There is a start-up boom underway. Each day, a few budding start-ups founded by enthusiastic young students and college graduates open shop. According to Nasscom data, more than 3,100 tech start-ups were registered by the end of 2014 and the number is expected to rise to 11,500 by 2020. Many of them will down shutters in some time, while a handful will go on to become behemoths in their niche space, backed by big investor money.
Meanwhile, in a highly competitive investment space, venture capitalists (VCs) and private equity (PE) firms are on the prowl for promising start-ups that could grow to become the next big global company with the right amount of funding and guidance. “The biggest challenge for VCs is to discover very early stage start-ups. The earlier the better, preferably well before the product is launched. Question is how do you discover start-ups well before they are launched?Tens of start-ups take off everyday. (see: Meteoric trajectory). That’s the hardest part of being a VC. You have to do a lot of networking, be on the ground and connect with the alumni of top-tier colleges like IITs or NITs or BITS,” says Tarun Davda, director at Matrix Partners.
Enter Tracxn, a relatively young start-up, which has made itself indispensable among Indian VCs by addressing this key information asymmetry between investors and start-ups. Founded by Abhishek Goyal and Neha Singh, both IIT graduates and ex-venture capitalists from Accel Partners and Sequoia Capital respectively, Tracxn began its operations in May 2013 from Lightspeed Venture Partners’ office in Menlo Park, California.
Funding for Indian start-ups in 2015 has increased more than five-fold since 2013
It was seed-funded by investors Sachin Bansal and Binny Bansal of Flipkart and Sahil Barua of Delhivery. Subsequently, it raised $3.5 million (series A) funding from SAIF Partners. Today, the company which is based out of Bengaluru and California, has more than 180 employees, of which more than 100 are analysts from IITs and BITS.
Regarding the motivation behind starting Tracxn, Singh says, “As investors, we spent disproportionate time discovering start-ups. We always wished if we could spend less time on discovering companies and more time on building thesis on market opportunities. On the other hand, founders spend equal time in identifying investors looking to invest in their sector. This is big value loss in the entrepreneurial ecosystem. We saw an opportunity to leverage technology to address this information gap, and launched Tracxn.”
Democratising deal discovery
Until a couple of years ago, analysts at most VC funds were a harried lot, having to apply ‘brute force’ when exploring companies for investment. That meant manually scouring Google, LinkedIn, and job portals to find a start-up worth considering for investment. “We would keep track of smart companies and smart people from top-tier institutes on LinkedIn. Sometimes they would change their status to co-founder of a start-up and we would know. We also did a lot of networking among angel investing groups since these were the first people start-up founders would get in touch with for funding. We attended entrepreneurship events and conferences, pored over app store reports, Alexa rankings and a host of other metrics. We did a cocktail of multiple things to discover start-ups,” says Davda.
Today, Davda’s headache has been diagnosed and cured by Tracxn. The company primarily relies on technology to keep up with the ever-changing start-up landscape, providing its services to more than 100 entities across the US, South Asia, Europe and Latin America. These entities include venture capital funds, corporate development teams that are looking for strategic M&A opportunities, accelerators, family offices, investment banks and universities. “We work with some marquee names such as Andreessen Horowitz, Sequoia Capital, Google Capital, Dropbox, VMWare, IIM Ahmedabad, Stanford University and Flipkart. They use our platform to discover interesting investable start-ups early on and research upcoming, promising sectors,” says Singh. The company declined to reveal revenue figures.
“Since a large part of my research is becoming easier and someone’s doing it consistently well, my job then is only to reach out to founders and convert,” says Davda. According to him, VCs spend 20-30% of their time and resources on start-up discovery.
However, it is Tracxn’s sophisticated discovery process that is most impressive. “We throw a lot of technology and machine intelligence to help capture companies very early, much before they get covered in popular media or tech blogs,” says Singh. For instance, Tracxn tracks more than 20,000 job boards and freelancing websites, domain registrations, alumni of top-tier backgrounds, activity of ex-founders, playstores and much more. The moment a founder is thinking about starting a company — he would register a website or post a job for logo design or for hiring the first engineer, Tracxn would get an alert.
At any point of time, Tracxn has over 100 servers running to process this data over millions of companies. “We use intelligent analytics to then bubble up interesting companies which are then passed on to our team of analysts to help curate by sector,” says Singh. In all, Tracxn tracks more than 20 million companies and whittles down this gargantuan set of companies into an ‘investable universe’ of 100,000 companies.
The company has a straightforward business model. “Ours is a SaaS platform with monthly subscription. Investors and corporate development teams subscribe to the practise areas based on the sectors and geography they want to track and invest in,” says Singh. The company charges between $20,000 and $90,000 per year from subscribers, and turned profitable in September 2014. However, the quality of information and the relatively low fees have ensured that most VCs have started leveraging Tracxn.
“If a few VCs start using it and see value in it, then it becomes table stakes for most other VCs,” says Mukul Arora, principal at SAIF who was part of the team that led SAIF’s $3.5 million investment in Tracxn. Davda concurs, “Most VCs have subscribed to Tracxn since it is not a big expense compared to the value that it provides. If you strike one deal per year, the cost more than pays for itself.”
However, this democratisation of information has turned out to be a double-edged sword for some VCs. “We were one of Tracxn’s first customers, so there was a short period of time when we had a lot of initial advantage. But like every arbitrage, that asymmetry has gone away. It is a level playing field as far as discovery of teams is concerned. Now it is about how who is able to first reach out to founders, connect with them, and ultimately strike a deal,” says Davda. For Arora, the emergence of Tracxn has been both good and bad.
“Good because it makes deal sourcing much easier and bad as it creates a level playing field among VCs. When it comes to deal sourcing, everyone using Tracxn gets to see all the new companies at the same time, and as a result, it increases competition to invest in promising companies. In such an environment, you have to be more proactive in approaching such companies before others do,” he says.
Action, not words
There are two broad ways in which Tracxn assists investors with actionable insights. Arora explains,“It helps us identify areas of opportunity through newsletters that tell us about the kind of themes which are becoming interesting. It also helps us in reaching out to companies by telling us which companies are coming up in what sector, which ones have strong teams and so on.”
In an environment where several start-ups often have similar business models, investing decisions often hinge on which company has the stronger team. Speaking about Tracxn, Davda says, “It is definitely a great value add to our overall sourcing process. By giving us information about the company, the team and the business idea, it does a lot of our work for us.”
For instance, food-tech was a vertical Arora was looking at previously. “There were close to 50-60 companies operating in this sector that we discovered through Tracxn. After talking to a lot of them, we zeroed in on Swiggy which had the best team in terms of pedigree and expertise. A couple of months later, we closed the deal,” says Arora.
“Our ‘business model’ tagging feature and the wide range of metrics in the platform enable and empower the analyst team to extract meaningful insights from the data. For instance, we are able to see what business models saw the most companies founded in India in 2015. Or what sectors got the investors most excited in India. We are also able to see which sectors saw most growth in terms of team sizes, and much more,” says Singh.
It’s useful to know the big trends like, in 2015, business models centred on groceries and automobile servicing saw the highest number of companies being founded, 50 and 40 respectively, while the retail and fintech sectors were the biggest recipients of VC funds, more than $1.6 billion and $1 billion respectively.
Tracxn has a few competitors such as MatterMark, AngelList and DataFox, which provide similar services. A partner at a leading VC fund says that Tracxn has lost a lot of its initial advantage in India. “AngelList and other databases are catching up with Tracxn because ultimately, it’s all about getting to the company first. There’s a big overlap of companies on AngelList and Tracxn. My analysts tell me that sometimes companies that are not on Tracxn can be found on AngelList. We’ve even heard that Tracxn sources companies from AngelList,” he says.
While VCs use both AngelList and Tracxn to discover early-stage start-ups, the nature of services both companies provide are quite different. Singh says, “We are a research-oriented company with more than 100 analysts, providing a comprehensive overview of the competitive landscape in a particular sector, whereas AngelList is a public self-listing platform, with not many analysts. The noise in such platforms is usually higher and it is the first layer of tool for VCs to discover new companies. Even if a VC finds an interesting company via such a platform, there will be 10 other companies doing the same thing they won’t be aware of. That’s where Tracxn comes in.”
Questioned whether Tracxn plans to raise funding in the near future, Singh says, “We are in an enterprise business. So, incoming revenues reduce the pressure to keep looking for more funding. Our current focus is on growing our business.”
Arora provides the investor’s insight into what he saw as the growth areas for Tracxn while investing in it. “We could see the power of platform, that it had become completely indispensable. Having said that, India by itself is not a large enough market, if Tracxn manages to replicate this success in the US and Europe, it’ll be a very large business. We are already seeing signs of early success in the US.”
The US seems to be the biggest market for Tracxn presently, with marquee names like Google Capital. “The US is a more evolved market, so there are funds out there which focus on specific sectors, unlike in India where most funds cover all sectors. The level of granularity is a lot more. Hence, the scope for Tracxn to apply its sector-specific filters is more in such a market,” says Singh. She also adds that there is no direct competition to Tracxn in the US.
“In addition, Tracxn is a valuable product not just for investors but also for corporates. Large corporate M&A teams in internet/technology companies are scouting the marketplace looking for interesting companies. As a result, the addressable market for Tracxn becomes much larger,” says Arora.
He says that their sharp analysts start building a lot of intelligence related to their sectors with time. “They are developing the expertise to be able to identify the top few teams in any sector. With these insights, they can also fulfil such specific requests for clients, eventually enabling Tracxn to offer specialised services aside from their standard products.” All these could become drivers of revenue growth going ahead.
Tracxn has already begun putting money where its mouth is, smartly leveraging its intimate knowledge of the start-up landscape. In June 2015, the company raised $10 million in a round of funding led by Sachin Bansal and Binny Bansal to launch its start-up incubator, Tracxn Labs. According to reports, start-ups chosen by the incubator will have access to Tracxn’s database of start-up markets.
Tracxn Labs does not ask for equity from start-ups and invests $50,000 to 60,000 for companies to develop a ‘minimum viable product’ (MVP). “We identify gaps or rather ‘inefficiencies’ in every market we have tracked for over six months. Since we cover more than 100 sectors, we have a large pipeline of potentially interesting opportunities. We then look out for teams who are interested in working on these ideas and have the relevant skill set,” says Tracxn Lab’s website.
Recently, Tracxn Labs invested in Opinio, a Bengaluru-based hyperlocal logistics firm. Singh says, “To take Opinio’s example, we knew how logistics as a sector has panned out in various countries historically. When we look at those markets and then look at India, it becomes clear that some themes are going to throw up large companies. We provide MVP capital as start-ups are validating their model. We guide the companies closely and the initial founders often work out of our office. The idea is to provide a little more than capital.”
Tracxn Labs has funded 30 companies since its inception in June 2015 and plans to strike 60-100 deals every year, going ahead. Tracxn itself fills an important gap in the start-up ecosystem. And as it becomes a must-have service for VCs, it's only set to grow.