Saturday, September 26, 2015

Venture capitalists adopt new ways to lure early-stage startups

 A fortnight ago, coworking space 91Springboard organised a startup event in Gurgaon where eight people made pitches to an audience of about 200. 

To a spectator, the event would hardly register as out-of-the-world. But for someone intimate with the startup world, the differences were apparent: those pitching wore formals, spoke for longer than five minutes, and were not asking for money. Instead, they were venture capitalists from top firms like Sequoia Capital, Matrix Partners and IDG Ventures asking the entrepreneurs in the audience for a chance to finance their companies. 

"The idea was to empower entrepreneurs to turn the tables and let them ask questions," said Anuj Pulstya, cofounder of 91Springboard. Going by the questions posed to the investors, empowerment certainly was at play. "In earlier editions, entrepreneurs used to ask plain-vanilla questions. 'Who are you?,' 'What is your ticket size?,' etc. Now they're getting bolder in their line of questioning," said Karan Mohla, executive director at IDG Ventures India.

At the 91Springboard event, he tackled questions such as: "Why should we take your money?," "Which fund are you currently in?," and, "Why do you not invest in non-tech companies?" Such events, common in Silicon Valley, are becoming more frequent in India owing to a variety of reasons: the emergence of more quality founders, excess venture capital in the system, and investors wanting to be seen as entrepreneur-friendly for fear of missing out on potential good deals. 

While the common perception has been that investors have the strong hand over startups and call the shots, the dynamics are changing somewhat in favour of entrepreneurs, at least in the initial funding stages. Venture capitalists, on their part, are also proactively organising mixers, beer parties, and viewing sessions for major league cricket and football matches, to be able to spend quality time with entrepreneurs. 

Mohla said he was able to leave the 91Springboard event after successfully shedding the "evil" persona venture capitalists are associated with. "A few (entrepreneurs) came up to me and told me, 'Hey, you guys aren't so bad. It is so nice to meet with you,'" he said. "That's a good feeling to end the day with." VV Subramaniam, chief executive of Happy Visitor, said that until a year ago if he met venture capitalists at a gathering and introduced himself as the founder of a businessto-business startup, the topic of investment was never broached. Now, he said, the conversation inevitably tilts towards, "Do you need funds?" 

startupsA recent gathering he attended was a mixer organised by Helion Advisors at Bengaluru, one of several the venture capital firm has hosted in the past six months, including in Delhi, Chennai and Mumbai. 

"We took feedback and realized entrepreneurs do not want to listen to any panel discussions. They valued networking more than anything else," said Alok Goyal, a partner at Helion. "So we get them all together and just talk over drinks. It's also a low-effort event on our part." He plans to take the mixers to Pune and Hyderabad as well. 

For venture capital firms, these events are a great play at efficiency, said Guhesh Ramanathan, cofounder at seed stage incubator Excubator. "VCs don't know which (startup founders) to meet face-to-face and which ones to ignore. In events like these, they get to meet 20-25 startups in a matter of two hours," said Ramanathan.

Investors say there are several other factors influencing this shift in dynamic. "What has changed is the speed of decision-making," said Mohan Kumar, executive director of Norwest Venture Partners India. "It has shrunk to a couple of weeks from 3-4 months earlier, especially for deals in the trending market of that season. Hence, VCs have to make decisions fast." 

This week, Times Internet-backed TLabs decided to do away with demo days - large public events where investors judge startups and get little time to connect - and introduced Investathon. The firm set aside 36 slots at its accelerator for investors to speak with startups in an informal setting over nine days. Within two days, about 90% of the slots were filled. 

"When one investor sees their competitor talking to another startup, they are compelled to talk to them as well," said Abhimanyu Godara, chief manager at TLabs. "It's a psychological thing, a fear of missing out that comes into play." 

The new camaraderie aside, it can't be said yet that there's been a full swing in favour of startups, as investors continue to put out the same terms as before. "Everyone gets so fixated on valuations that they fail to understand the fineprint of the term-sheets, and the terms haven't gotten much better than in the past," said Pankaj Jain, a partner at seed fund and accelerator 500 Startups, referring to redemption rights and liquidation preferences. 

Jain, however, added: "It is most definitely a far more balanced market than it has been. The best deals are filling up and closing very quickly." Meanwhile, early-stage entrepreneurs, who are only too happy to have the opportunity to be a part of such events, have feedback for the venture capitalists organising them: a more diverse group of people, including corporate executives and angel investors, will add more value.

"Not everyone is looking for money," said Rakesh Agarwal, chief executive of NotifyStory, a storytelling platform for brands, who was present at the Helion mixer. "We need more angels to be coming to these events, strategic partners who can guide us in the right direction and become our godfather.

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