“We had finalized on the Seedfund investment nearly three months ago. However, the deal took time to close because the angel investors first had to be bought out,” Innoz co-founder and CEO Deepak Ravindran told StartupCentral over a telephonic interview. Ravindran said that the company had raised the Rs 75 lakh in angel capital across 2-3 rounds of funding since its inception. Seedfund is now the sole investor in Innoz and holds a significant minority stake in the company. Ravindran declined to comment on the size of the Seedfund investment.

Ravindran co-founded Innoz with college buddies Abhinav Sree, Ashwin Nath and Mohammed Hisamuddin in August 2008. The four friends came up with the idea for a mobile search engine while still students at the LBS College of Engineering at Kasargod, Kerala. The company started up as an incubatee at the Technopark Technology Business Incubator in Trivandrum and went on to raise angel funding from CIIE, the startup incubator at IIM Ahmedabad, Sanjay Vijayakumar, CEO of MobMe Wireless, and Satish Dharmaraj of Redpoint Ventures among others. The company closed the last financial year ended March 31, 2012, with revenues at Rs 6 crore and profit margins at 60 per cent, said Ravindran.

It initially launched its search engine under the brandname SMSGyan through a partnership with Bharti Airtel. Since then it has entered into similar partnerships with telecom operators such as Airtel, Vodafone, Aircel, Tata Docomo and IDEA.  The company currently sees a daily traffic of 1 million search queries and 80 per cent of its revenues come from telecom operators through revenue share agreements. While users can pay per search query, it also offers a subscription model and currently claims 3.5 million subscribers. Nearly 60 per cent its revenues come from Tier II and Tier II cities. Following the Seedfund investment, the company will invest in strengthening the 55444 brand, which Ravindran says is aimed at creating a stronger, operator-independent identity for its search engine especially in Tier II and III towns.

The company expects to see a 10X growth in its daily traffic by 2015 and targets Rs 50 crore in revenues by then. Apart from garnering revenues from search services, it aims to diversify revenue channels by generating sales leads for ecommerce companies and offering mobile customer analytics services. It has recently launched an API at 55444.in, which allows application developers to use the Innoz platform to create their own applications. The company also relocated its headquarters to Bangalore from Trinvandrum for easier access to engineering talent. “We shifted about three months ago. Bangalore is our headquarters and the hub for our development activities,” said Ravindran. Apart from Bangalore, the company also has operations in Mumbai and New Delhi. It currently employs 35 people and expects to ramp up to about 60 people by the end of the current fiscal.

Read Deepak Ravindran’s account at StartupCentral of the Innoz journey from a college project to a fast-track startup.

Image Courtesy: Innoz

StartupCentral had earlier reported that  HandsPick had raised $2 million in what was most likely a Series A round of funding from Seedfund. The deal could not be confirmed either with Seedfund or HandsPick at the time. Seedfund co-founder Mahesh Murthy later confirmed that the firm had picked up a minority stake in the company, but said that the investment amount quoted was incorrect.

Founded in February 2011, the people behind DonebyNone are Amarinder Dhaliwal, Vijay Misra and Vijesh Sharma. Dhaliwal was former vice president of ecommerce at Bennett, Coleman & Co-owned Times Internet, while Misra was director-brands at TCNS Clothing Co. Sharma’s last job was product head-ecommerce at Times Internet.

Image Courtesy: DonebyNone

To find out what is the right valuation for the first cheque, it would be worthwhile  to study the valuations in later funding rounds. The organised angel networks usually operate between Rs 6 crore and Rs 15 crore pre-money valuations, in post-beta companies. The size of  deals ranges between Rs 1 crore and Rs 4 crore for equity stakes of between 15 per cent and 30 per cent. Seed stage funds also have similar valuations; usually investing less than $1 million (approximately Rs 4.9 crore) for stake above 25 per cent.  Although, of late, some deals have started happening in the $ 2 million (approzimately Rs 9.8 crore) ticket size, post the FFF round. A few have raised even $4-5 million seed rounds for e-commerce SEM budgets, but that may not happen again for a while.

So a very lucky company will raise $2 million after their first Rs 10 lakh or Rs 50 lakh cheque, at a pre-money valuation of say between Rs 15 crore and Rs 24.6 crore ($3 million or $5 million). Assume a Rs 15 crore pre-money valuation. At this point you would expect the angel investor to multiply their money by 2-4 times. This gives a pre-money valuation range of between Rs 3 crore and Rs 6 crore.

If the company has to settle for a Rs 2 crore round at a Rs 6-8 crore pre-money valuation, the angels stand to barely double their investment.

It is important to note a few things:

1. While the promoter gets compensated with salaries, MSOPs (full form) etc. and the investors have their preference rights, the FFF gets the worst of both worlds.
2. Many a time, they are forced to take exits at deep discounts. So their downside is unlimited but upside is capped.
3. Large part of the initial cheque goes to co-founder salaries

Suggestions for FFF angels in India:

1. Play in the safe range of Rs 2-4 crore valuations and write small cheques less than Rs 50 lakh in total. You may need to provide more for the long winters.
2. Take partial exits if you like the plan going forward. But when in doubt, take full exits if feasible.
3. If you continue to be invested, retain as many rights as possible
4. Don’t try to take more than a 20 per cent stake. It will surely mean that you will have to exit in some future rounds to make room for others.
5. Convince co-founders not to take salaries till the next round.

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.

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

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.

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.

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.

This is Seedfund’s second investment in a hospitals chain. It has earlier invested in Bangalore-based low-cost hospitals chain Vaatsalya Healthcare, which focuses on second rung cities and rural areas.

Jeevanti, which is based in Mumbai, has been founded by Arun Diaz and Deepa Chandrashekhar. Diaz is a former Standard Chartered executive. He currently runs Lynx Healthplus Services, a franchisee for The Apollo Clinic in Thane, with Chandrashekharan. Diaz has also been associated with social and rural sector focused venture capital investor Aavishkaar as an investment committee member since the firm’s inception. He is on the board of several Aavishkaar portfolio companies, including Vortex Engineering and Suryoday Microfinance.

The deal was advised by Intellecap.

Startupcentral was first to report the Series C round. redBus was founded in 2006 by BITS Pilani alumni Phanindra Sama and Charan Padmaraju. The company has crossed 3.5 million tickets and reports gross bookings of Rs 120 crore. The Bangalore-based company will use the funds to expand its geographic presence.

Founded in 2006 by former Texas Instruments executive and BITS Pilani alumni Phanindra Sama, the company is aiming for $33.3 million revenues this fiscal, Sama told VCCircle in an interview recently. We could not reach Sama for comments on the deal.

redBus’ last round of funding was in 2009 when it raised an undisclosed Series B round led by Bangalore-based Inventus Capital. The company pioneered the concept of online bus ticketing and connects bus operators with travelers. This is the second Seedfund-backed company to raise additional funding this month. Low-cost hospitals chain Vaatsalya is close to raising a $10 million round from existing and new investors.

Image Courtesy: redBus