Learning from our Mistakes

We’ve been investing for quite some time now, and we have seen ups and downs like most investors. Early stage is a ‘hits’ game – one free hit compensates for five dot balls – if we were to use T20 speak.

Everyone talks about the free hit sixes, but rarely does anyone talk about first ball ducks! It hurts reputation and credibility in the industry they say. We understand, however, if we do not document our learnings, share it with others for feedback, and try to learn from them – there is no point of being a growth investor. A growth investor is one that not only grows wealth, but also their knowledge base.

Today we will share what has gone wrong for Malpani Ventures in the past, what have we learned from it, and what are the steps we are taking to avoid these mistakes

What has gone wrong for Malpani Ventures?

a) Founders losing focus on their core business

Founders feel their core business (the one we invested in) is not sexy enough for growth trajectories, and hence try to experiment, or pivot. Often this happens when they see peers in their industry going out to raise multi million dollar rounds from large VCs. This is bound to happen. But the solution is not to follow the business model of that company and become a me-too player. Smaller experiments should always be undertaken to understand the pulse of the market. But that is to be done from the cash flows of the core business, for even Jeff Bezos has said that any new product line takes 5-7 years to become meaningful to the overall topline of the business.

What have we learned:

  1. Have fortnightly or monthly meetings to understand the business from the eyes of the founder
  2. Maintain visibility on cash flows -> 24 month runway is vital for any business

b) Founders have very good intent, but the MVP does not show signs of turning into a full fledged product

This is unfortunate, but it happens. There are mavericks in the startup space who can create fantastic products, however the commercial viability of these products may not develop.

What have we learned:

  1. Do thorough due diligence on the commercial viability of products before investing
  2. Invest in companies with some traction
  3. Start with smaller cheques, build up as the company grows

c) Founders are on track to build a good business, but its not sexy enough for VCs

We want to reiterate, we are not in this business to find and fund the next unicorn. Having said that, we understand that most venture companies require larger VC backing to reach to scale beyond a point. In such businesses, if there is no clear roadmap towards breakeven without VC money, no matter how much on track the business is, it may die.

What have we learned:

  1. Bucket companies into VC and non VC destiny companies
  2. For non VC destinies – the founders need to have a plan towards cashflow breakeven in 3-5 years
  3. Back founders who understand this, and if investing, be prepared to follow on till the company reaches breakeven
  4. Be prepared to pull the plug on non-performers
  5. Start with smaller cheques, build up as the company grows

How has our approach changed?

a) Co-invest rather than going alone. Double the backers, longer the runway in case things go wrong

b) Start small, and build up. We signed larger first cheques in the past. Today we start with 50 lacs – 1 cr, and will support companies with follow on funding

c) Engage with founders who want to work with us. Founders need to be comfortable talking to us monthly, sharing financials, cash flows and updates. This is a non negotiable. Else, we will pull the plug

d) Take time with due diligence. We will spend our time to probe on commercial viability and practicality of the business

Have we learned our lessons? Yes

Are there more lessons to learn? Also, yes

We wish to work with founders that are aligned with our thought process. We can not tell a founder how to run their company, but we are clear in our mind what we are trying to achieve.

Do you disagree with our views, or want to provide an alternate perspective? Please feel free to reach out to Dhruv or Siddharth! All feedback is welcome

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