Just yesterday, I got a question from a prolific angel investor who has been doing investing in the seed space for the past couple of years. He asked, "What kind of companies should he be investing in given the chill in the market environment?"
That got me thinking a bit deeper on the subject. I started my venture career 16 years ago, just before the Nasdaq crash, and I have some fond memories of making deals which returned great multiples then as the market turned back. Still, at that point it was quite scary, and the deals took a long time to get done. Also, we all know that any start-up that has to great out-sized value would likely be at it for 8-10 years, so avoiding a downturn is not a workable strategy-- the company has to have the survivability to ride through the rough patch.
[A]voiding a downturn is not a workable strategy-- the company has to have the survivability to ride through the rough patch.
So back to the question, what kind of companies should one invest in now? I would break it into two buckets:
What kind of founders?
What kinds of businesses?
Here are some key questions you should ask:
• How authentic is the vision of the founder?
• Would he do the business it even if he could not raise serious capital now?
• What are his life experiences that drive him to pursue this opportunity?
• Does he have serious skin in the game?
• Is he able to get people to work with him without promising them huge monetary incentives?
• Does he have some prior work experience or life experience to be able to ride out downturns?
A real example of such a founder would be Ranjeet Pratap Singh , who is CEO of Pratilipi--the leading Indian language self-publishing platform. He comes from very humble origins (he's the first engineer in his village), is a voracious reader, passionate about his idea and has inspired a team from among his peers at Vodafone and FMS to drive forward on this vision. He checks all the boxes on this list above. Another one would be Vasanth Immanuel, who is CEO of Olog--an intercity asset-light logistics provider, who has taken his business to double digits crores of revenue relying almost entirely on his own capital and with the maturity of 10+ years of experience and an authentic understanding and passion for the business he is driving.
I'd recommend looking at the kind of businesses where the DNA is about resourcefulness and capital efficiency...
I'd recommend looking at the kind of businesses where the DNA is about resourcefulness and capital efficiency and the economics are such that the business can be break-even very quickly in the absence of chasing rapid growth. Here again, Olog is a perfect example--despite their rapid month-on-month growth, which is accompanied by increasing unit margins, they could run the business on a flatter trajectory with nil burn. This is not a theoretical construct, it's something they have been doing in the past as their business has been largely bootstrapped, so they could do it in a jiffy.
Of course, there are many more businesses, such as those that have huge organic traction and don't need to throw money to attract or retain customers (Pratilipi again is an example where they have crossed 3 million reads with only lakhs of capital invested).
I would add that like in any other asset class, it helps to invest consistently over a horizon of time. It also helps to work with folks who have been around the block and are not perturbed by the ups and downs. At Equity Crest, we certainly know what we are doing in that respect.
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