The interest of venture capitalfirms in e-commerce start-ups continues to be high with investors backing start-ups with potential. Bangalore-based IDG Ventures India is a US$ 150 Million early venture capital fund investing in technology-related companies.Recently IDG venture led a $14m Series B investment into Firstcry.com and were a co-investor in the Series A investment into Zivame.com. To get a candid view on IDG future plans and potential investment opportunities in ecommerce, iamwire caught up exclusive with IDG’s Senior Associate Investment Professional, Karan Mohla. Here is the full wirte-up of the interview:-
What is your perspective about Online retail market in India, amid all goods and not so goods?
Online retail in India is here to stay. The fundamentals of the market have not deteriorated.
1) An increasing number of people are buying online and this number is expected to increase at a faster rate in the coming 2-3 years
2) The overall retail market in India remains highly fragmented and still presents a lot of opportunities for disaggregation and disruption
3) Selection of products via online retail will be far in excess of physical retail products
Key areas which need to be paid close attention to and remedied are disproportionate spending on marketing and advertising, supply chain management, over-discounting of products all of which create an unsustainable business model
To highlight the opportunities, where would you wish entrepreneurs to focus more, which category, space, model, etc?
In my opinion, entrepreneurs should evaluate the any opportunity in e-commerce via the following parameters
1) Large addressable market
2) Healthy margins but yet lower prices than physical retail?
3) Complex supply chain and sourcing of products
4) Build a founding team with complementary skills around 4 pillars – sourcing, technology, marketing and supply chain/operations
5) If seeking external financing – how can the investors be provided with an exit?
With your experience, what difference you see in plans created by entrepreneurs and real numbers? What are the common areas plans fail, and how can entrepreneurs make the plans more realistic?
The most common mistake entrepreneurs make is to overestimate how quickly the business will scale up. Relatedly, the quantum of capital required to build a scalable business is usually greater than initial projections. Focusing capital on marketing and front-end activities is half the job; the supply-chain and operations of e-commerce companies require an equal amount of focus and resource dedication.
In the last 18 months, we evaluated 500 e-commerce companies and invested in 4 (plus Myntra a few years back). Our estimate is that it requires at least $35-40m to build a vertical-focused e-commerce company and 2-3x that amount on larger horizontal companies.
What are the key metrics you consider to evaluate potential investment opportunities, how are they different for an early stage vs growth stage companies. What KPI, charts, MIS are important for growth stage investments?
In the initial stages, qualitative factors like team, addressable market, differentiation etc are drivers of valuation. Once the company has gone through its initial funding, financial traction including revenue growth is the most important driver of valuation. Typically from Series B onwards, investors look at profitability when evaluating companies.
What is the process for raising funds right from pre startup stage until series B / C
At the seed stage, entrepreneurs should invest their own capital and tap into their networks of friends and family. Depending on how long this initial capital lasts, angel networks and funds are a great resource of potential capital. There are 3 distinct pools of institutional investors who come into companies post seed/angel capital – early stage investors who typically invest at the Series A & B stage, Growth Capital investors and Late-Stage investors.
What are the typical valuations at different stage and quantum of funding, how should an entrepreneur value their companies?
Valuations depend on the stage of capital and the quantum of capital being raised. On average, investments in Series A rounds have been between $3-5 million. Series B investments have a wider range depending on the sector but largely speaking are between $8-15 million. It is important to note that under-capitalization of start-ups at the Series A level is one of the major reasons why start-ups fail.
What are the common mistakes entrepreneurs do while raising investments?
Alignment with an investor who shares the same vision and goal for a start-up is critical when raising capital. There will be ups and downs and the entrepreneur should ensure that the investor is someone that they will be able to work with.
Rather than focus on mistakes, I’d like to note out a few pointers for entrepreneurs when talking to investors:
1) Research the competition and don’t dismiss them
2) Differentiated technology/IP and competitive sustainable advantage
3) Commercialization of the “idea”
4) Credible financial projections
5) A well thought-out & concise presentation – 15 slides maximum
Any advice you wish to give online entrepreneurs?
Internet in India has just started to inflect and opportunities in all areas will be abound. Mobile internet opportunities will be even greater given the expected penetration of mobile internet in the coming 3-4 years. Online commerce in India is still v1.0 – there will be several innovations across all facets – travel, retail, social media, similar to the Web 2.0 evolution in the developed markets over the past couple of years.
What are future plans of IDG investments in India? What space you are bullish about? Any new investments happening recently?
IDG Ventures focuses on early-stage investments in technology and tech-enabled sectors. We recently led a $14m Series B investment into Firstcry.com and were a co-investor in the Series A investment into Zivame.com.
We are extremely bullish on all sectors including Internet, Mobile, Education, Software Products, Outsourced Services, Healthcare, Medical Devices and Engineering. Our current portfolio of 19 companies encompasses this entire spectrum. There has been a rapid development of the early-stage ecosystem across India and several serial entrepreneurs have emerged in recent years. Additionally, exits of VC-backed companies in India have started emerging. The confluence of all these factors gives us the belief that a greater number of start-ups will emerge across all sectors and will receive VC-funding.