Our primary thesis at Malpani Ventures is to back early stage founders who want to build business frugally (read – in the most capital efficient manner). In fact, we actively encourage our portfolio and potential investee companies to think about building lasting businesses which add value and don’t require to raise beyond 2 -3 rounds. In the era of new unicorns galloping out of VC stables almost every day, this prima facie appears to be self-limiting and contrarian. But is it really?
Hello Valley of Death!
As per the India Venture Capital Report – 2021 by Bain & Co., India had about 1 lac start-ups of which 10,200 have been funded. More significantly only 30% of the companies which were seed-funded from the year 2000 onwards have managed to raise subsequent capital (Series A or beyond) while only 220 companies have managed to raise a Series C round (~USD 20 Mn or beyond). This implies that VCs and late stage investors only take a shine to 2% of funded start-ups ever. The above numbers essentially necessitate that founders plan to become self-sufficient or at least extend their runway to its maximum.
Founders, who want to be in charge of their own destiny, will not chase the ‘Burn to gain top-line & Funds to burn more’ cycle.
What would you choose? A galloping horse or a mythical unicorn?
It is important to note that this thesis does not preclude companies from chasing growth (We wouldn’t be in the business of investing if it did). Rather it urges founders to maintain a lead shank on their galloping ponies. Too often, companies chase the Series A round before having their unit economics in place – this is often disastrous in the long term with founder having to consistently raise funds.
In our experience, the best start-ups from our portfolio actually had periods of limited growth before experiencing a rapid spurt in their toplines after having identified the most efficient business model. Note that there are certain exceptions to this line of thinking – companies in certain sectors such as EV, deep-tech, etc. need to raise several rounds to achieve a scale required to generate a positive contribution margin.
However, it can be dangerous to classify most start-ups in this bucket. While execution speed for early stage start-ups is crucial, raising money to scale faster usually betrays a lack of a strong moat developed. Founders who achieve positive margins with the right business model fit and then press the accelerator to derive the most from operating leverage are best placed to succeed – This is the essence of frugal innovation.
Frugal innovation also lends itself to founders making money by holding a significant stake in case of liquidity event in the future. Building frugally requires a gestation period. We at Malpani Ventures offer patient capital with a focus on building sustainable value rather than chasing the next VC who can provide us an exit. We wish to work with passionate founders across all sectors who align intrinsically with this vision. Are you ready to build frugally with us? Then reach out to Dhruv at email@example.com with your pitch.