A shift in investor interactions with startups

Of all these players involved with startups, allow me to focus on the investor community and how this has grown organically over the decade or so that I have been involved here. In late 2006 and early 2007, when I cut my teeth making my first startup investment, we had a loose group of friends and like-minded individuals trying to support some entrepreneurs willing to risk it all by setting up their businesses in new-age India. I reckon there were a handful of us across India at the time.

We would hear of these startups from our own contacts and network, evaluate them in a small group, invest in them if we were convinced about the potential and post that, a few of us would continue to work closely with the entrepreneurs/founding teams. These teams would mostly work out of one of our offices due to the lack of reasonably priced office spaces.  The relationship we built with these teams were pretty strong and they spilled from official to personal in no time and the camaraderie grew by working closely together. We would strategise with them, make business pitches, debate the best systems and processes to be instituted, pitch in for hiring decisions, work on go-to market strategies, accompany them for client meetings, make relevant connections, be happy with them on good days, brood with them on bad ones. We lived with them the life of an entrepreneur though it was one-degree away and nothing can take the laurel of being an entrepreneur away from them.

Somewhere along the way, the fourth estate got involved and focused on the startup ecosystem. This brought some fast-growing startups into the drawing rooms and offices of most Indians. We, Indians, now realised that there was some interesting stuff happening in this part of the business life cycle. Our inclination for equity investing and the proliferation of a vibrant equity culture since the late 80s only helped us consider startups as an illiquid but highly profitable equity investment option.

Some public market equity investors with high-risk appetites focused their energies in this direction to understand what was happening here. The early ones got initiated into the startup investing scene and some of them made their first big returns in a matter of a couple of years.  Nothing succeeds like success. Voilà, we now have a lot of interest in investing in startups and early-stage companies. So much that the pendulum swung the other way around and there was a glut of investments going into unsustainable business ideas under the guise of startups at illogical valuations.

Over the last 18 months, we have seen some semblance of restraint from this herd behaviour and questions have begun to be asked. However, this was overall a virtuous cycle - more investors, more money, more entrepreneurs getting funded, more examples of success, and the cycle repeated.