Deal Alert: Unitus Seed Fund invests in dental chain Smile Merchants
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For years, Bain has been one of the few outliers to the prevailing 2-and-20 model, charging 2-and-30 instead - and with some success, given that it raised five funds this way. This time round, however, it decided to offer LPs three options: a 1.5 percent management fee with 20 percent carry and a 7 percent preferred return, a 1 percent management fee with 30 percent carry and a 7 percent preferred return, or a 0.5 percent management fee with 30 percent carry and no preferred return.
Since LPs have long complained that management fees are too high, especially for the bigger funds (it was the most commonly cited sticking point in negotiations in our Perspectives investor survey last year), you’d expect them to go for the second or third option. But our LP source suggested that in practice, most investors would go for option one – because it’s “closest to market terms”. If he’s right, the net outcome may well be that one of the industry's only outliers ends up looking a lot more like everybody else.
...Indeed, however much investors grumble about fees, it doesn’t seem to affect their investment decisions all that much. And as long as LPs are not voting with their feet, GPs have little incentive to do anything about it. As Ed Hall, a partner at King & Wood Mallesons SJ Berwin, told us recently: “Investors don't generally select a fund because it has lower-than-market fees, so GPs don't generally have anything to gain by lowering [them].” At the moment, good funds can get away with charging pretty much what they want, while investors are unlikely to back weak funds just because they get a good deal on fees. So it’s hard to see the status quo changing any time soon.
Software product companies are also stymied by a RBI mandate - meant to protect credit card users- that prevent companies from debiting money without the customer approving every transaction. Enterprise software maker FreshDesk recognised this roadblock early and chose to register the company in the United States right from inception in 2010. Its development operations are in Chennai. The company now has over 18,000 clients, including Pearson and Unicef. "This mandate defeats the entire business model," said 38-yearold cofounder Girish Mathrubootham who did not want to lose customers who would have found the process tiresome.Tsk tsk.
But data analytics startup Profoundis wasn't so lucky. "Our retention rates went down to 30% as opposed to an industry standard of 80%. We were forced to register in Delaware last month," said Jofin Joseph, the 25-year-old cofounder of Profoundis which expects to earn revenue of about Rs2 crore next fiscal. The relatively low chances of big-ticket exits for investors who back India-based companies are also proving to be a deterrent for many startups.
"All things being equal, lawyers prefer to recommend a New York or Singapore-based startup over an Indian company to the clients looking for an acquisition," said Vaibhav Parikh, a partner at law firm Nishith Desai Associates. To address this perception issue, GamePlan, an Indore-based company which makes software for the construction sector, also incorporated a separate venture in Delaware, United States, called True Intelligence Technologies.
Many of India's successful startups have navigated a maze of challenges, creating leading brands and sustaining for long periods of time. Correspondingly, it is much harder in India, relative to the US/Europe, for competition to unseat leading brands.
...Startups need large markets (Rs 2500cr+ or $500 million+) to get large and succeed. This is hard to find in India, perhaps due to early consumer demand, unorganized markets, regional differences or foreign substitutes. For example, digital advertising is a roughly $400 million annual business here, with mobile at 10% of that. To access and maintain growth, almost every new startup here needs to increase their focus on creating and evangelizing their category versus just focusing on their own startup's growth.
Some examples of overcoming this challenge include:
Many brands in India are created from execution reliability at scale rather than product differentiation. Brands in India are disproportionately more valuable as they represent a trusted provider of products or services - think about the enduring value of the Tata brand in multiple unrelated categories. As one consequence, I believe more startups should think about brand-building here in India relative to if they were in the US.
- spending large amounts of capital to create a category (eg ecommerce, OTA, wireless telecom).
- expanding into adjacent markets (eg Info Edge, which expanded from jobs into matrimonials, real-estate, education etc.).
- building or piloting in India and transplanting to the US (eg Zoho)
- aggregating several emerging markets outside India, perhaps before proceeding to Western Europe and the US (eg InMobi, iFlex, Subex).
- attacking a large spend base (eg Micromax for hardware, Cafe Coffee Day for coffee/tea/snacks, BillDesk for bill payment).