"If you think it’s difficult to be an entrepreneur asking a VC for money, it’s even more difficult to be a VC asking sources of capital for money!"
Chances are, this is not the insider perspective on investing that early-stage startups expect from a venture capitalist. However, Mark Kahn, Co-founder and Managing Partner at Omnivore, wastes little time in sugar-coating the hard facts. He candidly spoke to the semi-finalists of the Cisco Agri Challenge about what he looks for in start-ups to help him make confident investment decisions.
Venture Capitalists are often envied for their luxury of being able to choose from a pool of hundreds of start-ups. However, it is accompanied by a considerable amount of decision making and accountability. One thing that is easy to overlook but is extremely important to remember is that while venture capital is a source of funding for a startup, it is also an investment for a pension fund, or a foundation, or an endowment, or a High-Net-Worth Individual (HNWI), or a bank and the investment comes with an expectation of a 3-4x return. Therefore, it is only natural that someone like Mark would rely on mental models to help place his bets on start-ups that can guarantee that return on investment. In his conversation with the semi-finalists, Mark speaks about the 4 T framework -Team, TAM, Technology, and Traction- that guides him in his decision making.
VCs are often accused of backing entrepreneurs from premier academic institutions. Mark defends that approach as he believes that the premier institutes generally have a highly rigorous selection process and therefore, serve as a good proxy for the grit and determination required to build and sustain a start-up. That said, he adds that he has also worked with some really strong founders who are from humbler institutes. He goes on to share from experience that he has largely stopped backing solo entrepreneurs, regardless of their educational background. Given the complexity of tasks and roles in today's start-up ecosystem, it is too much to ask for one person to handle everything and therefore, he emphasises the need to invest time, energy and, if need be, money in getting co-founders before thinking of approaching a venture capitalist. "It is a lot easier to get someone to quit their job than it is to get a million dollars from a VC," quips Mark.
Technology and Business Model
A good thumb rule for Mark when assessing a start-up or an idea is to ask, how differentiated is the solution and how much money has already gone into similar solutions? In most cases, a market initially sees plenty of similar players before eventually one or two power players emerge who drive the others out of business. Therefore, if the market is saturated, it is unlikely that a VC will want to risk investing in it, even if the solution is being offered in a geography that is currently unrepresented. As a caveat, he suggests that once a power player has been established and a sufficient time has passed, it is usually marked by the arrival of what he calls a 'disruptor of the disruptor' and that is what a VC might be interested in funding.
While traction is a function of what is possible and its definition and measurement is contingent on the stage of the start-up, Mark states that he is always on the lookout for the efforts and progress made by teams to generate traction without a major investor on the scene. Mark's pet peeves are teams who say that they will start entering the market once they raise the funds. What he appreciates, instead, is teams that have raised angel investment of a few lakhs at least from friends and family. This becomes a good proxy of the teams' ability to sell the vision of the idea to people.
Total Addressable Market
According to Mark, venture capital is for those who have the vision to scale exponentially and have a plan to back that vision. For smaller enterprises, perhaps a business loan or a small family grant is what will be more appropriate. A VC most likely will not be interested because, Mark reminds, a VC is looking to multiply the investment 3-4 times and that is not possible in an enterprise that does not have a sizable market. To drive home the point, he gives the example of an agri-processing start-up that works with farmers in Rajasthan to procure custard apples, process them and supply it to ice-cream and beverage industries. While this initiative is generating jobs and revenue, there is only so much scope for growth and it is mostly going to be only linear and therefore a venture capitalist is unlikely to get excited enough to want to invest in it.