Fearful of missing the bus, venture capitalists are now catching startups at birth
Venture capitalists are taking riskier but smaller bets in early stage funding rounds of startups as they are apprehensive of missing bus, if late.
BANGALORE: Venture capitalists in India are realising that it is better to be an early bird than a late latif when it comes to investing in startups, especially in hot sectors where valuations soar quickly. This is pushing them to take on riskier but smaller bets in earlystage funding rounds of startups as they are apprehensive of missing the bus if they enter later.
Take the case of Manjunath Talwar and Abhijit Khasnis, former Yahoo executives and co-founders of recruitment startup Mynoticeperiod. com, who were close to finalising their first round of funding in July. But instead of closing the round from only a large group of angels, a VC firm approached them with similar terms. Typically, VCs invest in a series-A or B round, not a seed funding round for an eight-month-old startup. The duo decided to keep only select few angel investors in the over-Rs 2 crore funding led by IDG Ventures India that was announced last week.
“VCs have a longer term outlook and deeper pockets to participate in future rounds. It also helped bring in angel investors more quickly, as it makes them comfortable,” said 38-year-old Talwar.
The deal highlights the rising interest of VCs in relatively riskier seed deals. IDG Ventures has set up a seed programme, where it will look to make six-seven investments of up to Rs 3 crore in the next 12-18 months. And IDG Ventures is not alone. VC firms such as SAIF Partners and Matrix Partners India have also been actively investing in seed stage over the past 12-18 months. Other VC firms like Helion Ventures, Mayfield and Lightspeed are also looking at such deals.
IDG Ventures’ first seed investment was mobile ad retargeting platform Silver-Push in April. “This is a well-defined strategy for us. We will make investment in the initial cycle of our new fund as seed stage investments may take time to mature,” said Venkatesh Peddi, vice-president at IDG Ventures. Bejul Somaia, MD at Lightspeed Venture Partners India which has closed three seed deals in the past nine months, said there is increased activity around Internet and mobile. “Another reason is that valuations tend to get high for later stage rounds,” said Somaia.
Mayfield, which recently led a seed investment in video interview platform Talview, is also actively eyeing more deals at the stage. The firm recently hired Sweta Aggarwal as venture advisor from Indian Angel Network (IAN) to work on earlystage deals.
“Younger entrepreneurs are building companies to sell as compared with family-funded businesses which are built for legacy. They are building companies and products that are smarter, better and cheaper,” said Mayfield Managing Director Nikhil Khattau.
Other VCs such as Helion Venture Partners are also looking at the space much more actively.
“We evaluate approximately 80-100 companies each year under serious consideration, which we call priority companies. Earlier 10 per cent of that was from seed, but now that has changed to at least 30-40 per cent of this deal flow,” said Ritesh Banglani, partner at Helion, which has $600 million (Rs 3,600 crore) under management.
Experts feel that startups, especially in consumer Internet and mobile, are scaling up much faster and there is increasing competition for deals as well. “A lot of the companies are moving very fast from seed stage to series-A/B and the idea is to identify and get in early in those companies,” said Peddi of IDG Ventures.
While earlier participation in seed deals was limited due to management bandwidth at VC firms, entrepreneurs come with better pedigree in company building. Also, mentoring is widely available.
This has meant that VCs now compete directly with angels for certain deals.
“The boundary between an angel investor and venture capital firm is shrinking. At IAN we are doing $1 million (Rs 6 crore) cheques, and angels are also sometimes losing out to VCs in deals,” said Sanjay Mehta, a Mumbai-based investor who has backed 23 startups, including online lingerie store PrettySecrets.
But even as more VCs get active in the space, entrepreneurs should be aware of “signalling risk” where startups’ ability to raise series-A gets impaired if existing VC decides not to participate in the future round.
Lightspeed’s Somaia said while some investors can look at seed investments as an option to participate in series A round, for a startup it can be hurtful. “We have an open dialogue with the entrepreneur that to fund in series A, these will be the expectations that you need to meet,” he said.
Helion’s Banglani said it’s a risk that entrepreneurs need to take, “but benefits of raising seed from an institutional investor outweigh the risks”.
Also, entrepreneurs need to be cautious of the capital they take at the seed stage. An angel investor, on condition of anonymity, said while VCs may offer more cash and relatively better valuations, startups should carefully consider large dilutions that may happen with these rounds.