Masterclass on India’s Venture Capital Ecosystem

Darius Teter: On a recent episode of Grit & Growth, we explored the reality of raising capital where none has been raised before with Indian entrepreneur Aditi Shrivastava, CEO and co-founder of Pocket Aces. Entrepreneurship in India is flourishing, as today’s guest Sandeep Singh knows.

Sandeep Singhal: We have seen returning entrepreneurs. The next generation of talent is coming out and starting their own companies. Whether it’s Flipkart, whether it’s Snapdeal, whether it’s BYJU’s — all of these companies are now throwing out talent who are going on doing the next thing.

Darius Teter: Sandeep is the managing director of Mumbai-based Nexus Venture Partners. He’s an expert in venture capital in India and has invaluable advice for ambitious entrepreneurs.

Sandeep Singhal: That individual, when they’re presenting to me, should get me as excited about the problem as they are, because that’s what they’re going to do day in, day out. It’s not sales, but it’s motivation. It’s getting that trust built in the other person that, “Hey, I can make this happen.”

Darius Teter: I’m Darius Teter, and this is a masterclass by Grit & Growth with Stanford Graduate School of Business, the show where Africa and South Asia’s intrepid entrepreneurs share their trials and triumphs. Today, Sandeep Singh shares his knowledge and experience in the world of venture capital. We hear about what sets the Indian investment landscape apart, how Sandeep decides which markets and ideas to invest in, and the single most important characteristic he looks for in an entrepreneur. Without further ado, over to you Sandeep.

Sandeep Singhal: I went to Stanford, graduated in 1987, worked for a startup in the Bay Area that was funded by a VC. I got an opportunity to actually see how a VC funded startup works. That company was eventually acquired by Digital Equipment Corporation. I actually saw the whole journey from the time that the company was started to the time it exited. It wasn’t a great exit for the investors, but it was an interesting product that was built. Subsequently, I went to business school and joined McKinsey.

While I was at McKinsey, I came and spent some time in India in 1997. At that time, there wasn’t really any real VC in India. There weren’t any early-stage investors, and so there wasn’t really risk capital available at that time. I saw that gap, went back to the U.S., pretty much cleared my mind that I wanted to do something in that space, ended up partnering with a fellow McKinsey partner, and we started eVentures. That was set up as an incubator. From our perspective, it was a play around two areas. One was looking at the internet economy and seeing how we could bring global models to the Indian market. The second focus area was looking at global services, Indian companies that could provide services to global clients.

Darius Teter: You’re the managing director of Nexus Venture Partners. Can you tell me a little bit about the firm and its investment thesis?

Sandeep Singhal: The firm itself is based out of the Bay Area. We have our office in Menlo Park and we have offices in India. We have an office in Mumbai, which is where I’m based, and our office in Bengaluru. We had two clear areas of investment that we felt were opportunities in a cross border fund. The two areas that we identified, one was cross border technology companies. These are companies that are starting in India, but have a global customer in mind. The second area where we felt there was an opportunity was the domestic consumption play. India started seeing significant growth in domestic consumption in the 2003, 2004 time frame, and we felt that that consumption would move more and more towards digital platforms.

Darius Teter: What would you say has been the biggest improvement in the startup landscape from an investment capital race standpoint over the past 15 years? Is it just that deepening of experience, more opportunity brought more talent into the early-stage funding space?

Sandeep Singhal: Absolutely. The first thing was that you had role models emerge. We funded MakeMyTrip in the original 2000 timeframe. By 2006, 2007, MakeMyTrip was a reasonably large company. They had a business model that was scaling. They had initially started with the cross border play between bringing Indians back to India from the U.S. and other markets, but by the time 2006, 2007, they actually had a domestic market play as well.

One was, somebody could look at what Deep Kalra had built at MakeMyTrip and say, “I can build something similar. Maybe in a different area, but I can build something similar.” There were, in some ways, rule books that were available for founders to base their businesses on.

Second, capital, (whether it was us, a couple of other funds got started at the same time) capital became available. Third big shift that happened was that talent started coming to startups. In the earlier days, the best talent would go to large companies. You had the Unilevers, the McKinseys of the world getting the best talent. By 2006, 2007, if you had a funded startup, you could potentially get some of the best talent from the business schools or from the IOTs and so on.

The other thing that has happened is we have seen returning entrepreneurs. The companies that started in 2006 onwards, I think because they have only seen growth from then on, they’ve never seen a real downturn. The next generation of the talent in those companies is coming out and starting their own companies. Whether it’s a Flipkart, whether it’s a Snapdeal, whether it’s BYJU’s, all of these companies are now throwing out talent who are going on doing the next thing.

Darius Teter: How is the Indian investing environment different from Silicon Valley today or is it?

Sandeep Singhal: The Valley is still a lot more vibrant in terms of the idea exchange in terms of talent availability. There’s just a lot more depth in terms of advisors, people who have gone through the journey, maybe not even once, they’ve gone it twice or thrice. People have actually adapted in the Valley and in India, it’s still early, from that perspective we are 30, 40 years behind. The other big sort difference, in some ways, is India as a market has only started evolving towards a convenience led approach in more recent times.

Darius Teter: What does a convenience led approach mean?

Sandeep Singhal: India has been primarily a value based or a discount based market. Most of the companies that have gotten created in India have used discounting and price as a primary means of competition. When you do that, one of the big drivers obviously is the need for capital. That is changing, partly I think COVID has had a role to play, but the other thing is there is now more and more a shift towards the consumer looking for convenience. Whether it is Zomato or Swiggy on food delivery, whether it is Unacademy on education, people are willing to pay and they’re willing to pay a good price for the services that they’re getting. That makes the unit economics more attractive. It allows companies to scale without it taking up as much capital. It allows founders to compete based on product and experience and not just based on price. That, in my mind, is a big shift that has happened.

Darius Teter: Let’s go into some of the basics of early-stage investment. I’m thinking here about some of the inefficiencies in the pre-seed and early-stage investment ecosystem. Is there enough capital, enough high net worth individuals, enough angel investors out there for entrepreneurs to find?

Sandeep Singhal: There are enough executives from large internet companies. There are enough high net worth individuals, family offices that are now doing angel investments in startups.

Darius Teter: If you have a good idea and a good growth story, you should be able to find an audience.

Sandeep Singhal: Today, yes. Interestingly, this cohort of Y Combinator had, I think 40% of the companies are from India. That’s the other shift that’s happening is early-stage capital is not just available from Indian angels, but Indian companies are now being looked at globally. You have all the accelerators from the globe now present in India. Techstars is here, Y Combinator’s here, AngelList is here. The availability to raise capital from a global pool is also increasing.

Darius Teter: Okay. I want to switch gears now and I want to play a little game of “Investing, True or False?” I’m going to ask you to say true or false and then to provide a one or two sentence explanation of why you answered true or false. The first question is angel or venture investors will want their money back in five to seven years.

Sandeep Singhal: True. The rationale behind that is we are working with a finite amount of capital and that capital has to be returned so it can be reutilized for the next stage of innovation. If a company hasn’t scaled enough in five to seven years, then typically that would mean that they’ll find it hard to scale from there on.

Darius Teter: The expectation for return on capital is different for emerging market angel investors than for Silicon Valley angel investors.

Sandeep Singhal: False. I think angel investors globally are looking for high returns. Today, Indian investors are able to go on AngelList and invest in value based companies and vice versa. Everybody’s looking for the best company and the best return.

Darius Teter: There’s no artificial geographic friction anymore in the system. Capital will go where it wants to go.

Sandeep Singhal: From a returns perspective, yes. Everybody, they want equally high returns.

Darius Teter: Next question. Founders will see 20% ownership in each investment round.

Sandeep Singhal: Mostly true. There are companies where because of early market leadership, the founder is able to dictate terms and reduce the dilution that they see in each subsequent round. In most cases, you will see a 20% dilution between rights and ownership for the new investor coming in.

Darius Teter: I understand from talking to Aditi at Pocket Aces that sometimes investors will have a de facto board seat, but they won’t want to take on the statutory liabilities of becoming an official member of the board. Is that a common practice?

Sandeep Singhal: In India, particularly, the global firms follow that more than the Indian firms.

Darius Teter: Okay. Next true/false question. Lead investors will always ask for a board seat.

Sandeep Singhal: True. I have yet to see a round getting done where the lead investor did not ask for a board seat, so I would say it’s true.

Darius Teter: Okay. Next question. Founders will not hold a majority stake in their business post Series A.

Sandeep Singhal: False. You would have to have been very, very diluted at the seed level to have reached that position. The only time when we see that is when companies struggle to scale at the seed level. Founders can overestimate latent demand and they end up struggling more to get to a point where they are ready for Series A. That does sometimes lead to higher dilution at seed. If that happens, it’s a tough situation for everyone, the founders and the angels included because typically a Series A investor does not like to be in a company where post Series A, the founders are below majority.

Darius Teter: The board will have the ability to replace the CEO in later stages based on that person’s performance.

Sandeep Singhal: True. The board does retain the right to change the CEO. However, the founder has a lot of operating control over the business. If they are doing a terrific job, the board will hardly ever replace a founder. The idea is to have the founder scale alongside the company. To do that, you have to think forward along with the founder. Either it is helping them find the right people to work with them, to cover for the areas where they may not be experienced, or the founder themselves can pick up skills.

Darius Teter: One of the things we learned from Aditi at Pocket Aces was that having multiple institutions in a funding round meant that she looked to different investors for different advice and support. In some of the deals that you’ve done where you’re side by side with somebody else, how do you work out who’s involved with what aspects of advising the founder? Is that all happening at the board level, or where else is it happening?

Sandeep Singhal: It starts with the founder themselves. This is not just a firm issue, it’s actually the board member issue. One of the things that good firms do is even though you have one board member who’s representing the firm on the company’s board, you’re making yourself available as a firm to the founder. That’s one thing that at Nexus we look at, that a founder should be able to talk to any one of us, even though that person is not on the board. As a board, particularly on major issues, I think it is very important to coordinate. We do that both within the board, we also do it within the firm. We have conversations around our companies. We get feedback from other partners saying, “Hey, this is… Have you thought about this, or have you thought about that?” Sometimes, depending on how you’re thinking about the problem, you’ll say “Maybe you should go talk to my colleague on this particular issue because they’ve dealt with it in another company. They may be able to give you experience based advice rather than I may give you theoretical advice.”

Darius Teter: I want to get a little bit into this whole question of how do you get to know an entrepreneur? What characteristics are you looking for? When somebody walks in the door, what do you need to know about them?

Sandeep Singhal: Number one is energy level. You can tell from a person in the way that they interact with you what their energy levels are and how they will sustain their energy as they build out the business.

Darius Teter: Define energy.

Sandeep Singhal: It comes from passion. It comes from internal drive, but it’s about how you are seeing the desire to build a business. Good entrepreneurs just want to build something big. They’re not coming in saying, “I just want to solve a problem.” There are many people that want to solve problems, but these are people who are saying, “I want to solve a problem at scale. I want to solve a problem with a good group of people. I want to build… I want to have people around me that are equally passionate about building things.” That energy, that passion is the starting point.

Darius Teter: They’re not just a lone wolf and they don’t just have a compelling problem they want to solve, they have a growth vision and they at least have some people who are with them.

Sandeep Singhal: That’s correct.

Darius Teter: You’re not looking at the numbers at all at first, or have you already done a bunch of due diligence before they even get in the front door

Sandeep Singhal: From a seed and Series A perspective, it is less about numbers and it’s more about people. Numbers really start coming into account in Series B and Series C, but at a seed and Series A, very few companies will have numbers that you can depend on for making a decision on a long term basis.

Darius Teter: Right. I mean, they’ll put something in front of you, but you both know that it’s vapor.

Sandeep Singhal: What we do look for is size of the market. For us, it’s very important that you’re planning to target a large market. The reason why I say planning versus saying you are targeting a large market is because there’s a third part to this, which is focus. You are passionate about solving a problem, you know that you’re going after a large market, but you are doing it in a very focused way. Sometimes what ends up happening is the focus can make it appear that the market is small because you have defined a niche. You’re going after the top 100,000 customers that really need audio books. It may appear like a small market, but you can walk me through and say, “Okay, if I get these 100,000, then I can get the next million and then I need this next 5 million.”

That’s the third thing, is focus.Many entrepreneurs struggle with that, that ability to walk me through why what you’re doing right now will allow you the right to get to the next set of customers. How will you be able to take the learnings from your 3 million in revenue and scale it to 10 20 50? This is my growth horizon to get to this point. Then I’m going to go on to the next growth horizon and the next one. An entrepreneur that’s thinking that way is also very well aligned from an investor perspective, because that’s how investments work. You start by saying, “Okay, my first thing is I need to get to a product market fit. The next thing is I need to get to a GTM fit. I need to be able to have a go-to-market model which is repeatable, which is scalable. The next thing is I’m now going to be able to protect my moat, whatever I’ve created as a moat.” At each stage you are thinking through what is the nature of problem you’re solving in your business. A good entrepreneur is able to outline that.

Third is… Or, the fourth thing is the ability to motivate. That individual, when they’re presenting to me, should get me as excited about the problem as they are. That’s what they’re going to do day in, day out once they have the company and they’re out in the market. They’re going to be trying to convince customers. They’re going to try and convince the best talent and employees. They’re going to be trying to convince the best partners to work with them. They have to get me convinced. It’s not sales, but it’s motivation. It’s getting that trust built in the other person, that, “Hey, I can make this happen.”

The final thing is the ability to listen and adapt. What you need to be able to, and this is what we test in the conversation, is we’ll throw them a curveball. We’ll ask a question which will get you upset, or which will say, “Hey, this just can’t work.” You see how the person reacts. Do they get upset or are they thinking, “Why is this guy telling me this? What do I need to do differently?” You can tell that this person’s wheels are turning in their head and they’re thinking about the problem. They’re thinking… That ability to listen, because the market is always telling you something, the competitors are telling you something.

Darius Teter: You want them to have the passion and the persuasive power of an evangelist, but one who also listens.

Sandeep Singhal: Yes, because if you don’t listen, then you are stubborn. The risk with being stubborn is you can hit your head on the wall and never be able to get across it.

Darius Teter: Another way I would think about this is you want someone who’s in love with the problem they’re trying to solve, not with their specific solution.

Sandeep Singhal: That is a good way to put it.

Darius Teter: Okay. Now I’m going to put you in the other chair. I want you to go back to your days of founding businesses and working in startups. You’re in a conversation with a potential first round angel or seed… Let’s not say angel, let’s say seed or Series A investor. How should you be assessing this investor as a potential partner?

Sandeep Singhal: Again, the starting point is is this investor passionate about this problem? Maybe not as much as I am, but at least has enough passion and is thinking about this, not just from a standpoint of, “Okay, I’ll bet behind Sandeep and he’ll make me money.” This is a person who has thought about this problem, has a point of view on it, and is therefore able to ask me intelligent questions.

Darius Teter: They shouldn’t be looking for someone who just says, “You convinced me here, but let’s do it.” You actually ought to go past that because I think a lot of entrepreneurs would be so excited if that was the initial response, they would feel like they just hit a home run.

Sandeep Singhal: I would at least, I ask the person, “What about what I said convinced you?” In a nice way. “Is there anything that I should be doing differently? Is there anything that… What is it that you think I should do more of?” Or at least check that this person is just not a lazy check writer, but is actually going to be a partner with you through the journey.

Darius Teter: Because you want more than the check.

Sandeep Singhal: Yes. Any startup is not a straight line. You are going to run into problems which you hadn’t anticipated at the time of the fundraise. If there is an understanding as to why that investment was made, you can always go back to that and say, “This is what we were looking to do. What was wrong with our assumption?” That ability to do that requires that there has to be some common set of assumptions between the entrepreneur and the investor. If you haven’t had that conversation at the start and the investors just wrote you a check, then how do you have this conversation later?

Darius Teter: I want to just ask you a little bit about the due diligence process. We talked about evaluations don’t really mean much in these early stages, but is it a point of contention in the negotiation?

Sandeep Singhal: In today’s world, yes. Valuations have crept up. There is an expectation from all founders that they should get Silicon Valley based valuations. Not all founders are targeting very large markets, equally large markets, or have the same capabilities that some of the returning founders in the Valley, or even in India might bring. What ends up happening is they read stories in the press that somebody raised $15 million, and their Series C is around a 35 pre money valuation. They think that, “Hey, if they can do that, maybe I’m not as good, but maybe I’ll get a 25 rather than 35.” The real clearing price is 10, or eight. There is some level of expectation management that needs to happen in even early-stage valuations.

Darius Teter: You’ve talked with so many founders and evaluated so many companies that are raising capital. What are the most common mistakes that entrepreneurs make during those early fundraising stages, pre-seed in early-stage funding?

Sandeep Singhal: One of the things I tell all my founders is don’t go-to-market stating valuation expectations. You can share with the market what your last round post money was. You can share with the market how your company has grown from the last round, but leave it at that. Have the market tell you what they think is a fair valuation.

Second is it is important for you to have clarity or what are the risks that you’re going to face going forward in your business. We see a lot of situations where entrepreneurs come expecting everything to be hunky-dory all the time and it isn’t the case. It means that they’re not good listeners. They’re not seeing, “Okay, here’s a potential problem that I could run into.” You should be able to imagine what, once you had the money in your bank, what would you do with it? What are the risks that you would see and how you would mitigate those risks?

We have people that come to us for funding and they haven’t even understood what their competitive landscape is. That I think is just sloppiness. Those are the kind of issues that a founder should be… Should have a few conversations with friendlies. You know, obviously talking to your own existing investors and using them as a devil’s advocate is very valuable and existing investors should do that. They should not try to be cheerleaders for their founders, but in these situations, they should be very objective and play the role of an external investor. It’s a tricky thing to do because you don’t want to have that person get upset at you for saying something, but it’s important that that person hear it from you before they hear it from an external investor.

Darius Teter: I’m just curious, is there a question that you wish I had asked you? What am I missing here?

Sandeep Singhal: How do you look at various opportunities that come to you? Today I can have an opportunity coming in, a company that’s building the next marketplace. It could be an opportunity in the company that’s building the next education portal. There’s a company that’s coming to me that has the next content play. Now as an investor, I have to make choices because as a firm, we are looking to invest across 25 to 27 companies in a fund to create a portfolio. I’m looking at either the stage of the company, I’m looking at the industry in which they’re playing. I’m making an overall portfolio. Sometimes I may have too much of a weightage in a particular area, in which case I may not be able to invest in you. Nothing wrong with the company that you’re running.

Sometimes you see three great companies come to you around the same time. How do you make a choice? You’re basically saying I can only back one. I only have the capacity to do one. How do I make that choice? That’s where it’s very important from a founder perspective to get to the right VC and have a point of view as to why this fund is more likely to invest in a content play. This fund, or this partner is more likely to back a marketplace and try to get as much information about the individual, not just about the firm. It’s very important that you think through and look at the partners, look at what the partners are doing. Look at what their interests are. What have they spoken about in the last six months about their areas of interest? People talk about, “Hey, I’m looking at investing in this area.” You need to stay on top of that. As a founder, I think going in prepared with an understanding of what the investor ecosystem looks like can be very helpful in running an efficient fundraising process.

Darius Teter: How many deals do you look at out a year and of those, how many do you actually invest in? Then I want to talk a little bit about the ones you turned away.

Sandeep Singhal: Normally we would do seven to eight deals a year. These are Series A investments, so we would probably do an equal amount, maybe more as seeds. In the course of a year, you’ll probably end up doing about 20 investments or 18 investments, out of which 8 would be Series As, and 8 to 10 would be seed investments. Our Series A investments would range between say $3 to $7 million, and our seed investments would typically be anywhere between $250 K to $1 million. Sometimes we’ll go slightly higher. We expect that in our seed investments, maybe 1/5 of them or a quarter of them would make it to a Series A and others won’t. These are very fundamental risks that we are taking. To get to this number, we will probably see on average 500 to 600 companies a year.

Darius Teter: You’re saying no an awful lot.

Sandeep Singhal: Yes. What we do is we say no quickly, and we know we will get things wrong. For us, a lot has to do with the founder and the team. Sometimes you can look at a plan and say the space doesn’t make any sense, but something about that plan says, “I should at least talk to the person.” We will do a call with the person, and sometimes you say, “This may not be the right problem that he or she’s solving, but they’re just a great, just amazing team. Let’s go back and look at a seed investment, and see where they go.”

Darius Teter: What I find fascinating about this is in the seed round, the personality of the founder and the team are so important. When you’re letting them down, when you’re in the room with them and you’re going to say no, in a sense, it must be hard for them to take, because you’re saying no to them based on their personality, on who they are. Do they understand that? How do they respond? I would love to hear an example of an unsuccessful pitch and how you handle it and how the founder accepted that.

Sandeep Singhal: Normally we will let the founder know that either it is because of the space or it is because we felt that there was something in the way that they were presenting, or the way they were taking the solution forward that we weren’t comfortable with.

Darius Teter: It’s not your role to be their psychiatrist.

Sandeep Singhal: No, but we will say, “Hey, listen. We think that you are too focused on marketing, and this needs you to build a better product first, before we go and spend money on marketing.” Or it could be that you need to build a team around you. It’s an interesting idea, but we just don’t see a team that can execute it instead. Sometimes that person will say, “Thank you for the feedback.” Goes and works on it for the next three months, and then comes back. Others will just say, “Don’t want to deal with this. Let’s move on.”

Darius Teter: Can you share a story of a time when you didn’t invest and then regretted it later?

Sandeep Singhal: We did not put money into Ola. Ola is India’s equivalent Uber, so Ola is the largest player in the taxi space. The reason why we didn’t do it is because when he initially started, the regulatory frameworks did not allow taxi hailing through an app. There was a risk of either direct liability or potentially, this thing being shut down by the government. We didn’t want to take that risk. We did not invest in Freshworks at this point, other than Zoho, it’s India’s largest software SaaS company, because our view was that they were at the point that they came to it for investment, they were effectively a copy of Zendesk.

Interestingly, the initial growth that happened was because the Zendesk founder wrote a rant and complained about how Freshdesk had just totally copied Zendesk and how they were just trying to compete on price. Any customer that was looking for a help desk solution at the time and felt Zendesk was too expensive, went to Freshdesk. Infamy is as important as frame, you take what you can get. Even if they’re copying something that is global, how will they differentiate? Aghassipour had a clear path of how they would differentiate themselves, vis-a-vis Zendesk, and they’ve done that.

Darius Teter: That brings us to the end of today’s masterclass. I want to thank Sandeep Singh for sharing his insights with us today. From Sandeep’s perspective, early-stage investment decisions are often based less on the numbers and more on the people involved. For entrepreneurs to attract strong partners, they need to demonstrate real insight into the competitive landscape of their market and to build businesses that solve problems that scale, founders need to have a strong internal drive. For Sandeep, what he looks for in an entrepreneur is clear.

Sandeep Singhal: Number one is energy level. That individual, when they’re presenting to me, should get me as excited about the problem as they are.

Darius Teter: This has been a masterclass from Grit & Growth with Stanford Graduate School of Business. I’m your host, Darius Teter. If you want to find out more about how Stanford Graduate School of Business is partnering with entrepreneurs throughout Africa and South Asia, visit seed.stanford.edu/podcast. If you liked this episode, don’t forget to hit follow and share it with a friend. Grit & Growth is a podcast by Stanford Seed from Stanford Graduate School of Business. Laurie Fuller researched and developed content for this episode with additional research by Jeff Prickett. Kendra Gladych is our production coordinator, and our executive producer is Tiffany Steeves, with writing and production from Isobel Pollard, and sound design and mixing by Alex Bennett at Lower Street Media. Thanks for joining us. We’ll see you next time.