1 Year with Bertelsmann India: Learning and Reflections (Part 1 of 2)
I like December quite a lot. The weather is great, things become more relaxed towards the second half as families unwind and look forward to Christmas and the upcoming new year. And the best part is getting time for reflection and introspection on the year gone by, on the goals made and progress against them. This is especially important in the buy-side space I operate in with multiple projects running at one time.
I have previously shared learnings at my prior fund- Acumen where I worked for 2.5 years as part of the Investing team till Dec-20.
Below I share a few reflections and learnings over the past year as part of the investing team at BII Fund. I hope it is useful to folks keen to enter the VC/ PE space, buy-side professionals, entrepreneurs looking to fundraise, and the curious many on how the VC world operates.
To start with and if I have to sum up 2021 in one line- It was a crazy year for VC funding! (What with six unicorns born in a week!)
The first fortnight itself gave inklings to how the whole year would play out
And it has been super exciting to have been part of this craziness and seen it up close as part of the ecosystem.
A decade in the making!
2021 was the year when unicorns became commonplace and you actually lost count of them!, the year when few investors felt like commodity as the Golden Tap remained overflowing in a record liquidity phase, and when tech startups went public marking a new phase in the startup world (some received amazing reception (Zomato, Nykaa, Policybazaar) while others not quite (Paytm)).
But overall, 2021 will be etched in memory as the beginning of an epic new ‘Sooryavanshi’ decade for the Indian startup ecosystem! You had all the makings of a masala potboiler!
Record liquidity ($39b invested) which was more than the cumulative three-year funding in 2018–20 made startups bolder to execute quickly.
This led to a premium for tech talent, rounds were raised at mind-boggling velocity (more on this below), and startups became hungrier for growth to outcompete competition as less than decade-old startups acquired traditional companies.
Amid all this funding craze where unicorns raised 2–3 rounds within a year and some of the top funds went ultra-aggressive, how was the journey for an insider in the roller coaster year?
Let’s dive in!
But before that, a brief on the fund I work at.
Bertelsmann India Investments is one of India’s largest corporate VCs. The parent entity Bertelsmann Group is among the world’s largest digital media conglomerates. With an active AuM of $300M+ across 16 companies, we invest in the early growth stages of the company (typically post Series A). Some of our investments include Eruditus, Licious, Shiprocket, Rupeek, Agrostar, Pepperfry among others.
In order to provide a structure, I break down my learnings across the three pillars fundamental to a VC job which are Sourcing & Evaluation, Investing & Deal Closure and Post Investment Support
1. Sourcing & Evaluation-
i) Sourcing
Let me make my deal flow vibrant and eternal: Coming from an impact investing background, the deal pipeline for me definitely increased. I feel that pipeline quality at top of the funnel is the most important skill/ KRA as part of the investing team. One has to constantly keep their ears to the ground finding a mix between outbound vs. inbound deals. Inbound is largely driven through fund reputation, events/ conferences/ brand building activities undertaken by the fund, referrals from existing portfolio companies, or warm leads from other funds (e.g. our latest deal that we are currently closing was referred to us by a senior leader at one of our portfolio companies.)
For outbound one thing that has helped me is to diversify my sources to increase ToF. Being in constant touch with peers in top tier funds, reputed investment banks, contributing through A Junior VC, tracking all VC/ startup related publications (Yourstory, The Cap Table, TechCrunch, Vc Circle, Inc42, Entrackr) and weekly fundraise updates on companies from databases like Tracxn is super important.
This is also the core role of any team member. If you don’t enjoy ‘hunting’ and trying to source the best companies for your fund to speak with, VC might not be what you want to do in the long run.
Prioritization is the moat for VCs: Few startups we speak to can be super interesting but early in their journey for us to evaluate further (since we come in at early growth/ Series A+ rounds). Keeping a track of them and re-connecting in 1–2 quarters to get an update on their business progress and fundraise plans is supercritical. In case I put a startup to track, what also helps is creating a brief summary on what I liked, what needs to be built further so that we can structure follow-up calls accordingly and track progress in a much better manner. During the heavy scouting phase where we are speaking to a lot of startups, prioritization again becomes critical on which ones to take forward to commercial diligence, which ones are good but not great, and which ones look super promising and exciting to accelerate diligence on them.
Net net top-tier funds look at 70–90% of all startups raising for their focus stage. What differentiates the best-performing funds from okay ones is prioritization and saying no faster.
Your ability to consistently participate in the funding rounds of ‘resilient’ future unicorns and increase/ maintain your stake is what differentiates returns of a legacy VC fund from others.
Best teams will always have the option to choose: Over the last year, I have been part of pitches where the team looked great, metrics were seeing hockey-stick growth after hitting PMF, the business model was differentiated and the market size was large (essentially the company was a ‘hot startup’ with all funds chasing them). In those cases, we might need to reverse pitch (digital media conglomerate, a large global presence with funds in 4 countries, track record of helping portfolio companies go global, partners being among the most respected and valued mentors in the cap table, allow founders to ref check from our existing portfolio companies, etc.).
Ultimately it depends on the founders on whom they want to partner with and factors such as how quickly they want to raise and which investors will support them in follow on rounds, are they aiming for a higher valuation that leads to lower dilution or looking for solid mentors who have seen businesses scale and to build with them.
The #1 thing that founders remembered after meeting a VC was how they made them feel. Not how cool the office was or how smart the VCs were in that space- founders who liked conversations with you remember you when they are fundraising next.
Keeping the wheels turning while being on auto-pilot: As a VC, one is constantly evaluating companies or ideas. In order to avoid a ‘pitch burnout’ as one prominent VC did at his earlier fund, one needs to take appropriate downtimes. For instance, if you have been heavily sourcing and speaking to companies over the past few weeks, you can switch to other tasks for the next 1–2 weeks while continuing to sharpen the ToF and deciding on who to reach out to next. These can be in the form of preparing a thesis/ fund view on your focus sector, connecting to friends/ peers at other funds to know interesting pipeline and portfolio looking to raise their next round, or picking a project (strategic review, potential acquisition, hiring, business development, etc.) which your portfolio company is in the middle of and spend time on that.
ii) Evaluation
Honey, we shrunk the deal timelines! — 2021 saw frenzied deal-making activity as mentioned. What that led to was high compression of deal evaluation timelines and renewed urgency to give term sheets to the best founders who had the option to pick among many. If a standard diligence (from the first call) would take 3–4 weeks, it was cut short to 1–2 weeks (for some funds even a few days!). Clear planning with defined timelines, mapping of diligence able risks and finding proof points for it, sharp focus on what next post each management call, more frequent internal discussions to update team views, and helped sharpen the diligence timeline.
Overall, I think we will revert to the original evaluation timelines once the market lets off some steam and we are back to a normal funding cycle (somewhere around H2’22 I feel). This will also help founders to deploy their money in a sustainable manner and not be caught in the fundraise every 6–9 months cycle.
In fact, the current cycle reminds me of this excerpt from Rahul Chandra’s book- “Portfolio adds from 2014 and 15 became the priority for VCs. In hindsight, these were seminal years for VCs according to Rahul as hunting and winning became a large part of the business. It also became a lot more competitive. VC teams had to react quickly on ‘deals with buzz’ and prevent hierarchical decision-making. ‘Great’ founders had to be hunted and firms had to minimize the number of touchpoints that a founder had to go through before a decision”.
May the momentum be with you- During the diligence phase of the first two weeks, the momentum direction (looking great till now/ good but we should wait for the next round/ data is not so exciting) dictates whether the deal will go ahead or not. As you start digging deeper into the data, understanding the MIS and financial architecture of the business, running cohort analysis to look at the quality of growth, and doing customer calls (most important), you begin to form your conviction (positive or negative) and validate the diligence points you set out to underwrite. An internal evaluation framework that we use for all deals helps remove any subjectivity and provides concrete reasons to approve/ reject a deal.
Typical reasons to pass on the deal can be okay to poor feedback from consumers, weak revenue/ retention cohorts, high competition, lower market size than initially thought, linear growth due to lifestyle business, founder misrepresenting growth (rare cases!), or where the right to earn is not clear (even though the right to exist and right to win was validated).
Even when rejecting a deal if you provide clear and crisp answers as to the reasons for rejection as well as 2–3 metrics, challenges that you would like the startup to solve before evaluating them again, that is appreciated by the founders a lot!
Hey Look Ma, you can’t bias me! — Some of the pitches take you by surprise in a positive manner. I have been fortunate to be part of a few of them and invested in one of them last year. But even if you are super positive with the pitch, story, and founders after the first call, you have to co-relate that qualitative high with a quantitative high after digging deep into the data and forming your own views.
Another aspect is the ‘thesis confirmation bias’ which VCs need to be aware of. A pre-existing thesis leads VCs to invest because it confirms their own conclusions. But the thesis is a theoretical construct. A startup that gels into the thesis is just a source of comfort for VCs.
From the book again, ‘This muscle is a complex network of openness to recognize the past mistakes, having people around to institutionalize the lessons from these mistakes, and carrying the gumption of investing in deals that might make you look stupid. Some of the worst investments Helion did were ones where the entire team agreed heartily’
Part 2 is live here and focuses on the other two legs- Investing & Closing a deal, Portfolio Management, and tips to founders while fundraising.
The views and opinions expressed in this article are those of the author and do not necessarily reflect those of any institute or organization he is or was previously associated with.
