An Investor’s View On How Early Is Early-Stage Investing

SUMMARY

Any investment decision should not be taken personally or to heart, or as a judgement on your business

What constitutes a great macro varies a lot from investor to investor since their comfort or mandate may lie in certain areas

When there is a lot of liquidity in the ecosystem, like in 2021 and 2022, investors are prone to taking greater risks

Several funds and angels, including ours, proclaim themselves to be early-stage investors. However, I continuously see entrepreneurs flustered when they talk to investors – they are not able to understand why they are being singled out as being too early! Let me attempt to explain a bit.

Firstly, an acknowledgement of a truth, before getting into the specifics of early-hood. The truth is that early-stage investments have a component of artistry to them, it’s hard to make a pure formula. 

Beauty does lie in the eyes of the beholder. You will find certain opportunities too early for some investors and just right for others. Comfort/familiarity with the space, founding team, past experiences, current investment portfolio, current availability of capital vs. current opportunity pipeline – they all play a role in the investors’ response to an opportunity. 

Understanding Why Investors Say No To Investment

Any investment decision should not be taken personally or to heart, or as a judgement on your business. It’s simply a view at that point of that investor, purely from their investment priorities perspective. If you are selling Chinese food when the other person is craving Italian, it’s hard to sell at that point.

Getting into specifics, let me take some examples from our fund. If I were to put it in a table – defining Macro as – comfort/belief in Space that includes Size, Timing, Competition, Environment and Team, and Traction as early execution success, this is how I would end up:

Unfavourable Macro But Great Traction

Favourable Macro And Great Traction

Investigate more, and sometimes wait.

For example, Lots of influencer marketing companies. Seeing good traction, but space tends to be agency dominated and TAM is limited

Invest.

For example, EximPe from our portfolio – large cross-border payment market, increase in cross-border activity, great traction)

Unfavourable Macro And In Concept Stage

Favourable Macro But In Concept Stage

Don’t invest

For example, edtech sector in current times

May Invest.

For example, there is general interest in AI, but traction is early. We invested early in tryPromptly, an enterprise AI adoption platform.

For example, we are a predominantly technology fund, so while Direct to Consumer (D2C) brands have seen a good run, and funds were taking a positive view on that, it was not our focus area. Similarly, while B2B commerce companies did well, these tended to be working capital-heavy and better suited to large multi-stage funds vs smaller funds like us.

Other Factors Influencing Investment Decision

Some other factors that influence how early an investor invests are:

Founder profile and familiarity

If an investor “knows” a certain founder from a past background, they may come in much earlier. For example, if I have invested in a company 10 years back and either the founders or employees of that company whom I know and come highly recommended, will tempt me to invest earlier than usual. 

Similarly, if it’s a repeat founder,  especially if successful, it will get a lot of attention earlier on. They just have a unique experience set that de-risks their next companies. 

For example, we invested in Trading Leagues, Raghu was earlier co-founder of Upstox. This was not the only reason we invested, but it had a bearing on our decision. When we invested early in Indiagold, we knew Deepak and Nitin had spent time in the fintech industry at Paytm and their reputation preceded them.

Macro Flow Of Capital

When there is a lot of liquidity in the ecosystem, like in 2021 and 2022, investors are prone to taking greater risks. They can invest earlier in the expectation that next-round investors will also lower the bar for investment. 

We saw several “pre-seed” type opportunities get funded in these years. On the other hand, when the downstream capital is tight, investors become more conservative as well and wait longer.

Portfolio Construction Reasons

Specially funds usually try to invest in a certain portfolio to re-risk themselves. A fund’s investment cycle is usually approximately 3 years and a normal seed fund would make, let’s say, 20-30 investments in this period. 

As they go about making these investments, they want to take some higher-risk bets and lower-risk bets. Depending on the time you pitch to them and where they are in their investment cycle, they may look more favourably at certain sectors, geographies or stages. This is hard for these funds to continuously articulate or for entrepreneurs to preempt in any meaningful way.

For an early-stage entrepreneur, unfortunately, some of this information is not fully available or intuitive. Hence, they may have to pitch to several investors. I feel one way to study recent investment activity from the investor is to get a sense of what they are investing into. 

Good investors are also more upfront about what they can or can’t do so usually you can get to a decision fast. Some investors like to track for a little bit and may not be able to give you an immediate answer. Hopefully, some of the above information can help you ask the right questions and gauge the interest a little more tangibly.

Having access to entrepreneur mentors who have done this before is another way to get better information and read about the process. While there are a lot more investor groups in India these days, raising an early-stage investment can still be challenging.

Sourced from Inc42‍