When investors put money into a startup, they are essentially buying a portion of that company and the rights to share in its profits. Obviously, such an investment will be backed by a sound thesis, and this results in the success of many a startup. The investor community creates, maintains and updates a carefully researched and data-backed laundry list. This list is dynamic and changing depending on micro and macroeconomic conditions. However, for many VCs, the prerequisite is working with a founding team rather than a founder.
There is sound scientific reasoning behind this. For years, India and the world at large has romanticized solo entrepreneurs, people who come from humble backgrounds and build lasting business empires.
Take, for example, the Warren Buffetts of the world, or closer to home, a Dhirubhai Ambani or a Sunil Mittal. These are examples where “one” leader leads a pack of many to build value. These visionaries built world-class teams responsible to build the business. However, this was before the pure financial investor class, i.e. venture capital firms were exposed to India.
The new startup ecosystem puts the investor in the driver’s seat as much as the founder/founding team. This in no way dilutes the powers of the entrepreneur founders, but makes the investor firm the co-creator of the fast-growing disruptive enterprise. Be it Flipkart, Zomato, PolicyBazaar, Freshworks and even Nykaa, the age of the solo entrepreneur seems to be diminishing. It also creates a certain nuance for the evolution of a business that would make lesser errors.
An idea or a business might look extremely tempting on paper, but it takes multiple skills to execute 10x faster growth, a demand of the startup ecosystem where everything happens at an accelerated pace. There is a demand to grow at 300% to 500% each year, and hence the need for an invested team.
The VC investor sees a founding team as a sounding board for the chief executive officer (CEO) rather than a gang of ‘yes-men/women’—people who are equally driven to succeed as much as the CEO. In such a scenario, every decision goes through a stringent round of vetting from all co-founders.
In a sense, a founding team is multiple leaders (CEOs) all working in tandem—for e.g., the cap table of BigBasket before it was sold for over $2 billion. There were so many owners of BigBasket in terms of shareholding that it is virtually impossible to zero in on one specific owner. Better still, the founding team’s collective equity was less than 10%. This phenomenon is true of upcoming startups as well.
A potent bunch
In simple terms, a bunch of engineering college grads who are friends with a great idea is more potent rather than one individual who is out to “change the world”. For businesses with heavy technology deployment, the chief technology officer (CTO) is on par with the CEO, with the investor having ensured a safe runway for the foreseeable future by accounting for losses. The product development takes precedence over revenue generation. In this scenario, the CTO would lead the technology benchmarks and even report directly to investors, while the CEO takes a backseat.
Other factors like a pandemic, health issues of founders and interpersonal dynamics too are important. If a solo founder falls ill or suffers a major personal crisis, the whole company suffers badly; however, with a founding team, co-founders take over immediately and the business is back on track. This gives the investor a sense of comfort and fortifies belief attracting repeat investments if the business does well. Investors bring in more than just money, they have deep insights from similar investee companies in other geographies, good talent references and real-world data. These insights help the startup evolve.
Compared to this, the cult of Jeff Bezos, Elon Musk or a Vijay Shekhar Sharma also continues to thrive. The romance for the one who dreamt and changed the world is relevant. On a micro level, startup entrepreneurs who started solo are now appointing co-founders to build growth and attract capital. I believe that we are in for some further twists and turns as the startup portrait unravels.
Rahul Gupta is the founder and managing director of Radar Capital.
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