Unveiling the World of Venture Capital
Funding Strategies, Growth Stages, and New Opportunities
Hello, I am Saurabh Tandon and welcome to the free weekly edition of More than Buzzwords.
Today’s newsletter is relevant for founders of early-stage startups, entrepreneurs, investors, and startup enthusiasts. Essentially, anyone who is interested in understanding the nuances of funding, the VC landscape, and the latest trends in the startup world would find this newsletter valuable.
Important topics that we will be discussing in this newsletter are:
Different stages of funding and who invests at each stage
The financial metrics every VC looks at and KPIs for startups
How AI is revolutionising startups and VC investment
The future of venture capital: what to expect in 2025
Venture Capital Ecosystem in India
How to engage VCs effectively
Let’s roll!
#1. Understanding the VC Landscape: Types of Investors and Funding Stages
Venture capital fuels founder’s ideas to an actual business. From the earliest stages of product development to the eventual IPO (Initial Public Offering), each stage of funding has its own distinct characteristics.
I have tried to keep it simple and by understanding the various stages of funding and the different types of investors, entrepreneurs can navigate the complex landscape of venture capital and secure the funding they need to succeed.
A. Investor Profiles: Who Are They and What Do They Look For?
Angel Investors: These are typically high-net-worth individuals who invest their own money in early-stage startups. They often bring valuable industry experience and guidance to the table.
For example, Kunal Shah is a well-recognised Indian Angel investor, having done an early-stage investment in Dunzo & razorpay. Nitin Kamath, Anupam Mittal, Sachin Bansal, Rajan Anandan are other notable names
Venture Capitalists: These are professionals who manage institutional capital. Instead of early-stage startups, they mostly focus on high-growth potential startups and aim for significant returns on their investments. The funds from VCs usually range from 100 crores to 50,000 crores
Private Equity: Private Equity investors are individual or institutional investors who pool funds to buy significant stakes in later-stage startups and established businesses.
They fund these companies with the aim of enhancing their value before eventually exiting through a sale or public offering. The investment size in PE deals often ranges from ₹50 crores to ₹50,000 crores or more, depending on the company and deal structure.
One notable private equity firm in India is Everstone Group, known for its investments in Burger King India, Sula Vineyards, and IndoSpace.
B. The Funding Journey: From Seed to IPO
The lifecycle of a company is often defined by its funding stages, each of which represents a milestone in its growth and development. Here are the key stages:
I. Pre-Seed Stage - The idea Stage
Funding Source - Usually funded by the founders themselves, family, friends, or angel investors.
Example– Zoho started as a small startup with limited funding in the 2000s from the founders before growing into a major SaaS player.
This stage is all about turning an idea into a business concept, conducting market research, building a MVP, and setting up the company.
II. Seed Stage- First official round of funding to develop the product further
Funding Source- Angel investors, seed funds, and early-stage venture capitalists.
Example- Razorpay, an early entrant into India’s digital payment space, raised seed funding from investors like Y Combinator and Sequoia India.
Seed funding rounds usually range between ₹1 crore to ₹10 crore. In this stage the focus is on validating product-market fit, acquiring initial customers, and building a core team.
III. Series A- scaling the business
Funding Source- Venture capital firms.
Example- Byju's raised $25 million in Series A funding from Sequoia Capital and the Chan Zuckerberg Initiative. In India, Series A rounds typically range between ₹10 crore to ₹100 crore.
At this stage, the focus is on expanding the product offering, growing the customer base, and optimizing business processes.
IV. Series B- companies that are growing rapidly and need funds to expand operations
Funding Source- Larger VC firms and late-stage investors.
Example- Swiggy raised $100 million from Naspers and other investors during a funding round in 2018 to expand its food delivery business and enter new markets.
Series B rounds in India are generally between ₹100 crore to ₹500 crore. This stage is crucial for scaling operations and exploring new services like grocery delivery in case of Swiggy.
V. Series C and Beyond- Growth and expansion funding
Funding Source- VCs, private equity firms, and strategic investors.
Example- Ola raised $1 billion from investors like SoftBank to compete with Uber in India and expand to other regions. Series C and later funding helped Ola diversify into areas like electric vehicles and financial services.
These rounds typically exceed ₹500 crore mark. The main focus in this stage is to enter new markets, acquire competitors, or prepare for an IPO.
VI. Initial Public Offering (IPO)- Offers shares to the public
Funding Source- Public markets.
Example- Zomato became a publicly traded company after an IPO in India, raising around ₹9,375 crore. In FY21, Zomato had an annual revenue of ₹4,180 crore. The focus in this stage is to raise significant capital for growth and provide liquidity for investors.
Have you ever thought about what do investors look at in the pre seed stage, given the high chances of risk?
This instantly made me think about how the Indian edtech sector (I have worked in a music ed-tech company) , once a darling of venture capital, has seen a significant shift in investment patterns.
Companies like BYJU’S, which once led the industry, have faced challenges such as layoffs, declining valuations, and mounting losses.
This shift in ed-tech investments highlights how market dynamics and behavioral changes influence investor decisions at all stages, including the pre-seed stage.
Coming back to what investors look for in the pre-seed stage,
They assess the founders' background and experience: They analyse if the founder has an earned insight, and whether he or she can lead and manage a team well.
They evaluate the product-market fit: Investors assess whether the product or service addresses a real market need and has the potential to scale.
They rely on intuition and gut feeling: In the pre-seed stage, investors often rely on their intuition and experience to assess the potential of a startup.
#2. Innovative Paths in Venture Capital: The Rise of Search Funds
There's another interesting model in the world of funding today—Search funds. In this unique model, investors back individuals or teams in their quest to acquire and operate profitable, established businesses.
This model bridges the worlds of entrepreneurship and private equity, creating unique opportunities for both searchers and investors. Could this be the next big thing in funding?
In this model, the searcher raises a small amount of capital—sufficient to support themselves for the first 2-3 years—while they search for a company to acquire.
The target company is typically founder-owned, generates positive cash flow, and exhibits slower but consistent growth. This approach follows a private equity model and gives investors the option to decide whether they want to invest in the company the searcher identifies.
Search funds often involve venture capital-like investment structures, where individual investors or VC firms provide capital to support entrepreneurial endeavors.
Search funding has gained traction among aspiring entrepreneurs, especially MBA graduates, and is becoming an increasingly recognized funding model in business circles.
So, does this model excite you? Do you envision yourself exploring a search fund opportunity in the future? Share your thoughts in the comments below!
#3. Venture Capital Funding: What Drives Investor Decisions?
A. What makes a company attractive to VCs?
Venture capitalists (VCs) evaluate hundreds of companies but ultimately invest in only a handful. So, how do you position your company to be one of the few that secures their funding? Following are some Key Performance Indicators (KPIs) for Startups:
I. Product-Market Fit
Before investing, VCs want to ensure your product has achieved market fit. One key indicator is the growth of your Annual Recurring Revenue (ARR).
Second, They often look for a monthly ARR growth rate of 10-15% or more, especially for early-stage SaaS companies.
Third, Demonstrating a strong and consistent growth curve reassures investors that your product is resonating with its target audience.
II. Sales Efficiency
VCs also prioritize sales efficiency. This means achieving a balance between what you spend on sales and marketing and the revenue you generate. A metric they commonly evaluate is the revenue added relative to sales and marketing expenses in the last quarter.
Companies that maintain efficiency without overspending while continuing to show strong growth trajectories are particularly attractive to investors. Striking this balance demonstrates both operational discipline and potential for scalability.
A very popular metric that VCs use for measuring sales efficiency of SaaS companies is the CAC (Customer Acquisition Cost) payback period. It demonstrates the amount of time it takes for a company to recover the cost it paid to acquire a customer.
III. Gross Margins
Another key metric VCs focus on is gross margins. For SaaS companies, maintaining gross margins in line with industry benchmarks is vital. This signals that your business model is sustainable and has room to generate profits as it scales.
B. The Founder Factor
Investors are drawn to founders who excel at sales — those who possess a magnetic charm about their product and can effectively communicate its value.
I recently had a conversation with a Venture Capitalist and asked him what he looks for in a founder before deciding to invest. He said,
"If a founder has a clear plan and understands the various 'unlocks' needed to execute it, that founder has a high chance of making me break the bank. If they can logically connect the dots from the starting point to the end goal, it’s both impressive and inspiring."
He emphasized that founders need to be tenacious, resilient, and fully committed to executing their plan with clarity and purpose. These qualities, he explained, are what make investors confident about betting on a founder.
Now, how do VCs measure their success? Let's dive in.
C. Metrics of Success for VCs: How to Measure Returns
VCs measure success through various metrics. Key metrics include IRR (Internal Rate of Return), which measures the annualized rate of return on an investment, and MOIC (Multiple on Invested Capital), which calculates the total return on an investment relative to the initial capital.
For context, an IRR of 10% implies your money is growing by 10% annually, compounding over a period—a benchmark often matched by long-term S&P 500 investors.
Most firms target somewhere between 3 to 5 x overall MOIC returns of the funds, whereas most successful funds usually generate 9 to 10 x returns.
Unlike the Internal Rate of Return (IRR), MOIC does not take the time value of money into account. This makes it easier to calculate and communicate, although it provides less nuanced information about the timing of returns.
Thus, VCs usually talk more about IRR than MOIC.
VCs often benchmark their performance against indices like the S&P 500 or local benchmarks like the Nifty 50. Other metrics, such as hit rate, loss ratio, TVPI (Total Value to Paid-In Capital), and DPI (Distributions to Paid-In Capital), provide a comprehensive view of a fund's performance.
#4. Venture Capital in India: A Booming Ecosystem
In recent times, VCs have put in a significant amount of money in the country, which has not only substantially improved the economy but also introduced world-class products that were previously unavailable.
Some of the top Indian venture capital firms include Accel, Peak XV, Lightspeed, Bloom, Elevation, and Nexus. For instance, Accel has funded startups like Flipkart, which sold a majority stake to Walmart for $16 billion in 2018, becoming one of the largest exits in Indian startup history.
Similarly, Lightspeed was an early investor in OYO, which has grown to become one of the largest hospitality chains in the world, operating in over 80 countries. These firms have been instrumental in shaping India's startup ecosystem by supporting companies across diverse sectors.
But, the question is, where do these VCs get their money from? So, VCs get the money from LPs (Limited Partners). LPs invest their capital in venture capital firms but have limited roles in managing the money.
These LPs invest with the expectation of making a profit when the fund backs successful startups or businesses. Common types of LPs include endowments, family offices, wealthy individuals, and institutional investors.
Their liability is limited to the amount they invest. If the fund loses money, they only lose their investment and aren’t responsible for any debts or obligations of the fund.
#5. AI and Venture Capital: The Rise of ChatGPT and Beyond
ChatGPT is a powerful enabler, making work easier and more efficient. Today, AI significantly reduces costs by minimizing the need for large development teams. However, AI cannot entirely replace human input; human interaction remains essential.
To strike the right balance, I personally prioritize hiring developers who can take on multiple roles while leveraging AI to optimize their work.
For instance, hiring developers who can also act as project managers or product architects ensures a human touch complements the 80% of tasks handled by AI.
By integrating AI to accelerate workflows and fill gaps, startups can drastically lower the cost of building a product from scratch.
For example, platforms like Shopify enable entrepreneurs to create e-commerce websites with minimal capital, a stark contrast to the high costs years ago before AI tools were available.
AI-assisted coding, meanwhile, allows developers to focus on complex, time-intensive problems requiring human judgment and emotional intelligence.
Therefore, Venture capital is actively funding AI startups, particularly those leveraging generative AI like ChatGPT. These technologies are revolutionizing operations, reducing costs, and enabling the development of innovative products.
This makes AI-related companies highly attractive to investors.
A. Why VCs Are Investing in AI Startups
I. High Scalability and ROI Potential:
Generative AI products, such as ChatGPT, scale quickly with minimal human intervention, offering cost efficiency and high profitability for investors.
II. Cross-Industry Applications:
AI is transforming sectors like healthcare (e.g., diagnostics), finance (e.g., fraud detection), and retail (e.g., personalised recommendations), creating expansive market opportunities.
III. First-Mover Advantage:
VCs are eager to invest early in AI startups, recognising the potential for significant returns if these companies secure market dominance.
Some recent examples of investors going big on AI are:
Pi Ventures: This Bengaluru-based VC firm focuses on AI and machine learning startups. Its portfolio includes companies like Niramai, which uses AI for early-stage breast cancer detection, and Locus, a logistics automation platform.
Accel India: Accel launched the AI-focused pre-seed program Accel Atoms 4.0 to support early-stage AI startups, spanning initiatives from small language models to large-scale AI systems.
In Q3 2024, despite a slight decline in overall startup funding, major VCs continued to invest heavily in promising AI startups, underscoring the sector's transformative potential.
So, what do you think now? Is ChatGPT a beginning or an end?
#6. 2025 Predictions: Navigating the VC Landscape in Uncertain Times
It might be a tough year, especially in the first half. Trends suggest that many companies will fail, get acquired, or experience other negative outcomes. This is partly because investors have likely reached their limit and are now reassessing their portfolios, which will also impact LPs.
As a result, there's a high chance that some companies will struggle to find investors willing to fund them.
Companies will face difficult decisions: whether to focus on growth or find a buyer. While many companies can become profitable by sacrificing growth, the question remains—are they willing to take that step?
Sacrificing growth also means sacrificing future potential. Founders will need to strike a delicate balance.
If they make strategic decisions that prioritize both growth and profitability, they could be in a stronger position for the second half of the year, when the ecosystem might begin to recover.
As overvalued companies are revalued, we could see the capital that has been on the sidelines start to flow back into the market.
With a strong foundation of early-stage startups in place, mid- and late-stage investments are likely to increase. Indian conglomerates and global investors are expected to provide the necessary capital to scale high-potential projects, particularly in sectors like AI, fintech, and health tech.
Emergence of New Sectors:
Edge computing, AI in 3D modeling, and blockchain solutions are expected to draw significant VC attention as these technologies become more integrated into both consumer and business applications.
#7. Maximizing Your Time with VCs: What Founders Should Know
I attended a seminar recently where one of the founders of a scaling company shared an incident that left him deeply frustrated with a VC. His company was doing good in terms of sales, but he was unsure of how to move forward.
He knew about this VC who gives commendable advice to business owners. So, the founder decided to approach the VC and seek his advice on some operation and sales strategies. He took out meaningful time from his busy day and scheduled an hour-long meeting with the VC.
However, just 15 minutes into the meeting, the VC handed him a goody bag, politely thanked him, and showed him the door. This left the founder infuriated, as he still had several important questions he wanted to ask but never got the chance.
What do you think about this situation? Was the VC’s abrupt behavior justified, or did the founder set unrealistic expectations for the meeting?
The reality is that VCs are incredibly time-constrained. They don’t have the bandwidth for long-winded pitches or hypothetical stories. Instead, they value concise, actionable discussions.
Moreover, if you want to build a meaningful relationship with a VC, focus on offering value. Ask, “How can I help you? I have these assets that you might leverage—what can we do together to solve your problems?” rather than “Can you help me with this?”
Be strategic about what you seek advice on. VCs excel in fundraising advice, pattern recognition, and networking but are less likely to provide operational or sales-related guidance. If you approach them for advice outside their expertise, you’re more likely to be dismissed, just like the founder we previously talked about.
Takeaway: Founders should approach VCs with a clear understanding of their limited time and expertise, focusing on offering mutual value rather than solely seeking help. Be prepared for unfiltered feedback and understand that VCs may not always align with your expectations. Not every business or idea will resonate with them, especially if it doesn’t fit their portfolio strategy.
#8. Conclusion: Preparing for the Future of Venture Capital
As the venture capital world keeps changing, it's getting more important for startups and investors to understand the funding journey, key metrics, and the latest trends. To stay ahead of the game, both sides need to embrace innovative funding models and prioritize sustainable growth. By staying informed and adaptable, startups and VCs can seize opportunities in this dynamic environment, ensuring mutual growth and success.
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