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Zoom meets at night, 46 weekend calls: FOMO drives VCs to faster deals

Venture capital firms are closing deals faster as founders are flooded with competing funding offers. The breakneck speed makes deal-making riskier. How are VCs interpreting the boom? How do risk and the possibility of massive returns stack up against each other? Moneycontrol explores.

Mumbai / July 23, 2021 / 09:47 AM IST
Image: Shutterstock

Image: Shutterstock

On July 16, Anar, a networking platform for business owners, had investors ready to invest $600,000 in an ongoing funding round. Anar was looking for more, but its pitch had not quite caught fire with investors.

A day later, its CEO Nishank Jain spoke to Elevation Capital, which was extremely interested and committed $2-3 million immediately. He also spoke to Accel, another top VC firm, which decided to join the round.

On July 18 (Sunday), Anar was on its way to close a $6 million seed funding round – 10 times what it had been offered less than 48 hours earlier – led by Accel and Elevation. Over the weekend, the investors spoke to the founders, carried out reference checks, issued a term sheet – a non-binding agreement with terms of investment – and conducted due diligence. The deal is expected to close soon.

Elevation, formerly SAIF Partners, made 46 calls to Anar’s customers through the weekend as part of the due diligence, said two people involved in the negotiations. Anar declined to comment on the funding.

In calmer times, top venture capital firms would often prefer to track a company for a few months, talk to multiple companies in a sector and then pick which one to invest in. The current funding boom, however, doesn’t allow such luxuries.

Top VC firms, which in any case get access to the best deals by virtue of their fund sizes and global reputation, are under more pressure than ever before to close deals quickly for fear of having the opportunity stolen from under their nose by a competing investor.

‘Market is crazy’

VC firms are starting and finishing deals over weekends and getting on to Zoom at 11.30 pm on a Saturday to thrash out deal terms, further exacerbating risk in an asset class known for its risk. VCs generally avoid FOMO (fear of missing out) investing – today’s hot startup could be tomorrow’s burning mess – but this seems harder when startups are flush with cash and more money than ever is chasing relatively few of them.

“The market is crazy – there’s no doubt about it. And there’s definitely some FOMO in the market,” said Gagan Goyal, a partner at India Quotient, an early-stage investor.

The startup ecosystem is currently like a house party with alcohol flowing freely, a founder told Moneycontrol in March. For their investors, however, the situation is more complicated.

Many investors have seen their portfolio companies receive more money at generous valuations, making their own holdings much more valuable. But the current deal-making frenzy is forcing VCs to be faster and nimbler, even though such breakneck speeds make exacerbate a risky environment, as investors may put in money without total conviction and without complete information about the company and its founders.

Elevation Capital, an early backer of Paytm, Swiggy, UrbanClap and Meesho, among others, is deliberately working on closing deals and making decisions faster. Investors and founders who have worked with them say that the firm’s risk-taking ability has gone up significantly.

Entry valuation

Last month, Elevation and Sequoia led a $38 million Series A round in FamPay, a banking startup for teenagers. It was one of the largest Series A rounds in India’s startup history, at a valuation of $150-170 million for a company yet to make any revenue.

“Was the deal expensive? Yes. But Elevation invested because they think the founders are two years ahead of anyone else in the market. And at such an early stage, you’re predicting a multi-billion dollar outcome, so the entry valuation matters less,” said a person close to the firm, requesting anonymity.

Mukul Arora, a partner at Elevation, acknowledged the shift.

“We are definitely faster than ever because we have evolved with the market and consciously pushed the envelope. We are customer (founder) obsessed, just like we want our portfolio founders to be,” he said.

In another case, on December 25, 2020, many founders, VCs and others were on a well-deserved break after the first wave of COVID-19 had abated. Yet, partners at Sequoia India and Accel were busy finalising terms to invest in Powerplay, a software platform for the construction industry.

“They need not have shown that kind of hustle in a normal market. You’ve had the first conversation, you can pick it up after the holidays. They knew it is a market where you have to move super-fast,” said a person who was aware of the discussions, requesting anonymity. The $5.2 million round was announced earlier this month.

Angel investments

VC firms are also increasingly enquiring about their portfolio founders’ angel investments, which are made in very early-stage startups in their personal capacity. They don’t want to miss out on seeing a single company.

Smaller VC firms are also pushing their young analysts to source investments, beyond their core jobs of due diligence and portfolio support. Large VCs already do this.

“Some investors are jumping on every deal they get and even $25 million rounds are getting closed super-fast,” said India Quotient’s Goyal.

The speed of deal-making has increased also because founders and investors can do back-to-back video calls from home during the pandemic, often going up to 7-10 in a day. Before the pandemic, physical meetings were the norm, and because both sides wanted the comfort of in-person discussions, which take time to set up, deal talks would sometimes drag on.

Earlier, investors would do three calls with a founder before issuing a term sheet. They may still do three calls, but in a shorter span. Three calls that would happen over a week or two now take place over a weekend, investors said.

Quality outweighs risks

Investors are aware of the risks of fighting tooth-and-nail and cutting cheques in a few days, but don’t see another way out because they feel the quality of companies outweighs short-term valuation risks. However, boom markets typically end up being less lucrative periods for venture funds, as summarised by a tweet from Abhay Pandey, general partner at A91 Partners, a growth-stage investor.

“Will failure rates be higher from this cohort? Very likely. But I am sure massive companies will also get built from this cohort, which will be a net positive for the ecosystem,” said Elevation’s Arora.

Failure rates could be higher for a number of reasons – companies raising more money than needed and losing discipline, founders and investors not getting along and market sizes being overestimated, among others.

Although early-stage VCs are investing faster than ever, when their companies look to raise their next round, they suggest that the founders take more time to evaluate a prospective investor, Arora said.

“This is a 7-10 year relationship and getting stuck with the wrong partner can be painful for the company,” he added.

Reference checks

Investors are counting more on founder reference checks. Early-stage VCs contend that the young companies they back have only so much data and numbers to comb through.

While a VC would earlier make one or two cursory calls to check the founder’s background, this has increased to 4-5 in some cases. This helps not only to check the founder’s ethics but also his execution capabilities, experience and ability to spot talent, among other things.

Not all VCs are as worried about momentum, though. While everyone is surprised, some attribute it to a demand-supply mismatch (lots of money chasing relatively fewer founders) and expect things to normalise.

“These crazy booms happen now and then. I’m not too worried. It will cool off in six months,” said a partner at a $100 million early-stage fund, requesting anonymity.
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M. Sriram
first published: Jul 23, 2021 07:46 am