Decoding how top venture funds source deals
Decoding how top venture funds source deals
Venture capital is all about scouting for founders and deals early. For instance: Back in 2008, when two young men were planning to revolutionise the Indian e-commerce space, the market did not believe in their idea enough. Bansals started out with the idea of building a price comparison website but eventually ended up with e-commerce.
While big VC players including Sequoia Capital, Helion Venture, Nexus Partners, and many others several times passed on the opportunity to invest, Subrata Mitra of Accel (then Erasmic Ventures) saw the spark and went with his gut. And that’s how Flipkart founders Sachin and Binny Bansal raised their first big cheque – $800,000 in seed capital – from Accel. Accel went on to invest more than $100 million in subsequent rounds.
Ever wondered what Accel saw in Flipkart which other top funds didn’t? How do some of the most marquee venture funds who have backed unicorns including Flipkart, Byjus, Paytm and Ola scout for their next billion-dollar founder?
They all look at teams, market size, stage, and business models of companies. Yet, each one of them has a distinct and innate approach to evaluate founders and deals
Today, with most of these funds trying to tap into companies early stage, nuanced differences like team structures, fund size, and thesis orientation showcase the unique defining culture across these firms.
True to its bet in Flipkart, Accel has over time built the DNA to back people at the cost of ideas.
Entrepreneurs say, for Accel it’s more about the founders and depth of thinking they demonstrate than the idea itself. Ideas can change. “It’s a question we ask ourselves every month, every quarter, how do we enable entrepreneurs more”, said partner Shekar Kirani.
With more than $1 billion asset under management, Accel raised its fourth fund of $450 million in December 2016.
Unlike any other fund, the Flipkart, Myntra and Freshdesk backer relies heavily on its entrepreneur, and investor ecosystem network to get inbound deals.
They have a strong angel network which passes on leads to partners, and while a lot of effort is made to add value to entrepreneurs they incubate, scouting for entrepreneurs is mostly an organic process” he said.
Sequoia India is the largest corpus venture capital fund in the country with more than $3.9 billion asset under management and a latest fund size of $1.3 billion.
A structural change in the fund which has backed companies including Byjus, Musigma, has been their interest in doing a lot more seed and early stage deals and not just mid to late stage companies.
Its seriousness about the accelerator is evident from the fund’s recent appointment of Google India and Southeast Asia head Rajan Anandan.
What makes Sequoia different from others? For one, its legacy, brand and sheer fund size.
More unknown is the fact that the firm relies heavily on technology and its partner network to source credible deals.
“The vision is to use technology to assist in deal sourcing using custom built products coupled with full-time people working on data analytics,” said an investment executive at the firm.
So, in order to filter companies, the investment team relies heavily on it Similar Web – a website which provides web analytics services for businesses, Google Play Store rating, app analytics and app market data platform App Annie, and others to receive automated signals about interesting deals in the sector.
Sequoia also leverages its global network from China and USA, to build a deeper sector specific thesis.
The bad, they may do conflicting business deals (which is only going to increase with Surge), and some founders may even find them intimidating,” said a Sequoia portfolio company founder who recently sold his startup.
When it comes to picking funds, some of India’s top founders have picked SAIF over Sequoia. In an interview, Deep Kalra from MakeMyTrip noted, “We got term sheets from both Sequoia and SAIF Partners. It was a tough choice.
The terms were better with Sequoia but I still went with SAIF.” His choice was influenced by SAIF’s Ravi Adusumalli’s agile decision making because for an entrepreneur prompt actions matter the most.
Ravi’s style, however, is different from the way SAIF as an organization – which is highly structured. Its design is such that there is a sector-specific structured allocation of teams. “The mandate is to keep track of every company starting up in your respective sector,” said a former executive at the fund.
Several SAIF funded startups that we spoke to said that SAIF teams would often have deeper sector related questions.
“Sometimes, they even offer to help with research etc and trace down ventures typically in 4 stages; Hyper track, track actively, track passively, pass. The thesis is that the 10% companies you want to meet, you’ll have to chase,” said a former employee.
Once they like a company or founder, and they’ve build thesis around what they like, SAIF will focus a lot of time doing diligence to validate any gaps they see in those data points.
“We don’t spread ourselves too wide; rather we pick a company, charter out what’s unique about it, and dive deeper to understand if our thesis around their defensibility holds true,” said a former investment associate at the fund.
The organizational hierarchy is strong and structure well-defined which is followed throughout. “Infact, when it comes to taking the final call on an investment, the startup presents to the entire firm and majority partnership vote is required for the deal to go through,” said another investment professional at the firm.
The fourth on my list-Matrix Partners- puts in a lot of effort in developing an on-ground network with the belief that having more ears on the ground is most critical to access deals that are at an early stage.
The firm has a “See deals first” philosophy.
Analysts at Matrix closely track venture data platform Tracxn, Angellist, large corporates, and several job sites, to scout for founders in a more organised manner than any other fund.
“Our reputation is very very clear. We are hustlers and our team here works harder than some of the operating companies. So that cushy lifestyle that people assume comes with being a VC – is a big fallacy when it comes to Matrix,” said Avnish Bajaj specifically talking about Matrix’ differentiation from other funds.
What’s also unique to Matrix is the extensive network it builds in large companies like Flipkart, Ola, Byju, Swiggy, or any top company or consulting firm to source deals. “We believe the next wave of internet companies will emerge from these companies,” said another employee.
Interestingly, two investment professionals that I spoke to said that the fund does not have a blanket technology lens across sectors it evaluates, like most venture funds.
“We like sticking to the belief that different factors are fundamental to different sectors – operations for a logistics firm, risk management for a finance firm, so on and so forth and technology in these businesses is largely commoditised,” he said.
In the final decision making leg, and after the investment team is convinced with a particular prospect, it is the entire firm that participates in giving inputs in a team meeting in which the startup is called to present.
There’s no formal voting system per se and the final call is left with the Deal team.
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