StartupCentral

Venture capital’s fascination with ecommerce startups in India continues into 2012. HandsPick, a fashion apparel and accessories ecommerce brand owned by Delhi-based startup Intuitent Online Venture, has raised $2 million in what is most likely a Series A round of funding from Seedfund. The deal could not be confirmed either with Seedfund or HandsPick at the time of publishing this story, but sources familiar with the development said that it has been in the making since late December. Startupcentral had earlier reported that the Mumbai-based specialist seed stage investor was close to signing two new deals worth $5 million in the mobile value-added services and ecommerce sectors respectively.

Seedfund’s latest ecommerce bet positions itself as a destination for affordable fashion apparel. The company has a team of stylists that keeps tabs on fashion trends and ensures that the site offers products in line with those trends. It claims to retail over 60 brands online, including Lee, Puma, Spykar and Wrangler. The site offers offers members the facility of placing orders over telephone (apart from online) and trials before purchase. It also has a 30-day return policy and the mandatory cash-on-delivery payment option.

Founded in February 2011, the people behind HandsPick are a seasoned team of professionals. The team is led by Amarinder Dhaliwal, former vice president of ecommerce at Bennett, Coleman & Co-owned Times Internet. The other two co-founders are Vijay Misra, earlier director-brands at TCNS Clothing Co, and Vijesh Sharma, who was earlier product head-ecommerce at Times Internet.

The investment by Seedfund is from its $54 million Fund II, which was raised last February. It closed calendar year 2011 with 10 deals and an investment commitment of $20 million. The last deal that it had announced was a $1 million investment in Mumbai-based financial information and analytics startup Heckyl Technologies. The firm’s only ecommerce investment last year was men’s fashion site Fetise, in which it invested $5 million.

Image Courtesy: Stuart Miles / FreeDigitalPhotos.net

Barely a week into the new year, specialist seed stage investor Seedfund is close to signing two new deals worth nearly $5 million. One of the deals in play is a startup in the mobile value added service segment, which is likely to corner a commitment of $3 million, while the other is an ecommerce startup based in Delhi, said sources close to the firm. Both the investments are being made from Seedfund’s $54 million Fund II raised last February.

The Mumbai-based venture capital investor wrapped up 2011 with 10 deals, making it the third most active venture capital investor in the country last year. It closed the year with a $1 million investment in Mumbai-based Heckyl Technologies, a Mumbai-based startup that provides real-time financial information and analytics. Heckyl was also the winner of the country’s first multi-city bootcamp organized by Indian Angel Network and Springboard Ventures in June. In all, Seedfund has investment commitments for approximately $20 million from Fund II, which includes the two new deals it is yet to announce. This takes its total investments across its two funds till date to $35 million.

A significant milestone for Seedfund last year was that two of its four incubatees — MyDentist and Jeevanti Healthcare — have graduated from the incubator, dubbed the Seedfarm, that it started in the middle of last year. The incubator starts off young businesses with an initial investment of nearly $200,000 and commits $2 million in follow-on funding, subject to the startup achieving certain pre-stated performance targets. The other two startups currently in the incubator are comic book startup Level 10 Comics and Frontier Markets, a Jaipur-based company in rural sales and marketing distribution.

Apart from the Fund II deals, the firm’s $15 million Fund I, launched in 2006, has invested in 12 companies which includes online auto classifieds startup CarWale, online bus ticketing  company Redbus and affordable hospitals chain Vaatsalya. 2011 has also been a breakthrough year for the firm, which is headlined by founding partners Pravin Gandhi, Mahesh Murthy and Bharati Jacob, on the exits front. The firm’s investing strategy — seed investments in innovative but unproven businesses — had few believers when they started in 2006. In late 2010, the strategy received validation when CarWale, in which the firm had invested $690,000 for a 25 per cent stake in 2006, was acquired by German media conglomerate Axel Springer. Seedfund made $25 million on the deal, whose total value was never disclosed.

The exit provided the venture capital firm with the momentum to raise its second fund and go after deals in its chosen segment more aggressively. It has also spurred other venture capital firms active here to look more closely at deals in the seed stage. While this is further validation of Seedfund’s investment strategy, it makes the playing field for the firm, which is still small compared to many of its peers, much more competitive. 2012 will probably be the year that will test Seedfund’s tenacity in the marketplace.

Indian startups, especially those building online businesses, have lately been seeing more than the usual level of interest from venture capital investors. As more and more deals get done, across stages from seed to Series B and C, the inevitable and pertinent question is: are the current valuations justified?

Let’s consider the early-stage valuations of some of the more successful companies around. A fast food company is raising money at a valuation of 10 times its revenues. It is not profitable yet. Another company that has not yet launched its product was valued at Rs 20 crore a year ago. Its sales will not cross Rs 2.5 crore after two years, which gives them a valuation multiple of eight times two-year forward sales. A group of investors including Seedfund recently invested in Redbus at a valuation that was more than a few times the company’s gross revenues. And it was worth every penny.

So are high valuations the preserve of only early stage investors?

Is it fair to term large bets on companies that are growing faster than early stage startups ridiculous?

Is it so unrealistic to expect an Indian startup to attract multi-billion dollar valuations?

Let’s take a look at a simple comparison of valuations of Chinese and American online companies:

The American companies are bigger than their Chinese peers. So Chinese companies still have some room to grow, particularly given that their GDP is growing faster. There is a factor of minimum income per capita and access to connectivity, but mobile internet and cheaper internet is solving that already. Both India and China will undergo behavioural changes that will be necessary to match expectations, but that’s happening too.

As shown in the table above, categories like travel (MMT), e-commerce (Flipkart) and local deals (SnapDeal) have a long way to go. However, this does not imply that these very companies will do well in the categories mentioned. That is the risk that venture capital investors are taking. But, in the next five years or less, somebody will touch and surpass these valuations. One can also assume that by then India’s GDP will be higher, per capita GDP will be higher and connectivity and behaviour will be favorable.

As for the risk, yes, the guys who are signing the big checks are taking risks. But frankly, an investor who writes a $6 million cheque to an Amazon.com equivalent in India, at however low a valuation, is taking a far bigger risk than somebody who writes a $150 million or $40 million cheque. The risk is lower with a fatter cheque because one is able to roll out good infrastructure and fortify barriers of entry.

Then there is the argument about profits. Profits don’t happen by chasing profits but by focusing on consumers. If consumers are happy, everything else falls into place. Sometimes, when you are fighting consumer behaviour, poor infrastructure, broken supply chains and hostile banking services, keeping consumers happy can be quite expensive. Enough has been said about those who are hiring SEM marketing agencies. These companies will die soon and it will not matter whether their valuations were high or low.

I have a theory about retail in India. We skipped the entire telecom wired revolution and jumped to mobile. The United States went through a phase where Barnes and Nobles shut down mom-and-pop establishments and then Amazon stunted Barnes and Nobles. In India, retail is yet to roll out and we are already looking at ecommerce companies giving them a run for their money. We will skip the entire retail store rollout phase in India and modern retail will significantly be run online.

A word about profits in online companies. Redbus is profitable, Infibeam doesn’t lose much compared to its revenues and MMT has finally become profitable. I am sure many others will do so in the coming years. And some day the profits will justify their current valuations.

As I wait patiently for some of our companies to roll out their products, delayed a couple of quarters, I am hopeful. My worry is not profits, or the infinite valuation we gave to a zero-revenue company. My worry is whether consumers will like the product or not. A good entrepreneur will never take his or her eyes off costs or profits, but he or she will dream big and bet big. It is these best-of-breed entrepreneurs who command the best valuations and also stir up debates.

I do gasp at some of the deals that are happening. There is a very high chance that all of us will exclaim after a few years, “I told you  about these ridiculous….” There is a smaller chance that the same guys will say after a few years, “Nobody believed us when…”

As venture capitalists, we make this choice all the time. Now we have a few big boys joining the game, the game just got bigger. I am not complaining.

About the columnist: Anand Lunia is executive director at Seedfund where he leads investments in technology, Internet, education and retail startups. He has 15 years of experience as an entrepreneur, venture capital investor and corporate executive. An IIM Lucknow alumni, Lunia was co-founder of one of India’s earliest elearning companies, Brainvisa Technologies (acquired by Indecomm Global Services) where he created the business plan, led the team in fundraising and facilitated the exit of the company’s venture capital investors, earning them five times their investment. Follow Lunia on Twitter.

This August make a date to pitch your business plan to Seedfund.

Entrepreneurs are invited to participate in the Seed Date with Seedfund contest, which opens today. Five winners will be chosen out of the entries received and will get a chance to make a 10-minute pitch to the Seedfund team in Mumbai.

Email applications to seeddate (at) mail (dot) com.

Who Can Apply

• Bootstrapped, pre-revenue and pre-funded startup companies
• Working professionals who are interested in starting their own business

Contest Rules

• Applicants should submit business plans in a 10-slide, open format presentation
• A working prototype of the product or service is not mandatory. However, an applicant with a prototype may be given preference over others.
• The pitch to Seedfund will be made at the Seedfund Mumbai office. Video pitches may also be arranged on a case-by-base basis.
• The evaluation of all applications will be at the sole discretion of Seedfund.
• Seedfund does not make any funding commitment to the winners of the contest.

The five winning startups will be profiled at Startupcentral.

Wikipedia defines thought leadership as “recognition from the outside world that the company deeply understands its business, the needs of its customers, and the broader marketplace in which it operates.” Yet, so many startups that have built decent products, and even a few that have great products, fail to give enough importance to this aspect.

The most common descriptions of a startup founder are that he is a great product guy or sometimes a great sales guy. But one rarely comes across a founder who can be classified as a thought leader. And just having a founder as a thought leader is good to start with, but in the long run the company as an entity needs to be known as a thought leader.

Why is thought leadership so important?

Companies have great products  and good sales too. But how many times does the client or prospective client call and say, “Hey we are having a strategy meet and I want to pick your brains before that,” or “Can you help me with some slides for our internal presentation?” I have always felt  that most decision makers buy into companies, not the product. And that’s where thought leadership can catapult a startup ahead of the giants.

How does one go about building thought leadership?

1. To begin with, you have to have some thoughts! Think about it. You built the product because you saw a gap in the market. So do some more research, quantitative and qualitative, and form views on what is ailing the industry that you serve. A lot of it may not apply directly to your product, may be much wider in scope and that’s the idea.
2. Thought leadership can be built around industry, but also around how things work with society, government policies, employees of the industry, suppliers etc. Similarly, thought leadership can be built around how one sees the future of a particular business, though again much of this may have no direct connection to your product.
3. The next step is to try to spread this knowledge in all forms possible. You could use a blog, presentations, syndicated articles, white-papers on your website, Twitter, etc.
4. Presenting at industry seminars produces great and direct impact. If you have something different, thought-provoking to say, people will invite you to speak. Be ready to give some sponsorship money for the first few invites. Ideally, involve some of your existing clients in these thought leadership initiatives. They will love it and become very enthusiastic supporters.
5. Don’t expect sales out of such initiatives. That’s the wrong way to track the effectiveness. Measure how many conversations you generate about your company. The buzz, as they say. The best sales pitches are when a prospective client calls you to discuss his business, and not yours.
6. The impact is not only in terms of more volumes, but also pricing, perception, renewals, and even better quality feedback from clients.

Some examples of thought leadership:

• McKinsey & Co and other consulting companies routinely conduct expensive research, unpaid, and then distribute it freely. First it was the McKinsey Quarterly and now it is their website. Rating agencies like S&P/Crisil and investment banks do this too. And one finds most mainstream media quoting their research.

• Redbus, a Seedfund portfolio company, forecasts peak season demand for bus seats on each route. This is then shared, gratis, with bus operators who can use it to plan their capacity. Indirectly, it improves the inventory available with Redbus.

• Carwale, with their vast understanding of consumer demand in various car segments, produces special industry reports that help marketing managers at OEMs.

If you want to read more about why thought leadership is now part of a company’s competitive strategy, take a look at this piece published by The Bloom Group in the subject.

About the columnist: Anand Lunia is executive director at Seedfund where he leads investments in technology, Internet, education and retail startups. He has 15 years of experience as an entrepreneur, venture capital investor and corporate executive. An IIM Lucknow alumni, Lunia was co-founder of one of India’s earliest elearning companies, Brainvisa Technologies (acquired by Indecomm Global Services) where he created the business plan, led the team in fundraising and facilitated the exit of the company’s venture capital investors, earning them five times their investment. Follow Lunia on Twitter.