Friday rant time. Investors don't take risks. Everyone wants Tier-1 background.
Nobody is out there for the little guy.
Sharing a brief breakdown of VC economics (deep dive link in comments).
VC is NOT charity, it's pure financial services. The NUMBER ONE metric we're measured by (for older funds) is DPI, fancy term for how much money you've given back.
1x, shut shop and go home. 2x, better, but still bad. 3x, now you have a reason to live. (for folks wondering how young funds are measured, it's typically MOIC + IRR, basically, how are companies you've invested in performing at present).
Assume a ₹200 crore seed stage fund. Needs to give back ₹600 crore at least.
Ignoring fees and expenses, you can invest ₹10 crore in 20 companies, for 10% each.
Since it's quite clear (Fractal, Zomato, BlueStone, Nykaa) that it takes 12-14 years to IPO a startup in India, you can't wait that long (fund life is 10 years).
So you have to exit to Series C/D investors who WILL want a discount.
Assume 3 rounds of dilution, leaves you with ~5%, 20% discount, so 4% held.
Seed has ~75% mortality rate, so 5 companies left.
These 5 have to get you ₹600 crore.
At 4% held:
1 company needs to raise at ₹15000 - Just NOT happening
2 companies raise at ₹7500 - Still VERY unlikely
3 companies raise at ₹5000 - Closer
4 companies raise at ₹3750 - Possible
5 companies raise at ₹3000 - More possible
^This is also the price Minimalist was acquired by HUL, which was an OUTLIER outcome and first of it's kind for consumer startups.
The above should illustrate how hard the business is.
Hence when funds insist on backing folks with successful exits, strong corporate careers, or absent both, just a great educational background, is maximizing luck.
At Seed, there are two things that swing it for you. I call it Numbers & Story.
If you have a GREAT story (I sold my last company for ₹500 crores), you can have ~no numbers.
If you have a good story (I was VP Google India), once again, numbers are lower priority.
If you're 22, from a small town college, breaking it down harshly, you NEED numbers.
As an investor, we just DON'T ignore amazing growth. That being said, since this is a (very hard) financial business, we're looking at any and every indicator of possible success.
Experience here helps in two ways:
- Have already made dumb mistakes on OTHER peoples money
- Have a network who will pick up the phone and help you/become first customer
#venturecapital #startups #funding