Ninad Karpe, Partner, 100X.VC, On The Start-Up Ecosystem In India
This is a company called Kerala Banana Chips; the founder Manas came to us two years ago. He said he wanted to manufacture banana chips from Nendran Bananas, found only in Kerala. They are supposed to be healthy, nutritious and also tasty. He wanted to make banana chips untouched by hand, hygienic, in oil that is not refried and, of course, instead of a packet of potato chips, why don’t you take banana chips?
He had a revenue of Rs one lakh or thereabouts when he came to us 20 months back. And this is his video from Shark Tank: we funded him, of course, and then he got another round of funds. The interesting thing is that 20 months ago, he had a revenue of just Rs one lakh a month. Now, in March, he will do a revenue of Rs 50 lakhs a month.
He is an MBA from Symbiosis, he has no family money to support him, no assets, no bank loan, he has nothing. If we hadn’t funded him then his ideas would just have been on paper. This is the magic that is happening outside this room. So, people keep asking me what is the basis on which you invest? What is more important, do you think: a winning idea or a strong execution? There is no right or wrong answer in this. In our VC terms, we call it jockey on the horse. So, jockey is the one executing and horse is the thing. But there is no right or wrong, I would go by strong execution.
Today, there is a unicorn being formed every 10 days. My guess is that by 2026, we will have one unicorn everyday in India. It is going to happen. You see the staggering numbers, we have created 60,000 start-ups. I could go to any college today, and the moment I ask how many of you want to be start-up founders, 90% raise their hand. I ask the rest of the 10% what will they do? You will be aghast to know that they want to work for two years and then join a start-up. So, approximately 100% students want to become part of the industry.
Let me give one or two slides in case you are considering to become an angel investor. I am going to give you in 60 seconds all that I have learnt in last 4 years, 24 hours a day. To become an angel investor, you have to put a limit on the total investment you are trying to make. Should it be 5% of your net-worth, 2% or 10%, you must put a total limit on each start-up that you are to invest. Start-ups by their very nature are capital hungry, they will keep asking for more, but you must keep a cap. At 100x we invest an X amount, that is it. We don’t do any follow up investment; we do our own assessment. What are the investment risks? The earlier you invest, the more the risk. If you invest at a concept stage, you will get very cheap valuation. OYO, 17-year-old founder raised Rs 30 lakhs and today you know the valuation. What is the expected return and thesis? Are you going to invest only in medicare, agri-tech or general? It is important to know these things before you jump. Don’t jump just because someone told you. If it is a portfolio investment, high-risk, you might lose all your money. It is not like any other investment that you will get your money back. But the beauty is that it can give you a fantastic return if you have the right thesis.
Should founders be obsessed of perfecting product or satisfying customers? There is still no right or wrong answer, but I will go by satisfying customers. Perfection is work in progress. So, when investing, people always ask what will go wrong? As early-stage investors we think exactly the opposite. We think: what can go right? And if my first instinct says that this is going wrong that means it will go right. That is exactly how I think. For example, banana chips, there are so many vendors right at the corner, but we always think if this goes right, what will happen? So, the moment you become angel investor you start thinking exactly opposite.
Is capital chasing ideas? The answer is yes. Today, we have received 15,000 pitch decks in the last 3 and half years, we invested in 70. These are coming from more and more smaller places, tier 2, tier 3 towns. More and more girls are applying as co-founders, it is 28-30% ratio, the trend is changing. There are lot of government schemes and lot of things are happening, capital is clearly chasing the idea.
How are start-ups evaluated?
- Look at the market size; is it a product of 8-grain bread serving only south Bombay? That is not a big enough market to get huge returns. That is a small opportunity.
- Look at large opportunity that can keep growing on and on.
- What is the person doing better? Better execution, better delivery, go-to market, is the person directly connecting to consumer? So, you don’t have to get an intermediary and you own the customer and the journey.
- Ask why should you invest? Why is the product there? Is it a vitamin pill or painkiller? Is it absolutely required? Identify a start-up which is a painkiller.
- Non-linear growth is important. Start-up has to have a model that grows from 50% to 100% month on month in the beginning, if it doesn’t then it is a normal business or a lifestyle business. Nothing good or bad; it is to lead a good lifestyle. Start-up is a journey of wealth and not income.
If you invest in 50 companies, what is the return in 5 years?
So, the global average is that if you do portfolio investments in small amounts, angel investments, if you invest in more than 20, you are assured that the capital will come back. Till that point you have to assume that you may not get the capital. The moment you cross that, 50 is a very good number, if you do 100 you should hit one unicorn, 50 will close down and balance 49 you will get 5x to 20x. So, that is the average with which you have to work.
What if a senior citizen has an excellent idea, will it be a start-up?
I’d be delighted. Age is just a small factor, idea is important. You can take a young co-founder and it helps.
Many start-ups have huge cash burnouts but still manage to attract massive valuations. How does one justify that?
I think what you studied about valuation doesn’t hold true today in the start-up world. Valuation is ultimately a public discovery of price, till they go public. Fundamentally, the VCs fund momentum capital, as long as there is growth and momentum there is money to fund.
