Vani Kola, Founder and managing director of Kalaari Capital Image: Chandru D for Forbes India
The relationship between founders and investors can be complex. “We are in this interesting emotional equation where founders hope and expect that when the chips fall, investors will step up for them. Of course, they step up if they have the confidence that the setback can be overcome, and value creation has a reasonably high probability in their interest. They can’t put money knowingly to lose it. It’s a very simple fact, but in the emotions, it gets lost,” says Vani Kola, one the leading pioneers of venture capital (VC) investing in India, in an exclusive and wide-ranging conversation on Forbes India Pathbreakers.
Investing in early-stage startups involves a higher degree of risk. Kola, founder and managing director of Kalaari Capital, who has funded more than 110 startups, would know: “There are many startups that fail. Just look at the statistics. If you invest in 10 companies, three to four will not return capital to you. Maybe three to four companies will give reasonable capital returns and two or three companies will give phenomenal returns. And that is sort of the nature of this business.”
In part two of the conversation, the veteran investor talks about her passion for identifying high-potential new-age startups in India’s rapidly evolving tech space to create impact, governance loopholes in startups, why valuation isn’t a validation but an expectation, how this ‘sugar’ can turn into ‘poison’, and more. Edited excerpts:
Returns: The Fiduciary Obligation
VC investors and founders are bound together in a tricky relationship as they navigate pitfalls in a challenging journey of value creation. Sometimes, what is good for the founder isn’t necessarily good for the investor and vice versa. So, striking a balance and aligning objectives is key. But this is simpler said than done.
“Venture capitalists are friendly, however, that doesn’t mean they are your friends, or that they are your enemies. You have to understand that we have obligations and commitments to the well-being of our own investors and firms, that is our fiduciary obligation we have signed up for,” Kola elaborates. “But we are in this interesting emotional equation where founders hope and expect that when the chips fall, we step up for them. Of course, they step up if they have the confidence that the setback can be overcome, and value creation has a reasonably high probability in their interest. They can’t put money knowingly to lose it. It’s a very simple fact, but in the emotions, it gets lost.”Read more: There is no one who will buy all the companies that go up: Prashant Jain
Valuation: The Mania
The state of frenzied dealmaking and the perplexingly gravity-defying valuations of startups in the last few years raised eyebrows. The euphoria has somewhat settled but there are important lessons for investors and founders. Many pin the blame partly on investors for the lousy state of affairs in the rapidly growing startup industry which by-and-large has been chasing growth without a clear path to profitability. Yet there is another side to it that cannot be negated.
“As a founder, somewhere, I have to ask myself, investors are investing in me to triple or quadruple their value in a certain finite time. If today I take money, let us say a billion dollars, in three years do I know how to create this into a $3-5 billion company? It is really important to think about that,” Kola asserts. “The reason for that is that the sugar today could be poison tomorrow because if a founder can’t create that value, they have a huge monkey on their back.”
She continues, “At every step, it is important to make sure that you know how to deliver to that expectation. What happens sometimes is that we look at the here-and-now value and we look at it as a validation. The problem is that it is not a validation, it is an expectation. That assessment is very important. Otherwise, it is fun today but very painful down the road.”
But Kola understands a founder’s dilemma too: “I think founders also in some ways are a bit powerless here because investors also create that expectation. Listed or otherwise, it is very difficult for a founder to, when an investor is offering a certain valuation, to reject it. And especially in cases of public companies, how do you do it? There is such momentum, what can the founder do?”
Also read: Being Vani Kola: Trailblazer, entrepreneur, investor
Governance: The Red Flags
A huge concern at most startups is the poor level of governance and the rising cases of financial irregularities that often continue for years under the nose of the board. How can investors control the menace? Kola answers, “What is governance at the end of the day? It is trust. We cannot work without trust in the system. I think the opportunity is so large for all of us to create such significant value. We have responsibilities at so many levels. I think we need a broader sense of awareness and discussion among entrepreneurs to not think about the ‘here-and-now’ shortcuts: ‘Oh, what will happen to my valuations if the revenue growth is not xxx?’ Those are the setbacks they have to handle. The more you get into the tunnel vision, and myopic about growth and valuation, sometimes you can lose purpose and you can lose perspective.”
“Whenever I see these instances of potential gone awry, it makes me deeply sad. It usually starts with minor compromises. But it adds up and compounds. I think they don’t start with an intent to commit fraud, there may be rare cases where it does, but it causes a lot of pain in the ecosystem. I also think that it is important to create a collective responsibility by boards and the ecosystem,” she adds. “Sometimes I have heard people saying, ‘Oh, if I am too strict on the board, maybe the founders don’t want my money.’ To me, that does not make any sense because you have a job to do. I think that to some degree, the board has to also reflect. If we ask the founders to reflect, the board should also ask themselves, ‘How did this come to be?’ The board’s obligation is governance and the fiduciary well-being of the company. But it is easy to get caught up in the euphoria of the ‘Go-go-go!’. You set the tone from the beginning that you should not make any compromises on this. That is an obligation on me and my peers.”Also read: I wonder why there are only a few businesses like us that are built to generate profits and not raise venture capital: Nithin Kamath
Kalaari Capital: The Road Ahead
Kalaari Capital raised $200 million nearly two years ago and has deployed around half of it. Its portfolio includes early-stage investments in over 110 new-age startups. It is actively eyeing investment opportunities across evolving segments like gaming, space tech, deep tech and climate tech. Some bets include Dream11, Winzo, Atirath, Creative Galileo and Digantra.
“We see that Web3 and blockchain is a core technology much like the internet and even generative AI as foundational technology which will affect many sectors—whether it is education, manufacturing or productivity. We think that new solutions, tools and business models will emerge from these spaces. Likewise, more and more industries are using automation. So, these create many opportunities for investments in robotics and so on and so forth,” Kola says. “We also think that India is an aspirational, social experiment right now and lots and lots of great brands have an opportunity to get created. The long tail of it, because of distribution challenges, has never been explored. Much like what had happened with OTT and entertainment. When you have affordable solution channels and the ability for experimentation to be multiplied, you can get access to markets that haven’t been tapped into at all. We think that there is an opportunity to create many new brand companies, so that is something that we are interested in.”
Kola is championing the next generation of women leaders for more inclusivity in the country’s burgeoning startup industry, and during the pandemic, she spearheaded ‘CXXO Collective’ to build a power-packed community of women leaders. The initiative aims to level the playing field for women founder-CEOs and help them scale their business. Some portfolio companies funded under this initiative include Deconstruct, Aastey, Kindlife and Samosa Party.
What’s next for Vani Kola? “My 20s were very preparatory to learn to be an entrepreneur, my 30s were about being an entrepreneur and learning the craft. My 40s and 50s have really been about driving investment and hopefully creating impact. I assume that my 60s and 70s have a role in pursuing other passions in a way that is productive and gives back to society and community and my family. I have no doubt that I will leave this behind and also do something else important,” she says.