Mumbai: Entrepreneurs-turned-investors Krishna Jha and Hemant Sharma are giving a not-so-common twist to seed-stage funding by becoming co-founders through TelNet Ventures in all the start-ups it provides with seed funding.
TelNet was founded in February with funds from the $12 million (around Rs57 crore) sale in 2007 of the duo’s wireless data firm ITFinity Solutions to OnMobile Global Ltd.
TelNet has earmarked Rs15 crore for investments and will fund companies in the Rs50 lakh-Rs1 crore bracket.
“While it isn’t a common model, it’s also not totally uncommon. Incubators do this, as do angel investors, and some seed- and early-stage funds,” said Subrata Mitra, partner at Accel India, a seed- and early-stage fund affiliated to Silicon Valley-based Accel Partners.
Risk appetite: TelNet Ventures’ Krishna Jha.
Jha, who is also a member of the Indian Angel Network (IAN), says that working with the network has made him realize that there are a number of ideas that may not get funded by an angel network, and that these networks would be a potential source of deal flow for him rather than competition.
“At time zero of any venture, there is a degree of non-clarity and it’s a flux process,” he said. And in many new ventures that have been successful, it was not always Plan A that worked but a derivative of that plan, he said, adding that a typical angel investor, even if he finds an idea good, may not invest without a definitive plan to take the business forward.
However, Praveen Chakravarty, co-founder of Mumbai Angels, another network of angel investors, contests that description of his tribe.
“I think it’s necessary before we fund a company that its plans are flexible. There are numerous examples where companies have changed track when it found its initial plan not working,” he said.
Where TelNet could potentially differ from a typical angel initiative is that Jha and Sharma will not demand a sales pitch or a set of projections from the entrepreneur. Being an investor as well as a co-founder, TelNet will be on the same side of the table as the entrepreneur.
“When I sit with companies, my lookout is whether the promoters have the passion, and whether the broad idea is good for the entrepreneur to start the business,” said Jha.
“There are some guys who’ve done okay at this (incubation model), but generally speaking, it’s tough and there aren’t too many successful examples,” said Sumir Chadha, a managing director at Sequoia Capital India Advisors Pvt. Ltd, the Indian arm of Silicon Valley-based venture capital fund, Sequoia Capital Operations Llc.
He said that in the US, during the dot-com boom days, there were a lot of these, where incubators co-founded companies, and took an equity stake not for investing, but for co-founding.
Chadha added, however, that Jha, whom he knows personally, is a “talented guy”, and hopes he will be successful.
Mitra of Accel India said that he and one of his current partners at Accel India, Prashanth Prakash, had invested in five companies between 2004 and 2005 (before the fund was Accel India or even its earlier avatar Erasmic Venture Fund) in a somewhat similar model to that being followed by TelNet, though never as co-founders.
According to him, the advantage of the model is that you tend to know a lot about the company’s technology, business, strategy and health in general.
However, he lists out at least three challenges that may be relevant for a fund such as TelNet. One, co-founders are usually expected to be more than full-time with one company. This can be tricky if there is someone who’s a co-founder in multiple companies, especially when future investment is sought in these companies.
Jha of TelNet said that at any given point in time, TelNet will work with just two companies, the target sectors being Internet and mobile services.
Two, it’s tricky to establish a right sense of valuation for such companies, since the fund has effectively a way of getting more equity for lesser investment. This could become tricky again when a new round of investment is sought.
And three, depending on how the fund is set up, there may be regulatory challenges in accruing founder/sweat equity directly to the fund, he said, adding that this last challenge is related more to legal structuring.
Jha seems to be aware of the risks, and cautioned that he would only have limited patience with the companies he co-founds. “It’s going to be risky, and we’re going to take on ideas that are either going to be very big, or dead in one year,” he said.
Apart from angel networks, another potential source of deals could be venture capitalists who may not be able to invest in a company they like because their deal sizes are typically in the $2-20 million range, and the company in question may not require so much, according to Jha.
Besides, even if one partner at a venture capital fund is completely sold on the idea to invest, he may not be in a position to convince other partners or his investment committee. In both situations, said Jha, the venture fund could potentially direct the company to TelNet. In return, TelNet could give the venture capitalist the first right (for funding) if the company needs to raise additional capital in the next stage.