Every enterprise story starts with an idea. This one starts with a statistical law — the Power Law. It is a functional relationship between two quantities, where one quantity varies as a power of another. The simplest example of the law is in a square; if you double the length of a side, then the area will quadruple. An intricate example of the same law is early stage start-up investing.
On this foundation, serial entrepreneur Sanjay Mehta built his venture capital firm 100X.VC in July 2019. “In Power Law, you focus on magnitude of success and not frequency of success. This means that chances of losing money will be high but if you get success, it will be in a large magnitude,” he says. From Box8 to Coolberg, Mehta has funded several start-ups in India. After nearly a decade of investing in his individual capacity, he launched 100X.VC to increase his scale from 20 odd investments a year to 100. While tech start-ups are launched almost every day, finding the ones with immense potential, writing them their first cheques and mentoring them to success is no mean task. “To achieve this, I wanted a team in which members can leverage each others’ experiences and competencies,” he says.
Funding fledgling start-ups can be risky but 100X.VC has cracked the code
With an ambitious plan of investing in 100 start-ups a year, this Mumbai-based venture capital firm is off to a promising start
Thus, a league with an impressive record was gathered from investment and entrepreneurship backgrounds. Apart from Mehta, the team includes Ninad Karpe, who previously headed Aptech; Yagnesh Sanghrajka, the former CFO for MT Educare and partner at Bessemer Ventures; Shashank Randev, a veteran investor and advisor to start-ups, and Mehta’s nephew Vatsal Kanakiya who doubles up as CTO and is part of the investment team at his family office Mehta Ventures.
For a new start-up, apart from a team and a good idea, the most important requirement is funding. But, without a proven track record, convincing a seed investor can prove to be a challenge. It is here that 100X.VC comes into the picture. “In India, there are not many investors who curate leads. We saw that gap and our idea was to become a feeder to the VC ecosystem,” explains Mehta.
Funding the next unicorn
The team uses the following criteria to select start-ups to invest in — the founding team, market size opportunity, scalability, moat and the possibility of 20x return. “We want products which can scale a lot. You might have the best product in the world but if it is only going to cater to 200 people in South Bombay we are not interested,” explains Karpe. From The Renal Project setting up micro-dialysis centres across the country to Pocketly providing loans to college students, all the start-ups selected by 100X.VC in the first year tick every box. “The companies either have a first mover advantage or have a unique and more efficient way to solve an issue from the other services/products in the market,” says Karpe.
Once a start-up is shortlisted, 100X.VC brings the iSAFE agreement to the table. It stands for India Simple Agreement for Future Equity. Essentially, it is a three-to-four-page document that a start-up founder issues in lieu of the investment from an investor. So, in this case, the start-up issues the note to 100X.VC for its Rs.2.5 million investment. The note compulsorily converts into equity shares on occurrence of specified liquidity events — next valuation round, dissolution, merger/acquisition or at the end of three years from date of its issue, whichever is earlier. “It also mentions the trigger points, such as a valuation round, when the investor will get a fixed 7% of whatever valuation happens,” explains Karpe.
iSAFE stems from the concept of SAFE notes, originally created in 2013 by Y Combinator, a California-based company, as an alternative to convertible debt. Since then, various versions of the open-source documents have been used across the world to make early stage start-up investing easier. “In early stage investments, the founders are new to the whole process of valuation discussions, shareholders agreement, lawyer fees, and so on. We wanted to cut down the four months process to a few days and that is possible because of the iSAFE instrument,” explains Karpe.
And, it is not just founder-friendly, says serial entrepreneur K Ganesh. Even for an investor it makes more sense to use this simplified method. “With this, the investor can ensure that all the money put in the company is used to grow the business rather than paying legal fees,” he says. The iSAFE notes itself take legal shape in the form of CCPS or Compulsory Convertible Preference Shares under the Companies Act 2013, when the liquidity event occurs.
Moreover, Mehta and his team want to make the process easier for everyone. The notes are open source, just like the original one, and can be downloaded by any start-up founder or investor for their use. “SAFE notes have been popular globally. We wanted to bring a similar change in the Indian ecosystem and that is why we made the template open source after investing a lot of money and time with lawyers to build it,” says Mehta.
However, Parag Dhol, managing director, Inventus (India) Advisors says it is tough to keep documentation simple as a start-up successfully scales up, “iSAFE notes work for early stage investments. Once it reaches Series A stage, the documentation required will be much more complex,” adds Dhol. He points out that when it comes to the next round of funding, more variables come into the picture such as the ESOP pool. “In the beginning, there may be one or two employees, but down the line there could be more. These variables are not that important at 0- 6 months stage but will be at 10-15 months. So, by the time it comes to us it has to be a more structured legal document," explains Dhol.
The edge
But, if the documents are freely available and seed money can come from any other seed fund, what makes 100X.VC stand out? The answer lies in the mentorship and networking opportunities offered by them. “Other than investing Rs.2.5 million, we help the start-ups in their business modelling and strategies. The start-up founders are mostly young and do not have many contacts in the industry. We open up our networks for them,” explains Karpe. This is not be confused with a start-up incubator. “Unlike an incubator, 100X.VC does not provide a physical space or negotiate an equity share for space or advisory,” he adds.
A big step in grooming the selected start-ups for the future is Pitch Day. It is a conclave in which 100X.VC invites VC funds, angel networks, family offices and HNIs from across the world to be a part of the India story. The goal is to enable one-to-one meetings of 100X.VC funded start-ups with potential investors. For the first batch or Class 01, Pitch Day was held in December 2019 and Class 02 pitched virtually this September.
Shashank Moddhia, founder of The Renal Project, one of the 20 companies, shares that Pitch Day opened up many doors for them. “100X.VC not only arranged a meet with as many as 500 investors, they also put us through a two-week intensive training programme on what to and how to pitch,” he says. In August 2020, The Renal Project raised Rs.22 million as part of its pre-Series A funding round.
The founders of another Class 01 start-up RoadMetrics, an app that detects major road defects, mention a similar experience. “Ours was not a tested model. Hence, finding a seed investor was challenging,” says co-founder Nikhil Prasad Maroli. With iSAFE notes’ quick turnaround time, the money was in their hands within a week of signing the documents. The connections, too, are a plus point. “For example, if we are looking to partner with auto infrastructure companies for B2B projects, they immediately put us in touch with people from the industry for a pilot project,” says Maroli.
Expanding avenues
With this founder-friendly approach, the firm has already started developing partnerships in the Corporate Venture Capital (CVC) space. The concept of CVC is popular in Europe, says Karpe. Under this, an established corporation expresses interest in funding a start-up for strategic benefits, in addition to financial return. “In simple terms, a bank may want to invest in a start-up developing new technologies for the banking sector. This not only gives them a strategic advantage but also gives them the return,” he explains, adding that 100X.VC is working to introduce a similar model in India.
For 100X.VC, the eventual goal is to invest in 100 start-ups a year. That road seems long. The first batch had 20 start-ups and the second batch had nine. However, with a four-page document and a network of high-profile investors, the firm is on the right path. “We want to be the preferred institution for all start-ups seeking early-stage investment,” says Karpe.
Ultimately, Mehta says if he is able to grow at least one of the 100 companies that they invest in into a unicorn, he will consider that a job well done.