job to catch the wave during the investment, but also must be foresighted to see if a sector will continue to be hot over the next 8 years. That is the difference between a fad and a trend. A short-term capital can ride a fad and make money, but patient capital like venture needs to catch a trend. The difference between fad and trend – Vietnamese food in India may be a fad, but healthy eating is a trend.

Founders have an even tougher choice to make. The path to fad is easy – it is the talk of the town and can attract talent and capital. The path to follow a trend is relatively tougher and needs a greater understanding between the partners building the company – founders and investors. The investors must understand the upside of a trend and continue supporting the team. The founders must believe in frugality to sustain the company for the years until the start of significant cash flows from the business.

For investors, the choice can mean better returns. A fad usually has irrational investor interest and valuation. A trend could be more attractive investment, but would require greater analysis and connecting the dots.

So, shouldn’t the question for the investors be – what is your prediction for major trends in 2025?

 

 

 

 

Advertisements

Fintech: more than just hype

We in India are experiencing a shift in the way we are paying our bills, buying insurance, investing our savings and borrowing. Tech led companies are offering us better alternatives at lower cost and more convenience.

What are the macro trends that are driving these changes?

Millennials are thinking differently about financial services

A recent survey by CBInsights found that 79% of millennials in the US view their relationship with their banks as transactional and 59% think the financial products are not even targeted at them. Around 2/5 of India’s population is in the working age group of 20-35 years and like their counterparts in the US, do not relate to the traditional financial institutions and their products. These mobile first customers want convenience and personalization.

Incumbents underserving the consumers

Like in most other sectors, the Indian consumers are underserved by the existing financial service providers. Only 14% of individuals save at a financial institution, not a surprise considering that gold is still the preferred asset of investment. Even worse, only 6% of borrowed from a financial institution. We continue to be a cash economy with only 1 in 5 having a debit card.

Government pushing for financial inclusion and digital economy

The government is pushing for financial inclusion with programs like Jan Dhan Yojana, UID / Aadhar and Unified Payments Interface (UPI). A recent paper claims that with Aadhar decision making on loans would be done in 15 seconds and virtual credit cards will be issued instantaneously. Over 200M bank accounts were opened under the Jan Dhan Yojana bringing a large section of the population under the banking and digital umbrella.

Tech players are innovating

The tech players are re-imagining the role of tech from being an enabler to a disrupter in delivering financial products. With credit scores being new in India, tech enables the use of social and transactional data to evaluate credit risk for millions of new to credit customers. It has lowered the friction of making online payments through wallets and seamless payment gateways.

Where are the opportunities?

Creating new markets

As the economy becomes less reliant on cash and moves towards a digital economy, there is a lot of transactional data which can be used for assessing credit worthiness of a consumer or a business.  Companies like CapitalFloat and LendingKart use digitized credit risk processes to disburse business loans in record time. New to credit customers like people in their first job, who would have never got a traditional bank to loan them for a durable purchase, have access to personal finance from companies’ tech lenders like Finomena and Krazybee.

Virtual EMI cards, which are now a payment option on popular ecommerce sites, are pre-approved personal loans for buying from ecommerce sites. NBFCs like Bajaj finance and new age tech players like FastBanking are among the growing number of virtual EMI card providers enabling a large population to get financing for their online purchases.

Disintermediating the traditional bank

Banks have traditionally been the one stop shop for all our financial needs, but they have been very inefficient and discriminatory. Small savers never got the personal finance advice that the HNIs got. But this is changing with personal finance platforms like MoneyView and Slonkit that provide tools to everyone to set savings target and effectively manage the use of credit cards. Personal asset management companies like Scripbox and FundsIndia have democratized the portfolio management services that were earlier exclusive to HNIs. They have simple intuitive mobile apps that makes it easy for a new to investing consumer to save and track investments.

There is a huge disparity between what the savers get for their deposits and what the borrowers pay for their loans in India. This is bound to change as P2P platforms like Faircent take off. It has already taken off in western markets like the UK where over 50K people have cumulatively lent GBP 1.4B to businesses on FundingCircle.

Online brokering

Not long ago, getting a quote for insurance, loans and credit cards involved a visit to a few neighborhood bank branches. Consumers were still not guaranteed the best deal. Platforms like policybazaar, bankbazaar and deal4loans have made it possible to get a comparison and buy insurance and loans almost instantaneously.

Lowering the friction in a transaction

Payment gateways have made the process of completing an online transaction seamless. The governments push for ‘Digital India’ is proving to be a huge boon for the gateways. Wallets, with preloaded money that can be spent at participating online and offline merchants have become ubiquitous. It is not only the backbone for most ecommerce transactions today, but also provides solutions like remittances and transfers.

Conclusion

Tech companies seem to be best placed to offer financial services to the large young underserved population that is mobile first and on the internet. It is happening already with apple, google and amazon making big bets on fintech. The next set of large financial companies will be tech startups that serve this large innate demand of the new consumers.

 

Pitching your startup!

Founders usually are looking for advice and thoughts for pitching to VCs. Typically VCs look at hundreds of deals every month. Not every VC is looking at the same data or has similar preferences, making it even more complex to know what to cover in a pitch. While I’ve pitched only a few times, it occurred to me that I spend a lot of time listening and discussing pitches, so I should just put a piece about what VCs would like to hear!

You have around 5 minutes to grab the attention of VCs; so do not wait to tell about the most awesome part of your startup – team, market entry, technology etc. Tell it like a story. We need to know what problem you are solving and why you care about it. Tell us about your market. How big it is, how much can you address, how soon and who are the competitors? How will you have sustained differentiation against your competition? Who are your partners in crime, your team. Of all the things they could do in their lives, why this crazy thing? If you have launched, show us what you have done. Nothing like seeing product demo and hear customer testimonials. Have a clear ask, having clarity about what you want from an investor (how much are you raising, at what terms, introductions) tells a lot about your planning skills. One last key takeaway is to know your audience before pitching to them.

Shake it up! Edtech 1.0 ripe for disruption

How do you identify an industry that is ripe for disruption? When there is a gap between the solutions offered by current players in the industry and the changing demands of its customers, new players can disrupt the industry.

Companies from edtech 1.0 assured us that they would solve all the problems with our education system. They did solve for access by bringing offline content online. The best content from top professors and universities that was previously inaccessible to most was bought online by the likes of Coursera and Khan Academy. Online and live tutoring by companies like Tutorvista provided access to quality teachers to students around the world. edtech 1.0 was the best thing to happen in democratizing access to knowledge, since the invention of internet.

However, providing access has not solved all the problems, students struggle to learn, underperform in tests and fail to reach their true potential. As per a public report, 47% of Indian graduates are unemployable and 90% of engineering graduates are unemployable. The key reasons for these are:

–  The current learning process is boring and outdated. The focus is on rote learning and scoring at all levels. There is no engagement in the learning process.

– There is no personalization and one on one tutoring is expensive. It has been reiterated in many articles that we can not have a “one size fit all” solution to educate our diverse students. Students have different aptitudes and most are not even exposed to the various career options they have. The traditional and the edtech 1.0 players have failed to innovate and build products that individualize to every student’s profile.

– There is a disconnect between what is taught and the skills required in the job market. The traditional educational and edtech 1.0 players are teaching curriculum that is not in sync with the new age jobs. The frequency at which the curriculum is updated is slower than the rate at which the job profiles are changing.

If India has to fully capitalize its demographic dividend, then we need to address the issue of unlocking the true potential of everyone in our workforce. While this is a massive problem, tech can offer simple solutions. Edtech 2.0 companies are unlocking true potential of students using data and analytics to personalize education, make the process of learning fun and social, focus on true learning rather than rote and give real time feedback.

Sources for data:

What will it take for high tech startups to bloom in India

A few weeks ago, I heard the pitch from Team Indus which is the only Indian team competing for the Google X prize to launch a rocket to the Moon. In the process of competing for the prize, it is building the next generation aerospace company in India. I left the room with a lot of optimism in the future of high tech in India and with the thought – What would it take to see many more bold startups from India aiming for tech breakthroughs like advanced materials, super computing, blockchain technologies and space?

Nasa photos

Pic from: http://history.nasa.gov/ap11ann/kippsphotos/apollo.html

India has seen hundreds of consumer internet startups by founders who had just graduated. These 23-25 year olds understand the millennials and technology better than anyone else. They built startups that took advantage of the current technologies to define new business models. However, few ventured into advanced sciences, as high tech startups require people with doctoral and post doctoral degrees, research background and experience in the relevant field. Though Indian’s bloom and flourish in research labs outside India, few have built hi-tech businesses here.

The spawning of high tech startups in India could be driven by a trifecta of diverse forces. First, we need to create a higher education system that focusses on real innovation. India has very few institutes that are renowned for advanced research, so people who want to pursue research end up studying in the US / UK. Most end up working in high tech startups in the Silicon Valley and Cambridge, UK. To provide these talented people the opportunity, the Indian government must focus on building advanced education institutions on par with the best in the world and open up 100% FDI in higher education. There are examples of how this has been done. Saudi Arabia founded KAUST (King Abdullah University of Science and Technology), a private post graduate research university that brings together the best faculty from around the world in areas of super computing, visualization, nano fabrication etc. The university has become the nucleus of research and development in the region.

Next, We need to bring together research and business ideas. The scientists and researchers at the various advanced institutes, like ISRO, IISc and HAL are our best bet to start up in the near term. These institutes must encourage their scientists to commercialize their ideas. Most accelerators are focused only on popular business models and consumer internet, which require little intervention. We need specialized accelerators for high tech businesses like the global aerospace business accelerator by Airbus in Bangalore. Government and industry must promote / incentivize many such accelerators that incubate technologies that take longer to gestate.

Finally, the Indian investors – both venture and corporate must build capabilities to evaluate high tech. Opportunities in this space have potential for very large impact and outcomes. Investors could form alliances with universities and foreign funds that have experience in advanced tech investing to understand the technologies. They can take cues from Israel’s venture capital and incubator industry that plays an important role in the booming high-tech sectors like material technology, medical devices and internet security.

With these forces coming together and the large domestic market, India will be among the best places for true innovation and commercialization. I hope to see the next breakthrough medical devices, AI robots and spacecraft designed and built in India.

Let a 1000 high tech startups bloom in India.

When startups should not raise money from angels/VCs

A lot of time is spent in startup circles discussing fundraising rather than business ideas and viability.

No_VC_Angels

Startups must stay focused on the business and its profitability rather than securing investments as the primary goal. If the entrepreneur stresses on commercial viability, the employees recognize that cash generation is of utmost importance. Once a strong business is built the entrepreneur is in a better position to seek funding.

Raising early stage finance is generally a demanding process, which takes up a lot of time, commitment and emotional involvement, which must have been directed towards building the business and meeting customer’s need profitably. Also, external capital comes with demand both in equity and time. There are obligations for results and it limits the ability of the entrepreneur to make independent decisions. So unless, the entrepreneurs have made plans, like a strong execution team, to stay focused on business while trying to raise funds, they must not pursue angel/VC money.

On the other hand Angel and VC money has its advantages – entrepreneurs not only get capital, but also get the vast experience of active VCs, who might prove connectors for you in the industry and help you make decisions. Raising private equity from VC and Angels is a straightforward process and does not require complex permissions/regulations that are a part of raising public equity/debt. And sometimes, the business can benefit from the publicity of the investment,

Reference: A Guide to Early Stage Investment by Alan Gleeson.

Disclaimer: This blog is my personal perspective of this and is not intended to constitute legal advice.

5 Exciting b2b startups in India

Header

Here’s a list of 5 exciting b2b startups that I’m following. I used the evaluation criteria used by Jason Ball in his blog. – People, Product, Potential and Traction.

1. UnicommerceUnicommerce

Cloud based Multi-Channel Order Fulfillment Platform which enables E-commerce merchants

People: Started in 2012 by a group of IIT / IIM graduates, they have proved that passion, talent and ability are more important than experience. Without any previous experience in warehouse/inventory management , they have build world class inventory management software and have over 4000 paid users! Ankit, Manish and Vibhu have relied upon their IIT connects for the first few deals and there after relied on the products strength and customer service.

Product: Their product, Unicommerce, is comprehensive enough for big e-commerce players to rely on and easy enough for smaller online merchants to use.  It provides end to end order fulfillment including procurement, vendors, inventory, warehouses, drop shipments and returns. Being hosted on Internet, it enables small and medium sized online sellers to tap power of technology without any technology knowledge.

Potential: One of the ways that small offline businesses can survive the onslaught of e-commerce is by joining the e-commerce marketplace. The millions of small offline retailers and suppliers willing to join the online marketplace in India are the potential market for inventory management software.

Traction: Within a short span of 2 years, they could help their 4000+ customers do Rs. 1000+ Cr business. Unicommerce comes pre-integrated with all the leading marketplaces like Jabong, Snapdeal and Lazada, carts, couriers/shipping companies, accounting software and have built high barriers with these alliances for new entrants and in 2013, they raised their first round from Nexus.

2. Power2sme

Power2SME

Group buying site for SMEs

People: The founder, R Narayanan is a seasoned entrepreneur with experience in diverse industries, he is also a cost accountant working on profitability from early stages. He has built a team of around 60 and is advised by a very capable board.

Product: The company is a group buying site for SMEs in India. It has also diversified into SaaS applets and employee retention and motivation for SME. The primary business of group buying can include several products (over a million products listed in amazonsupply.com) and serviced through the common infrastructure.

Potential: The Indian economy is poised to return to high growth and the new government will provide an impetus to manufacturing, the market for industrial supplies will only increase. It is a blue ocean out there and the market is in billions, even amazon has started catering to SMEs in the US through amazonsupply.com.

Traction: With $8m of funding from Inventus, Accel and Kalaari, there is enough capital to see the company through the venture phase. The company has its head quarters in Mumbai, which is the hub of commodity business in India. Continue reading

Myntra Acquisition: Efficient price discovery?

The Indian startups are celebrating the acquisition of Myntra by flipkart, some estimates put the valuation of the deal at $370mn. Myntra, the older of the two, is in a high margin category – fashion, which is also one of the largest categories in the offline market. It has made some great moves by introducing its private label and celebrity lineups, but it is also has higher returns, resulting in high operating costs.

Did shareholders of Myntra get the maximum value from the acquisition? Most acquisitions we hear in media have competing bidders and Myntra could have looked for other buyers and not just Flipkart. As news of the deal has been around for months before the deal was finalized, both had invested/sunk time, money and reputation into the deal and were in high pressure to close the deal. Myntra could have been bought over by one of the large conglomerates that are also in offline fashion retail or international investors, these have deep pockets for investments and innovation. With competing bidders, the price discovery would have been more fair and in this case Myntra shareholders may have benefited.

myntra acquisition

Disclosure: Both Myntra and Flipkart are private companies sharing very little financial information, so these comments are based only on publicly available information.

Trade Sales: Should it be the preferred route for Indian PE/VC exits?

Indian VC/PEs are excited that with the new government with clear mandate set to take office, the IPO markets in India will be better in the next 6-8 months. Is it the best exit for VC/PEs? IPOs usually involve selling a minority stake to the public and fail to extract and synergy control premium that majority stake sales can elicit. Public issue of equity involves high transaction costs and carries the risks of market conditions for success. The other common exit option is secondary sale, but PE firms at the buy side are shrewd negotiators and can walk out of a deal if they do not like, this limits the premium for the seller. Management Buy In is another possibility, but will usually involve a PE, limiting the upside potential.

Trade sales seem to be better – strategic players who have interests in the sector and company pay a higher premium for control and synergy and deals involve very little payout to the bankers and legal team, bettering the returns for the investors.

Due Diligence: Don’t Miss these

The usual checklist of due-diligence before recommendation for deals/investments involves a series of checks in accounting, actual check of inventory/bank balance and letters from vendors etc. However, the potential target must also be evaluated on certain qualitative parameters like the business model and environment, macroeconomic and social consideration and fit in the portfolio for the acquirer.

Below is a list of a few important considerations

Business model and environment

  • Is there any venture like businesses that has promising high growth?
  • Any Intellectual Property that can be leveraged for new streams of revenue?
  • Will the current management team continue?
  • Is there major re-structuring of business required?
  • What is the prospect of the business – Is this a declining industry?
  • When is the next level of large capital investments required for the current growth figure?
  • Credit ratings of the business
  • Evaluate investments made by the company in other businesses?

Continue reading

Raising funds for your startup? Get the right capital structure

Many startups in India do not have an idea of how the capital structure of their company will affect them and their company. Adding debt can be a smart way to retain a higher ownership of the company and meet government regulations in certain sectors (Flipkart and Myntra received ED notice for allegedly exceeding the foreign equity stake holding beyond what is permitted). Companies must use debt to finance capital equipment/expenses and expensive venture equity for product development and as a bridge between operational income and expenses. Raising debt is more challenging and may require collateral and personal guarantees, but is worth the extra effort.

Sources of debt Continue reading

How to get into a VC firm in India

The people structure at VC firms is very different from conventional companies and professional firms. There are more people at the top than at entry and mid levels. At the top are general partners or GPs, they have raised the money and have the check book, these are people who have in their past lives been successful entrepreneurs or professionals with several years of experience at top consulting/investment banking firms. The middle level is principals/VPs who have a top notch MBA either from top IIMs or Harvard/ Stanford and a few years of experience, these guys head teams of entry level analysts, legal and core finance professionals to assist the partner by recommending investment opportunities and serve as an extra pair of eyes on the portfolio companies.

Continue reading