2021 was an exciting and challenging year for us. Backed by Dr. Malpani and his family office Solidarity, we ventured out on our own this year where:
- We made 5 investments (2 follow ons, 1 debt, 1 Management Buyout, 1 LP investment), and 2 fresh equity commitments, 1 in Education & SaaS each (please watch this space for an update!)
- We were joined by Dhruv in April. After all we are a growing startup too. This post started it all.
- We incorporated a new entity and will be moving forward with a distinct identity.
Multibhashi is a language learning platform that enables its users to learn multiple languages in live, one-on-one, and group settings. We have backed the company in the past when it was a purely B2B enterprise. Today, the company earns majority of its revenues from B2C, approaching consumers directly. Exciting days for the company and its founder Anuradha!
Zipgrid is a proptech company operating in full-stack society and building management for both residential and commercial properties. It has over 35,000 households under their ambit (and growing!), works with the top developers pan-India, and has also made an acquisition recently to strengthen their operations. We followed on our investment in the company earlier this year.
Bibox is a company in STEM learning, and operates Atal Tinkering Labs in hundreds of schools across South India. Considering our long-standing relationship and the nature of business which is close to our hearts, we invested in the company via debt instruments. This may have been our shortest TAT since we went from a text message checking debt options to cash in bank in under 10 days.
YLG Salons is a chain of salons, predominantly based out of Bangalore. The company has 54 salons in Bangalore & Chennai, and was backed by investors like Everstone & Helion. The promoter Rahul Bhalchandra started the company in 2008, and previously worked with Pantaloons and RPG Enterprises in leadership roles. We participated in the Management Buyout which enabled the promoter to regain control of the business while undergoing a massive turnaround in operations.
We rarely invest in fund managers. Primarily because we want to do this ourselves. However, Anand Lunia and his team brought amazing insights into the world of early stage venture which was impossible for us to pass. In the past few months, we have had a great time interacting with Anand and his team and hope to continue the same as our relationship deepens.
LP Investments
Along with India Quotient, we continue to work with Inventus, and Aavishkaar.
We really liked interacting with the below mentioned companies and were close to investing in them. However, we ended up passing because somewhere they did not fit what we were looking for. Sharing learnings:
Watch Your Health
We loved the alternative approach of Watch Your Health to work with insurers directly rather than policyholders. We learned that consumer is difficult to crack, and banking on B2B partnerships as an early stage company is a very cost effective way to grow your business sustainably. We also learned that every growing business does not necessarily need outside capital to grow. Many founders will thrive when they retain equity and have the freedom and flexibility to operate without the fiduciary responsibility of an investor.
Refrens
Think Shopify + LinkedIn for freelancers and you have Refrens. We loved our interaction with Naman, and quickly understood the importance of insights and design while building a startup. Our only grouse: rich valuations. What is a fair valuation you might ask? We don't know. But we work with a certain scope and rarely make exceptions. We wish Naman our best!
Exprto
Another fantastic founder who built out a full-fledged MVP without spending a dollar on tech and started making revenues. We did not have conviction on the long term use case for a platform like Exprto especially in peer-to-peer learnings which have offline pockets of influence. Having said that, Varun is probably one of the best founders we've seen who believes in the essence of frugality.
We invested in Chalo in 2017 and have seen the company grow in leaps and bounds. We got an exit during the company's Series C raise.
We invested in DoSelect over 5 years ago. The company subsequently raised from investors like Aarin & 3One4. InfoEdge acquired DoSelect this year providing us an exit.
Delhivery acquired Primaseller this year in a bid to strengthen its product portfolio before its public offer. Although we did not make money from this investment, we loved interacting with Ali and know that we will be the first number he calls when he is building his next company.
Much is said about flair and pizzazz of founders. But resilience of founders is rarely spoken about. We have a case of two such founders in our portfolio this year who, against all odds, managed to show resilience.
COVID-19 hit everyone hard. And it hit the 2 wheeler industry a bit harder. Garageworks & Ajjas are portfolio companies that work in the 2 wheeler space. Garageworks is an on-demand doorstep 2 wheeler servicing platform. Ajjas is a 2 wheeler ride safety device. During COVID, neither were riders venturing out (for them to need safety), nor were vehicles being serviced at their doorsteps due to movement restrictions of mechanics and restriction of outsider entry in residential apartment buildings.
These companies, against all odds, managed to stay on, and have not only strengthened operations, but also secured healthy funding lines to ensure undisrupted continuity of business.
While we have funded numerous social impact entrepreneurs in education, we have worked the most with Beyond Exams, and Learn with Comics. Our thesis is to fund social impact entrepreneurs in the education domain who will offer free-to-extremely affordable options for students to learn, while building in public. You can read more about our initiative here.
Beyond Exams
Beyond Exams is a Section 8 company operating for the greater good and promotion of education at grass root level. We saw remarkable progress in the company which operates from a design-first philosophy, while managing to stay true to its purpose. In addition to a video-based learning platform, Beyond Exams is experimenting with cohort-based courses to upskill college students and make them employment ready.
Learn with Comics
Learn with Comics is an interesting take to make education fun and less taxing for both students and teachers. While the world is crazy about comics, we fail to see its adoption in mainstream education. Learn with Comics is trying to solve for this gap and reach out to a million students with comics as a learning aid.
- We do not understand the consumer space, and will stay away from it.
- We understand B2B SaaS, and we welcome it
- We find outliers while experimenting and will continue to do so in small capacity
- Great founders make everything look easy
- The resilience of a founder is massively underrated
- We come with small ticket sizes, smaller network, and the smallest (if any) value add, hence we will not compete with those who can outshine us in all these departments, for we are playing a different game
- We used to, are, and will keep looking for camels who can return our entire fund, we are not chasing mythical unicorns
We have not changed the way we think, but our investment thesis has evolved. We want to work with exceptional founders at pre-seed or seed stage who have insights we don’t, are solving problems their customers want them to, and have the ability to raise capital if and when required.
Happy Holidays to everyone! See you in the new year.
Every week we share our good reads with the Malpani Ventures ecosystem comprising of Founders and Partners. We thought why not share it with everyone? If you would like to join the mailing list, please drop me a Hi!
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Casper: An Autopsy
https://kjlabuz.substack.com/p/autopsy
Despite Casper having higher gross margins than its peer, a wider offline presence meant its P&L bled. Do note, despite wider offline presence, there was nominal difference between the online:offline mix compared to its peer. This is a warning sign when many Indian D2C players are aggressively trying to increase their offline presence. Failure is a great teacher indeed. And it will help readers to know that Casper is being taken private at 1/4th the valuation of its last private funding round.
What is a Tech Company?
https://stratechery.com/2019/what-is-a-tech-company/
Everyone wants tech company multiples, but do they run tech companies? What is a tech company? A tech company is one that creates ecosystems, has zero marginal costs, improves over time, offers infinite leverage, and enables zero transaction costs. Does your company tick these boxes?
How much runway should you target between financing rounds?
"Building a product takes time. Finding the right talent takes time. And it turns out that fundraising takes time, too. If it takes you less than 18 months to raise another round then great—keep going—but don’t reduce your probability of success by planning for less than 18–21 months of runway between your financing events."
The Web3/Crypto/Metaverse Ecosystem Guide — From the Minds of Lightspeed
A great resource to round off your year with some in-depth reading.
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See you in the new year folks! 🥂
Every week we share our good reads with the Malpani Ventures ecosystem comprising of Founders and Partners. We thought why not share it with everyone? If you would like to join the mailing list, please drop me a Hi!
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Until next time 👋
Every week we share our good reads with the Malpani Ventures ecosystem comprising of Founders and Partners. We thought why not share it with everyone? If you would like to join the mailing list, please drop me a Hi!
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How to hire Executives
https://barmstrong.medium.com/how-to-hire-executives-e2ee8e05cad3
Behind every successful startup is a rockstar team running it. Often, we see founders rushing to fill executive positions very quickly. VC & startup twitter also seems to suggest that startups have to hire team members by the second meeting. According to this, the cost of a bad hire is Rs 20 lacs. We believe it is much more. This post explains the comprehensive steps a founder needs to take to hire executives.
Don’t bother raising a Series A if you don’t crush these 3 metrics
In this episode of the startup bubble, everyone is in a race to get funded. This post is a good reference point for many founders who are looking to raise their Series A soon.
The Ultimate Guide to Pricing your SaaS Startup with Data
Many startups face the issue of pricing their product. Pricing cant be too high or too low, but just perfect. This SaaS specific post may seem like an academic exercise for many. However, the mental math behind each of the examples is mind blowing.
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Until next time 👋
To convert or not?
We see an increasing number of companies and founders looking to raise rounds based on convertible notes. While convertible notes are fairly common in the US for rounds preceding the Series A, non-priced rounds are catching up in India. A number of marquee VCs including Sequoia, Accel, etc. have started writing cheques for convertible rounds through their accelerator/ early-stage programs. We pen down our views on convertible vs priced rounds here:
A convertible round involves a company raising a sum of money where the valuation is deferred until the next ‘priced’ round. The rationale behind deferring the valuation is that there is no practical/ generally accepted way of valuing early-stage companies. Usually, a company offers a discount (10-25%) to the price set in the next round whilst promising to raise in a certain time frame. Early-stage investors also prefer to have a cap and a floor i.e., the maximum and minimum valuation the investor is willing to attribute to the company at this stage. However, with the rise in global liquidity, the massive potential of the Indian market, and improved exit options in Indian tech – founders are increasingly looking to raise un-priced rounds with no cap/ floor. Large VCs are also appearing to comply – Chiratae’s Sonic claims to offer a $500K cheque within a 48- hours turnaround time, Accel Atoms programme offers $250,000 as a convertible round with no cap.
The lure of a convertible round for founders is easy to see. Convertible rounds, especially the ones with no cap, offer the promise of limited/ minimal dilution for founders. Further, founders do not have to negotiate/ haggle on valuation terms with investors thereby hastening the round closure progress.
However, in our view, non-priced rounds with no caps/ floors often end up creating a misalignment between founders and investors. Let us consider three broad scenarios:
Scenario 1: Company becomes a super success and raises a priced round at a high valuation: In such a scenario, the early-stage investors will end up with a lower stake than they intended, as they are pegged to the high valuation. Thus, they are not rewarded for the value created by the company at the early stage beyond the discount!
Scenario 2: Company gains traction and raises a priced round at a reasonable valuation: In this case, the investors receive a reasonable stake and the founders too, do not suffer a heavy dilution.
Scenario 3: Company does not gain much traction and raises a priced round at a low valuation: This is where the real kicker comes in – Not only do the founders get diluted heavily in this round but also suffer from additional dilution to the discount offered in the note. Investors end up owning a significant stake in the company while founders are often shocked at the diluted shareholding they end up with. (One may argue that investors do have downside protection in a priced round – however, it is usually a weighted average conversion versus a full ratchet as is the case which will play out in the scenario)
It is pertinent to note that Scenario 2 and 3 are likely to play out in more than 8 of 10 companies. Thus, whilst investors are likely to not make a decent return in the early stage; and in the unlikely case that they do, unpriced rounds also do not allow them the benefit of the markup.
From the perspective of founders as well, most do not end up at the stake they envisioned. Convertible notes tend to get complicated in terms of how they are priced, and complexity often causes unintended consequences in subsequent rounds. Tracking dilution easily, accurately and in real-time enables founders to plan out their seed round, but also to plan for their Series A.
Unpriced rounds obfuscate the real cap table both for the investor and the founders as well! As Fred Wilson puts it, convertibles put the ‘founder in the difficult position of promising an amount of ownership to an angel/seed investor that they cannot actually deliver down the round when the notes convert’.
We also researched the advent of convertible notes in the mature Silicon Valley ecosystem:
Convertible rounds were championed in the US late in the first decade of this century. YCombinator was one of the early pioneers pushing for convertibles.
However, a look at the valuation terms over time from roughly 2010 onwards is interesting to note:
· The initial model was a 7% equity stake in exchange for a sum that depended on the number of founders—$17,000 per founder on average.
· In 2011, YCVC began to offer $150,000 to every startup selected using an uncapped convertible note. This number was eventually was brought down to $80,000 (in addition to the equity investment by Y Combinator)
· 2013 – ‘SAFEs’ introduced by YCombinator
· Iteration in 2014 - $120k for 7% on pre-money terms. The investment would come in two chunks, representing a flat 7% of the company
· 2018 - $150K investment for 7% will be made on a post-money YC Safe.
· 2020 - $125K in return for 7% of your company using a post-money YC Safe. Future pro-rata restricted to 4%
YC which originally propounded convertible rounds eventually settled on post-money-priced rounds! Even further, YC moved away from pre-money safe agreements (i.e., YC would not be diluted by option pools created by subsequent option pools created by investors). In their own words “The convertible notes and safes we used got complicated in terms of how they got priced … It was hard for founders to actually predict how much total dilution they were looking at”. “We believe the post-money safe is simpler, making ownership and dilution easier to understand…”
Thus, after over a decade, it is clear that priced rounds are more beneficial to investors & founders in the long run. To their credit, the original move of YC towards convertible rounds was driven by a need for speed and they adjusted their terms quickly to provide for the emerging consequences in future fund-raises.
Most sophisticated investors such as micro-VCs or super angels prefer to invest via a priced round rather than a convertible note, but can often be dragged into a convertible note financing. This is also evident as per the Angels Funders Report 2021: 1 of every 2 angel deals are in the form of preferred shares – dispelling the popular notion that convertibles/ SAFEs are the norm in the US.
Source: Angels Funders Report 2021
So, does this mean that convertible and SAFE notes are not useful?
In our experience there are certainly some use-cases for convertible notes:
Convertibles are best used in a scenario where there is reasonable certainty of the likelihood of a priced round in the next 6 -12 months. However, to simply use them as a mechanism to postpone pricing equity until the valuation is inflated or to drag on the round until a lead investor puts in the serious dough is a red flag in our view.
We also believe that the early-stage convertible rounds offered by marquee VCs in India work for them as they are in a position to control the Series A/ B rounds. As the Ken writes about Sequoia's Surge ‘The competitive-based, self-service format of startups submitting applications is an efficient and inexpensive filter to learn about these companies…. In the worst-case scenario for Sequoia, it represents an inexpensive call option to take a punt on an entire cohort of companies.’ However, startups also need to be wary about the signalling risks that come with a large VC not participating in a Series A from startups out of its accelerator program – This is one of the major problems which YC faced as well.
At Malpani Ventures, it is our belief that the right founders will ultimately do right for the investors in the company. Whilst convertible and SAFE notes are not our preferred option, we may make calculated bets (always with a cap & floor + timeline!) to work with the founders we really like. However largely our bets shall always be in priced rounds. Do write to Siddharth or me with your views!
Every week we share our good reads with the Malpani Ventures ecosystem comprising of Founders and Partners. We thought why not share it with everyone? If you would like to join the mailing list, please drop me a Hi!
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Most of you have read about the changing landscape in VC with the rise of rollover open-ended funds, crossover funds, solo GPs, democratization of syndicates. In this week's good reads we share some of the best pieces which summarize this change and its implications for early stage founders.
Andreessen Pulls a Bezos
https://www.drorpoleg.com/pulling-a-bezos/
A16Z is pulling a page from Amazon's book "Your margin is my opportunity" - A16Z is no longer building a venture capital firm; it is building a new type of venture corporation with a thick management layer that helps support its multiple portfolio companies with marketing, legal, lobbying, and technical resources.
The Changing Venture Landscape
https://bothsidesofthetable.com/the-changing-venture-landscape-6b655c68e631
A good read on the implications of easy liquidity on round sizes, funds and how VCs are evolving (barbell approach)."On the one hand, you’re over paying for every investment and valuations aren’t rational. On the other hand, the biggest winners will turn out to be much larger than the prices people paid for them and this will happen faster than at any time in human history".
Do You Have a Weak Investor Syndicate? You Need to Know.
https://www.saastr.com/do-you-have-a-weak-investor-syndicate/?utm_source=pocket_mylist
Even in these, The Best of Times for SaaS and Cloud, an important but subtle issue is coming up for a lot of start-ups. Especially these days, when more and more seed, Series A and even Series B rounds are being done by less traditional sources of venture capital. The subtle issue is this: A Weak Investor Syndicate.
Startup CEOs Should Test Strength of Cap Table Every ~6 Months To Know Where They Stand.
A great add-on to the previous blog: Healthy founder <> VC relationships should always have open discussions about capital.
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Until next time 👋