Startups live in economies that can have the luxury

By Pranbihanga Borpuzari

Q: What prompted you to start 500 Startups and what is the idea behind this name?
A: Previously, when I was in the consulting business, I had a website called 500 Hats. When I got into investing, I decided to keep the ‘500’ aspect of the name and call it 500 Startups. We felt we would be making a lot of investments and it has turned out to be true. In my career as an investor, I have started developing an approach and a belief that with a larger sample size, you can have more consistent results even though outcomes maybe small. I believe that you need at least 20 investments to have a predictable positive outcome. We have worked on that a bit more at 500 Startups and decided that we potentially need about 20 Series B or larger investments, 50 Series A investment along with 200 seed and incubation investments to get value. For us, the sample size for a fund should be somewhere between 150-250 investments, which would give us a reasonable shot at 10-20 larger outcomes and 20-50 smaller outcomes. Q: What is your typical ticket size?
A: It is usually in the range of $50,000-$100,000 in the first check and then $100,000-$500,000 in the second and third checks. Q: Since 2010, you have invested in about 460 companies, which translates to 150 investments a year. Do you get a lot of flak for being out of ‘acceptable investing norms’?
A: I am aware we are far outside any norm of investing. This can be a future industry norm, but even that is unlikely. With the exception of a handful of other investors, nobody makes more than 50 investments in a year. We are applying a different philosophy and model to most other funds. There is a lot of risk here-there is nothing proven about what we are doing but we do think this model will work and is working out despite the criticisms. However, doing the same thing in venture capital will surely fail. We believe in doing things differently. We may fail, but at least we are giving ourselves a chance. Q: When did you decide to enter India? What propelled you to make that decision? Was there something unique here that made you think that 500 Startups will work here?
A: I have had an affinity for Asia and particularly India, for a long time now. I had also started a company along with some Indians 20 years ago. I have generally felt very comfortable with Asia and South East Asia because of its demographics and growth. Most of Europe has not seen any growth while Asia is growing very well. I also have a number of friends from India. This makes it natural and easier for me to invest here. India is one of the biggest markets for us primarily because of the advantages: it is English-speaking, has a lot of connections with the US, and is backed by strong talent and cooperation between the two countries. I came here first in 2011, but I feel I have been here for over a decade. Since I came to India, we have made about eight investments in the country. Q: You have invested in about 20 companies in your portfolio which deal with food. Why are you so bullish about this segment?
A: The last time I checked, everyone consumed food and I think it is a good business, which is not going away anytime soon! It is a straightforward revenue model in most cases and a good segment to go after. You do not have many people entering the sector and the sector is not in vogue- like photosharing or messaging. In a lot of the food-related businesses, there are plenty of problems to be solved, plenty of money to be made; and incumbents will not be very responsive to competition but will still be ready for an acquisition. There are a number of categories where the food business can be made more efficient-in delivery, notification, discovery and reduction of overheads, and creating infrastructure. Food is also very culturally transitive and we like to believe that people like to eat food everywhere. Q: What are the key aspects that you take into consideration before investing in a company dealing in food?
A: For a food-based startup, we look at pretty much the same things that we do normally; which is trying to solve a problem and a straightforward basic customer need. We look for a very basic economic model, the one that we understand-which is normally transactional subscription. We also like to see a functional product before we decide to invest and that the team has substantial technical depth or marketing skill set. In the future, we hope to invest in more companies in the areas of food, some of which will be regional-based, and some will be unique to the region. Q: Where is the next level of innovation and growth going to come for modern economies like India and even the US?
A: I think it is clearly the startups which would see innovations and I am optimistic that some of the non-tech global multinationals are acquirers. On the tech side, there are some big players which are innovative like Apple, Google, Amazon and Facebook but the areas which I think are overlooked are where YouTube operates. Video as a platform is going to be the future of monetization and we think it drives a lot of opportunities. Q: Would you say that consumer behavior is changing too fast for businesses to adapt and be sustainable in the long-term? Many experts feel that this a real challenge.
A: I do not know if consumer behavior is changing as much as it is about finding ways to use technology that is different from traditional ones which continue to be used. If we look at how people adopt mobile apps and social tools, existing human behavior has evolved. For companies, technology has changed how they acquire consumers and for consumers, access to information has changed. I do not think human beings are built differently and it is only about the tools used to amplify our social signals. Q: How difficult is it to be an entrepreneur in today’s world? There is a lot of talk on governments not doing enough across the world to foster it.
A: I think it is a First World problem where we do not have the same issues like war, starvation or oppression. However bad we think it is, entrepreneurship is a fortunate condition where startups live in economies where you can have the luxury of creating innovation. At the same time, there are a number of challenges in adopting and adapting to the needs of entrepreneurship, which is very different from what our parents teach us. A lot of people desire to take up a job which they assume is ‘safe’ and will help provide for their family. But for the crazy few who want to be entrepreneurs, they figure out how to deal with challenges. © Entrepreneur India April 2013
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