Risk, Reward and Startups: Funding your Titans

Most early-stage startup investors don't pick it as a career starting point. Legendary Mike Moritz was a journalist before he became a venture capitalist. We also did not set out to be investors. Start-ups were getting recognised, and as one of the early founders in the ecosystem, we often got pinged by those starting after us - to discuss ideas, refine business models, get introductions and, at times, assess if we would invest in the business. It’s been 12 years since. What started as a way to help the next cohort of founders has grown into Titan Capital .

Through my journey of entrepreneurship, it became clear that the trajectory of a company is typically set very early in its lifecycle and hence recognising the importance of this plays a significant role in selecting the right companies. Having invested in over 250 start-ups - some successful and some that didn’t work out - here is what we learnt about investment selection:

• Great outcomes happen at the intersection of what is contrarian and true at the same time: Being contrarian doesn't mean blindly going against the grain; it means having the discernment to identify opportunities that are dismissed by most. Fortunes are rarely made while chasing the herd at early stages. Hence, it is prudent to pay close attention to businesses that are not in favour with the bulk of investors - either because it is hard to understand the space, seemingly difficult to execute or there is some perceived inadequacy in the founding team. Because such businesses may have a complex path to success, they will likely face less competition. If you can assess the business well and are convinced that the founders have what it takes, you may be looking at a winner - even if nobody else sees what you see.?
• When in Doubt, Stay Out:? In the world of startup?fundraising, it's easy to succumb to FOMO and make rushed decisions. One of my learnings over the years is that if you are in doubt, it is better to opt out. If something doesn't feel right, if you still have unresolved issues, or if you perceive hidden risks, you should listen to your instincts and not invest. The discipline to say no is an important filter because then every company in your portfolio has cleared the same test of conviction to be there, and you don’t feel buyer’s remorse. You don’t need to end up in all the good companies. You just need to make sure your companies are good.
• Consistency of cheque size and frequency over years: Risk is inherent in early-stage investing - many start-ups underperform, some succeed, and only a few outperform. Making investments year after year helps you incorporate your learnings from previous investments into current investment decisions. Not even the best, most seasoned early-stage investors can predict the future. Hence, investing consistently, year after year, ensures you don’t miss major market cycles or over-index on bad cycles.?
• Buy and hold Vs trading mindset: Start-up investments are long-term bets on founders and their ideas. There is often an initial period of volatility in a start-up before green shoots become visible. This is the point other investors may enter, and early-stage investors may get their first exit option. Premature exit, at this point, leads to minimum returns for maximum risk. The value creation thereafter is multi-fold. This is captured by investors who hold onto their convictions, resisting the temptation to trade on impulse. 80% of the upside happens in the final 20% of a startup’s journey before the exit. We’ve stayed invested in companies for more than a decade and benefitted tremendously from that.
• Taking chips off the table is rarely regretted: This may seem like a contradiction of the above point, but is not. Seasoned investors are aware that making money along the way is just as important as riding the wave. It is a risk-reduction approach rather than a sign that the company lacks potential. When we believe we don’t have a line of sight to a company growing at least five times from here, we will typically sell a small part of our shareholding. Often companies do end up growing more than five times, and we have no regret because we still have a majority of our holding in the company. Also, on a lighter note, if an investor had the superpower to always sell at the peak, nobody would ever buy anything from them.?

You've now invested following a set of cogent principles with a high bar. The founders will reach out to you for guidance. Here are some patterns we have seen over the years which can be helpful.

• Focus on a singular problem statement by an early-stage startup is highly underrated: The importance of focus is often lost in an ecosystem that continuously celebrates new launches. There is incredibly more value to be created by focusing on building one business well rather than pursuing multiple ideas at the same time. Staying focused on one problem statement enables start-ups to understand user needs deeply and meet them in a way that casual competition cannot hope to emulate. Keeping the company focused on a singular problem statement is arguably the single biggest value add of an early-stage investor.
• Without unit economics, you are only hoping for a miracle in a portfolio company: When a business loses money every time it serves its customers, it is de facto paying its customers to buy its product. As the scale grows, so will the losses. Often an investor will hear from the company that with scale the unit economics will improve. They do improve, but rarely dramatically, which usually requires structural changes to the business. Negative unit economics lead to high burn, more need for fundraising, more dilution for founders and investors and most importantly, introduces existential risk. Hence, keeping the founding team focused on executing within defined guardrails of unit economics is critical.?
• Long-term success is not possible if companies are not delighting customers: This is not a cliché. A rapidly growing business that doesn’t have a focus on customer experience will struggle to retain customers. The business will keep spending on customer acquisition without getting enough opportunity to recoup that investment. In the digital age, where competition is fierce and choices abound, the ability to consistently delight customers is a superpower. It is also an incredible way to increase customer lifetime value and reduce acquisition costs. However, it takes intensity, obsession and patience to build a customer-centric organisation.
• Cash is king: Cash is not just a financial asset; it's a strategic one. Start-ups that keep their cash position stress-free are more likely to be able to continue with their operations unhindered and grow steadily. A business of any scale or stature goes to zero if it runs out of cash. We never consider the final 6 months of cash runway in any company we have invested in - that’s the buffer. The urgency to keep costs under control and/or to raise additional capital tends to increase substantially with this mindset.

Finally and most importantly, be humble about the wins: Start-ups succeed due to the efforts and perseverance of the founders & and their team and when entrepreneurs, teams and investors come together with a? a healthy dose of serendipity. Investors must recognise that although they made the right investment call, they had little to do with a company's ultimate success. If it wasn’t them, somebody else could have as well cut the cheque with similar outcomes. Humility will help you stay grounded, learn new things, and respect the amazing journey that companies go on.

Each of these ten lessons is etched into our investment philosophy - they assist in the process and guide our actions. In hindsight, while we’ve had a good run at Titan Capital over the last 12 years, the experiences, knowledge and relationships gained along the way are more significant than the financial gains. As they say, the fruits are in the journey.

This article originally appeared in The Economic Times on 28 November 2023.