The following is an excerpt of the interview with Mr. Suman Bannerjee, Co-Founder & CIO, Hedonova.
Tell us briefly about you?
I was born in a small town called Purulia in West Bengal, India. A cricket scholarship allowed me to attend Cambridge where I studied psychology and international economics. A stroke of serendipity brought me to investment management where I had the good fortune of working under Israel Englander, the legendary founder of Millennium Partners. His take on the spiritual essence of life always resonated with me.
How was the year 2021 for you as an investor/VC?
2021 topped the charts both in terms of returns and deal flow. But it's going to get better. Institutional investors like private equity firms and have around 25% of their assets under management in dry powder [free cash]. The sum total would be around $1.25 trillion. Part of this money coming into the startup space would increase valuations considerably. The availability of cheap capital will allow funding of black, LatinX, and Indian entrepreneurs. And immigrants get it done. I feel that some very large, very important companies are going to be built by non-white founders. I'm especially bullish on Indian founders. Indian founders have a unique combination of technical acumen coupled with a sixth sense of business.
How often do you bet on the entrepreneurs and not on the ideas? And when/if you do that, what quality of the entrepreneur usually makes you do that?
It's a mix of both of course. I invest in the Series C or D stage when the company has reached unicorn status already. At that stage, the startup has a proven idea and has displayed operational excellence. In the more mature stages of a startup, it's the entrepreneur that matters more for two reasons:
- The founders need to make senior hires, sometimes from other geographies or industries. Hires at this point are critical.
- An entrepreneurs' ability to focus is critical. Companies at this stage can get swayed a lot. Entrepreneurs have a lot of resources at their disposal and try to start side projects. These are distracting and can harm the company.
What is a warning sign for you when investing in a startup?
A lack of numbers or KPI tracking and too much talk about 'vision' or 'story' is a definite red flag. Another red flag is when the CEO is too busy. It's an indicator of the CEO's inability to delegate or to hire good people.
What are some common biases you find in the Indian Startup ecosystem?
It's human psychology to want to back a sauce, urbane entrepreneur so I get why investors want to back founders with pedigree. Emerson said that every institutional is the reflection of one man. Consider how profoundly correct and incorrect the statement is. I'm talking about the bias against woman founders. While men are asked about their growth strategy, women are asked if they'll be able to contribute adequate time given family life. It's always a man who's looked up as the figurehead of a startup.
We are seeing many startups exiting with IPO, what’s your opinion on that? How is it going to change the ecosystem?
Once startups reach a certain size, acquisitions are off the table leaving IPOs as the only exit route. I get the recent IPO fad in India but I don't think it's going to last. India does not have a mature institutional investor infrastructure. There are no private pension funds investing in the equity markets, insurance companies are limited to the amount they can allocate to stocks and the university endowment fund is nonexistent. An IPO does bring prestige to a company or its founders but it also curses you with additional compliance requirements, responsibilities to stakeholders et al.
More than 42 unicorns in 2021. What do you think caused this wave? Is the valuation justified according to you?
I've been tracking the Indian startup space and it's very talked-about in my circles (European venture capital and private equity space). The inflow of foreign capital is going to create more unicorns in the short term. However, in India's structural demographic, the lack of women in the workforce will deter exponential growth. You can't support multiple unicorns when the per capita income is less and 40% of the working-age population is not in the workforce.
How can we support/ enable entrepreneurs in tier2 and tier 3 cities?
We don't need to do anything at all apart from changing the general mindset. Everyone has access to the same information and in the post covid world, the need for proximity to investors has diminished.
What do you look forward to as an investor in the year 2022?
Apart from the exciting world of crypto innovation and web3 business models, I'm really looking forward to companies that make the world smaller, more connected. Last decade, Facebook was the torchbearer of startups that brought the world closer together. That was in social capital. I feel that the torchbearer of this decade is going to bring the world closer together in its financial capital.
What are a few sectors you think would be hot in the upcoming year?
One learning that you would like to share with founders who are looking to raise funds?
Before giving any advice, we should thank our entrepreneurs. In terms of the nobility of their work, they're right up with teachers, doctors, and soldiers. Entrepreneurs take extreme risks, sacrifice a functional family and social life only to chase a dream that probably has a 1% chance of even working, let alone morphing into something big. Entrepreneurs push mankind forward. The only advice I can provide is so someone trying to raise funds is to demonstrate operational excellence. Strong processes, Strict protocols, and amazing people are what separate good companies and great companies.
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