Vikram Upadhyaya, the Chief Mentor and Accelerator Evangelist at the premier GHV accelerator in India shares his investment strategy and the key criteria on which he judges the eligibility of applying startups.

Transcript of the Interview

You've grown companies to ventures of over US$250 million, you had clients like NASA and Google and you had investors like Sequoia. How does your current role and Green House Ventures specifically, fit into that story.

The journey started way back in 2004 when I was living in Tokyo. I am a graduate of UC of Tokyo. My thoughts were to use my skills, innovation and differentiator in a tough market like 2004 was working very closely with telecom players.

I thought let me explore the ideas back in India. I was visiting India at the time quite frequently and met an enterprising entrepreneur from [IIT Gohati]. He came with the thought of disrupting the market with a 'Made in India' Veritas. We like the idea and the product was quite promising so we invested in them at the very early seed stage as an angel.

And this company is like, they've done Series A, B, C, D and it's counting. They have a global footprint, more than 300 clients globally, like NASA. They are touching the market cap of a billion dollar and they're still growing with plans for an IPO.

That was the first experience with the Indian startup scene, way back in 2007. So it took me two, three years to plan how I should explore Indian startups. From 2004 to 2007. That was the starting point of my journey.

Now I am running an accelerator called GHV accelerator after coming back from Japan in 2011. This accelerator is focussed on the very early stage, seed level with startups where the proof of concept is in place. That's how we are looking at it.

It's been just two years for us in this space.

How does your previous experience with working at this company and building it from the ground up yourself, being in the trenches yourself; how does that experience play into your current role as an investor - which one would argue is a completely different role.

I was actually the angel investor. Angels, they put in a small check and a lot of sweat. I mentor the entrepreneurs at the technology side of things and that experience was quite good for us. This experience included three, four things altogether for six to eight months around GTM, go-to-market strategy where bootstrapped startups trying to build a vision and showcase their knowhow around how to acquire the first customer as well as how to get the first repeat order. Those were the challenges they were having. That's where we were mentoring them and they were able to prove it based on the inputs we gave them.

Using the capital we injected in the right manner and as an outcome in just twelve months, Sequoia came in with a Series A. Exactly 13 months later, Nexus came in along with Sequoia. While having these great stories around [Druba], that was the name of the startup and I am still an investor in them, it gave us a lot of experience about the early challenges for a startup at a very nascent stage, around how to build a product, how to build a go-to-market strategy using the right resources.

The concept that the investor's money should not be treated as OPM or 'other people's money' rather it should be used for building a product, building a team. Not building a discounted customer base.

These were the learnings for us when we invested in Druba. Druba was the initial one, but there were many more we invested in at the early stage. For me at least, as an individual since 2007.

These experience really helped us to conceptualize an area where the Indian market could be tapped. Hence I came back from Tokyo in 2011 where I identified 99 percent incubated startups in India were non-fundable. The prime reason for them not getting funding were around four parameters:

Excellent Team - the T - Strong Execution capability of the team - the E - and building a Scalable business model using Technology - the S and T. This was TEST, the investment thesis of our accelerator. These experiences really helped and are still helping us to learn every day, and most importantly unlearning a lot of things every day.

Let's talk a bit about your investment strategy. TEST and Proof of Concept, what does that exactly mean and what makes a good company for GHV portfolio. You talked us a bit through T, E, S and T and then PoC, but having a good team, what does that mean, for instance?

I'll take a step back and talk you through the full form of GHV accelerator. It stands for Green House Ventures, it's a concept based on a green house, where we provide greenhouse effects to the ventures, by providing the right resources and irrelevant are removed from the ecosystem.

What are those resources? Those resources for the early stage startups, the seed stage, immediately after the family and friends round, we call it a post-incubation. They need the right set of skill in terms of building a product, which we expect the entrepreneurs to come with.

At the early stage, what we can look at, is the capability of the team. The capability of the team to build a product using their skills, instead of hiring very expensive resources e.g. they can code or build a business model and test it.

That's how we look at it. Now, this team is not relevant for a venture if they don't have an execution capability relevant to the business. So let's say there's a guy who worked for fifteen odd years in healthcare as a data scientist. Now he's thinking, let me launch a venture in the hyperlocal space, so there's piece which he brings on board that can help him to execute the venture. We look at the execution capability of the venture through the team. That's the E part of it.

Now, in a very competitive environment, one has to be scalable, highly scalable in a country like India where we all talk about a population of 1.2 billion with a big geography, a large number of smartphones and consumer base. This scalabilty in a country in India for a startup can only be achieved through technology, hence this S and T come in. We use this TEST as terminology for the investment thesis.

We are coming in with a position post-incubation, we prefer they have some Proof of Concept in place. Someone has made a product and say they can make it big, we look for a proof of concept in terms of the customer acquisition and repeat customer orders. We try to judge the engagement experience of the customer and what the loyalty factor is of the customer he is bringing in.

In a nutshell, that's how we define TEST PoC. That's our investment thesis.

Those who don't recognize themselves in that formula. If those startups that are pitching themselves to you to be incubated and they don't fall in these criteria, would you still consider them? If you do, how do you go about it.

Those that don't fit in these criteria, either they're eligible for pre-incubation stage, where we'll introduce them to some incubators and achieve these parameters. Those that are all grown, they go in the category of institutional investment post-accelerator, because they don't need acceleration, they need capital. We connect them with VCs in the market.

Jumping on that Vikram. When you try to recognize what is a good investment opportunity for yourself. There are so many factors here and I'm sure that 99 percent of them don't have a 100 percent with each of the criteria in your reference framework. How do you decide on going for an opportunity. Is this a scientific approach based on e.g. 3 out of 5 criteria or is it more of an art form where you have a deliberation with the rest of the team and you try to decide whether there's a match and potentially a long term opportunity. How do you go about that?

TEST PoC is a framework. Definitely for each parameter we have various weightage and various subcategories. In a team we look at around six points one has to achieve. We look for them to pass and achieve all the parameters to a certain level.

We give weightage based on the business model or the space they are trying to venture in. We can't have a total miss on for example PoC and still pass them and pick them up. They have to adhere to TEST PoC in full, but it may be like 80 percent for Team but 60 percent for the technology part of it. We have complete metrics which is driven by the excel. A score card we can call it.

Can you share a secret question you use to evaluate your startups?

The first 1,000 dollars, where will you spend it after you get an investment from us? I'm serious, most of the startup entrepreneurs in India will say that they'll buy the laptops and the office.

Is that an immediate pass or do you still continue asking questions afterwards?

We do ask several questions. Is it the attitude or the aptitude you would like to consider post-investment for instance. We definitely focus on the aptitude vs. attitude. Then, next 100 or first 100 days plan. Something we also definitely ask for. That's make or break actually. Most of them, we have seen spending a lot on marketing without building the right strategy.

They spend a limited amount of the time on the strategy for the complete 12 months program they would like to execute. Similarly, in terms of product, we ask them the SWOT analysis. 

A lot of these entrepreneurs are so passionate about their product which they have yet to accomplish, they can not find the strengths and weaknesses or their (potential) competitors in the market. When we look at their capability to do the market research, secondary or primary, based on the situation.

These are the very minute observations we do, which we call our secret sauce. Another thing, how will they survive in tough days? When they're running short on their runway, what kind of course would they take?

These are the kind of methods which we have been using in the back end. TEST is clearly a reference framework, which is powered by a lot of heavy lifting we do before we onboard someone.

My Taxi India, one of our initial investments, they were running the business on excel all over the country. Technology was not there with them, but they had the domain expertise, they knew how to make a business profitable and they were doing this business for almost three to four years before we came in. And they never borrowed a single penny from anyone.

We realized they were missing the technology and one more contributor in the team. We helped them to get the right team. Mohit joined the team later. Technology, they were not sure about, so we provided them with the right mentoring. This was prior to onboarding or investment from our side. What we were checking was whether they were mentorable, how fast they could move while doing business, with the available resources. In those days, they got a lot of extra points from us, hence we selected them. 

Even though they were not able to make 60 percent of the complete TEST PoC parameters.

How important is being cash-flow positive to you?

At the end of the day, what is a venture? It's not a project in a big university, funded by government money. A venture is a company and if it's a company, there's a balance sheet. Coming back to your question, the faster they can achieve positive cash-flow, the better the balance sheet. If they cannot achieve being cash-flow positive in the first few quarters, it's acceptable if other parameters are in place e.g. the product coming up pretty strong.

In the case of Druba, it took almost a year and a half for the first product to be finished and tested by customers. Cash-flow positive situation is very relative, but if it is a model for a venture in which a cash-flow positive state should be secondary, then I think one has to seriously look into that.

Presently, 2016, in India, the market is tough. So one has to know how to build a business, how to get a paid customer without a discount. Those who are able to prove it and able to execute it, they can make a company cash-flow positive any day then.

That's what we focus on now, rather than product innovation.

Let's talk about the failure and not being able to execute. In the startups you have seen passing by, what are the most common reasons for startups to fail.

There are plentiful scenarios, but I want to touch only on the top three which I've been experiencing in the startup scene in India. Categorizing this based on those who have been failing or failed in the past.

Most of them, they start their venture, assuming there will be an investor who will give a runway to experiment. Whereas an investor comes for the growth.

The second, also quite common, the team is falling apart. After a certain stage, when the startup starts performing, there's a lot of difference which appear between the cofounders. It's like a relationship. Maybe the expectation was set in a wrong way in the beginning. Or it wasn't mutually signed off on a piece of paper.

Third, not in our hand or anyone, negative sentiments around the ecosystem at times. For example, hyperlocal is a big market in this country, but the sentiments are so negative. Investors, though they like the model, they are holding it back, they are not investing, even when they know the venture is really good.

Three of the most common reasons for failure I've seen.