Signal vs Noise: Investments in Indian Startups

Hey You,

I bet things are starting to stir up at your end. We’re almost ending the first month of the year and it’s time to push for momentum if you haven’t already. There’s just so much chatter around on startups, investments and some out of the park numbers that everyone’s clocking. The government in India even declared a National Startup Day last week. And amidst this noise, I wanted to bring home some signals to you. So this time, I’ve taken a tangential approach to my typical edition. Instead of a tactical one, here's a more opinionated one.

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I recently began my journey of investing / evaluating investments in DTC businesses in India and there’s been so much happening out there that you’ll always feel as if you’re late to the party.

So today, is a new investor’s perspective into: Investments in DTC & Consumer-Tech in India.

The time for startups in India:

Startups in India are coming up dime a dozen. While that's great, there would also be a tonne of them that would not see the light of the day. I’m not going to get into mortality rates because that’s subjective. But say you’ve got an idea: chances for it to be accepted (adopted) by people is at an all time high. Especially if you’re either solving a need or building a better mouse trap.

This is assuming you’re a digital-first business serving customers via your own DTC site or a mobile app.

Investor Sentiment:

Investor sentiment is at an all time high. It’s a bull market for startup investments right now. Marketplaces, aggregators, web3 platforms or just DTC products: most being seed funded because investors are looking to be part of the bull wave. They want to ride with you and the FOMO is making them act quickly. 2021 saw frenzied deal closures. What that led to was compression of deal evaluation/ closure timelines and increased urgency to give term sheets to the best founders. Because in this market, it was the founders who had more options to choose from, than the investors.

Seed Funding: Furthermore, investors aren't like before anymore. There’s new money in the market. Angel investors have shot up. Consultants & subject matter experts are jumping into angel investments. So are established founders. Which means there’s more push available in the seed funding market for your idea to get going.

The average cycle for investment returns might be shortened because consumer adoption is increasing. You can scale to a larger set of audiences much faster than what you could back in 2014. From a 9 year maturity cycle that funds would traditionally look at, down to almost 3 years with multiple rounds of funding. Syndicates have sprung up, officially too (like AngelList), for your investments to be channelised into startups, even via small cheque sizes.

Market Maturity:

But what has happened in the process is: multiple companies trying to solve the same problem. The pie is smaller and more niche segments have emerged. And hence, even though you might get traction (read: acquisition) by spending on the right channels, it’s not enough to have initial spikes of success on customer acquisition. 

Attention spans are lower and as you dig deeper into ‘why products work’ (explained below) you will realise that below the facade of quick investments and seed funding, the game has actually gotten tougher on sustenance. And that’s what isn’t visible to the first time founder.

Achieving PMF isn’t just about initial traction. It’s not even about one social trend that goes viral, it’s about ‘customer retention’. What gets your customer back again and again and again.

Tenets of sustainable businesses:

Let's start with CX (customer experience) as the north star metric that a new business is chasing. Given the plethora of options available to the customers, the few reasons they feel delighted in their experience with a business are:

• Ability to purchase via mobile (hassle-free, mobile experiences)
• Discovery of product / service (amidst multiple products / service that you offer, how does one find the product that’s right for them)
• Right customer at the right time (digital content, pushed through the right channels)
• Spark of innovations (could you plug-in your product at places least expected for customers to find you)
• Availability / delivery experience (for DTC, do i have to wait for your product for 15 days vs do I get them in 15 minutes)
• Habits & Reversals (Could you embed yourself into the daily lives of customers (subscriptions) and make it easy for them to pause / stop those if required (returns & exchanges included))

While you could have different yardsticks that you value your business around, this is what most businesses I’ve had an opportunity to work with, focus on.

Beyond some of the points above, a good investor would look at the following:

• Founding team: it’s history, pedigree or motivations to be in business
• Sector: the maturity of the sector and data that drives higher consumption of your product / services in the coming few months.

And most importantly,

• PROFITS: Yes, that’s right. Behind the game of customer acquisition, great investors would back businesses that are profitable. DTC / CPG businesses should be run on customer revenues and not investments. While brand equity are great yardsticks to measure success, they would only take you to a few more rounds of investment before the pipeline dries out and you run out of cash to continue acquisition.

The funding alley down the line becomes fiercely competitive and it starts to become a bloodbath on acquisition. If you can build for retention from early days, you’re better placed to focus on multiple cash-flow driven metrics beyond just burn rates.

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The Truth:

The institutions that typically come in during the taper ends of your investment journeys (Series C+) are still limited. They’re still cautious and they still look at the same metrics / mindsets as before. If anything, it’s evolved with experience of investing in the Indian startup ecosystem.

The last big wave of Unicorns (that we see blooming now, faster than ever) were conceptualised / scaled up between 2016 to 2018. The time to Unicorn (TTU) is definitely leap-frogged from before. The set of Unicorns that will see light of the day in 2024/25 are being conceptualised today.

So as rosy as it looks, early funding is only a mirage. And if you look at it from an investor or consumer’s vantage point, they’ll all point you towards: CUSTOMER RETENTION.

Personal Experience:

And through my conversations with founders & investors over the past few weeks, I wanted to dig deeper into what it takes for the right founder-investor partnership to succeed. Here are a few that I’ve gathered through these discussions:

• Energy: Investors need to be as prepared, energetic, positive and well read about investing in your business. As a founder, you are going to go through multiple rounds of funding (hopefully) and have multiple conversations with the same people on your cap table, within and outside of funding cycles. You need someone who pushes you forward and isn’t a soul sucking call that you dread making in the middle of the night.
• Value: You may get multiple investors depending on how you’d like the rounds to close, but make sure most investors bring some value to the table. As much as they bring the money, they need to be able to help you out with thor networks, experience and time.
• Multiple Investors: Having multiple investors on your cap table looks like the flavour of the season. But it’s not always in the favour of the business. So just in case you do have, make sure you still have a lead investor who sits on your board and the rest could have minority shareholder rights. It would make a lot of sense for your legal & finance teams to keep the communication loop rolling.
• Dilution: As much as a founder would think of this while raising investments, keep in mind the long road ahead. You would need multiple rounds of investments, a series of dilutions. Set aside your ESOP pools, look at the bigger picture, write down your motivations to be in business and keep tracking them every 6 months. The business landscapes rapidly evolve and it’s possible to be swayed by what’s happening. And as far as possible, stay PROFITABLE.

I hope some of these help you as a founder to make better long-term decisions. As for investors, let the party begin.

In other news, here’s the latest DTC site that we delivered at Lights Out:Bodega. You would love the latest UI designs & tech integrations used here.

Well, that’s it from me on this one. I’ll write in soon with my next edition on another interesting topic. Until then,

With Gratitude,

Sak.