I am speaking from personal experience here, so please read this note with that caveat.
Over the past 3–4 months, I’ve encountered a disappointing trend among a few tech entrepreneurs (in India) towards their early stage angel investors.
The argument goes,
hey, i need to clean up my cap table as I want to raise a lot of money, and I need to reduce founder dilution …it’s something my current big VC investors are pushing me to do. Please can you take an exit at a multiple of your invested capital?”
In most cases, this should be cause for celebration. How often do angels get exits in early stage tech deals in India after all.
But recently, I’ve found myself with the short end of the stick. Founders approach us saying, “please take an exit since you’ve already made X-times the invested capital and that should give you a healthy return”. Another version is, “you’ve invested in that other company that vaguely competes with us, and so we are worried about information rights you have and you may leak our secrets to them.”
In each case, the offer on the table is a “market rate discount to last round” … without an upfront disclosure about an impending big-up-round on the horizon. Because there is no way for the angel to truly know that a new round may happen, and even when it does, the disclosure will happen much later anyway, why not “clean up the cap-table”.
I see it as nothing short of theft.
When an angel investor invests in your company, it is often at a stage when your company is at the formative stages, and has little to no evidence of achievement. The risk factor of the angel investors investment going to ZERO is pretty high. In other words, unlimited downside risk on the capital invested.
So, on the other side, when you start achieving great success, just as Founders have unlimited upside potential; early investors should have the same opportunity (to the extent of their investment) … unlimited upside potential.
Thought I’d share this for the benefit of fellow angel and early stage investors in the India startup ecosystem. Don’t fall for this trap.
PS: if you want solutions for how to protect against such practices (i.e. safe guard yourself against such malpractice), feel free to email me.
Couple of friends asked me this question recently, so I thought it may be useful for a wider audience.
Often during a fundraise process at startups, you come across the investment arm of an Operating Company (unlike VC’s who only invest and don’t run companies).
Let’s call them OpCo’s.
OpCo’s typically invest from their balance sheet, and do investments for one of two reasons:
Strategic Investments (learn a new market, buy-in early into future potential new lines of business, build an ecosystem of partners around their core business, create more stuff to sell to their existing customer base, etc)
Separate Investment arms [for capital appreciation, not only for (1) above]. In these cases there is often a strategic angle involved, but not explicitly a must-have. In these cases, capital is typically set aside in a fund vehicle.
Critical to know which type of Corp VC arm you are engaging. You can simply ask questions along the lines of (1) and (2) to figure this out.
Strategic investments should typically come with “more than money” benefits. For example: supply chain, distribution channels (sales, user acquisition), unique/early access to tools, and some inside track on enabling you to build an unfair advantage in the marketplace.
To ensure you really (and tangibly) get these benefits, it is important to ensure that you secure buy-in from OpCo Executives who control those assets. In other words, don’t just trust the investment team to be able to deliver on these unless the operating team has bought in. In most cases it helps to make the OpCo Exec your champion within the company in the long run.
Another important question for Strategic investments is to ask about the time horizon for the investor. Typically OpCo’s will have a longer horizon (read: patience), and be willing to back you in future rounds as well as long as their goals are being met. That being said, if their goals aren’t being met, then they can be tricky to deal with.
For Corp VC’s that are setup as separate Investment Arms [(2) above], the best way to evaluate is to look at them just as you would another VC. Ask all the same questions you would a regular VC firm.
The Upsides of Corp VC can often be game changing.
Getting access to (and locking others out) of proprietary “more than money” benefits can set you apart from competitors fast. It can help you achieve things at lower cost.
Corp VC’s aren’t as active on your board as a regular VC. So as long as you are hitting broad goals, they won’t get in the way for most operating decisions. This is sometimes a negative too; all good boards help entrepreneurs avoid pitfalls
Corp VC’s understand their markets & adjacencies fairly well. So, they are what I call more-committed capital, and will invest in adjacencies with deeper conviction than some VC investors (the few who are easily swayed by market sentiment).
Of course, there are potential downsides! … primarily two: Speed and Priorities.
Speed of getting through internal decision making can sometimes be a challenge. It often also takes longer to turn around documents. Keep in mind, the OpCo isn’t setup like a VC (Monday meetings, standard contract templates etc) so some decisions aren’t as high frequency. Therefore, it also can take longer to get documents reviewed/signed etc. But this a minor thing in the grand scheme.
Priorities of the OpCo often change from time to time, as they themselves see market transitions and competition in their core business. If you and your company are no longer a priority for the OpCo then you can find yourself in some level of stress. This can mean that the “more than money” benefits may not continue to be available or deliver as much value to you as intended, or the interest in doing follow on investments may not be the same anymore. This is the thing to watch for, and honestly the better way to handle this is to partner only with very strong companies who have durability on their own.
In conclusion, Corp VC’s can be very productive partners in enabling you to build and grow your startup; you just need to be smart about the process of getting to know how to extract the best value for both sides.
Bonus point: in some cases, Corp VC’s also make potential acquirers.
Consumers have more choice, and Pizza is no longer the only preferred home delivery option
I read this article in the Economic Times yesterday, and realized that the food-tech sector has just demonstrated its real impact and latent demand on two public stocks (Jubilant Foodworks & Speciality Restaurants)
“Delayed recovery in same-store sales over the medium term seems not just cyclical but also structural. There seem to be no signs of revival,” Abneesh Roy, an analyst at Edelweiss Securities
Roughly 36% of Jubilant Foodworks sales were via online ordering(OLO as they term it), which contributes to approximately — INR 800 Crores GMV (run-rate) in annual revenue run rate across Dominos & Dunkin Donuts in India & Sri-Lanka. (Keep this number in mind)
The structural shift spoken about by Abneesh Roy, isn’t a slow down in the Indian economy, or consumers cutting back on spending as some others have conjectured.
Consumers have a lot more choice today when it comes to where they order home-delivery food from. Thanks largely due to the Food-Tech Bubble as many perceive.
A whole host of new companies got created as a result. Food delivery marketplaces, Internet-First restaurants (or “cloud kitchens” as some call them), a couple of physical restaurant brands pivoted to delivery only, Recipe Boxes, Chef marketplaces, and many more.
The initial sampling and surge of orders was driven largely by deep discounts offered by the likes of Foodpanda, Tinyowl, Swiggy, Zomato, Faasos, Freshmenu et al. And lets not forget the discounts offered by the payment gateways as well; PayUMoney & Paytm splurged lavishly on this category.
The exuberance has left behind lasting & meaningful structural changes:
More choice for consumers — beyond QSR’s & delivery chains. you can order from a restaurant that doesn’t have their own delivery fleet
New infrastructure — delivery-riders available “on-demand” quoting RoadRunnr — ‘book, track, and manage deliveries at scale’
Digital payments, Menu discovery, Repeat Orders simple but powerful features enabled by a variety of apps
Based on a couple of articles, and my conversations with people in the industry, I conjecture that an average of 100,000 orders @ average order value of INR 300 per order are being placed through new Fo0d-Tech companies relying on the online/mobile channel exclusively. These orders are delivered from nearly 25,000 restaurants.
That is roughly 1095 CroresGMV in annualized orders. 20% more than an established mega-brand like Dominos & Dunkin.
Couple this with growth rates of category leaders in the range of 15% MoM, the category should double every two quarters.
INR 1000 Crores in GMV in a short 18-months is no small feat!
What the future may hold
While the Food-Tech exuberance raised a lot of eyebrows in past 6-months, it has created new-infrastructure that brings more choices for consumers, and enables a broader spectrum of Restaurants/Chefs/Homecooks to deliver their product to a mass audience.
my prospection is the following:
Emergence of new “delivery only” brands at the scale of Dominos, Chipotle, McDonalds enabled entirely via the new Food-Tech infrastructure. (Freshmenu, Faasos are already getting to some scale; we will see 10–15 more)
Tier-2 markets will latch on to this phenomenon, the same way they adopted E-Commerce.
Micro-entrepreneurship for good home-cooks will flourish. A new form of scalable livelihood for many
Palette expansion for the mass Indian consumer — international cuisines become more accessible at lower price points
At least two or three nationwide online Food delivery marketplaces will reach sustainability, and see a path to an IPO in 3 years from now
Consumers will be willing to pay for “assured delivery” at peak-hours. We may even see some platforms introduce Surge-Pricing like Uber & Ola
The worst of the Food-Tech correction is behind us, the revolution will continue on, and it just demonstrated its impact on two large stocks on the BSE SENSEX.
Now, I am going to go order a Starbucks coffee from Swiggy!