Time for Entrepreneurs to Prioritize their Time
Should entrepreneurs, who have investors in their startups, also themselves be investors in other firms, thereby not giving enough time to their own startup?
Economic Times reports that after the heady flow of capital and the aggressive growth of the last two years, for founders and investors in Indian technology companies 2016 is a year of calibration and introspection. With capital flow slowing and job cuts becoming prevalent across startups, the environment for emerging businesses is undergoing a change. To gauge the pulse of startups in this period of churn and the challenges they face, The Economic Times conducted an exhaustive survey of the most influential entrepreneurs and investors in the country. The first part of the survey's findings, published last week, focused on the Big Picture—will domestic startups be able to triumph over the US giants; when will investor sentiment improve; and despite the doom-and-gloom, is it still a good time to startup.
In the second installment, ET zooms in on what has changed for founders and investors specifically. One factor of friction between founders and venture capital investors, mentioned only behind closed doors, is the growing tribe of entrepreneur-investors. The concern is not over the investments but how much time do the founders allocate to their investee companies. And how do they overcome any possible conflict of interest? The findings reveal how entrepreneurs are adapting to the changing landscape, how they are reducing spending and the salary expectations of employees. To investors, ET asked how have valuation expectations had changed and what sectors are next on their radar.
One of the strongest trends to have emerged in the last two years is the rise of entrepreneur-investors. While earlier the main option for entrepreneurs seeking angel funding was groups like Indian Angel Network and Mumbai Angels, now founders such as Snapdeal's Kunal Bahl and Rohit Bansal and Flipkart's Sachin Bansal and Binny Bansal have become the first port of call. Angel investing has become a cool thing to do especially for Indian technology entrepreneurs. Even the founders of a few seed-funded companies are dabbling in such deals. More than half of the entrepreneurs surveyed by ET have made at least one angel investment. Some founders have built portfolios of dozens of investee-startups and hired professionals to manage their investments. Venture capital firms have started coinvesting with entrepreneur-investors in seed deals. But there is a simmering tension. More than three-quarters of the investors polled believe entrepreneurs should not be angel investors, instead focusing their time and energy on growing their own companies.
Now that investors such as New York's Tiger Global Management, Japan's SoftBank Corp and other overseas hedge funds have pulled back in India, venture capital investors are seeing a significant correction in the valuations of their portfolio companies. Many of the investors polled estimate that valuations have dropped by 20-50% across companies. One investor indicated that valuation expectations for consumer Internet companies have fallen by at least 50%, and for software-as-a-service startups by 30%. Mutual funds have started marking down their shares in companies such as Flipkart, India's most valuable Internet firm, by as much as 40%. Recently, budget hotel-rooms aggregator Oyo raised capital from existing investors without any increase to its valuation.
It was a busy 2015 for venture capitalists as funding hit a peak, with 473 deals registered and total capital invested doubling to $5.4 billion. But the first half of 2016 has been a sobering experience, as the number of VC deals decreased to 183 and the capital invested dropped to $1 billion. It is not surprising that investors are split on whether to get their house in order first or make the best of the decreased valuations. Investors have kept themselves busy this year working with portfolio companies, helping them improve their metrics and in several cases also leading internal funding rounds. Some are also busy figuring which startups will click and which won't before putting their weight behind them. Several are also reserving their corpora for follow-on funding rounds. Several investors who were sitting on the sidelines last year because of the high valuations have become more active this year. Other investors increasingly getting into the Indian market are strategic and corporate venture capital firms.