As one toxicologist famously said,
the difference between a lethal poison and a life-saving medicine
‘may be only a matter of dosage’.
The Global Investment scenario had experienced a similar situation between 2020–2022.
- Dry powder (capital for investment) was available in abundance.
- Investors (Angel to VC) were betting on any & every start-up/entrepreneur in the hopes to generate ‘X’ returns overnight.
- Entrepreneurs believed any ‘Me Too’ idea could raise millions of dollars overnight.
Outcome:
- Governance issues started cropping up
- The commitments by entrepreneurs could not be delivered in proximity or in a timely manner
- Start-ups shut shop
- Investors lose money
- Entrepreneurs joined start-ups or VC funds which have raised capital at hefty packages
….. the overdose
What’s Next???
- Investors held back from investing further
- Round sizes became slower
- Bridge rounds, convertible instruments, follow-on from existing investors became the preferred mode
What could have been done differently???
Investors could have patiently sat with the capital and funded companies with optimum capital to fuel growth and not turn it into a forest fire.
Availability of optimum capital would have ensured competitiveness, innovation and willingness to work hard & outperform. While excess capital led to complacency and reduction in throughput.
Founders could have realized that equity is amongst the most expensive source of capital for any good business and thus dilutions/equity raise must be considered with detailed situational analysis. Critical consideration must be given to raise amount, valuation, deployment and expected outcomes.
What must be considered to avoid history repeating itself??
Founders must be patient with what they are building. As the famous saying goes ‘Rome was not built in one day’.
Even if the emperor had all the money required they could have not built it one day. It would have taken its own time and that cash reserve would have starved the other potential domains of growth.
Thus keeping the analogy in mind, founders must view building a venture and raising/deploying capital as a slow process requiring patience & discipline.
Patience to not give up in between and discipline to not get carried away when the resources are available at disposal.
It has been rightly said by a Managing Partner of a leading PE firm from India — “The years which have the easiest fundraising are the worst vintages; the toughest years of fundraising are the best vintages,”.
Investors must focus on milestone based capital deployment. Underperformance must not be rewarded with more capital but outperformance.
Companies that generate alpha must be supported till they continue to generate alpha, thus fueling the spirits of competitiveness, innovation and disruption.
Investors must regularly & closely monitor the performance, reporting and governance of the portfolio companies.
Thus ‘PATIENCE & DISCIPLINE’
- Patience to sit on capital and deploy in tranches/ based on outcome/ at the right opportunity
- Patience to monitor the companies regularly and treat the capital as OM (Own Money) instead of OPM (Other People’s Money)
- Discipline to continue step 1 & 2, day in and out for years and not falling trap to FOMO, Flavors of the season, Party Rounds and such other fads.
At Auxano, we have patiently held back from deploying capital since the second half of 2021. Only 6 new investments were affected in 2.5 years as against investing in more than 5 start-ups a year in the preceding periods.
This discipline of patient investing & diligence has enabled Auxano to steer away from investing in the times of bubbles at unrealistic valuation (FOMO and Party Rounds) and as we observe we are receiving most of the companies at a flat round or down valuation even 2.5 years later.
Investing today in these companies may generate a similar MOIC (Multiple on invested capital) as any other fund (commonly reported matrix) which had invested 2 years back. On hindsight, this decision looks good. However, actions are taken in real time and this is where the processes and the playbook of the firm came into play.
Takeaway:
Thus, whether it’s about business, sports, life or anything one must build a character defined by good virtues including but not limited to ‘patience and discipline’ — framework for informed decision making..
Author:
Karan Gupta
