1Mby1M Virtual Accelerator Investor Forum: With Aniruddha Malpani of Malpani Ventures (Part 4)

Sramana Mitra: How do you parse the unicorn mania that’s going on in the industry now? If you do get a hot company that goes through multiple rounds of financing, you could get buried under later-stage liquidation preferences. How do you protect yourself and how do you think about this scenario?

Aniruddha Malpani: We’ve not reached that stage yet. It’s still early days for us. I think the reality is that most of these companies are never going to become unicorns. That’s a good problem to have. Our focus is making sure that we have pro-rata rights. Initially, we will continue growing with these companies as they continue to grow.

Our hope is that as we engage with entrepreneurs, they will not ditch us when they start talking to the bigger boys. Again, I have

 no idea how some of this is going to play out.

Sramana Mitra: When you do term sheets, especially if you think a company has the potential to become a unicorn, always negotiate co-sale rights. The larger funds are often giving liquidity to the entrepreneurs in the process of later stage financing. If that happens and there are liquidation preferences ahead of you, you want to be able to sell at least a part or all of your investment at that point. Otherwise, you’re going to get washed out.

Aniruddha Malpani: That’s such a great point. That’s one thing I really love about your perspective. You’ve seen the lifecycle of some of these companies. That’s not a perspective I have as an angel investor. I’m hoping we’re going to be able to see how that plays out in the Indian context over the next five to ten years. I think it’s great learning some of these cautionary lessons.

Sramana Mitra: Look at what’s happening with SoftBank. There are companies that are ridiculously funded that have no profitability, but the entrepreneur has taken out $35 million. That is a scenario where angel investors get screwed.

Aniruddha Malpani: I complete agree with you. You then start losing leverage as the company keeps on getting bigger and bigger. I am what I call a value investor. I don’t understand all these valuations and I don’t even try to pretend to understand them. The way I look at it is they’ve got billions of dollars. They must be much smarter than I am. I am happy playing in fields that I understand. Some of these theses are going to play out. Quite frankly, I think it’s going to take three to five years before we know how some of these things will do.

Sramana Mitra: This is actually a good segue into my last question to you. We are in 2017. Lots of stuff have already been built. There aren’t so many wide open opportunities for building billion-dollar companies but there are many niche opportunities. This is more in your sweet spot. Some of the businesses need to be built for very small amounts of capital – $250,000 maybe. Then they will get sold for $5 million. That’s probably where your sweet spot is.

Aniruddha Malpani: That’s absolutely right. They’re generating revenue and therefore, you’re willing to pay a multiple on that.

Sramana Mitra: To some extent, it could also be a strategic acquisition where the technology has been built and the acquiring company has the channel. Bring the technology and the team in, and just push it through the channel. Those companies get very good valuations relative to the amount of capital that has gone into building those companies. That’s probably your sweet spot.

Aniruddha Malpani: You’re right. We’re quite happy to be patient. I’m not looking for a next immediately. If the entrepreneur wins, that’s the only time we win. We’re happy to be patient and allow him to find something which he will be happy about as well.

Sramana Mitra: Thank you for participating.

Aniruddha Malpani: It has been exciting to have this conversation with you. I’m sure you have silent fans like me all over the world whom you don’t even know.

Sramana Mitra: Super. Thank you for your time.

This segment is part 4 in the series : 1Mby1M Virtual Accelerator Investor Forum: With Aniruddha Malpani of Malpani Ventures
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