Past few years in the Indian startup ecosystem have been a rollercoaster. If you’ve tracked the space, you’d agree that we were pretty nascent till 2013, reached euphoria in 2015, hit winter in 2016-17 and now have rebuilt with renewed zeal albeit with cautious optimism. There is much more maturity across the board in the ecosystem sincea fair share of founders, investors and employees have experienced the cycle of success and failure.
Naturally, the investor mindset has also evolved.Quite a few fingers have been burnt through the FOMO investments of 2015, while some have missed out on strong deals post that due to excessive pessimism. The ecosystem seems in a balanced state now and at Globevestor, we believe that an investor’s ask today includes the following:
1. Large outcomes (still a necessary condition)
Despite all the hoopla by disgruntled founders and outside observers about investor fascination with unicorns, the reality is thatthere’s no credible alternative to VC-funded path for tech startups to build quick & huge scale, at least in India yet. With high startup failure rates & short fund lifecycles, the early-stage investor expectation will continue to be a 20-30x return potential from an investment.
This means startup founders would need to continue focusing on huge target markets and solve for strong needs in large potential customer bases. In addition, technology should provide them a shortcut to reach & deliver at huge scale quickly.
2. Strong execution experience (bias towards second-time founders)
Investors always want strong teams, but there’s an increased bias now towards second-time entrepreneurs and founders with prior execution experience at large startups. It might be a reflection of deal flow, as many more second-time founders now dot the ecosystem, or of investor wariness in backing zeal over demonstrated capability from the heady 2015 days.
In any case, there’s a lot more mature, quality competition among founders vying for investor dollars than before.Naturally, all things being equal, investors are gravitating towards prior relevant experience to improve chances of success.
3. More traction (higher burden of proof)
Although there are many more early-stage investors (new funds & angels) in the system now, the average round size has increased, and overall seed stage funding has reduced in value in last few years. This means that it is currently a buyer’s market and there’s hardly any fear of missing out among investors.
Investors are taking their time to make investment decisions and round closures seem to be taking longer, based on anecdotal data. As a result, founders need to demonstrate more traction, market proof and customer need, andoverallcarry a higher burden of proof on their shoulders in 2020.
4. Capital efficiency (rethinking growth-at-all-costs)
In part due to the recent wavering fortunes of WeWork and other tech IPOs in the US, struggles of some late-stage funds, and emerging challenges of some leaders back home, the growth-at-all-costs mindset is being revisited. Investors usually view growth Vs profitability as a switch, but it’s increasingly apparent that the switch can come at a price in terms of valuation and can be quite challenging to navigate.
Therefore, there is a renewed focus among investors to look at capital efficiency much earlier in a startup’s journey than before. Hence, founders may find themselves being pushed more on unit economics and profitability indicators now.
5. B2B businesses (higher acceptance now)
B2C businesses have been the cynosure of investors for long due to the obvious market opportunity. However, there’s growing confidence that Indian businesses are a valuable segment that can be tapped too, as well as that global businesses can be successfully targeted by startups based in India. The rise of several global SaaS plays and local SMB plays have bolstered this confidence.
The added benefit of typical B2B businesses of being revenue-led and their ability to be more capital efficient, adds to their attraction in the ongoing market environment.Hence, investors are much more enthusiastic about B2B startups in India than before.
Globevestor remains very bullish on teams that demonstrate the above and we look forward to meeting founders executing with passion and urgency.
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Ankur Shrivastava is a Founding Partner at Globevestor and has invested in over 30 startups, including Zoomcar, Springboard, Flintobox, Doxper& Avanti. He can be reached at [email protected].
