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“We follow a very simple philosophy that the best time for a startup to raise money is when they don’t need it”
advantEdge also runs an incubator programme in Noida
2016 was a learning period for many venture capitalists focussed on the Indian startup market. This was the year when much of the money they had thrown into the ecosystem, out of FOMO (fear of missing out), vanished into this air.
But they are fast learners, unlike a rookie entrepreneur who is just out of college. The moment they sensed that the startup market was on the brink of a collapse, they took a backseat and saved some money for future investments. This, in turn, adversely impacted many startups, leading to the shut-down of some, while others scaled back.
There were very few VCs who did not fall into this trap of FOMO. When all this hullabaloo occurred, these VCs stayed away from the media glare.
Noida-based advantEdge was one such VC fund, which kept itself out of PR and marketing activities. While they had made quite a few investments in its under two years of existence, they chose to stay under the radar, because the Partners believe that the “real thanda (chill) lies not in investing, but when making exits”.
e27 talked to advantEdge’s General Partner Kunal Khattar — a seasoned entrepreneur and investor with nearly 24 years’ experience — to know more about advantEdge, its investment philosophy, the market opportunities, the trends and a lot more.
Here are the edited excerpts:
There is no dearth of VC funds in India, but only of good investments. Why does India need yet another VC fund?
India is the largest startup market in the world where 70 per cent of entrepreneurs are less than 35 years old. Definitely, there is a bias towards younger entrepreneurs. We recognise it. If you look at our fund, we make seed, Series A, and Series B investments.
Kunal Khattar, General Partner at advantEdge
From a fund perspective, we have already exited from two companies. For us, investment is a hobby. For us the real ‘dhanda’ (chill) is in exits. Anyone can invest, but you need to make sure you invest smartly. We earn our bread and butter only at the point of exits, not at the point of deployment.
So we had a very clear focus that we would be spending a large per cent of our time identifying companies, not necessarily on exits. From the day we invest in a firm, we will be looking as to how to raise next round of funding. We have a very simple philosophy that the best time to raise money is when you don’t need it. We tell our promoters that they should actually look for follow-on funding the next day the money hits their bank.
We have a bunch of new LPs, most are family offices in India and overseas. They run business with a combined value of US$15 billion.
We are patient capital. All of the team members at advantEdge have been entrepreneurs. None of us are pure investors.
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We seem to understand what entrepreneur means. Entrepreneurship is not a career change, but a lifestyle change. This will drastically change one’s way of living. We understand that we have gone through that cycle. We have built companies — some of them fail and some succeed.
We have empathy with entrepreneurs when they are struggling. We support them in every way, as long as they are committed.
You just mentioned exits are your bread and butter, but over 80 per cent of investments fail. What factors do you look for in entrepreneurs when investing? How do you know if the company you are investing will succeed or fail?
Although we are a sector-agnostic fund, our real expertise lies in transportation and mobility. We have have spent many years in this sector. Some of our portfolio companies such as Shuttl and Rapido have raised follow-on funding.
We mostly invest in entrepreneurs who have failed at least once. At least they will not repeat the same mistakes they committed while building their previous venture. That way, we mitigate risks.
You started a year and half ago, but you kept yourself out of the press. Why?
We have deliberately kept ourselves under the radar for a couple of reasons. One, last year it was fashionable to invest, and it was crazy. We didn’t want to be one among them. Two, investment is a hobby for us. As I said earlier, the real chill is when you exit a company. Today, out of the total 17 investments we have made, we made two exits, and 15 of our companies have already gone and raised follow-on funding.
Rather than popularising ourselves, we were busy helping founders building ventures. Our investments speak for themselves. Nobody cares how many times you have invested.
People talk about those who invest in Ola and Uber. You try to popularise yourself so early by making five investments. If three of them shut down, then there is more negativity towards your brand than positivity. We waited deliberately for 18 months until a point in time where we can say, “Look, these are the investments that we have made, and guess what, most of them have raised more money, and we have exited some, many of them are profitable, and we have with us Kalaari Capital Hellion Ventures, IDG Ventures.”
We also have Michael and Dell foundation invested in one of our companies.
Now, when we go the market, we have a story to tell. I don’t say we are extremely successful, but we are lucky that we made good investments. We have looked at almost 600 business opportunities to date. On average, we look at 10-12 opportunities a day. Everyday, we learn something new. Rather than popularising it, we are building good business with good track record.
Some investors say that you should not look at exits and should focus on building the company instead. But, you hold a different view on this …
advantEdge
I think the timing of exit should be important. There is a joke I share with my portfolio companies: “There is never the right age to get married. Get married when you meet the right person.”
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Exits also needs to be timed. Finding exits at the right time needs a lot of effort, right partners, right prices, etc. I am not saying that I am focussed only on exits. For me, at the end of the day, if I am asked to choose between raising another round of funding or exits, I will go for exit. Ultimately, the founders should decide. That said, the focus should be to build the business.
In India, exits are very few. There are hundreds of companies chasing angel round, 60 per cent of them raise seed round, 30 per cent Series A, and only 5 to 7 per cent raise Series B. Probably, only one or two per cent end up getting acquired. Other than Freecharge (acquired by Snapdeal), TaxiForSure (acquired by Ola), or redBus (acquired by Naspers), exits are very few.
The investment environment has been very bleak for the past 18-20 months. What could be the reasons for that?
I was in Silicon Valley in 1999-2000. That was when the first economic recession happened. Then I was in New York in 2008 when the sub-prime crisis happened. I have gotten used to this. All industries go through a cycle. Silicon Valley has gone through this cycle two to three times. Tech investments are a highly unregulated area. There is no regulator in the public investment market like SEBI or IRDA to regulate funding.
Here, people who don’t understand business also write cheques. There are many angels who don’t know what they are investing for and where they are investing. They get carried away.
People drop out of colleges and start companies. A good example is Housing. As an investor, I am glad this funding crisis happened. Because of this, many people saved a lot of money, which they would otherwise have lost. Only the fittest will survive.
Entrepreneurship is a different domain. Only people with entrepreneurship DNA become entrepreneurs. Many of these people should have gone to work in an investment bank and acquired some experience before delving into entrepreneurship. Now, people realise that entrepreneurship is tough. Now, only high-quality deals are getting funded. Serious investors look at dedicated and passionate entrepreneurs who are looking to solve serious problem in the market. Entrepreneurs should have the capability and experience to make it happen.
So, you are not a very good supporter of people dropping out of colleges to start up, right?
The Indian education system is flawed that it does not produce actual entrepreneurs. I have lived, studied, and worked in the US. Their education system, and to some extent European system, actually forces their children to think like entrepreneurs and to take risks. There are crucial component of whatever you want to study. They have summer internships and winter internships. They are very important.
All of this creates a very different capability. I think entrepreneurship should be learnt from real life experience. Indian children are a pampered lot — parents protect them. Children in our system are punished if they try to take risk. With that kind of mindset, if a student just drops out of college, doing entrepreneurship is difficult, but it is not impossible. Probability of success is lower.
The best investments that we have made are in failed entrepreneurs. That is the thesis we follow. People who have tried once and failed are the ones who will succeed for two reasons: One, at least they will not repeat the same mistake. Two, this is a person who is actually an entrepreneur who want to be an entrepreneur. This is a lifestyle for him. People who are not comfortable with this, if he fails once, he will go looking for a job.
Most successful entrepreneurs succeed in their second or third attempts. We look for failed entrepreneurs and look for people who are in the 30-35 age bracket. If we find they have the domain knowledge, we will probably invest.
What is your investment philosophy?
We don’t necessarily invest in a space that we don’t understand. We are sector-agnostic. We are normally investing in an entrepreneur or team, but we like to keep it flexible.
Depth in India is very narrow. If you narrow down your investment areas and want to invest in just a particular domain, say logistics, it will take years to deploy your fund. We would like to go across verticals and domains, because we never know at which point a sector will explode.
When e-commerce was hot at a point, everybody started investing in them, and we deliberately stayed away from them. When hyperlocal delivery was hot six months ago, everyone was investing in B2B. Now everyone is investing in fintech, and valuation is going up.
We are flexible in a sense that two of our portfolios are in Singapore.
Last year, there was FOMO among VCs and they followed a herd mentality to invest in startups.
I don’t think there is FOMO here. India is not a market where innovation happens. There is a lot of ‘me-too’ businesses. It is not a ‘winner-take-all’ market. If you miss out on a foodtech business, there are many other similar companies there for you to invest in. If you are coming in Series C or D round, then you are probably investing in a winner. In early stage, it is not easy to know whether you are investing in a winner or loser.
I have a contrarian view on this. Last year, many VCs invested in a lot of companies in online local/home services. There was clearly a sign of FOMO.
That is exactly what I am saying. The minute FOMO set in, we deliberately walk way from there. We looked at Near.in, but we didn’t invest. We looked at UrbanClap, but we did not invest. Their unit economics didn’t make sense for us.
Most angels don’t understand business metrics, whereas we look at unit economics and metrics. We look if this company will make money. We look at their customer acquisition cost. People who look for things at a later stage, we look early on. And we have a simple philosophy in life. While other look for reasons to invest, we at advantEdge look for reasons not to invest. If I can’t find a reason not to invest, we invest in that.
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