Early-stage deal evaluation is all art, no science and other key takeaways from the lead investor’s masterclass

At India’s largest conclave for startup investors LetsIgnite 2022, Vikas Choudhury, Partner at Pivot Ventures, and Arpit Agarwal, Director at Blume Ventures, aptly sums up that India is in a happy marriage with almost half the country into angel investing and the other half entrepreneurs. 

Vikas believes the Indian startup ecosystem has attained a certain degree of growth and maturity that it continues to be relatively shielded while the tech companies have gone down in the US and investor sentiment has turned sour. 

Amid abundant opportunities to invest in India’s startup ecosystem, here are the key takeaways from Vikas and Arpit’s extensive investing experience. 

You have to build a portfolio

Building out a portfolio is key. Vikas asserts that investing in startups is not like buying blue chip stocks on the public markets. “It's not the same as buying stocks of TCS, Reliance, HDFC and thinking you’re good to go. Instead, it is like buying the lowest of all your small caps that you've never heard of, and not knowing whether that company will survive,” Vikas explains. 

The hit ratio of angel investing is such that you will be amongst the most successful angel investors in the country if your probability of success is more than 25 percent of your portfolio which means one in four or five companies succeed. Therefore, it is best to build a large portfolio to hit the probability of that success. 

At the same time, the timeframe for success is at least 10 years to get successful returns that you read about in newspapers. If somebody is making 20X to 100X returns, know that there are 99 other companies that failed. 

Be aware that this asset class can go to zero just as it can give 100X returns and make sure you are capable of swallowing both possibilities. 

Do not quit after three misses

Vikas notes that hundreds of people who have just started angel investing tend to give up after their first three investments fail to yield high returns. 

Instead, Vikas believes it is likely that their fourth and fifth investments are the ones that hit because a lot changes in the course of their first couple of investments. One will have learned how to pick better, played the odds of probability and stayed in the market for some time so that people in the network get to know you as well – all of which will shape the next startups that come on the plate. 

Early-stage deal evaluation is all art, no science

For companies in the early stage, there is absolutely no data to help predict the future outcome so investors can only bank on current affairs to gauge the idea and its relevance. 

Fundamentally, Vikas suggests investors look at three things including whether the problem is large enough to be solved over the ten years, has a considerable Total Addressable (TAM), and if that is scalable. Understand that luxury does not scale in India and one needs to build companies and affordable products that millions of people will be willing to use and pay. Do not get led by exciting ideas.

The team matters especially at an early stage.

“I'm not necessarily looking at IIT IIM grads. They are obviously very smart but that doesn't predict success. What predicts success is whether the team has the tenacity to build a business and go through tough years for 10 years of their life and not give up,” Vikas says, adding that is the single most important determinant of success for an entrepreneur.  

Lead investors will be expected to work with the company

Arpit Agarwal, Director at Blume Ventures, shares that the venture capitalists have an advantage of managing investments full-time. However, that comes with an inherent assumption by everyone else – the angel investors and smaller funds – on the captable that it will be largely the lead investor's job if the company requires help and time in terms of strategy and product-market fit. 

“So, all of you who are looking to be lead investors at some point in future should please understand that there is an assumption that you are looking to work in the company as opposed to investing in a more passive manner,” he adds. 

Make sure the startup knows their competition 

It is a big no for Vikas when an entrepreneur claims to have no competition in the space, especially in a market as competitive as India.

“If you are thinking of an idea, you can be assured that 100 others are thinking of that idea, 50 out of them are serious, 10 have started working on that idea in some form, and three of them are actually competing with you in some part of the country,” he says, adding that it is important for entrepreneurs to be cognizant of the competitor’s moves and milestones. 

They must then be aware of their sustainable advantage and know if they can still be the leader if 10 others enter the same market. 

Be ready to help the startup

With increasing funding options, access to capital has become comparatively easier for startups. So, entrepreneurs are smart capital from investors who can bring value beyond just the money because the entrepreneurs are very lonely at the top.

Hence, it is critical that investors think about ways to help the company.

“Founders today are looking for investors that can help them, not just ask them inane questions but actually also present solutions to them,” Vikas adds. 

Arpit says the investors should also provide the right kind networks, resources, and a community that entrepreneurs would need to continue growing. 

Finally, Vikas suggests that investors do not sell the winners because the power of compounding works equally well in the startup world as it does in the world of interest rate. 

‍

We at LetsVenture would like to thank our sponsors, partners, and the ecosystem at large for their unwavering support to our annual conference. Hope to see you next year.