Starting a (student) VC in India.

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I & Prateek (24 y/o at the time) raised a VC fund with no experience in raising funds as VC. I had 1 year of experience, that too in physics research & as a VC analyst, while Prateek had 1 in finance.

We will be deploying all our capital by the end of this month. $1M in 22 companies. It’s been a crazy journey - simply because we thought raising a VC fund was a veteran's job - by ex-VC partners or CXOs of large startups. 

It was a combination of strategy, luck, privilege, and hard-work. Here’s the story of how we did it:

Why the F did we start a fund?

Before I get to raising a VC, I need to share our personal context as a driver of our motivation. I had just completed my 1st year of MBA at IIM-A. I was never sure about the objective of many kinds of races in life, and it was one of them. The culture is set on the race to top consulting & banking jobs - jobs that I never admired in life. 

I disliked it so much that it motivated me to start venturing my own ideas. Although starting my own thing was back in my mind for long - IIMA just pushed me, and I am grateful for that. 

In 2020, I decided to start a local investment club at IIM-A. Many seniors & batch mates simply said (and laughed) at my aspiration to build an investment entity. In a particular student body meeting, my proposal to start an investment club was brought up and was shunned to the extent that they felt it’s not even important to talk to me and hear my pitch. 

Having said this, I am actually really grateful for IIMA. I got to meet people like Prof Anil Gupta, CIIE folks and for the diverse cases we studied. 

Now I meet Prateek, my batch mate from BITS. Initially hesitant, but then he completely bought into the pitch. Now I need to tell you what our initial pitch was. 

“Building a VC firm for students, by students and of students - like a democracy” Students start most of the startups in our country (yes! More than 30%), then why do we have capital sources located in Bangalore/ Mumbai/ SF and run by old people? Why don’t we have sources of capital within campus and run by their peers?

Imagine you are a student founder with a rock-solid project. Either you’ll need to find capital from one of the distanced VC firms or they’ll have to find you through their referral driven networks? It was just inefficient. We dreamt of a localised yet scalable solution where students can get funded by a more approachable entity. 

We wanted to build the “invisible infrastructure” to make it easier for students to raise capital & for capital to find the best investment assets. But well, I still didn’t answer the question why “we” started the fund. Honestly, it’s because we wanted to be around students who want to start their own companies. Adults are normalised into defending the status-quo too much. Still dissatisfying as an answer, we know. 

The un-real MVP

Now back to our story. Now we were 2 who believed in the student mission. We had our pitch. What’s missing? We thought MVP. Let’s put up a website, hire 2-3 students from colleges and invite applications. We built a website, hired 2 students from a college. But what do we make people apply for? We didn’t have money, so what do we offer?. But a random epiphany struck someone in our team (I credit most of our success to this random epiphany). Most students want to get into Y-Combinator and they seem to be open to college students; then can we help them in that? We worked on getting YC alums to build a mentor platform.

Then our offer to students was clear: “Apply to us if you want to get into YC. We will make you meet mentors from these 5-7 YC alums. And if they like you they may even recommend you to a YC partner.” We got 500 applications. It was just a LinkedIn post from our team, and we got 500 applications. We interviewed many and finally selected a cohort of 5 companies. 

The cohort: Zepto (then KiranaKart), Codedamn, Valerio, Fragmynt (then Hazlo), Humit 

After the MVP, we decided to speak to people in the ecosystem. As a VC fund manager: an investor will ask for 2 things: a) what is the return expectation?, and b) what’s the evidence that they'll get this return?

We had a hypothetical answer: We have this cohort of startups that are looking for capital. Had you invested in them; you would make Y on X. 

Our MVP was the evidence that the student thesis could work. Evidence made our thesis real. 

Capital

Whoever tells you that you can achieve outsized outcomes without capital is, in my view, truly lying. Well you can source capital from your inheritance, or a VC, or even your revenue - but you need capital to make any project work with meaningful outcomes. All the accelerators who don’t put money and charge advisory equity is a scam. Not only because their promise of outcome based on “advice” is flawed but because there’s no skin in the game. Capital also brings that.

Now we started knocking on all doors to get capital. Partners at CIIE, IIMA noticed and decided to fund us. Having a lead investor gave confidence to us; and the other individual LPs we approached.

LPs are of two kinds:

• Made wealth in their generation (and to this, a proportion is startup founders)

• Multiplying and managing inherited wealth 

Category 1: they knew it was an entrepreneurial project and had a clearer understanding of risk-reward. They also understood why our thesis could work out. Hence, their bet is a mix of hope & evidence. They know evidence isn’t strongest, but there’s a strong upside of the project. 

Category 2: they look for signals they understand. Our portfolio, other investors, valuations - but we really didn’t have much here. Having credible investors boosts the comfort in category 1. 

We wanted to raise a mix of category 1 & 2. Because many first time wealth creators are still monetising their equity and assets but they have fantastic credibility in building businesses. Their presence in your investment structure creates the easily understood signal that you can use to get category 2 investors.

In all reality, I even expect many people to raise more money from category 2. And having skin-in-the-game of category 1 creates a pull effect for category 2. In terms of the proportion of their wealth, we have noticed that it varies, many don’t expose more than 10% of their capital to VC/ start-ups while some may expose more/ less given their risk appetite. Getting to LPs is a challenge, and you really need an initial set of believers to get the ball rolling. This is very similar to a cold-start problem in a social network. 

Privilege. Creating luck and using it

Let me now acknowledge a few uncomfortable facts. You need to exhaust 100% of your social capital. We had mailed, texted and called every near person in my life to find support or potential support. And exhausting social capital is a one time thing. It is limited, scarce and not repeatable. So you truly need to take the all-in risk.

We were privileged to raise a $1m fund because we solved our cold-start problem through knocking every door. Before joining IIMA, I used to work for CIIE in their investment team. I worked with Vipul & Kunal (Partners at Bharat Fund/ CIIE) and had built a mentor relationship with them. This solved the cold-start for us when we went out to raise. After having a few conversations with them, they had decided to be our lead LP. 

In numerous instances during our journey, gradCapital continuously reaps benefits of the alum network to solve the cold-start problem. Once we cold-started we are judged against return on capital. The capital cold-start problem has another uncomfortable truth. It relies on social capital. While some may have more than others, one may not lose heart and start building social capital early on. Our privilege was that we came with a head start on social capital.

Prateek, my co-founder, keeps bumping into potential LPs through various unexpected channels. Spreading your surface area (which he really does well!) sets you up to be more lucky.

Bottom line: cold-start is a combination of work & luck. You can’t solve for the luck you start with. But you can spread to create more luck.

Beyond that, when going to LPs, you need an investment strategy. A strategy that screams this is gonna work. Without any real investment strategy, you are going to truly crash yourself. Many people want to raise money and hope they figure out their strategy later on. That’s bad. Because hope is not a strategy, it’s a reason for a bubble. 

The pitch, the thesis, and the student machine 

Schumpeter, an economist, focused on entrepreneurs as a machinery for positive change in society. And yes it is. We propose something more specific here. Students create the most impact within entrepreneurship. $85B + worth unicorns in India (out of $220B) were started by students (naive or arrogant). That’s a lot. Look at FAANG: and 3 of 5 were student companies. No points for guessing who. 

So, students are drivers of change, empirically. But what makes them do that? We feel there are 3 key drivers:

• Irrational optimism: Students make assumptions that others won’t make. Zepto for 10 min delivery, Pixxel for a satellite, GreyOrange for a robot & automated world :). As Alagu (our investor) says, the best entrepreneurs in the early days are either naive or arrogant -> irrational optimism.

• Purpose > profits: Well, during an IPO you gotta return money. But radical projects in the early days… money can’t be your motivation. You need more to execute ideas day in day out.

• Friction-less teaming up within campus: They build teams like butter on a knife. People come together beyond their egos or their utility. They do it because they love being with each other and want to experience something new. So many of the founding teams were just dorm-mates! It’s an organic, irreplaceable, and robust hiring process. 

Combine these 3, and we believe it’s an engine for a radical positive future.

Building it

Now on investing strategy. It means: sourcing deals -> closing them at value X -> exiting from them at value Y (Y >>>> X). Let’s call Y - X as delta. 

• Deal-flow: A student friendly channel of meeting with capital. This means no referrals, only applications (although we do take referrals but only through portfolio/ associates). We got 2000+ inbound & 50%+ investments came through that.  A typical student cannot get an intro to a tier-1 VC quickly & seamlessly. Moreover, they may not even want it because they feel they are too early for it. Hence, the typical deal-sourcing method of VCs through getting referred to smaller investors or their co-investors is a truly student unfriendly way to get deals. We knew we wanted to invest in a more democratic & accessible way to get applications.

• Offer: They need more than a term-sheet. A “cohort” where they get exposed to the world through peers & other founders brings them a reality check. Our cohort has Ankur Warikoo (Co-founder, Nearbuy), Sanjeev Bikhchandani (Infoedge), Kailash Nadh (CTO, Zerodha), Shashank Kumar (Co-founder, RazorPay) amongst many others. Even though it seems like they need advice - but they actually really just need accountability on the goals they set to achieve. Conversations with outsiders just crystallise on their approach, objectives and their speed.

• Experience: A seamless deal-closing process. Well, this is not a student dependent advantage. Many VCs are opaque in their process. They take more than months to decide and if they reject, give a really off-guard reason that doesn’t help the founder. We decide really quickly and upfront tell them about our IC process. If they are not going to the IC, they are rejected for that time.

• Brand: Lastly, there’s a deep psychological gap where students don’t know which institution is there to support them. With a real offer, there’s an opportunity to create a “student driven” brand. Because we rely mostly on applications, we need to scale our inbound. And I have finally learnt doing typical branding activities is the way to go.

1, 3 & 4 solve for X. It will give you the best founders. While 2 solves for delta. And there’s a feedback loop between all of these factors.

The 4 factors: deal-flow, offer, founder experience & brand are the competitive advantages of a VC. Let me slip in a secret I learnt - the best founders actually are immune to cohort & experience. They just need the money and want us to get out of our way. They will win, with or without you. 

Our final competitive advantage - Get out of the way

Just don’t take the board seat. Or pressure them. Or give unsolicited advice. 

Key take-aways

• In India, while many first time entrepreneurs have built great businesses, they still comprise a smaller proportion of the total capital accessible to VCs. When raising, you need to form a mixed strategy. Timing matters a lot. Don’t knock doors first on category 2. Get category 1 first.

• There’s a lot of privilege involved. India is a class-based society. People are just divided. And division of people leads to division of resources. Caste, college, gender - trust me all markers play a significant role in your success. Whoever tells you otherwise, either is at the receiving end of the privilege OR is trying to be manipulative OR believes in a living utopian world.

• Founders that give you returns, really don’t need you. You can’t make them win. You can only accelerate their process.

• If you are a first time VC, figure out a way to establish a low capital “MVP”. An MVP that proves you can get a VC advantage: deal-flow, experience, offer, or brand. Industry runs on deal-flow - you can still get away with others.

• You need to burn all your resources to solve the cold-start problem. Don’t expect it to be solved by talking to 10 people. You will probably exhaust all of your social capital. It’s non-repeatable & scarce.

• Finally, you need to build a company. A team, processes, offerings, branding. Many rules of building a startup apply here too.