Start-up investors not chasing the big idea now, seek experienced professionals

From a CEO’s arrest over fraud to wife-husband founder duo’s ugly public spat, start-up sector has seen as much drama as a Hindi TV show this year. Subsequently, investors have become weary of investing only in ‘the next big idea’. They are now looking for entrepreneurs who have professional experience to steer companies through odds.

As the funding ecosystem has matured, investors are now cutting down their exposure to out-of-college founders, in favour of entrepreneurs with professional experience. “Our belief is that professionals who start-up in their late 30s and 40s after gaining considerable corporate experience are more likely to survive even when the going gets tough. The reason is simple; they have been part of the grind for decades, have run P&L (profit and loss) for their previous employers, have established their credibility within the industry and most importantly have a nerve to swim through a rough tide,” says Bhaskar Majumdar, managing partner, Unicorn India Ventures.

Broke vs Build

Large-scale breakdowns like Softbank’s $550 million writedown of its investments in trouble-ridden Snapdeal and Ola, have jolted the investor community. Yet, the steady increase in the number of companies shutting operations, is making investors wary of confident bets. According to data tracking firm Tracxn, as many as 314 start-ups shut down last year. The variety of difficulties that led to ill-fate of failed start-ups range from mismanagement to unviable business models. This shift inspired investors to cover their bases while taking bets on risky investments such as those in start-ups.

Majumdar sees a trend where VCs across India, apart from Unicorn, re-design their investment strategies. “Early success of the likes of Flipkart, Snapdeal, Ola and Common Floor inspired youngsters to turn entrepreneurs and attracted investments. Four years later, some of the money is certainly gone, both founders and investors have gained a lot of wisdom. Over the last two years, investors have become more focused on seeing path to profitability, unit economics, cost cutting and positive gross margins,” he says.

“It is a process of evolution. The first stage was that of exuberance of youth. The second stage is where they look for companies with experienced professional guidance, though they need not necessarily be run by them,” says Ninad Karpe, the former CEO of Aptech and the chairman of CII Western region. “Young people bring in a lot of energy but they have not seen how real world operates and there is a giant divide between text book to reality and the leap has to be guided. If not, they might land in a ditch,” he said.

Nest eggs

Experienced professionals who are now bit by the entrepreneurial bug, bring numerous advantages to the table. Their need for seed funding is not as high as young professionals, since they tend to save money before they launch a company. They also build businesses in domains where they understand the need gaps of businesses and their audience.

“Their network (of experienced professionals) helps them generate early traction and move past proof-of-concept stage quickly. We have seen them signing clients and generating revenues early on in their business life cycle. A good number of such founders have led large teams, impacted bottom-line and P&L of the concerned business, making them more valuable when it comes to running their own ventures,” says Majumdar.

However, the extensive success of young start-up founders comes from deep understanding of technology and their needs. Experts also say that younger founders fare better at business-to-consumer businesses, while experienced professionals comprehend the needs of business-to-business industry much better. 

...& ANALYSIS

• A matured founder’s need for seed funding is not as high as young professionals
   
• They also build firms where they understand the need gaps of audience
   
• Experts say that younger founders fare better at business-to-consumer space
   
• Experienced hands perform better in business-to-business industry