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The topic I wanted to speak to you about today is Angel Investing or Venture Capital and how it affects all of us as marketers and students. I will also talk about some of the trends in angel investing. Today we hear that a lot of investment is happening in many areas. A lot of start-ups are getting founded. This is a lot more than when I started around seven years ago. At that time, it was a buyers market. Today, it is a sellers’ market. So the eco-system has really exploded in the past few years.

What do Angel investors actually do?

Let us start with what Angels and VCs do. They typically finance ventures that conventional sources of financing wouldn’t. They finance a very high-risk and high-return asset profile. When angel investors invest in a portfolio, we understand that almost 40-50 per cent of startups will fail. That’s the kind of investment thesis that goes in. On the other hand, if you invest in stocks, you would really not see this level of risk. Angel investing is really about managing a lot of failures. Then there would be some modest successes (40-50%) and there will be very few home runs (10-20%). These home runs will overall decide the return on the portfolio. The return on these home run portfolios could be 5 times, 50 times 100 times or even 1000 times the investment. It is these home runs which we expect to cover up all the other failures and give us a healthy return on investment. That’s the mentality of an angel investor.

Usually, every start-up will go through multiple rounds of financing. You must have read that companies are raising Series A, B and C of funding. As more and more capital gets infused in the system, the ability for startups to remain in negative cash flows has increased multi-fold. You will see several startups which have negative cash flows up to series C, D or even more. The way Angels and VCs invest is they focus on the pre-seed funding stage. (The earliest stage of funding a new company comes so early in the process that it is not generally included among the rounds of funding at all. Known as “preseed” funding, this stage typically refers to the period in which a company’s founders are first getting their operations off the ground.) They stay invested from 5-7 years and then exit either through a secondary sale or through an IPO. That’s the typical financing part for a startup.

"Through the experience of a decade and a half which has come from large companies such as Flipkart, etc, there is a lot of engineering and product talent. When these two meet together, you can actually build big companies and craft success stories from India and sell to the world"

Ankur Shrivastava, Co-Founder and VP, Globevestor

Tech startups rule the roost

If you look at the top 10 companies in the world in 2020, they are tech companies. What this means is that over time, technology companies have been able to get massive value for investors and they are becoming more and more powerful. Even blue chip companies are now getting upstaged by tech upstarts. What this means is that no sector today is shielded from the disruption by tech. Companies across sectors are not only getting disrupted, they are getting disrupted faster and faster. That can only happen to technology sectors. What is happening these days is that tech companies are going public much later. Companies which started 3-4 decades ago, such as Microsoft, Apple, etc-the distribution of value for investors in both public and private markets was well distributed. Over time, it has gone really down. Now, if you look at companies formed over the last 10-15 years, the entire value distribution has come to the private markets. Which means, if I am a public market investor, and I want to invest in technology stocks and create the same amount of value, that option will not be available to me anymore. Apple gave around 600x to private investors and around 400x to public investors. But if you look at Twitter, that probably has been only about 10-20x, even though it is one of the more successful tech companies. The larger point is that the return multiples in technology stocks has really gone to the private markets. Any savvy investor who is creating a portfolio of investment stocks needs to have technology stocks in their portfolio, because tech companies are disrupting all aspects of our lives. But at the same time, you cannot wait for tech companies to go public anymore, because these aren’t the kind of multiples that are being delivered anymore. Angel investment is really coming into vogue and it is becoming part of the portfolio strategy for a lot of people.

Value creation is being shifted to private markets

If you look at the average age for an IPO for a US tech firm in 1999, just before the dotcom bubble, it was four years. Companies were going public within four years. In 2014, it had ballooned to almost 11 years, and in my sense, in 2021, it will be even more. Because companies can remain private for much longer, there is a lot of capital available. Companies with unicorn status has steadily grown. A decade and a half ago, it was less than 1 per cent. In 2015, it quickly ballooned to 40 per cent. What that means is that of all the companies that are valued at more than a billion dollars, almost 40 per cent were still privately held, and my sense is that in 2021, it will be even more. A lot of this value creation is happening in the private markets. If you look at Zomato, they have returned the same amount of multiples that Infosys did, and Infosys is considered the gold standard of success in public markets. The same kind of success have been seen by some other companies in India, but most of them are still privately held. What this means is that it is not just a US trend of value creation being shifted to private markets, it is a global trend. The question could be that while this is all fine, from hereon, can Zomato or Paytm or Ola, give the kind of returns that Infosys gave post IPO. Is there a further 1000x or 2000x available for public market investors from hereon.

As companies grow, the expectations grow. For Facebook to deliver, it will have to grow so much in value that it will have to go above the nominal US GDP, which is crazy. This is similar for Twitter, LinkedIn, and Snapchat. To deliver returns, they have to grow to a sizable portion of US GDP. In India, the picture is even starker. If you expect Zomato to create that sort of value, the value of these companies need to grow to trillions. It is therefore safe to say that these kinds of values are now not available in the public markets. Hence a lot of investment now happens in the private market.

"If as students, you have to provide for your family, then you have to come to a point where your personal financial situation does not come into the picture for almost 4-5 years. This is a long term game, and success takes a long time to develop"

Emerging markets are going truly global

The other point I wanted to make is that emerging markets are coming into their own. The wealth being created by emerging markets is growing very steadily, from 20 per cent in 2000 as share of GDP, to almost 40 per cent as expected in 2025.

A decade ago, it was almost impossible to imagine that there would be more unicorns outside the US than within. But that has happened. The value that is being created by tech startups is global. What this means as a overall trend is that angel investing has become the norm globally. Investors want to invest in technology companies, else they are losing out on portfolio value. But, waiting around for IPOs to enter the technology stocks isn’t working as a successful strategy anymore. Big investment firms such as Tiger Global and Softbank are investing huge amounts of money into the technology space and this has a huge impact on us as consumers and marketers.

India specific trends

In India, we are seeing three broad trends. The first is that the power of the Indian consumer is really on the rise. This is evident in the growth of companies such as Zomato and Swiggy, where as marketers, you are directly targeting consumers much more than ever before. But the fact that these are tech companies which market direct to consumers means that there is a lot of instantaneous direct feedback. This is one theme that marketers need to consider. The other trend is of creating a lot of startups in India for the world. A lot of companies have their offices in India and they are selling to the world. You have very big success stories in this space. Bangalore and Chennai have become big players in this space. This is targeting consumers and businesses outside of India. This is the second trend. The third trend is the realisation that the Indian MSME or SMB is also not far behind. You look at companies which are being created which are selling software or SAS or some sort of software to kirana stores or small factories. These are the trends that are being explored in the eco-system in India right now.

The reason SAS and other products are coming out of India is because we have a long history of successful IT services companies which have understood global clients, their needs and have developed a good amount of sales experiences in those industries. Now all that talent is being roped in by SAS companies as well as companies that are building out of India. Through the experience of a decade and a half which has come from large companies such as Flipkart, etc, there is a lot of engineering and product talent. When these two meet together, you can actually build big companies and craft success stories from India and sell to the world.

Valuation of startups

Let’s talk about valuation of startups. This is a question a lot of founders also want to ask. The answer to this is more art than science. There are no benchmarks available. There are no public market companies which you can benchmark to. At the other end, there are no projections. In a private equity firm, we have discounted valuations, but you can’t do that in startups. It’s all assumptions at the early stage. What then can we do? The way we value is that we look at the potential of the idea. A company has to go through multiple rounds of financing. There is a certain level of expectation from investors about how much percentage of ownership each one of them will take. So it’s almost like a triangulation of how much does the startup really need for the next 18-24 months and how much should they raise, how much should they dilute, and on the other end, how much does the investor want in terms of control, rights and ownership. And the third factor is what is the kind of potential the company has, what is the makeup of the core team, what is their track record, what is their execution potential, etc. All these things are certainly considered, but at the end of the day, it is more of an unstructured approach than a structured one. Of course, this is more about early stage valuations. If the question is about late stage, the problem is that since a lot of these companies are still not making positive cash flows, a lot of these things have to carry on and their impact must be considered.

There are a lot of budding entrepreneurs who want to start their business. They have concerns that this is a line of work where the failure rate is very high. I would say a couple of things to them. I would tell them to think from a very problem-oriented way. Are you solving an existing problem in society? A start-up is still a new territory. The key thing is that whoever is creating a start-up because they think it is cool but that start-up is not actually addressing a strong problem at the customer’s end, then that would turn into trouble very soon. I would advise budding entrepreneurs to focus completely on the customer. Does the customer actually have an acute problem that needs solving? If the problem is very minor, then those things don’t scale as well. The second point is that the team that you build has to have the various skills and capabilities which are needed for building the solution you are aiming for. You must have a very well-rounded team. Your ability to attract talent and pay them, is very low in the early days. It is very valuable if you can round the required skills among the co-founders itself. You are then not dependent on anyone else. Investors want to know if a team can survive on just Maggi noodles and still deliver results. The third important point is financial viability. If as students, you have to provide for your family, then you have to come to a point where your personal financial situation does not come into the picture for almost 4-5 years. This is a long term game, and success takes a long time to develop. I would advise budding entrepreneurs to have a Plan-B for at least 4-5 years in order to have financial viability in the initial stages. If you can manage these three things, then you will have enough tools to be successful with a start-up.

‘Investing’ in the Future!

"When angel investors invest in a portfolio, we understand that almost 40-50 per cent of startups will fail. That’s the kind of investment thesis that goes in. If you invest in stocks, you would really not see this level of risk"