No Method To The Madness - As a VC aspirant the first thing you need to understand is “the math behind investing and also understand the fact that the math doesn’t apply all the time,'' says Pai. Most of the time there will be companies who don’t return even 1x of what you invest. But then there will also be companies that provide 7x of what you invest. There is no “hit formula”. What worked with one company may not work with others.
The Power Law: The Power Law simply states that VCs cannot reliably pick winners. They can, however, construct portfolios that consistently generate great returns. In order to be victorious in the “Power Law” environment, VC needs to be comfortable with making losses while aiming for higher gains.
Investor’s Secret: If you ask investors, which companies do well or why such companies do well then you will get varied answers. Some will say, it’s just the idea or timing that determines success. Other VCs like Pranav Pai will disagree with the notion. For them, the following factors need to come together -
- Right team
- Timing the market entry correctly
- An idea to be an outlier and be relevant even after 5+ years
In short, there is no real rule to the above-mentioned list. No one knows the secret. Looking for a great startup to invest can be equally hard (or easy) as finding a friend, girlfriend/boyfriend, marriage, or even a neighbour. At least that is what Pai thinks.
Various trends in Venture Capital
Here is a list of few trends that are being observed in the VC space -
- Spike in investment: 2018 was a record year for all assumptions of venture capital anyone had over the last 30 years. Just in 2018, 250 billion dollars went into venture capital globally. The second quarter of 2018, Jewel (e-cigarette) raised 8 billion dollars in one round. It is now valued at 40 billion and that is why quarter two spiked along with a bunch of other companies in all that one quarter. And that one quarter has beaten most annual VC funding even as far back as 2010, 2011 and 2012.
- Increasing trend of round sizes: Take the case of BYJU. In the news, you must have seen them raising 100 million, 300 million and 500 million in the span of 12 to 14 months as more money is getting funnelled into later-stage funding - series C, D and E. The best companies are bubbled out of the early and mid-stage and showing the promise of being the next Facebook, next UBER, next Jewel. “A lot of money in the world is waiting on the sidelines to bet on what's going to a bigger part of our future,'' says Pai.
- A unicorn phenomenon - A unicorn company is basically unlisted or private venture-backed “tech” company, valued over 1 billion dollars. Today in the world, as of last month there are 360 unicorns in the world. 33 of them are in India. India has the 3rd highest concentration of Unicorn after the US and China. USA has crossed around 140 and China is going to cross over 100. “Never in our history or economic history has so many companies, so valuable, been private for so long and are comfortable to spend private for longer,'' says Pranav.
- Asia the emerging leaders: Venture Capitalist have observed that India or Asia as a whole is winning the VC game and Europe is declining. America (dominated by the US) gets the majority of VC attention from all over the world. But increasingly money is funnelled out of Europe and moving into Asia. Pranav says, “This is a good sign. More people are realising that the future is Aisa and not in Europe. However, the US will still be the leader for the next 10 to 15 years.”
About Pranav Pai’s 3One4
3One4 is a venture capital firm. We operate at the early age of the investment spectrum. Over the last four years, they have managed to raise over 800 Crs (110 million USD) across funds. One of the Indian companies that they invested in is FilterCopy. They invest in many areas including - agritech, fintech, home automation, dataspace and enterprise automation. They are always on the lookout for interesting opportunities and interesting people to work with.
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