Startup founders turn picky about onboarding investors

Mumbai: Call it a case of role reversal in the startup arena. Founders, who used to be closely vetted by investors, are now using the same magnifying lens to carry out due diligence on the former. Startup founders have turned extremely cautious about the type of investors they take on board following a string of incidents wherein investors turned against them and have backed off from follow-on rounds.

From reference checks to diligence on the funds, founders want to be sure investors are aligned with their vision and will support them in times of need, half a dozen investors, industry experts and founders told Mint.

The recent instances of investors training their guns on founders, restricting follow-on funding, and ensuring a stronger business model is established have spooked the founders. The trend has picked up pace after the funding winter got pronounced, leaving cracks in the investment ecosystem. “In the mid-late-stage growth market, only the top quality 10-15% of the assets are of interest to investors—these founders have all the choices. Interestingly, even within these, the winning and losing bids have 30% or less margin—so the softer issues are higher in the founder’s consideration set than ever before,” said Kashyap Chanchani, co-founder and managing partner of The Rainmaker Group, an investment bank.

From who the company takes on board to what rights each investor gets, the founders are spending more time on these issues. “Does the investor have a large balance sheet? Does their name help attract more investors or make the IPO easier? Does it change my board dynamic dramatically? How are the peer reference checks adding up? We are seeing these questions being asked by founders more than ever before,” he said.

As capital has become commoditised, the funds that can open doors to global market and have had the experience of running similar companies in other markets are assuming more importance for a founder, experts said.

“With the community having expanded, there are ways a founder can run reference checks on investors to know their approach and what they bring to the table. While most funds can help one with capital, only those with differentiated skills can really add value and open doors,” said Anjana Sasidharan, partner and head-India at L Catterton, a consumer-focused investment firm backed by luxury brand LVMH.

According to industry experts, in early-stage funding, the nature of investors always matters, as well as the ability to invest in subsequent rounds. However, in the growth stage, 24 months back, the quantum of capital and the speed at which a fund can wire the money was the only criteria founders would look at given the product market fit and total addressable market—the most important metrics of a business—were already established. Now, whether the investors are ready to back founders in tough times and through tough decisions also matters.

“Founders look at onboarding investors who are aligned with the founders and the company’s vision. The ability to back business through tough times and decisions is paramount,” said Ankit Agrawal, co-founder and chief executive of InsuranceDekho.

The firm raised its series B funding round of $60 million earlier this month from investors led by MUFG and Beams Fintech fund.

Two years ago, through the funding boom, investors did not question the founders on the growth trajectory and valuations.

However, with liquidity drying up and many companies failing to scale beyond a point, investors have been posing tougher questions.

Not only have investors refused to participate in follow-on rounds, but some have even questioned governance practices at the company and have taken stringent measures to ensure founders toe the line, leaving the divide more pronounced.

“The diligence process, initially intended for investors to gain better insight into the founders, benefits both investors and founders. Building a business is a decade-long journey, and we owe it to the founders to back them with conviction. Through diligence, we reaffirm this commitment. As investors, we also encourage our founders to thoroughly evaluate both the firm and the individuals taking the board seat. The process isn’t just about uncovering flaws but understanding the synergy for effective collaboration.” said Alok Goyal, partner and co-founder of Stellaris Venture Partners, an early-stage venture capital firm.

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Updated: 15 Oct 2023, 10:58 PM IST