Startup Street: Is Fattening The Goose A Good Idea?
Here’s what went on this week on Startup Street.
This week on Startup Street, a recent CB Insights report busts myths about the correlation between funding and a startup’s success. South Korean technology giant Samsung’s venture capital arm just made its first investments in the country. And Kerala to launch ‘Startup to Scale up’ initiative.
More Funds = Success?
Raising more funds has increasingly become synonymous with startup success, particularly in the Silicon Valley where the venture capital ecosystem has matured. But does it hold true? Perhaps not.
A recent report by CB Insights found that after listing, the most highly funded startups tend to underperform peers that raised less. “In fact, the companies that raised the most almost uniformly struggled to create long-term growth,” the report said.
Mega rounds of funding, those of over $100 million, in the U.S. nearly tripled between 2016 and 2018. CB Insights analysed more than 500 venture capital-backed U.S. startups that have seen $100 million-plus exits since 2013.
The study compared the startups that raised less than $100 million from venture capitalists with the ones which mopped up more than $100 milion. Based on their valuation and IPO performance in the short and long run, CB Insights found:
Overall, low-raisers did better with a median increase in post-IPO value of 263 percent—compared to a 64 percent increase for high-raisers.
Not just that. Another assumption is that well-funded startups tend to offer better exit values to investors. Still, of the 50 biggest exits in the U.S. since 2012, a third were from the startups that raised less than $100 million. The list includes WhatsApp, which had raised only $60 million before its $22-billion buyout by Facebook.
Since 2013, the return ratio for investors has also declined. “Despite writing sizable checks, these latecomers have not always been able to reap the huge returns of years past,” CB Insights said. “While valuations are bigger than ever, multiples are not, because the biggest exits today are creating less value with the money.”
On exits of over $1 billion, investors in 2018 made just 6.9 times their investment compared with 16.1 times in 2013—a 57 percent drop in six years. “That’s the difference between a company that raised $500M selling for $8 billion and the same company selling for just $3.45 billion.”
Startups are highly efficient on this metric if they can take in little money on their way to a big exit — such as WhatsApp or an Atlassian. Less-efficient companies, like Snapchat or Cloudera, raise large amounts of money but can’t produce a proportionate return.CB Insights
The problem, CB Insights said, is that while investors are raining money, startups are showing “signs of being unable to turn that capital into greater value—with the worst effects at the top end of the spectrum”.
The report becomes relevant in the Indian context. In 2018, both private equity and venture capital investments and exits were at a record high. That growth too has been driven primarily by large deals, according to EY India. With inflows expected to nearly double over the next five years, investors may gain from taking note of CB Insights’ finding.
“The Silicon Valley love affair with mega-rounds needs reexamination,” CB Insights said. “As much capital as possible and as quickly as possible is not only a bad formula for a great exit — it’s downright dangerous when viewed through the prism of long-term success in the public markets.”
Samsung’s VC Arm Makes First Investment In Four Indian Startups
Samsung's venture capital arm has made its first set of investments in the country by pumping around Rs 60 crore into four Indian startups.
Samsung Ventire Investment Corporation chose a system apps company OSLabs (Indus OS), speech technology venture Gnani.ai, IoT solutions provider Silvan Innovation Labs and an early-stage computer vision startup, according to a statement. All four are meant to add value to Samsung’s efforts in those fields.
The chaebol has invested in a number of startups globally and has over $2.2 billion in assets under management. It now hopes to invest in 100 Indian ventures over the next three to five years, it said.
Aloknath De, corporate vice president and chief technology officer at Samsung R&D Institute in Bengaluru, told PTI that SVIC is looking to invest in early and growth-stage startups that are engaged in technology areas or work on services like healthcare or vernacular content.
“We feel the time is right for investing in India as deep-tech is now growing fast and the whole ecosystem is also maturing,” he said. “We can help startups in terms of UX (user experience) support, tech validation and go-to-market.”
As for the four startups it backed, according to De, their integration with the smartphone giant has begun and the applications are now available on Samsung’s Galaxy Store.
Kerala To Launch ‘Startup To Scale Up’ Programme This Week
The Kerala Startup Mission’s ‘Startup to Scale up’ programme is set to commence on July 18 in Kozhikode, followed by training sessions at the Integrated Startup Complex at Kochi on July 19 and at Technopark, Thiruvananthapuram on July 20.
The programme is meant for startups which have completed their prototype stage and can now be trained on how to scale up, select teams, mobilise resources and manage finances.
It will be led by tech entrepreneur and mentor Avelo Roy, a startup adviser to the prime minister of Nepal. Roy, managing director at Kolkata Ventures, is leading a programme for the first time in Kerala.