Mumbai: Raj Mahadev, who spent 21 years in consumer banking at various foreign banks, turned entrepreneur six months ago. Together with six others, he set up Touch Base Capital Pvt. Ltd, a company that aims to be an integrated financial services distribution platform in a year’s time.
Touch Base today distributes general insurance and loan products to retail customers and companies, but hopes to play across financial products including life insurance and mutual funds.
While his initial plan was to develop an offline distribution model, and subsequently add an online platform, his engagement with a venture capital, or VC, firm a few months into setting up the company, saw a change of approach.
New tactic: Clearstone Venture Advisors director Rahul Khanna (Left-Abhijit Bhatlekar / Mint) and Seedfund chief financial officer Anand Lunia.
“Our initial plan was to treat the online platform as a lead generation tool, but now (after the conversation with the venture capitalists), we think it will provide an end-to-end solution in the initial phase itself,” said Mahadev, who is managing director of Touch Base.
“They (venture capitalists) helped us prioritize the phasing of the business, let us know the right amount of capital expenditure in order for us to scale the business faster, and basically, enabled us to crystalize our model,” he added, without naming the venture capitalist.
Mahadev is one among few entrepreneurs who are being treated to a new trend that seems to be getting exported from Silicon Valley to India, where the VC firm mentors a company even before it’s funded.
“When we feel a company is still early in its lifecycle for funding, or maybe the business is just a concept, we wait for it to get to a stage where it can receive funding from financial investors like us,” said Rahul Khanna, director of Clearstone Venture Advisors Pvt. Ltd, a VC fund that has made four investments in India. Khanna goes into every meeting (with entrepreneurs) hoping to find something investable, but regardless of whether he puts in money or not, he tries to give the entrepreneur an honest depiction of where the business is today, where it can be taken to, and how.
Such feedback, at times, results in further dialogue and partnerships between the entrepreneur and investor, with the investor playing the role of a mentor. It’s especially true in instances where both parties sense a certain level of chemistry between them, according to Khanna.
“It’s not a formal mentoring cycle, but it’s about encouraging him, and giving him feedback whenever he comes to us. Our advice is less about the domain, and more about the organization, design, capital structure and milestones to achieve,” he said.
The time a venture capitalist spends with a start-up does not normally come with any strings attached. “(The mentoring is) done in good faith. If we fund 10 companies, there are 25 that we mentor. There is no condition that we will fund all of them or that they should approach only us for funding,” said Anand Lunia, chief financial officer of Seedfund, an angel fund that typically deploys capital of $200,000 (Rs1 crore) to $1 million in a company.
“It is an informal and inefficient ecosystem today. Our idea is that that when he (the entrepreneur) leaves the room, the dimension of feedback should be such that he gets a clear ‘yes’ or ‘no’ as an answer to his questions and problems,” said Khanna.
It helps that many in the VC business in India today come from an operating background, which allows them to engage with the entrepreneur at a high level of detail.
Nexus India Capital, also an early stage fund with $350 million under management, typically invests amounts upwards of $3-5 million. But in addition to its regular early-stage investing, the Mumbai firm has also made seed investments of a few hundred thousand dollars each in some five undisclosed start-ups. Along with the capital, it also regularly mentors these entrepreneurs.
The idea behind providing mentorship and initial capital is to get the companies ready for the so-called Series A, or first round, investment of a few million dollars. These were companies with interesting ideas and good entrepreneurs, but were yet to show the kind of growth or customer traction that it looks for during first round funding, said Nexus.
“It is working out well for us, as we are now seeing these companies come to the level of proving the concept and finding their initial markets,” said Suvir Sujan, managing director, Nexus India Capital, and earlier co-founder of Baazee.com, which was sold to eBay Inc., the world’s largest online auction site, in mid-2004. “We will probably end up financing about two-three of them,” he said.
Sujan, who has also played angel to companies such as Guruji.com before forming Nexus with co-investors, cites the example of one such company in the business software space, which required constant customer feedback while building its product. “I spent a lot of time trying to get the customer to try their product,” he said.
While momentum in customers is something that Sujan watches closely in companies he mentors, others such as Seedfund at time completely turn business plans around. “We may like almost everything including the entrepreneurs’ profiles and the sector they operate in, but the plan. In case of existing companies (he means companies that they don’t have to incubate), it may be that we don’t like their current product but we think a slightly different approach may work. So we mentor them to try new things,” Lunia said.
He cites the example of ThinkLabs, a company that Seedfund mentored and subsequently invested in. ThinkLabs was into conducting robotics workshops for college students, and had been running for a year or so. Seedfund felt it was a good business, but could not grow big in that form because the company felt it would make money selling the robotics kits and offering workshops for free.
But Seedfund felt that in India, where people are more career-oriented, the certificates were more important and people would be less keen to buy kits than attend workshops. “We mentored the company to try a few things before we funded them. We also felt the workshops were priced too low, and advised them to sell them at thrice the price and charge Rs7,000 per workshop instead of Rs2,500. There was no change in demand even after they increased the price,” said Lunia.
Another company that received a lot of inputs on its business model and financial strategy before it recently got funded by the Indian Angel Network (IAN), is Karmic Labs Pvt. Ltd, the Mumbai-based contract research organization that conducts trials in drug development on behalf of US pharmaceutical companies.
“We had two rounds of meetings with investors. It was a fairly complex process, where we met several people at IAN, who asked us detailed questions about our business model and financial model. During the discussions, we changed our numbers a couple of times, thanks to their inputs. For example, we had some idea of our capital need, but they pointed out that we should take more, and how our revenue guidelines should be different,” said Nidhi Saxena, president and chief executive of Karmic Labs.
For others such as Touch Base, the VC firms’ hand could have only done a world of good and made the company more venture-ready. “By offering a technology-enabled distribution platform, Touch Base could now potentially be of interest to a venture capitalist who focuses on technology-enabled companies,” said Mahadev.