Startup Co-Promoter Model

Startup Co-Promoter Model

Last October, Bengaluru-based intra-city logistics startup Shippr was in a bit of a muddle, reports Economic Times. The company was spending thousands on acquiring each customer, who never came back. After all, nobody needs packers and movers every month. They would run out of cash soon, founder Rohit Fernandes realized, though the company was growing at 100% every month. So Shippr's investors and co-promoters Venture Factory sat down with Fernandes and did an analysis. They decided to change their strategy to focus on profit rather than aggressive growth. Shippr became a last-mile logistics company for e-commerce and FMCG companies rather than a trucking platform, and in May turned a profit and has grown from four to 180 employees. 

When the offer of funding came from Venture Factory early in 2015, it wasn't the highest Shipper could have got. Money was easy to come by last year, but Fernandes chose Venture Factory because the firm was offering office space, infrastructure and full-time assistance worth $250,000 along with cash of the same amount. "While I had prior experience in logistics, I had no clue about finance. The advantages of sitting with a team of experts and experienced former entrepreneurs made me go with Venture Factory," says Fernandes. 

In the startup world, you often hear that 95% of ventures fail. But in the co-promoter model, the success ratio goes up manifold. Co-promoters get a stake in the company but they also provide much needed support to young startup founders who have a sharp idea but not the market smarts to make it work. Serial entrepreneur K Ganesh, founder of co-promoting company GrowthStory, says, "We pick a sector where we see opportunity and in which we have domain expertise." Ganesh has set up three companies and made successful exits from all, the biggest being selling a controlling stake in Tutorvista to education giant Pearson for $127 million. 

In 2011, Ganesh started GrowthStory, which has seeded more than 10 startups, including Bigbasket, Bluestone, Homelane, Freshmenu, Acadgild and CredR. Ganesh has invested between Rs 5 lakh and Rs 1 crore in each. Bigbasket later raised more than $210 million and has been valued at $500 million.” We chose segments that were fragmented with no powerful brands and did not have internet companies of scale," explains Ganesh. Angel Prime, now called Prime Venture Partners (PVP) has co-promoted companies like ZipDial (acquired by Twitter) and Ezetap, later funded by former senior Facebook executive Chamath Palihapitiya. "Anyone can come up with an idea and develop it," says Jay Pullur, founder and CEO of Hyderabad-based Pramati, which has built companies and sold them to Silicon Valley leaders like Autodesk. 

While deciding to work with a larger group, they factor in risk exposure, stability of income during the startup phase, probability of success, distractions from all other aspects like funding, human resources, legal issues, and global expansion plans. "These entrepreneurs get credibility with acquirers and our prior experience building successful ventures matters," says Pullur. Soon after Bigbasket was founded in 2011, the startup was meeting investors every week. Ganesh attended every fund-raising meeting with the co-founders. "He knows the investment bankers we needed, he had connections to venture capitalists, and knew exactly how much money we should look for at every stage," says Bigbasket co-founder and CEO Hari Menon, who has known Ganesh for 16 years. 

Menon's first venture Fabmart was the first customer of Ganesh's BPO firm CustomerAsset in 2000. Ezetap co-founder and CEO Abhijit Bose says that during the initial days, PVP's partner Shripati Acharya spent as much time as the founders. "In those days in 2011, they had only two startups in the portfolio. Investors understand the business as much as the founders. Our learning curve rose faster. There is no substitute for a good investor," says Bose. Angel Prime, which has 10 startups in its portfolio, has a 20% stake in Ezetap. 

Co-promoters help wet-behind-the-ears entrepreneurs with more enthusiasm than experience avoid expensive mistakes. Ganesh has years of experience which he shares with startups. He and his wife Meena started CustomerAsset, a business process outsourcing company, which was acquired by ICICI Bank in 2002 for over $20 million. His next venture was Marketics Technologies, which was acquired by BPO firm WNS for $63 million in 2007. But he's quick to play down his role in the companies he mentors. "My contribution to their success is limited and give them only direction. The credit has to go to the entrepreneurs' hard work," he says. Venture Factory , which works with five startups, is looking at scaling up the model to churn out successful startups, and is hoping to raise $20 million. "We have started an entrepreneurs-in-residence programme where people working with corporates can come and work with us and try incubating ideas without leaving their jobs. We feel that this model can create more startups," says Deepam Mishra, its founder. 

But when entrepreneurs part with too much stake, they run the risk of ceding control to the co-promoters. Menon of Bigbasket warns that strategic investors at later stages can be a risk than a strength. New investors would not want to come in because they would not have enough stake and one investor can overrule them or acquire the startup, adds Menon." If the entrepreneurs goof up, the co-promoters or strategic investors have no option, but to take control," says Menon. 

Some experts warn that this is a model with limited appeal as one co-promoter will not be able to do justice to many companies. "It is a model that cannot build many startups as there aren't that many people who can mentor entrepreneurs," says Sharad Sharma, cofounder of iSpirt, a software product companies body. "It needs many Ganeshs and Pullurs. This won't be a dominant model in the ecosystem," he says. Institutions like Info Edge, the group that runs Naukri and 99 Acres, prefer a relatively hands-off approach. Info Edge, founded by Sanjeev Bikhchandani, takes a large stake in companies but remains a strategic investor rather than a co-promoter. It has stake in Zomato, Mydala and PolicyBazaar. Bikhchandani, who took Naukri, one of early consumer internet companies, public, says Info Edge can offer startups a lot without being a micromanager." Our support is only as much as the entrepreneur wants. We open out our operating departments to investee companies so that they can come in whenever they like and see how we do it," says Bikhchandani. "Being entrepreneurs ourselves, we have a better understanding of how lonely the entrepreneur's job is and we are perhaps slightly more sensitive to the entrepreneur's fears and apprehensions. We are patient and we give a lot of rope to the teams we invest in," he adds. 

At a smaller scale, the model seems to be better and more successful than the spray-and-pray model that many investment firms follow, says Kunal Kashyap, director at The Indus Entrepreneurs (TiE). "In fact, now many venture firms have slowed down and are focussing their energies on a few sectors and companies. The engagement levels are going up."

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