Sunil K Goyal, founder and CEO of early-stage venture fund YourNest, is betting big on Internet of Things (IoT) and enterprise solutions with his second $45-million fund. Goyal believes the frenzied $100-million funding rounds that consumer-centric startups saw in 2015 are history, but "enterprise will be big in 2017", clocking bigger rounds of $40-$50 million.
In an interview with News Corp VCCircle, Goyal talks about his second fund, current portfolio performance, exit pressures and temptations as an early-stage investor. Edited excerpts:
YourNest recently announced its second fund worth $45 million (Rs 300 crore). Can you elaborate on your investment strategy?
We are a specialist Pre-Series A, early-stage VC in tech startups. We come after customer validation, which means the concept stage is over and somebody has accelerated to the next stage on who to sell, how to sell and has identified the target customer base.First, our Fund II will focus more on the IoT space. We believe this is going to be the biggest revolution over the next 3-5 years.
We invested in two IoT startups, from Fund I and II, respectively, and we will announce their names soon.
Second, we will continue to focus on automation of knowledge work, either using deep learning, machine learning or blockchains and digital payments.
Third, we will continue to be a serious investor in the enterprise space. We have already invested in three companies from the first fund, and we will invest more and more in enterprise software solutions/products.
Last, the internet–mobile or the app play–is going to be another vertical.
Within this, it’s always going to be about the team. In early-stage pre-Series A, entrepreneurs need lots of hand-holding on every front–from business development, business strategy and pricing to team-building, fund-raising and even compliance and business structure. We are distinct from other funds here as we have four full-time general partners: Sunil Goyal, Sanjay Pande, Girish Shivani and Vivek Mansingh. This kind of experienced team, which hand-holds and co-creates these startups, is tough to find.
How will investments under Fund II differ from those under Fund I?
They won’t. Just that earlier, the focus was more on enterprise software product companies. Now, it’s going to be IoT, which is where the new wave is going to be.
In 2017, we will invest in 7-8 startups, of which one is already done and others are in the shortlist. We could co-invest, or even go solo.
There were 144 investors in the first fund while in Fund II we have close to 60 investors. All four partners have put in a total of Rs 5 crore in Fund II.
Have you fully deployed your first fund?
It’s fully deployed. We have some money left for follow-on rounds, around 20% of the total corpus of Rs 90 crore. We might also do some follow-on rounds from our second fund, if someone else is leading. There are 5-6 startups–Aahaa Stores, SeeDoc, Fashalot, SmartQ, among others–where YourNest will soon make follow-on rounds. Kalaari has already led an investment in Rubique, so there will be some follow-on rounds there as well sooner or later.
How is your current portfolio performing?
It’s doing great. Most of our investments are at a revenue run rate of Rs 1-2 crore per month. For pre-Series A guys, it’s a pretty healthy sign.
Are you looking to make any exits?
This is the time to build businesses, than bother about exit pressures. I personally made three profitable exits in 2015, including ZipDial and Jigsee. ZipDial made 10x returns when Twitter bought it while Jigsee, now VuClip, was sold to Hong Kong-based PCCW Media.
Today, M&As may not offer attractive returns if you want to exit, so it’s the time to build. We have made investments in 16 companies from the first fund. With the average holding age of these investments merely 21 months, they are still young…so we are easily going to be with them for another 12 months.
What are your learnings from the first fund?
Multiple. First, in the consumer business when an early-stage investor puts in money, he’s actually betting on somebody else believing in his story. We are not in the business of betting, so it is better to focus on enterprise solutions as these are sustainable businesses that offer low customer acquisition costs. The biggest risk with an early-stage investment in the B2C space is that someone is simultaneously making a big investment in a competitor. That doesn’t normally happen in the B2B space.
Second, early stage is about co-creating, investing time with entrepreneurs, and hand-holding. Therefore, we make only a few investments every year. We are four full-time partners and we invest in 1-2 startups per partner per year so that we have enough time to be able to hand-hold them. Hence, our learning is to build a concentrated portfolio that we can co-create.
Third, our duty towards our investors is to build a portfolio that’s differentiated from other angel and VC funds. None of our companies is a marketplace/market aggregator, and we don’t believe in investing in those spaces. When you build a differentiated portfolio, studies have shown that over a period of time returns are much higher.
Fourth, stay focused on what you do. Sometimes we get excited by meeting entrepreneurs and want to invest in the incubation stage. Our learnings say one should stay away from these temptations and concept-stage investments. In our first fund, we had several debates on ‘this is a great guy and let’s invest’, but in hindsight we wasted time. Since you are a customer validation company, come in after customer validation. Stay focused on your core areas. Of the 16 companies we invested in, we were the lead investor in 14.
Fifth, be a patient investor. Never have fear of missing out and don’t invest in flavour-of-the-month opportunities. Otherwise, luck starts playing its role and the team and strategy take a back seat.
Sixth, have enough money for follow-on rounds, at least 2x amount in the kitty. It helps when companies pivot, get re-engineered and build teams.
2016 was all about funding crunch, shutdowns and pivots. What, according to you, will 2017 be like? Was there actually a funding crunch in 2016?
2017 will be all about enterprise software and new IoT solutions, and people will soon talk about breakeven and profitability in the space.
The good part about 2016 was that funding was consistently happening, but it was happening at the pace seen in 2014 and not 2015. For fundamentally strong ideas and entrepreneurs, funding was always there. In the last two-three months, it has picked up a little more and should accelerate in coming months. As it picks up, we will see some Series A (funding) happening, and also some Series B.
2017, however, won’t see the crazy rounds of $100 million that 2015 saw on the consumer side of the business. The enterprise side will, however, see bigger rounds of $40-$50 million. And, by 2018, we might see even bigger rounds–by that time the startups will be of the size and scale that can absorb that kind of cash.
Lately, we have seen investor-driven consolidation and M&As. Does that makes sense?
Very difficult to say this as it depends on everything from the company and the founders to their like-mindedness. M&As are tough, and making consolidation work is not easy. It’s the meeting of minds between the founders that is more important than what investors have to say. It’s always about the team getting aligned to that common objective. If that happens, M&As will excel.
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