Author Archives: Aristotle Consultancy
Private investment activity started on a tepid note in 2016 with private equity dealmaking staying weak while venture capital firms turning cautious on backing startups in the first three months.
According to accounting firm PwC, during January-April 2016, early stage PE investments witnessed a decrease of 57% in value terms and 25% in volume terms. Investors too agree that funding is increasingly getting difficult to come by.
“We are seeing a slowdown but there is nothing to panic. Smartphone proliferation and 4G will create a large platform where big enterprises can be created,” said Rajesh Raju, managing director, Kalaari Capital.
Therefore, the overall focus goes back to the fundamental question of how startups can build scale in a challenging funding environment.
The truth is that slowdown in funding has made competition less intense in many segments of the consumer internet sector as a lot of companies, especially those in food-tech and hyper-local segments, have closed operations. “This gives room for the existing companies to build strong foundations and focus on unit economics,” said Sudhir Sethi, chairman and managing director, IDG Ventures.
Entrepreneurs should go back to their bootstrapping mode, cut expenses, delay capital spending, reduce working capital and explore alternative funding options.
According Paytm founder and CEO Vijay Shekhar Sharma, going for a down round, where a startup raises money at a valuation lower than the previous one, is not bad if a company believes that it has a strong business model.
“The current cycle of venture capital funding that peaked last year was built over five years starting 2010. This kind of a downtrend is good. Otherwise, people tend to forget startups are real businesses. Unit economics has become the key factor for new startups,” said Mohandas Pai, angel investor and chairman of the venture capital firm Arin Capital. “Globally, large companies were built during tough times. Google emerged after the dotcom bust of the 90s and Facebook, post 2008 recession. “In India too, some of the big companies were founded during tough periods. Flipkart in 2008 and Ola in 2010-11 found it extremely tough to raise money,” said Anupam Mittal, founder of People Group.
In such tougher times, entrepreneurs need to be wiser and choose routes that they would have avoided when the going is good. The focus should be on product (business model) and instead of spending big on brand, they have to concentrate on customer engagement. Therefore, in a constrained funding environment, it’s just about unit economics, margins and a healthy path to profitability, not GMV (gross merchandise value) figures that will lead companies to profitability.
Source – kotakbusinessboosters.vccircle.com
Rocket Internet-incubated fashion e-commerce venture Jabong that hit a speed bump in the second half of 2015 has begun the new year with a marked improvement in performance while simultaneously cutting down operating loss.
Jabong, which competes with Flipkart-owned Myntra among others, has been focusing on mending its leaking boat. Its EBITDA or operating loss (adjusted for share-based compensation) had been shrinking from Q3 and declined further in the three months ended March 31, 2016.
The performance of the first quarter shows that the firm is back on the growth track while pruning its day-to-day losses even further.
Jabong saw a change in management at the fag end of last year with former Benetton India head Sanjeev Mohanty taking over as CEO in December.
Indeed, Mohanty had claimed early this year that Jabong registered the highest-ever month-on-month growth of nearly 35% per cent in net revenue for January, which marked its best performing month ever since inception in 2011.
In what appeared to be a veiled reference to arch rival Myntra, he had said, “Some players in the industry hide their real performance behind the veils of lofty GMV figures. In those terms too, we touched $66 million in GMV in January itself positioning us as the largest fashion e-commerce company in India, with a robust growth of 56% in our gross orders and 59% in gross items. At this rate, we will be within striking range of the $1 billion GMV mark by the year-end.”
The company secured €300 million ($339 million or Rs 2,250 crore) from Germany’s Rocket Internet SE and Swedish investment firm Kinnevik. The transaction valued the company at €1 billion. This was a drop of almost 68% from its previous funding round in July when it was valued at €3.1 billion.
While the deteriorating performance of Jabong last year showed the big risk for e-commerce firms who have grown at a hectic pace on the back of aggressive customer acquisition tactics with discounts, its more recent track record reveals a silver lining.
But that has not stopped the dilution in valuation. Global Fashion Group (GFG), the global parent of Jabong, had recently raised fresh funding from its existing investors at a sharply lower valuation
GFG was created by combining six e-commerce brands that continue to operate in emerging markets around the world. It includes India’s Jabong, Latin America’s Dafiti, Russia’s Lamoda, Namshi of the Middle East, Southeast Asia’s Zalora and The Iconic in Australia.
Source – Techcircle.com
Industry estimates suggest that nearly two startups are born daily in India adding to the already existing pool of strategically placed companies knocking on investors’ doors. However, in recent times, the country has seen a tilt, with investors taking interest in startups that have proven product/service profile for ideas gaining ground with Internet-savvy consumers looking for consumer and lifestyle needs.
India has heard of competitive turnarounds in fundraising aspect in recent times, with valuations and adjustments being the buzzwords.
Some notable names have had significant markdown of their valuation before convincing the investors to shell out money. Corrections help the heated markets cool down, thereby making investment scenario little tougher. Nonetheless, the pleasant news is that valuations did not dip as much as to stop the deals altogether. Given the sentiment, the investment community has become further prudent and deals worth their value are still being signed. This has led to a longer gestation period to examine and recheck the values or prospects of a good business idea.
Nonetheless, the winning survival strategy is to keep building the business with profit for all relevant stakeholders. In any case, it becomes more important for startups to really scrutinise the way in which they approach investors. At a time when VCs tighten their purses and examine the expenses closely based on business models adopted and raise questions on self-sustainability, let us revisit the dos and don’ts of approaching a VC investor.
Timing and valuation
The mind of an entrepreneur is always torn between looking after the business and raising funds. Sometimes they wish to first establish themselves a bit and then go for raising money and sometimes it is the other way round. While a proof of concept is important for investors and fundraising, it is really for the entrepreneur to decide what stage he/she believes it to be a concept-ready product. It is a stronger case if one has run a company almost bootstrapped and shown profits or good growth figures with an established set of clientele over a period of time before approaching the investor.
One of the prime reasons widely discussed in the investment corridors is hyped-up valuations. The investor likes the team and approves of the idea but disagreement on higher valuations stalls the talks.
Usually, startups come up with a really big number and go down with their ask for fund raise with time, as they begin to realise that such a number is in fact unrealistic. This obviously indicates that there is a need for startups to consider this number very carefully. The fund raise ask clearly needs to be backed by the financial and operational traction achieved so far and those expected from a realistic future budget.
It is good to contact investors who have domain experience and deal in the kind of business model to better fit the criteria. Complete homework should be done on the mindset, goals, and track record of the investor to see if he could provide the necessary guidance, network, and funding rather than seek share control in the company. Beyond funding, investor’s business is about helping the business work through its problems. Do keep in mind that an investor coming on board is going to be a partner for a long term – and a very important partner. The entrepreneur would be letting someone share one’s vision and journey, so it is important to do the homework and make sure that there is a convergence of mindset as well.
When approaching the VCs, it is always best to have a presentation deck handy, as they are probably receiving dozens of ideas in a day and it is impossible for them to remember your company the next time they meet you without looking at the presentation. It is better to be prepared with a demo while presenting for the right kind of impact.
Presenting the idea
Beyond the number crunching, investors always look for the motivation and driving force behind a venture. Presenting the passion balanced with required professionalism with clarity and conscious manner is most likely to generate interest among the investors. The entrepreneur should be able to explain the business quickly and accurately for the right impact.
It is often seen that the presentations start with the entrepreneurs citing huge market size figures to create the impression in the minds of the investors that there is definitely a need. This is not a very good idea as the investor is probably someone who has a fairly good idea about the market and has agreed to listen to the entrepreneur with that in mind. The overselling generally does not work well and it is better to even skip that part politely while alluding to the market size briefly.
It is also seen that when preparing the projected financial figures, startups generally tend to become a bit too optimistic. It does not really help and can become a source of projecting over confidence. It is important to have the business model based on market opportunity at present and future, which would grow the company and make it profitable.
A judicious way of making the business and its model explainable to the investor is important rather than keeping things secretive with the fear of someone stealing your idea. It is pertinent to note that the challenge lies in execution. Additionally, the risks need not be downplayed but one should present a plan to mitigate them.
Mostly, the interested investor would give some signal in the first meeting itself. In case of a rejection, you may look to convince the investor again, but that usually does not work. However, the feedback, if any, should be taken seriously to address the flaws for interaction with the next investor or before pitching to the same investor again after some time. Feedback from the investors (even negative) can be extremely valuable to the business as they are the people who really know what’s going on in the industry, so it should be taken in a positive manner without being defensive about one’s idea/product.
If the investor gives the nod, it is a long road ahead for the entrepreneur. If the investor has said no, or kept things on a standby for some reason, it is advisable to keep in touch and there is absolutely no harm in keeping them updated about one’s activities/ awards/recognition/new client onboard etc. This helps to remain on their radar and keeps the possibility alive so that they come back if things keep looking good.
India’s startup ecosystem has seen the phase where investment was mostly with the big contenders with potential to become number one in a particular space. The new phase would be about entrepreneurs who could manage the business with lower burns and beat competitors simultaneously. A recent announcement by the government to form a working group to make things easier for startups in the country is a welcome move. The startup policy to be announced in the near future should reflect the Indian government’s commitment to entrepreneurship and take into account delays in incorporation and winding up of business, employee stock options, lack of initial funding, cumbersome foreign exchange documentation and access to external commercial borrowings, and easy compliance norms, among others.
Both entrepreneurs and investors together need to build a sustainable business for the long term and earn profit and respect for all relevant stakeholders. While the entrepreneur needs to judiciously use the money to build a strong and efficient management team and infrastructure to roll out market relevant product/services, the investor’s focus should rest mainly on adequate mentoring of the entrepreneurs, especially the first timers. The startup ecosystem grows when there is adequate coordination between entrepreneurs, investors, employees, and regulators.
Source – YourStory
It plans to assist the startups in India through one-on-one interactions, workshops, boot camps, and mentorship programs. DigitalOcean has also created a special cloud credit program as an incentive for the startups associated with the Nasscom 10,000 initiative, which will offer cloud credits worth $10K to the selected startups in the program. The cloud credit will also be extended to subsequent batches of the initiative later.
DigitalOcean recently appointed Prabhakar Jayakumar as the India Country Manager to help grow and support the local startup ecosystem. The company is also launching its first data center in Bangalore, which is being set up at a cost of $5 Mn. The company also announced a fundraise of $130 Mn credit facility in April this year to purchase more servers and continue its global expansion.
Nasscom 10,000 Startups is an initiative by Nasscom to incubate, fund and support 10,000 startups over the next ten years. Last month, Nasscom partnered with Invest Ottawa for the launch of a startup exchange programme to connect entrepreneurs’ community, innovators, and investors to the emerging startups from India. It had also partnered with Facebook to focus on assisting the innovation ecosystem, helping product-based companies to build solutions in key sectors where technology can play a transformational role.
Source – Inc42
If the proposed levy on online advertisements is actually implemented, it would translate into startups ending up paying 6% over the 14.5% service tax. This equalization levy on online advertisements can burn a hole in the pockets of early stage startups for which online advertising makes more because of its targeted reach and lower cost. Manik Mehta, cofounder Leaf Wearables, a startup that works in the area of women safety through smart jewellery says:
“The levy puts us in a precarious position because all these companies-Google and Facebook- which are the most popular advertising platforms for us, are going to make us pay more at the end of the day,”
In the month of March this year it was proposed by an eight-member committee on taxation of e-commerce, that services ranging from online advertising and cloud computing to software downloads and web hosting be subject to an “equalisation levy” of 6-8% of gross payment if the provider of the service is a foreign entity without a “permanent establishment” in India. The rationale behind the levy was given as a way for the government to get foreign internet companies such as Google and Facebook to pay taxes in India. Rashmin Sanghvi, who was part of the equalisation levy committee and is a chartered accountant and an expert on international taxation and taxation of e-commerce has said:
“Under the existing law and double taxation avoidance treaty, India will not be able to tax them. How can India allow this kind of revenue loss?”
However, the impact of this can be that – because of the nature of the levy, the companies will not be eligible for credits in their home countries, which means the levy is likely to be passed on to users of their advertising platforms, such as startups and small and medium businesses. Sarita Singh, who is the founder of Gurgaon-based Corpus Digital highlights how this levy could mean increased difficulty in collecting payments and eventual loss in business-
“Typically, for an SMB client, the media spend is between Rs 50 lakh-Rs 1 crore a month. The taxes are over and above this cost- service tax is 14.5% and 10-15% is the agency’s commission. Collecting this money is also painful sometimes, and now if a further 6% is added , small businesses that we deal will might decide to change the structure of their digital spends altogether, and we could end up losing business,”
The levy committee members say that all those issues related to startups being impacted have been discussed in detail before finalizing the levy. They also said that being burdened by the additional levy or not, will depend on the negotiation of the startups with these providers. It is also being said that government wants to “test” this levy with online advertisements to begin with, and will have to find an alternative to get non-resident companies credits, similar to the way the Mauritius treaty has been re-negotiated.
Source – KnowStartup