Banglore, Feb 8 -- Last week, advertisement network Vizury Interactive Solutions Pvt. Ltd raised an undisclosed amount from two early stage investors.
There is nothing unusual in a two-year-old start-up raising funds, except that two investors decided to co-invest in the firm at such an early stage.
Co-investing, when two or more investors come together to fund a company, is typically associated with venture capital (VC) and private equity (PE) deals, where investments are more than $5 million ('22.8 crore).
But early stage investors in the country, who typically invest up to $2 million in a startup, have also started looking at syndicated deals as they try to diversify risk and have a bigger portfolio in their limited corpus.
By definition, early stage funding refers to investments in companies that have a prototype but not yet a product to approach the market with.
They are usually less than five years old.
Early stage is a very risky stage to invest in, said Rajesh Srivathsa, managing partner at Ojas Venture Partners, which invested in Bangalore-based Vizury Interactive along with Inventus Capital Partners.
"This is a strategic business decision, it's a means to diversify risks," he said. "Also, in a limited pot of cash, I can invest in more companies with co-investors.
And once we see a company is doing well, if they need capital we can fund them again." Due diligence is also better as two investors gauge a firm's potential. The company, too, would prefer co-investment as it gets two sets of pockets to back it and two sets of networks, which helps the company grow faster, said Parag Dhol, director, Inventus Capital. "In the (US) Silicon Valley, for example, most deals have two or three VC investors even if the amount invested is very small.
This is done for multiple reasons as it helps both VCs and entrepreneurs if more people are on the board," he said.
Dhol said there are more opportunities than investors at the early stage. "Demand for capital is high. There are only 12-14 investors. As the number of early stage companies grows, co-investments will become a norm." Of the two other deals that Inventus is working on, one will have a co-investor, Inventus Capital managing director Samir Kumar said.
Gaurav Saraf, director of Epiphany Ventures, said investors seek a co-investor who can bring expertise in a particular field onto the table-such as help in hiring, expansion in overseas markets, networking and client referrals.
He said having two-three investors backing a start-up in the first round of fund-raising does not necessarily mean a stake dilution. Incremental dilution is, however, an issue promoters should be wary of, he cautioned.
"Investors need to ensure that the promoter has control in the company. If too much stake is diluted, promoters may have less incentive to stay with the company. This may not align well with the investor's idea," Saraf said.
Vizury plans to get into global markets, and US-based Inventus will help it enter China.
Internet advertising is going to be a global industry and can't be restricted to one country, said Chetan Kulkarni, co-founder and chief executive of Vizury. "It has to be a global play directly or indirectly for us. Our focus is to be a dominant player and use the power of technology for our clients." Suresh Narasimha, founder and chief executive of TELiBrahma Convergent Communications Pvt. Ltd, which also raised its first round of funding from two early stage investment funds, said value addition from investors led to higher efficiency and better corporate governance. Having two investors gives you access to two perspectives on how to handle different situations, he said.
But co-investment, like any partnership, comes with its own problems. "I think startups should be cautious of the fact that both the investors should be aligned with the goal, vision and strategies of the entrepreneur," said Narasimha.
"One needs to manage two different sets of funds and in some cases it may be an operational overhead." Srivathsa said if the other investor has opposing views, it can be difficult for all involved to work in the company's larger interest "If in the next round one of the exiting investors do not participate, it becomes difficult to raise capital," he added.
"New investors begin to suspect that something is wrong with the company. Choice of partner is critical."
Published by HT Syndication with permission from MINT.
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