Cheque sizes for early stage startups are down by 10-15% in last 2-3 months: B Capital's Karan Mohla

Karan Mohla, Partner, B Capital.

Facebook Co-founder Eduardo Saverin’s B Capital on July 19 announced the close of their first dedicated early stage fund. Ascent Fund II, which raised $250 million, is targeted to find bets around India and the Southeast Asia.

The investment firm will be looking for startups across digital healthcare, enterprise software, fintech and logistics, among other growing industries. Ascent Fund II will be led by Howard Morgan, who is B Capital’s Chair and General Partner; firm’s Co-Founder and Managing Partner Eduardo Saverin; General Partners Gabe Greenbaum and Karen Page; and Partner Karan Mohla.

B Capital had previously invested in BYJU’s, Meesho, PharmEasy, Blackbuck, DailyHunt, Khatabook, Fi, and Bizongo among others in India.

In an interview with Moneycontrol, partner Karan Mohla who will be heading the early-stage investments in India and Southeast Asia, discusses the early-stage opportunities in the Indian market, themes to watch out for and how the startup ecosystem is coping with the ongoing funding winter and macro headwinds.

Mohla was earlier a partner with Chiratae Ventures before joining B Capital in January this year.

Here are the edited excerpts of that interview:

What's will be the investment strategy going ahead for B capital in India?

I'm focusing on the early stage side of things. Basically, everything from seed to Series A, maybe a little bit of Series B, and then there is the existing growth team, which is focusing on the same region, but from Series B onwards, typically C onwards. So, I think I'll just talk about the early stage side, which is very critical for us as an overall part of our strategy. There's been the thought to do something in the early stage.

I think, for us this strategy in India and Southeast Asia's look, it's still very early in terms of where the markets are right, despite so much, having been done on the funding side, exits, etc. But it's still very early and I think that's where we feel we have a very critical role to play. With specific focus on enterprise, SaaS and B2B, healthtech, Fintech, logistics and mobility, transportation which actually help the industries grow. I think that's how we look at this segment. And in all of these, there's one way democratic, long term trend going forward. For the region, that's what we're really, really excited about.

What is the average ticket sizes for the deals that you will be looking at? And also, how do you plan to deploy the new fund?

We can invest as low as $500,000 and can go up to $10 million. But that sweet spot is in the real areas around $1 to 3 million at seed, $5-7 million at Series A, and whatever the rounds in between you can fill in the blanks. I think it's really about finding the right and the best founders, and the most innovative founders and business models to support them. Being a globally integrated firm, I think it helps a lot, because we're able to actually work closely with the companies as they look to expand, we're able to bring different perspectives to the table. So that's how we'll obviously look to deploy across you all regions.

There's a lot of gunpowder available at the moment for early stage start-ups with major VC firms closing big funds recently. With so much liquidity available in the early stage funding, will we see funding rounds happening at higher valuations?

You rightly said that a lot of capital has been raised in the last six months for the early stage. The opportunity set of quality companies has also gone up. I think there is some level of normalization, which is undergoing right now and allowing companies to raise amounts, which are in line with how they would normally think. There was a lot only growth oriented mindset in the last one and a half years, I think that some of that has definitely made it to slightly more normalized growth.

So I'd say, we aren't seeing valuations go up in the early stage, valuations are probably holding up to what they were in the last one year. Instead round sizes have come down a little bit. It's probably not as acute as what we may see on the growth stage side of things from what I've heard. But valuations I don't think are going up in the early stage. But I think there's definitely a lot more capital, and at the same time, there's also some good opportunities. So that kind of equate it and bring it in line with each other, currently.

Then are the cheque sizes going up for the early stage start-ups?

I think they went up in the last 12 to 18 months. I'd say they probably have come down a little bit by maybe 10-15% and that’s anecdotal data from over the last two-three months. I wonder if it's a one way trend or not. But I think overall, the point that we are excited about is that there is a lot of capital available to support early stage companies, number one. Number two, it's it actually holds well for a lot of founders that are wanting to start up even in an environment like this. And, you know, from seed to sort of series A and B, there are different types of investors that are available to for partners to partner with. And I think that overall this is something good for the ecosystem, which is why we're obviously very excited to continue to spend that much time in it.

How much of the $250 million fund has been allocated to India. Is there a range you could share?

We don't do a top down allocate. We just want to focus on the best founders in the best businesses.

How is the India opportunity looking to Howard Morgan and the rest of the team?

I think overall, we're very positive on the India market. So if you look at some of the sectors that we're focusing on, so I think SaaS has been a very positive trend over the last four to five years, very clearly, that will continue. We don't see any reason why that won't accelerate. I think in healthcare, we are seeing some phenomenal opportunities, which are focusing on the India market. We all know the acute need for healthcare and healthcare services, and how the physical delivery models aren't able to keep up with the need. So Healthtech and digital health really takes the place of physical healthcare opportunities. We'll see much more of that.

Again, whether it's fintech or other areas like logistics supply chain, those are the areas which will continue, but I think that's where we are spending time, that's where we’ll be able bring in our expertise as global investors. With our partnership with BCG, our platform team, we really try to be the most value additive investor for founders.

Last year, we saw certain themes and segments like roll-up e-commerce and Buy Now Pay Later raising a lot of funding. As of 2022, which are the defining themes you're noticing?

I'll say SaaS is definitely one of them. I think the area around digitizing traditional industries, which has happened through B2B marketplaces, I think that continues. Sectors which are probably lagging on digitization compared to sectors which have already been digitized. And healthcare. I think those will be the three defining sectors for the industry this year and part of next year, as well.

Because, for three reasons, one, the kind of founders that are wanting to build large scale businesses in these areas are plenty. They have seen scale at other companies, and then now they're wanting to build out on their own. And the ecosystem around supporting such companies has also been created over the last two years. So I think that's where, even in a market like this, they'll be defining in many, many ways, for this product next.

Overall, will we possibly see down rounds in India? And how should founders prepare for it?

I think the possibility of down rounds happening is there. When they happen? How much? And does it become a trend or the exception that probably remains to be seen, but I think it's definitely a possibility. Founders and boards are aware of that already. So, you know, founders or companies that require urgent capital need to think about their options very strategically and carefully, whereas others that have these capital may need to think through, how to build a sustainable business in this environment for a long time before they go out and fundraise again. So I think those are eventualities that boards are probably thinking in any case, and that's where a crucial role will be played by everyone in the ecosystem to tide over this time, if that becomes more of an ongoing phenomenon.

Do you think that India's experience might be slightly different from the Silicon Valley counterparts of the Indian start-ups, because the cost structures would be very different for India?

Cost structures may be different and lower but also what you get on the other side of it in terms of yields are also commensurately lower. Unless of course you're building on cross border SaaS, in which case, there’s definitely so. It's a good question. Typically I've seen through my experience, at least that India, generally in situations like this, theirs is a six to nine month lag from what’s happening in the US, and that it may be a little bit of a lesser lag or a shorter lag this time, because I think the US started looking at this in March-April and we started seeing this two-three months later.

As we go to the next two-three months, we'll probably know a lot more, because there is a lot of uncertainty of around interest rate volatility, where a lot of things will settle down, at least to some extent by September end. But if it doesn't, if it goes beyond that, the effect could be deeper.

As energy prices and supply chains sort of normalize, that will definitely help the macro pain that we've seen for the first six months of this year. Generally, the hope is that the impact is for a six to 12-month period. The reality is that it could be for an 18 to 24-month period, and we don't know how long it will be. I think it's good to be prepared for a period which goes for longer in a not so positive manner. But if things turn around, then one can, it's much easier to adjust that within the other way around. And I think that's how we can conduct our business. Look, this is not to paint a very dire picture. There are, like I said some very, very good founders and very good businesses.