Learnings from Early Stage Investing

Roughly three years ago, I wrote a few articles on Angel Investing / Early Stage Investing with my perspectives on why I was doing it, how I was doing it and so on. Links to the articles in the comment section below.

Three years in, I wanted to look back on how some of my theses on sectors, trends etc have panned out over time. This article seeks to be a commentary on this, as well as my learnings from this journey so far.

Performance

In the past 3-4 years, I have invested in 30 startups across sectors including EV, Rural, Consumer Tech, D2C / E-comm etc, largely through platforms such as Venture Catalysts, Inflection Point Ventures and Let's Venture.

Below is a snapshot of sector wise capital allocation, distribution of investments, MOIC (Multiple on Invested Capital) as well as returns performance so far.

1. 17/30 startups (57%) are in the Green performance bucket where business performance has been in line with or above expectations and there has been genuine progress in their chosen problem statement. Out of these 17 startups, I have exited in 3 with an MOIC of ~2, while 8 have seen up-rounds with an MOIC of ~3.6. The remaining 6 startups continue to perform well, have great discipline in MIS and should be raising up-rounds in the next 12-18 months.

2. 3/30 startups (10%) are in the Amber performance bucket where there is very slow or no progress or lack of willingness from founders to share periodic MIS. In 6 to 12 months, these are most likely to end up in the Red performance bucket.

3. 8/30 startups (27%) are in the Red performance bucket. These are startups that have encountered fundamental PMF issues and have been unable to find any sort of pivot. As cash in hand runs out, they will likely not raise further funds and wind down operations unless a life changing pivot is identified and executed relentlessly.

4. 2/30 startups (7%) are Dead and have wound up operations. One was trying to replicate Thrasio in offline retail through placement of private labels in kirana stores, while the other was an online gaming platform that did a poor job in managing cash runway and delayed fund raise to the point where they had fully depleted cash.

The general rule of thumb for a healthy portfolio is that 1/3rd of your portfolio will be 0x, 1/3rd of your portfolio will be 1x to 2x while the remaining 1/3rd will produce >2x returns. The overall performance of your portfolio will likely be a function of whether or not you have at least one super winner clocking 10-100x.

From this portfolio, I do think the following outcomes are likely based on current performance trajectory, size of the opportunity etc.:

> 1Bn Valuation - Zypp Electric Leverage Edu BluSmart

500Mn to 1Bn Valuation - Otipy Even

100Mn to 500Mn Valuation - Rozana.in Hesa Awiros

....and the performance of this portfolio in the next 12-24 months will hinge fully on the above outcomes happening.

Learnings

Anything offline channel related is, well, bloody hard.

Be it SaaS companies trying to sell software to Kirana stores (Dukaan, Khatabook etc), startups trying to solve offline channel distribution (udaan, jumbotail etc) or D2C companies trying to scale their offline distribution (Tagz, Auric etc), the offline channel is bloody hard to master. Building a brand and a product is very different to building offline distribution muscle, which very few brands outside of large FMCG players have built at scale.

Scaling D2C beyond a MRR of 5 Cr

While several brands attempt to build pure D2C muscle, most brands realise that driving traffic at scale to their own app or website is very expensive and hence pivot to the likes of e-comm and q-comm. While this helps them with initial traction, most D2C brands get stuck here as their growth then becomes a function of channel growth and market share. This is where most D2C brands pivot to offline as their next channel of growth and unfortunately fail to scale.

Consumer tech businesses can scale and how

Contrary to the offline channel problem, consumer tech solutions to large consumer problems seem to be infinitely scalable. A couple of great examples where I have seen this play out is the OTT startup ( STAGE ) and the subscription startup ( Fleek ) where scale-up to millions of paying subscribers has happened in a very short span of time. Digital solutions also pave the way for global expansion as is the case with both of these companies.

Timing is key

Seed investors in one of my portfolio startups are at a 42x multiple while those of us who entered at Series A are still at 1x even after three years. Timing is key, but so is risk management. In this case, the seed investors deserve these returns because the risk they took was much larger than the one we took as Series A investors. From a portfolio building standpoint, it is therefore important to have some exposure to early stage seed deals which can then become moon shots.

Large sector theses sometimes stare at you in the face

How many of us have had poor experiences with both Ola and Uber over the past 5-7 years?

How then is it a surprise that BluSmart has come in and does what it has in this time period. Sometimes, you will need to just ask yourself a few questions:

1. Would pay for this service? How much premium would you be willing to pay over incumbents?

2. How many such paying customers exist?

3. Will it be possible to provide this service at scale with healthy unit economics?

You will find many such examples in your daily interactions with products and services.

Backing the right founders

Whether it is Vinay Singhal from Stage who had to start all over from scratch after his previous startup shutdown, or Matilde Giglio from Even who is an Italian living in Bangalore trying to create huge impact in the Indian healthcare space or the rockstar couple Rashi Agarwal and Akash Gupta driving Zypp to incredible heights through their conviction, backing the right founder is such a critical part of any early stage investing journey. Hunger, conviction, vision, relentless execution and indefatigable spirit is the name of the game.

Think deep and hard about regulatory risks

Fintechs involved in P2P lending will vouch for how one single notice from the regulatory authorities can bring up existential questions. Likewise for gaming startups constantly fighting of game of skill / game of luck related scrutiny. Any potential investment in spaces with deep regulatory oversight needs deep thinking and scenario building.

Find a group of right minded individuals to invest with

I was fortunate enough to be surrounded by friends who I could bounce off company and sector these with. This always helps as an additional layer of due diligence scrutiny and leads to an overall high bar on decision making. These friends also make every win a little more special and every defeat a little less painful. Tagging a few of these folks that have contributed immeasurably to me in this journey - Abhijit S. Nipun Jain Tarun Sabhlok Kuldeep Kulshreshtha Vakul Agarwal Shreya Hegde Poonam K Khandelwal Mitesh Shah Vinay Bansal Karthik Nair Ashis Nayak Avijeet Alagathi Shreyas Nagdawane Vikram Manjeshwar Dilip R.S.

When is a good time to exit?

One of the important pieces around early stage investing is about having a good decision making framework on when to get off the bus, wherever a choice is available.

A few parameters that I now consider to arrive at an exit decision where I have the option to do so:

1. What is the expected trajectory for both topline and bottomline, which will eventually culminate into a valuation trajectory and in what time frame? For instance, exiting at a 4X MOIC today versus a "potential" 5X MOIC in two years, is where time value of money, risk appetite and probability will need to kick in to help you decide.

2. How much of the company's valuation is based on current performance vs future performance. The more a company's valuation hinges on future performance, the more likely the future upside will be subdued since that performance is already priced in. A multiplier approach, similar to P/E for public markets, can help you make this comparison versus other companies operating in that space.

3. In most sectors, beyond a certain stage and valuation, the only way an exit can happen would be through an IPO, which would likely take several years. This then becomes a simple choice of do you exit whenever you can or HODL till IPO.

4. Impact of STCG and LTCG depending on tenure of investment

That's a wrap on this. Setting a reminder to write an update on this cohort of companies by September 2025.

Cheers!