Funding & Investing: Are There Shortage Of Venture Funds?

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At the recently concluded eTailing India Expo 2017 – “India’s Flagship Conference & Exhibition on Retail, eCommerce and Mobile” (http://etailingindiaexpo.com), leading thought leaders shared their perspective on “Technology Services for Retail & eCommerce”. This article summarizes the session for Funding & Investing: Are there shortage of venture funds? (The session is not verbatim here)

Do you see a shortage of funds in 2017 than last year?

There are more funds available in 2017 but lesser number of deals will get executed. In 2015-16, ideas or being a high ticket player were getting funded. Now it is about having the right business model. Does it make sense? There are multiple factors which people see while investing at different stages. Whenever there is a potential to invest, they are getting funds. So there is more than enough money available at every level.

Will investor invest in a startup which isn’t making profit? Are investors looking at EBIDTA as a sort of metrics while investing?

I don’t think they are looking at EBITDA right now, but it has definitely got more matured than last year. This year, you need to have a running product along with traction. There should be a proper scope for how and when the revenue is going to come. The business model must have real unfair advantage to make profit.

Do you see companies in metro cities have unfair advantage over companies in smaller cities?

If it is a heavily tech-based company, then you might have an advantage. Otherwise, for companies like eCommerce, hyper-local, etc. it doesn’t really matter.

Which sectors do you find attractive for investing into?

The interesting thing about eCommerce is we ask ourselves, “How are people buying today”. We find most people initiate buying on online platforms such as Facebook, Google, Amazon and increasingly on chat channels. We think those channels are sort of spoken for.  In search, there is little opportunity, in finding there is a good opportunity on Facebook and in chat, while Whatsapp is a great conversational place, we think there will be opportunity for chat-based commerce companies that will emerge. So, all these make the top of the funnel.

As we moved down to the demand funnel, we find there are opportunities for companies addressing CRM, companies targeting better in terms of advertising. As we get closer to the seller side; seller tools, channel integration, payment tools and lending to market offer a good opportunity. There is still capital available for eCommerce. The challenge is you can’t come and say to become the next global company. You need to be offering your capability and role in the value chain you play that represents a large investible opportunity. It also has to be capital efficient as you build it up.

Which are the areas that offer a lot of transaction in 2017?

The sense in eCommerce has started prevailing. Specifically, there is lot more focus in the cost metrics. The investors are very closely looking at the business models and in turn the potential entrepreneurs are also actively closely looking into the business model that they want to setup unlike before. Now the end result is not to get money but to run business. This change is good for the overall ecosystem.

2017 will be a shift where the existing venture will be backed up more while ventures with the first round of money might find it bit difficult to get first round of funding.

What are the parameters an investor will look at to evaluate a company?

We look at the idea which has potential to make money and cost of acquisition. If it requires a low cost acquisition or kind of model that can go viral arises the interest. Then, breaking even, projection, traction, market value and validation should be there. The prototype must have some level market validation for very early stage. We look at the potential of business top make an exit. Even if we have to go round 2 with them, we see whether there is a potential exit plan.

Does a company require lot of money for building the brand or able to do it virally? How important is that to your investment decision?

“For me as an investment thesis, I look at only 3 things: Is there money to be made?  Are these people getting me money? How much many I can make? If these 3 questions are answered, then potentially I can get the value out of the startup. These 3 has to be aptly pitched, answered and executed. Then you can have a home run,” quoted Sanjay Mehta, (Angel & PE Investor).

Every business is different in nature. But if you go overall and the parameters matches across, they you go out back the team. Overall, the above mentioned 3 steps works out very simplistically.

The only companies that make around billion dollar money are the ones where the consumers spend. Companies that index their growth to consumer spend and have low cost of customer acquisition attracts our attention.

Most of the startups go plain vanilla. They don’t have a pricing model. Then, for an ecommerce company, if it is not taking about customer loyalty and retention, it is very difficult to fund those companies.

What is your advice to companies that come up with a large branding or cost of customer acquisition model given the fact when there is lot of unawareness in the country about brands? How will you balance it both from the investor and entrepreneurs end?

Entrepreneurs value the customers the least. We can throw a question to entrepreneurs if they can survive 3 months without raising money. If yes, they are going good.

In the eCommerce space, what are the companies that can get Series A or Series B round of funding (subsequent rounds)?

Cost optimization would be the key to look at. Any enablers of business such as SAAS, logistics players, content providers probably could get funding easier than the others.

On the demand side of the commerce, there are enough stuff happening. The supply side brings differentiation. Tech is making a huge difference in terms of customer experience which falls under supply side.

Entrepreneurs miss out on branding and positioning. Every brand has a representation in the minds of consumers which is more than logo design. So we look for a real understanding of building branding among entrepreneurs.

What would you look at for tech companies enabling eCommerce?

There is a huge potential for tech companies whether it is logistics and delivery, whether getting AI or churning data for eCommerce. There are so many intricacies involved in eCommerce that remains to be tapped. Those companies who have expertise in these fields will excite the investors.

What has been your experience in funding tech enabled companies?

When you invest in enabling companies, often times you build a supply side and building a two-sided marketplace simultaneously is often very hard. So, if you can build the supply side and win that, then you focus on marketing dollars with later stage capital and start acquiring customers. It creates a sound foundation of a company that learned to monetize and then looking to customer acquisition. The best companies in the portfolio have started as SAAS Company and now have emerged as a marketplace.

Do you see that investors are worried about exits?

We have done couple of investments in eCommerce enablers such as Intelligence Email Marketing and Cloud based calling. These companies might provide a faster exit as compared to marketplace because it is pure b2b place, where the revenue and traction kicks faster. The chances of buyout or more of acquisition is high. These businesses are more exit friendly compared to marketplaces.

Are you seeing enough transactions in the B2B space?

Indeed the enablers are largely in b2b space only. Earlier in b2b commerce space, they were not largely favored. But the action has come back either in the form of enablers as well as those who were focusing only in the b2b side of business. It is a service related business and with the era of specialization coming in whether in the eCommerce or other space, the b2b is happening lot more. Generally it is a sort of fixed income. Listing portals or commerce space in b2b will largely have a fixed kind of income; the investors are looking in these spaces. It could be an additional investment one can look at after the earlier discussion on b2c space.

How do you see the B2B part specially the supply chain side?

B2B is sort of a better option for investor. It is far more stable business. On technology front, they are more predictable and manageable than b2c.

If it is only aligned to ecommerce, the pace of growth has limited opportunities. But, if it is an enterprise plus ecommerce model, then there are more opportunities.

Q&A

In companies where there are stocks, do you think the supply should come first or the customer should come at first and then follow up?

The need is should come first. The timing has to be right in order to succeed in the market. Firm backend support is important.

Do investors also look at companies which are carrying stock?

From a VCs perspective, historically VCs have preferred investing in companies carrying stocks to use working capital from bank.

So, there is no shortage of funds. There is a need to have an understanding between investors and entrepreneurs.

Speakers: Suraj Kalra (Senior Partner- Baker Tilly DHC), Mahavir Pratap Sharma (Chairman and Co-Founder- RAIN), Abhijeet Kumar (Co-Founder-ah! Ventures), Sanjay Mehta (Angel & PE Investor), Rajan Mehra (Managing Director: Nirvana Ventures Advisors) and Sushanto Mitra (Founder & CEO- Lead Angels).

PPT Link: https://goo.gl/KPNiJI

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