1Mby1M Virtual Accelerator Investor Forum: With Anirudh Suri of India Internet Fund (Part 4)

Sramana Mitra: What about unicorn mania? I know India went completely crazy with unicorn mania for a while. Are you seeing a slowdown in unicorn mania? As a seed investor, how do you prevent yourselves from getting buried under later-stage liquidation preferences? What practices are you deploying to prevent such unappetizing outcomes?

Anirudh Suri: Unicorn mania has calmed down a little bit. It was not focused on fundamentals. Thankfully, it has slowed down. Our focus has always been on fundamentals. It’s very tough sometimes to stay focused on fundamentals.

Sramana Mitra: When the market goes crazy, fundamentals go out the window. That’s when it becomes

 really difficult to reign in the entrepreneurs because they start to get carried away.

Anirudh Suri: I was talking more about the investors getting carried away. They feel like everything they invest will turn into a 500x multiple.

Sramana Mitra: If you have a savvy entrepreneur who understands the ramifications and the risk of taking too much capital into the company, then this investor mania can be checked. If you have an entrepreneur who’s inexperienced, the entrepreneur gets carried away. The whole thing goes out of proportion.

Anirudh Suri: Both have to have steady heads on their shoulders. I’ve seen some of these cases where the entrepreneur wants to move slower, but they see competitors. They say, “If I can raise $50 million, let me raise that money. If the investors are willing to have this high burn and quick scaling, why should I be conservative?”

You suddenly start second-guessing yourself and then your investors start second-guessing. Both the entrepreneur and the investor have to be on the same page about what the plan is to build the business and how to build the business to scale. Food tech was a big victim of that. Fundamentally, the companies would not have made money. The margins were not there. The basics of scaling is, you should be able to make money as you scale.

Sramana Mitra: The unit economics has to be preserved.

Anirudh Suri: Hyperlocal deliveries, people are just scaling without thinking about unit economics.

Sramana Mitra: That’s true in the US as well. That disease has been rampant in the US and in India. That sector, especially, has really damaged the fundamental economics. How are you dealing with the liquidation preference issue?

Anirudh Suri: We don’t have a solution for that. It’s a very tough problem, especially for early stage investors. We don’t have a solution for it, per se, except to try and have an agreement that the company protect you to some extent. But what happens is when the company is scaling and it needs more capital, the guy who’s bringing in the big dollars will have the largest share. That’s the reality of the game. It’s hard to completely protect yourself.

When technical solutions are not working, then I think the only solution you can rely on is human relationships. It’s a matter of building good relationships with all players in the ecosystem; not just entrepreneurs but also later-stage investors.

Sramana Mitra: At some level, you have to make a smart choice about when to exit. If a company is starting to get into a bubbly frothy mode, it might not be a bad idea to exit.

Anirudh Suri: That’s exactly right. On the other hand, they want that money to go into the company for good. Sometimes there is a bit of a conflict of interest between the early-stage and later-stage investors. Most of the time, it’s through conversation and good working relationships that you get on the same page. Sometimes it’s conversation that helps. The leverage is much better for the later-stage investors.

Sramana Mitra: Unless there is a lot of competition amongst later stage investors. In which case, you do have the option of selling out.

Anirudh Suri: Ultimately, it’s a supply and demand game always, whether it’s valuations or exits.

Sramana Mitra: Last question. A lot of stuff has already been built. There aren’t as many wide open opportunities out there, but there are many niche opportunities. Some of these are small businesses that need to be built for small amounts of capital and sold for $10 million to $15 million. Some invest to $550,000 and still get good multiples.

Given the Indian cost structure advantage, this is actually quite attractive for the Indian entrepreneurs. What is your take of these non-unicorn, more niche opportunities?

Anirudh Suri: We are open for something like that – investing a small amount and have an exit for $10 million valuation. There’s more appetite for smaller acquisitions of $10 million amongst Indian companies.

Sramana Mitra: It also tackles the exit problem.

Anirudh Suri: Correct. However, once your business is built in a way that you plan to invest in companies aiming for a $10 million valuation. You know that a bunch of them are going to fail and if the max you’re getting is 5x to 10x, you might end up with little revenue. That’s the only thing that goes against that – overall fund economics issue.

When I see the Indian landscape today, there’s a lot of opportunity for companies to be bought at that $10 million scale before they get into the value of debt where they become too highly-valued. It’s a dangerous stage to go into. I often advise that $10 million exit is not a bad exit. It’s something that investors and entrepreneurs should be open to.

Sramana Mitra: Very good conversation. Thank you for your time.

This segment is part 4 in the series : 1Mby1M Virtual Accelerator Investor Forum: With Anirudh Suri of India Internet Fund
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