Musings on a Venture Capital Internship

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Harsh Doshi has recently graduated from the New York University Stern School of Business after majoring in finance and statistics. He has previously completed a consulting internship at Cedar Consulting in Mumbai where he conducted research to model a business plan around a new hyper-local delivery startup, and in Deloitte S&O in New York where he helped plan the strategic turnaround of one of the world’s largest fragrance manufacturers. He recently spent a semester working at the Unitus Seed Fund to assist with the sourcing of disruptive companies and identification of terrific entrepreneurs.

I wrapped up my internship at the Unitus Seed Fund last week — marking the end of one of the most insightful, informative and interesting 3.5 months I’ve spent.

I pursued the opportunity to learn more about business dynamics in a setting I knew I wanted to be a part of, but felt a little removed from. Just over a quarter later, I’m convinced that I want to be an active member of the Indian startup ecosystem. Given my limited experience, I just don’t know when, or on which side of the table.

Regardless of the path I choose (investor or entrepreneur), I want to highlight three crucial, path-agnostic and un-intuitive learnings from my internship.

Not all good businesses are VC investable

The ideal startup creates disproportionate value using repeatable, scalable business models. The potential for an investor to realize a super normal return makes it investable. The factors which affect the size and probability of that return are:

1. A large market experiencing some meaningful friction
2. The ability to scale without incurring significant marginal cost or compromising quality
3. A product with a sustainable competitive advantage
4. The potential for sizable positive returns in the near future
5. An incredible team willing to tirelessly tweak their venture to defend and grow its position

Startups outperform on a few criteria, underperform on others, and investors fund ventures with a figurative ‘weighted average score’ that they are comfortable with.

A good business, on the other hand, is a venture that has a consistent, positive cash flow, but doesn’t check at least one of the boxes above. Selling a commodity in a large market (diamond traders) or a differentiated product in a small market (constituent-specific ERP systems for political representatives), for example, are potentially good businesses, but not investable ones.

That said, good businesses can often become investable, and this is particularly true for differentiated products which resolve their initial challenges in scaling. I’ve noticed that the path of least resistance is often building a brand (Paperboat by Hector Beverages or Cafe Coffee Day) or pivoting (going from running schools, to standardizing and managing them).

For example, most FMCG products are good businesses — large markets, no great competitive advantage, scaling is expensive because it is a function of distribution etc. The Paperboat (packaged Indian drinks) team focused on building a brand that emotionally appealed to consumers, locked in key distributors and priced very effectively — converting the business into a cash cow and potential acquisition target — making the venture a lot more investable.

Good business are happy occupying and defending small pieces of a large pie, while investable businesses often look to grow or significantly reallocate portions of the pie. A team’s willingness and ability to make the transition often determines whether a good business gets funded.

Product need does not equal product demand

Need represents a market gap. Demand represents the willingness of the purchaser to fill that gap. Companies make money off demand, not need.
For example, there is a need for faster, cheaper and more accurate diagnosis of UTI (urinary tract infection) in India to reduce drug-resistance and bring down healthcare costs. But doctors make money off prescribing a broad-range antibiotic that works for the majority of UTI patients. They don’t have a high willingness to pay because the existing solution isn’t that bad, and the new solution doesn’t supplement their incomes.

An alignment in incentives between the seller, purchaser and consumer is therefore crucial for sales. Put simply, unless the person who needs to buy the product has a reason to buy the product, the seller will not make money.

Information asymmetry creates strong signals

Information is sparse around private companies, so every action (or lack thereof) sends a strong signal.

A large institutional investor, for example, who doesn’t want to participate in a future round after initially investing in a company signals that something may be unattractive. A company raising a bridge loan signals that it’s struggling to raise money and/or needs money immediately, suggesting that it may be up for grabs at a more attractive valuation.

Signals extend to individuals too. Referrals from reputed angels warrant another layer of due diligence, even for a me-too, because it signals a potentially attractive opportunity. Passing the opportunity to invest in a great startup fishing for term sheets in bad faith signals that investors care more about relationships with each other than just multiplying money.

The converse holds true as well —which makes maintaining a trustworthy reputation, especially in an ecosystem as small as this one, extremely crucial.

If you’re interested in working at Unitus Seed Fund as a Dealflow & Partnership Analyst in Bangalore, India, you can apply via CareerNet (Job Posting 1032660).