BackThese founders took the road less travelled to reap rewards
'You don’t need a lot of venture capital to build a software product. Go-to-market is where it gets expensive and that’s where large VC rounds are raised,' says Vijay Rayapati, founder of Minjar
PremiumThe Silicon Valley venture capital (VC) model followed around the world has an investment thesis skewed towards finding mega winners. The acquisition of Flipkart for $18 billion by Walmart in 2018 gave its early backer Accel India a manifold return that more than made up for any “failures" of other startups in its portfolio. A Facebook initial public offering in 2012 gave the California VC a reported 1,000-fold return on its $12.7 million investment seven years earlier.
While such stories hog the headlines, there’s many a tale of a startup fallen by the wayside in this quest for a “hockey stick" growth trajectory. While a VC focuses on the top 10% of its startups that can scale fast by pumping capital into marketing and expansion, others come under pressure to meet growth expectations that may not suit their startups.
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This has prompted a new breed of startup founders who push back against such a model. And supporting them are alternative VCs like Indie.vc, TinySeed and Earnest Capital that are positioned to back founders aiming for modest revenue-led growth rather than being rocketships.
The classic case is that of San Francisco-based Gumroad, whose founder Sahil Lavingia raised millions of dollars from top-tier VCs when he was 19 years old. After a couple of years, growth stalled. The business was still going up, “but we were venture-funded, which was like playing a game of double or nothing", wrote Lavingia in a blog post.
To cut a long story short, Gumroad got written off by its lead VCs, but Lavingia stayed the course to build a profitable company that creates value for its users, without measuring his success in terms of becoming a unicorn in valuation.
Alternative path
Many SaaS (software-as-a-service) startups out of India making a dent in global markets are similarly drawn towards this alternative path. “You don’t need a lot of venture capital to build a software product. Go-to-market (GTM) is where it gets expensive and that’s where large VC rounds are raised. In our case, we decided we could not afford a marketing-led GTM. We wanted a product-led GTM," says Vijay Rayapati, founder of Minjar in Bengaluru, which got acquired in 2018 by US-based Nutanix for an undisclosed amount, rumoured to be around $50 million. The total funding it had raised was $2 million.
Rayapati was influenced by an article he read early on in his startup journey that began in 2013. It made the point that a founder who raises $2 million and sells a company for $30 million often makes the same amount of money as a founder who raises $40-50 million and sells a company for $200 million. “I didn’t believe in raising a lot of venture capital because then you would have to show high growth, which puts pressure," he explains.
“A VC can have a portfolio of 50 companies and he would always put pressure on growth. It doesn’t matter so much to a VC if one company works out or not as long as he gets a few big winners in his portfolio. But for you as a founder, this is the only thing you are doing."
Another Bengaluru SaaS startup that eschewed VC funding was Recruiterbox. The HR tech company was bootstrapped through its seven-year journey to profitable growth before being sold to San Francisco-based Turn/River Capital in 2018 for an undisclosed amount.
“As with a lot of B2B (business-to-business) SaaS, we were very quick to get revenue. We were basically reinvesting our revenue into the business. We deliberated raising funds but we were not convinced we had the right strategy," recalls Raj Sheth, who was Recruiterbox’s co-founder and CEO.
Around three years into its journey, Recruiterbox got an angel investor in Freeman Murray, a tech entrepreneur who co-founded Jaaga as a collaborative space for the artist and techie communities in Bengaluru.
Murray agreed to provide capital as debt instead of taking equity because Recruiterbox already had enough revenue to show by then. Recruiterbox needed the debt to fuel its growth and Murray’s contribution was handy at a time when loans for startups were not readily available.
Better options
That has changed. Venture debt from the likes of Alteria, Innoven and Trifecta was available for startups that had raised series A or later stage funding. Now, entities like Startuploan have brought venture debt to even the pre-series A stage for startups reluctant to dilute their equity too much.
There are different derisking models at such an early stage. GetVantage, for example, provides revenue-based financing but restricts the usage of the debt to sales and marketing where return on investment can be tracked. Startuploan provides unrestricted debt but takes a small equity stake.
“We typically give three to four times the monthly revenue of a startup as the loan amount. It varies from ₹20 lakh to ₹1 crore," says Hari Krishnan, co-founder of Startuploan, which has invested in 19 early-stage startups so far.
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