In India, statistics indicate that less than 2% of the companies end up raising money from any professional investors, and a Forbes report stated that 63 percent startup leaders had ‘unfavourable’ experience raising funds in 2016. This is largely because of reasons ranging from non-scalable businesses to the lack of exits. But after years of aggressive fundraising, the startup space now appears to be showing early signs of maturing. Manish Singhal, Founding Partner, pi Ventures in an exclusive interview with Techseen discusses how investors’ approach towards investing has evolved now, and what startups can do to bag early stage funding deals.
Techseen: What drives valuation in technology? How do you value companies differently?
Singhal: Valuation in startups, especially technology startups is governed by several parameters like differentiation and defensibility of the IP the startup is creating, how much validation have they been able to get and what is the extent of impact on the business case they are trying to address. We look at several of these parameters ourselves along with the stage of the startup. In addition, we also look at the data strategy they have put together; how do they plan to acquire data, who will the data belong to, how will it grow, what is its cost, etc.
Techseen: Do investors in disruptive technologies or innovations need an iron stomach? How tolerant do they need to be towards risks?
Singhal: Patience is the key as the gestation period of a deep tech startup could be longer than expected. Investors should understand this aspect as adoption of a new technology takes some time with the target segment.
Techseen: Sustainability is an important precursor to a successful business. What do you have to say to startups about assuming sustainability and achieving commercial success?
Singhal: For applied technology startups, demonstrating business viability is key. Therefore commercial success is an important milestone in their journey.
Techseen: Why do we see the obsession with a handful of unicorns, or startup companies valued at more than $1 billion? Doesn’t it compromise a deep understanding of the impact and scale of new technologies?
Singhal: We in India are going through a shift in thesis for venture investing. So far, most of the venture investing has been about backing companies which can get most market share, what I call as a market share led thesis of investing. We are moving from that to more of IP led product thesis. As we see more success coming these kind of startups, the overall mindset of chasing unicorns will also shift.
Techseen: Given that artificial intelligence has the potential to revolutionize many areas of a company’s operations, including their decision-making processes and their budgeting abilities, how best is it equipped to make an investment decision? Do you leverage AI in determining your investment moves?
Singhal: This is an interesting point. There has been some work in this area especially in the US where venture investors are trying to leverage AI to make their investment decisions. This is still very young in maturity. We will probably also look at in due course.
Techseen: IoT is the next big thing, and almost every organization is thinking or doing something around it. How do you see this trend? Do you think there is a need to invest more in this area?
Singhal: Absolutely, IoT is becoming an integral part of all products as we create and consume a lot of data. The products and services that succeed in the future will be the ones that use data very well and hence the IoT trend is here to stay.
Internet of Things (IoT) in India is expected to see a rapid 31-fold growth to reach 1.9 billion by 2020, as per a Deloitte report. It mentions that the market value of IoT is expected to reach $9 billion by 2020.
According to NASSCOM, the IoT market in India is expected to reach $15 billion by 2020, which will be roughly 5% of the global market. Nearly 120 companies offer IoT solutions, 70% of these IoT startups have emerged in the last five years itself. Investors have been taking active interest in startups offering innovative IoT solutions and a cumulative amount of $60 million has already been invested in the last two years alone.
Techseen: Which sectors in India do you think will see a potential rise in funding and demand in the near future? Can you support your answer with some stats?
Singhal: We are very bullish on healthcare, logistics and enterprise. I think we should see an upsurge of investments in these sectors in the coming times.
Techseen: What trends have you observed in the fintech space in 2016? Any predictions for 2017?
Singhal: After 2015’s $46.7 billion in total global funding to fintech companies, 2016 experienced a decline in the market, with a 47.2-percent downslide in fintech investment, according to KPMG International’s quarterly report on global fintech investment. Despite the decline, India appears to be a key focus of VC investors in Asia as per the report.
Fintech is seeing disruption and will continue to do so as it is still largely untapped. The initial areas being tapped are digitisation, credit models etc and I am sure will move to analyzing the vast datasets on consumer intelligence using AI.
Techseen: You have recently raised a significant amount from Accel Partners. How do you plan to use this fund? What are you key focus areas?
Singhal: We have raised funds not only from Accel Partners but also from International Finance Corporation and have had backing from SIDBI, prominent family offices from USA, Singapore & India and leading entrepreneurs like Mohandas Pai, Binny Bansal, Deep Kalra, Sanjeev Bikchandani and Bhupen Shah among others.
We recently announced the first close of our maiden fund at $13mn. We will focus on investing the funds in 18-20 start-ups over a period of three to four years – startups that are disrupting the traditional space to impact a large number of people positively by their product/ service utilizing AI, ML and IoT.
Techseen: Can you suggest 3 things that young startups aiming to raise funding from pi Ventures should focus on?
Singhal: First, they should focus on a specific business case, which states the problem that they are solving, using AI to their advantage. Second, the startup should focus on the IP, and what is the real AI algorithm that they have built. And third, look at the data strategy; how will you acquire data, who will the data will belong to, how will this data grow, what is the cost of the data, etc.