One of the most prominent themes which this crisis has opened is the collaboration between different startups and companies. It has also opened up an entirely new field - where companies which have differentiated business models and are bringing something to the table can get the kind of clients they want. Where should one go to raise money - family offices, HNI or Seed?
Ranu Vohra has been an avid entrepreneur and an investment banker. The story of how Ranu made capital and overall growth in investment banking and financial advisory and started his own company is an inspiring one. He has been an insider in a lot of the deals that have happened in the past for successful fundraising for enterprises.
In India, there is a confluence of several factors at work. Even before the COVID-19 crisis hit us, there were several things which we could see on the horizon, which were disruptive enough. Some of the issues were around the banking ecosystem. So after COVID, all these factors have come together, which makes life stressful and exciting at the same time for entrepreneurs.
Ranu thinks that the crisis is an opportunity for startups to think about things which matter most, such as achieving higher unit economics, higher productivity, accelerate profitability, introduce cost discipline, etc.
They can then decide the matrix they want to chase. At one level, there has not been a better time than this to build businesses in the right way and to focus on what benefits firms in the long term. While we cannot predict how long the COVID-19 crisis will last and when the economy will come out of it, Ranu thinks that the way startups are starting to innovate, some influential leaders are going to emerge out of it.
Are founders innovating in this crisis?
Most entrepreneurs have gone back to the drawing board within a few days of the crisis, regardless of their size and valuation. This is not just relevant to startups but also to larger companies. They see their businesses from the first principles and seek ways to innovate their business models. They are focusing on the pieces which they need to have within the firm to see where they can collaborate.
Clients are also a lot more open to experimenting. Therefore, this is the time when large companies looking for an innovative business model can come forward and create an impact to get a space in the market.
It is a saying that when it is a sunny day, you cannot overtake 15 Ferraris but on a rainy day, you can. So, this is the time when you have to boost innovation and be aspirational. As an entrepreneur, your natural tendency is to start looking at survival and capital. There is nothing wrong in that except that it gets you into a different track of thinking. Only survival is not going to make you successful, but the positive things that you do will make you a game-changer.
What is the scope of fund flow coming into Indian startups?
There is no clear answer to this. But in markets like these, the investor segments get very fuzzy. They all start behaving conservatively and wear their risk hats. Anything that is presented to them whether it is numbers, story line, performance matrix, cannot be digested by them. This is because they are worried about their portfolio and a thousand other things happening to them.
The entrepreneurs have to have a sharper story and proposition.
The base of the investors continues to be the same. It is the same bunch of investors, but the solutions have to be spoken.
So where a venture capitalist might have been open to 30 ideas before this crisis, they might be open to 4 or 5 ideas today. So, this is a very narrow band. It is for an entrepreneur to be exhaustive in terms of going through different categories of investors.
Another thing is to make sure to appeal to that narrow band which a venture capitalist has. You have to be very specific with your plan to come out of the crisis and for your business to stand out in the thousands of companies today. You have to be very open and innovative in fundraising.
Entrepreneurs cannot choose to be selective in the market. They have to appeal to a broader range of investors. They have to try the same bunch, but they have to go with a bespoke answer.
How does one view Series A and Series B upwards?
The venture capitalists and hedge funds had started operating a vast spectrum of deal sizes. Some investors would probably go into a late series A and later stages of financing. So people chose broad ranges because they wanted to get into the right companies early. However, at this time, the venture capitalists get a lot more segmented. Hence, the entrepreneur community is a market where you can approach those investors but don’t count on the hedge funds of the world to come into series A. This is a market where your best bet is likely to be a bespoke solution with someone who needs you.
For instance, if you are a company serving in the agriculture space, and there is an offline company that needs help, it is a solution package into financing. Another thing which matters is that not just the series A but the series B, C are all evolving. You just have to change your model and accordingly go to the kind of investors with a refined consumption story.
What is the role of an investment banker in this crisis?
From Ranu Vohra’s perspective, their company continues to be very focused and very close to their clients. The clients need a lot of sounding boards at this time when they are thinking of their business model, current investors, fundraising strategies, tracking matrices etc. Their teams are engaged very closely with them. They have an entirely digital business and are continually sitting with clients. They are just going to them with creative solutions built out of their companies. As venture capitalists, they are very closely engaged in finding the answers.
At this level, you will also find solutions coming up in a significant way. The venture capitalists are continually having communication with each other where they are discussing the reasons behind duplicating costs.
Is the deal size going to shrink due to this crisis?
The deal sizes contract in markets like these. But the contraction of deal sizes is not led by a very proactive VC strategy to reduce the sizes. It happens very naturally. For instance, the same company, which was valued at 30 million, might get valued at 15 or 20 million. So, the advice to entrepreneurs is not to be hypersensitive towards valuation. Valuations can swing around very wildly in these markets. You should be willing to take up because whatever capital you pick up in these markets can be highly useful.
So, for some of the companies, the valuations go down. Hence, the size of the investment also goes down. Thus, reducing the deal size is not a proactive strategy.
What should the angel investors and family offices do right now?
They should continue to look at startups. This is because this is a set of companies and entrepreneurs who are very agile. The startups flourish in a disruption led market. Some of the best returns have been made when people looked at these companies in challenging markets. Look for value and good quality entrepreneurs. You should discover the right opportunities.
Unless you are with a high-quality wealth management firm, you should go to an HNI. But it is not a good idea for an entrepreneur to spend a disproportionate amount of time trying to churn the ocean. It is a very tricky strategy unless you have the right distributor.
A family office is always welcome. Some high-quality family offices are willing to back startups and have managers in there.
Every entrepreneur knows that going to a seed investor always carries a credibility stamp of an institution. This helps you over the long term. An entrepreneur at this stage should go in with an investor who has pockets. So, you need a credible investor with you who has the credibility to help you across the difficult times.
One of the most prominent themes which this crisis has opened is the collaboration between different startups and companies. It has also opened up an entirely new field - where companies which have differentiated business models and are bringing something to the table can get the kind of clients they want.
Where should one go to raise money - family offices, HNI or Seed?