In physics, there is a famous experiment from Quantum Mechanics – Light behaves in a strange way.
Sometimes it acts like a wave – Sometimes it acts like a particle.
And here is the interesting part, It changes its behaviors depending on whether it is being observed/watched.
This idea is often explained using the Double-slit experiment. When no one observes the system, light behaves like a wave. The moment you observe it, behaves like a particle.
In simple words: The act of watching something changes how it behaves.
In the venture capital world, looking closely at early-stage investing, similar things happen with the startups. Understanding this “observer effect” is everything. It is the difference between holding a startup’s good ideas or helping it build a great future…
The Pre-Investment: A Wave of Possibilities
At its earliest stages, a startup operates similarly like that wave of light. It does not have a fixed outcome yet. Instead, it is a fluid bundle of possibilities.
- It could build a very large business (from category creator to market owner)
- It could pivot the business entirely.
- It could take years to find its true product-market fit, or
- It could fail.
At this point, nothing is certain. Founders operate on instinct and early data, navigating an evolving market.
Auxano’s Lens of First Observation
When we evaluate a business, we certainly look at business future potential, viability, and market sustainability but we also look closely at the founder.
We observe their operational habits, their professional environment, and even their personal choices and belongings. These micro behaviour’s show us their true discipline, resilience, and commitment.
Most importantly, we look for an authentic, deep-seated connection between the founder and their product. Is the business just a quick way to make money, or is it a personal mission? This initial look tells us if the founder has the discipline to handle the long journey ahead.
Post-Investment: Active Monitoring as a Catalyst for Value
Watching a company can help it or hurt it. It all depends how it’s being monitored.
At Auxano, our post-investment approach is anchored in constructive observation –
- regular reviews to monitor the company’s progression (through monthly/quarterly business review/ board of director seat/ or a board observer),
- ensure actively delivering strategic value (by connecting with other portfolio companies/ institutional investors)
The goal of our regular touchpoints is not to involve into day-to-day operations, but to act as a sounding board that sharpens execution.
| Observation Intensity | Impact on the Startup |
|---|---|
| Under-Observation | Leaves the company unguided, increasing the risk of strategic drift and operational inefficiencies. |
| Over-Observation | Creates a rigid environment where founders optimize for investors slide decks instead of execution of business plan. |
| Constructive Observation (The Sweet Spot) | Provides a robust framework of governance and capital efficiency while leaving room for the founder’s creative execution. |
Compliance as an Accelerator of Trust
In the context of the Indian VC ecosystem, regulatory frameworks laid down by SEBI are often viewed through the narrow lens of governance. Few of them as following-
- LP’s (Investors) onboarding to portfolio investment and exits should be well documented with rational and requisite periodic disclosure and reporting to SEBI and LPs
- Category I & II AIFs cannot invest more than 25% of their investable funds (net of estimated expenses) into a single company.
- Any uninvested funds must be kept only in safe, liquid assets.
Governance is not an anchor that slows growth (overall ecosystem perspective); it is the foundation that allows value to compound over time.
Similarly, when a startup follows governance and keeps clean records, it builds a strong foundation. This trust makes it easier for the company to get more capital and grow even bigger in the future…
A Perspective for the Ecosystem
For Founders
Raising money is not just about getting cash in your bank account. It means your business will be monitored very closely.
Before seeking capital, the vital question to ask is not just, “How much runway do I need?” but also, “Am I ready for the institutional observation that comes with this partnership?”
For Investors/ VC firm
The questions we ask, the metrics we prioritize, and the governance frameworks we build are never neutral. Two identical startups backed by different funds can produce completely different outcomes simply because their investors maintained different observation styles.
Final Thought
Venture capital is a journey of interaction – It starts with raising capital from LPs, which in turn backs visionary founders to accelerate their growth.
Startups begin as open possibilities. Investment gives them a defined path.
Ultimately, exceptional returns are built not just by deploying capital, but by understanding how carefully, how wisely, and how constructively the journey is.
Author,
Rakesh Rana
