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For start-ups, investors' 'no' is more common than dollar deals over cups of coffee

If investors spend time thinking of their misses, they are busy planning for exits as well. The typical window is seven to 10 years. Till then, they are part of the dizzying valuation game

Nivedita Mookerji  |  New Delhi 

How many millions of dollars an entrepreneur raises - and how often - usually determines the galloping valuation of his tech start-up. Many of these deals, often said to be struck over cups of coffee, sound fascinating. But, for investors, there are weeks and months of hard work behind every signed cheque.

If there are happy stories of fundraising in internet business, there also are thousands of start-ups almost every day that do not go smiling to the bank.

Even as close to $2 billion of venture-capital money has already flowed into start-ups across major Indian cities in the first half of this year, around 99 per cent of entrepreneurs' proposals are believed to have been declined by investors. And, though investors believe valuations of many start-ups are illogical, they put their trust and money in founders with "deep insight and ability to solve complex problems".

Here's one example of what gets an investor interested. In the early days of Ola (earlier Olacabs), when drivers would refuse to show up on time, co-founder & chief executive Bhavish Aggarwal would take a train or bus to his girlfriend's Mumbai house, borrow her car, drive to the customer's location and drop him to his destination himself. "An IIT Bombay computer science graduate driving a cab to keep his customer happy impressed us," says Tarun Davda, director, Matrix Partners India, a venture capital firm that invested in Ola in 2013.

This was among the rare B-series funding by Matrix, with its portfolio for early investment including firms like Quikr (online classifieds), Practo (doctor search engine), MSwipe (mobile POS), and Woo (social dating).

"We like to spot the raw diamond," Davda jokingly says.

Aggarwal has not disappointed his investors - not only because Ola has grown 500 times in 18 months but also because the chief executive still does not own a car; he prefers to experience his own product and understand what a customer might be going through. Investors also take note of other behavioural aspects - like Aggarwal answers messages on his phone within 30 seconds, even at 3 am.

If start-ups have proved a point by driving passengers home or delivering books to their doorsteps (like Flipkart's Sachin Bansal and Binny Bansal; not related to each other), investors have done their bit to know the space first-hand. Sumer Juneja, principal, Norwest Venture Partners (India), for example, says "my colleague and I sat on scooters and mobikes with delivery boys in Bengaluru and went around (during the deal with food aggregator Swiggy. How else would he have experienced it? We saw how order was picked up and delivered, and how payment was made."

"Best businesses are where the founder can see what you and I can't see. So, our investment is not based on the sector so much as the people we'll be working with," says Davda, when asked how an investor chooses his target for funding.

According to Juneja, however, both the sector and the founders are important. "Food is a big part of consumer wallet. So, we thought let's go after food. Among other things, we look at how well similar products and services have done in other countries," says Juneja. For the Swiggy deal, comparisons were made on eating-out habits - in Thailand, people eat out an average 40 times a month, compared with eight times in Mumbai - to draw an inference on how the service might do in India.

But Vishal Gupta, managing director, Bessemer Venture Partners India, points out "you never know which story consumers might like and which one might go viral".

Many of them dismiss as myth that an entrepreneur in his 20s attracts investors while the older ones do not. Davda of Matrix says, "that's not the way we look at it… we look for fantastic founders… age doesn't play a part". He cites the case of mSwipe, a mobile POS company where Matrix has invested. "mSwipe founder Manish Patel had run a successful offline venture for 17 years before he started up".

Bessemer's Gupta, too, downplays the significance of age in the funding universe. "Bigbasket, Hungama, LivSpace (where Bessemer has invested) all have founders aged 35-45 years." In fact, rather than factors like age, investors often get attracted to a start-up that is working on something that relates to a personal experience.

Gupta was in the middle of designing his house in Bengaluru and tearing his hair over it when LivSpace, co-founded by Anuj Srivastava, Ramakant Sharma and Shagufta Anurag, came about. A home design and decor start-up, LivSpace, clicked with Gupta because of his immediate experience of doing up a house. "Solutions from furniture to paint to layout can all be customised and delivered in six weeks on this platform. And, we said yes to them."

It's a different matter that Gupta's house was already 90 per cent done by the time LivSpace deal was struck. For Snapdeal, where Bessemer had invested way back in 2011, it was co-founder Kunal Bahl's convincing pitch that appealed to the VC fund. "Ánother partner at Bessemer was working on the deal and Kunal impressed everyone - he knew exactly what to say." That was many years before Snapdeal was recognised as an e-commerce powerhouse with marquee investors chasing the founders.

But, the numbers in public domain often camouflage the real story. For instance, recent media reports cited Venture Intelligence data that Bengaluru attracted $311 million in VC funds, while Mumbai and the National Capital Region got $772 million and $621 million, respectively, during the first half of 2015. Mumbai start-ups have already attracted in the first half of the year as much as they did in all of 2014, according to the data. However, fund managers point out that these mega numbers are a result of thousands of meetings every year with potential fundraisers. A top executive of a VC firm says its team in India meets six to seven start-ups every day on an average; but it did only six deals in 2014.

"Last year, we met some 3,500 and invested in about 10," says Davda of Matrix. This year, the team is likely to meet more than 5,000 tech start-ups looking for funds but it will invest in just about 20. "We have already met 2,500-odd this year, and we have 30 to 40 per cent coverage. You can imagine the total number of start-ups… Saying no to so many thousands is not easy."

Once the target is chosen, the time taken to complete a deal is anything from three weeks to six months. While the Matrix deal with Ola had actually started over a cup of coffee, it took six months to understand the people in the ecosystem, including cab drivers and customers.

Bessemer shares similar numbers. "We are getting 2,500 to 3,000 proposals a year on average. These include those through emails and on phone," says Gupta. Last year, his India team met some 800 start-ups and struck about half a dozen deals. "We say yes to less than one per cent that come to us for funds." Bessemer's quickest deal, in 22 days, was the Snapdeal one.

In fact, due-diligence is done on both sides of the table in many cases - there are quality start-ups that are chased by moneybags all the time, so they too need to be sure who they are tying up with, admits an investor.

There also are regrets over deals that could not be done. "There are lots of them where we are not there - Flipkart, Snapdeal and Zomato, for example," says Matrix's Davda. They did meet the Snapdeal team but there was no deal. "It is as much an art as science. In hindsight, we can think about why we didn't invest in Snapdeal." According to Norwest's Juneja, "it's a dynamic industry, so these things happen". Bessemer's Gupta, too, admits that investors do make mistakes in spotting the right start-up sometimes. "We missed Ola because of what we thought was a crazy valuation two years ago… Then, among others, we could not invest in Flipkart because we were already invested in Snapdeal, a rival."

Globally, Bessemer lists out such mistakes or missed opportunities on its website, clubbed under "anti-portfolio". The firm says, "if we had invested in any of these companies, we might not still be working". Google and eBay are among its big misses globally.

If investors spend time thinking of their misses, they are busy planning for exits as well. The typical window is seven to 10 years, they say. Till then, they are part of the dizzying valuation game. "It's been like this in the US for at least 10 years, here we have just about begun," argues one of the leading investors.

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First Published: Mon, July 13 2015. 00:57 IST