After having spent countless hours reading blogs and posts on VCs, I had a fair idea of what VCs actually do, but never in my life had I met a VC. To be honest, I just graduated from college and wasn’t bold enough to contact or network with VCs during my years at college. But, thanks to Sahiba Sethi, Founder HelloMeets for inviting me to my first Investors & Founders Meetup at HelloMeets and Boy ! It was totally fun!!
If you are also new to VCs and Investors, you would imagine them to be the sort of cocky and unreachable folks like Investment Bankers from Wall Street with a personality that exudes superiority.
But I was wrong, not only are they grounded and nice but they consciously make an effort to make everyone at ease. After all, their job isn’t just to give you money but also to advise and work with you and it was interesting to hear that sometimes VCs have to work hard to impress founders as well, you’ve to be extremely brilliant and valuable for that to happen.
After the initial introduction, the Q&A session began and being the extrovert that I am, I asked the first question and the one that I always wondered about.
How the hell do some startups get valued when there’s no revenue?
And I was amazed to know that even for VCs it’s a hard job to accurately value a company when they are investing in it. A lot of things are considered depending on what stage the startup is in. But, the key takeaways were:
A: Traction: The larger the number of users you have initially, the larger your valuation is. The key thing for any product company is to get users and what better way to show the value of your startup than to show the number of users you have.A startup with 100K active users will most likely raise a million with a valuation of 10X.
B: Revenue: Again it depends on what stage the startup is in. But, if a SAAS company has a good MRR (monthly recurring revenue) due to a large number of paying users, there’s a good chance, the startup will be valued at 10X their Annual Recurring Revenue.
This doesn’t hold good for consumer internet companies, as they don’t necessarily have any monetisation strategy in place in the early stages.
C: Intellectual Property: If there is a significant amount of IP and original research, the startup definitely gets higher valuation than other companies with similar size and numbers.
D: Founder’s Reputation: VCs often a pay a premium for betting on serial entrepreneurs or founders who are starting another venture after a successful exit or proven track record.
E: Geographic location: Depending on market size and the cost of operations in a particular location, the valuation can be significantly different.
For example: Companies which operates only in India tends to have a lower valuation than companies serving worldwide and based out of the Valley.
F: Conviction: Sometime it’s just the conviction of the VC’s and their partners.
One thing Vaibhav said that I really internalized was “Build a business for it’s value and not for VC fund raising”.
After my curiosity was satiated, various founders started throwing in their questions which can be categorised under the following broad terms:
1: Metrics that VCs pay attention to while investing in a startup:
Both Arpit and Vaibhav reiterated the points that were mentioned above plus they added that:
- There are various Industry-wide benchmarks for evaluating companies in different domains.
- Arpit went ahead and confessed that VCs in India are still learning in terms of accurate assessment of a business. Two years ago, it used to be GMVs for assessing e-commerce companies or exponential growth.
- He also said that typically they invest about $500K-$1M in a Seed Round, $2–4M in Series A/B and $6–10M in expansion stage.
- Depending on what stage a company is in, the importance of profitability of a startup changes a lot. For an early-stage company, it might not hold so much significance compared to a 2–3-year-old startup. And it widely differs depending on what space the product caters to.
- A Consumer-Internet startup would initially burn a lot of money to create a network effect which requires actively seeking market opportunities. Vaibhav stresses on the need for a product-market fit more than worrying about the profitability.
Even if you don’t have revenue, it’s okay. Some companies don’t have a clear monetization strategy even after their Series A, what’s more important is that there should be a lot of initial traction and your users should be actively engaged. If you nail these two aspects, business and revenue will come along with time.
VCs love scale and they want to see your product gather millions of users. If you nail that, VCs would love to pour in their money.
Vaibhav talked about exactly that when he mentioned the reason behind Lightspeed’s investment in ShareChat, an Indian language social platform. ShareChat has been downloaded 5 million times, with roughly two million active users on the platform. On a daily basis, one million content pieces get shared on ShareChat.But, there is also a catch. Arpit warns that this doesn’t hold true for all startups, especially for a SAAS business or a B2B business. Startups catering to other businesses should have a clear monetization strategy or at least plans for profitabIlity.
4: Market Size
- Before investing in any startups, VCs do a lot of background research on the market size or for completely innovative products. It’s a huge challenge for them to estimate the market size. But due to the tremendous experience of all partners, they can fairly estimate the market size for most products.
- They also place a lot of importance on how disruptive a product is compared to other products in the market. Though they don’t worry much about the competition, they would like to see why your product is different and how well-positioned your product is compared to others in that space.
- Arpit mentioned that IDG, invested in POPxo, a media company catering to Indian women even though there were other fairly well established large digital media companies already operating in the space. But what made them invest in POPxo was their highly engaged userbase comprising of 18–25-year-olds and India being a consumption-driven market, where there are multiple ways to consume content.
- He says that VCs also look at the bigger picture, the possibility of the market itself growing multiple times. Therefore, he suggests founders not to worry so much about what the competition is up to, but to focus on their own unique value proposition.
One of the founders asked what the VCs think about the rampant discounting campaigns being run by startups these days.
- The consensus between both the VCs was that discounts are not a bad option but it depends on whether there is actual “buying growth”. If the product or service is actually creating value for the user, then initial discounts is a good way to get the momentum going. But startups should do the math on the LTV(lifetime value) of the user. They should factor in the cost of acquiring a user and the revenue that can be generated from that user in the long run. Also, it important to note that a lot of users won’t come back when the discounts stop, so one should tread with caution. There is a fine balance between discounting and retention.
- Vaibhav Agrawal also recounted from his past experience that sometimes discounts give your best users the feeling that your product or service is cheap. He mentioned that when he ran his healthcare startup, he never provided any discounts. Imagine would you visit a doctor if you see a discount was available for consultation with a certain doctor in your locality!
You have to find the key thing that brings back your users and try ways to gratify their needs either emotionally or financially.
For example, Facebook really hooks their users by providing an immense sense of gratification with things like “Number of likes, comments, friends”.
As we were approaching the end of the Q&A session, I took the opportunity to ask one more question that I often googled about —
How does someone become a VC?
Both Arpit & Vaibhav were humble enough to share with us in detail about their respective VC Journey.
- Arpit took a fairly off-trodden route by leaving his cushy job as an algorithim trader at Goldman Sachs in order to do something impactful and help others. He took a huge pay cut to join an accelerator in Bengaluru and spent a year interacting and mentoring different startups and learning a lot about the space himself. And thereafter he joined IDG Ventures in the Investment Team.
- Vaibhav, on the other hand, had a more unorthodox entry into the VC world. A Doctor of Medicine by profession, he started his own startup in healthcare back in 2010 and then after a series of stints at Investment firms, he got an MBA from Stanford. While he was still in Stanford, he co-founded another start-up and after completing his MBA joined Lightspeed.
They mentioned that having started your own startup is a fairly great way to learn the ropes and see first hand how a startup works, but you could also very well move from an operations role at a startup to join a VC…
What ultimately matters in the VC world is excellent people skills and that you really have to go out of your way to help other people, the founders & entrepreneurs and manage your time well.
It doesn’t hurt to be as humble as you can be, because in the VC game, nobody can always be 100% right
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