Why we believe in students...
We started gradCapital because we knew students are change-makers. I wrote an article a while back on our initial thesis. Now it’s much more nuances. Let me recap and share what we think about the relationship between students & business.
A first-year hacked into our course system to play a music video on the portal. A team developed the first humanoid robot. People used automated delivery vehicles to deliver across UC campus. A PhD student developed a face recognition algorithm for attendance. Students protested against fee-hikes at BITS. The CAA/NRC movement was centred at JNU. Students in China started a democracy movement (Tiananmen square). Two technologies that will genuinely change the upcoming world, CRISPR & quantum computing, have its roots in another college. CRISPR will truly revolutionise medicine and how we think about healthcare. Quantum computing is likely to change everything. Students are scattered everywhere with their hands on the most radical projects. You won’t ever witness this in corporate spaces but on campuses.
Now here are some other success stories that came form students:
1. Steve Wozniak had taken a gap year and built apple machine.
From building new machines, political movements, governments, to robots & new nano-material, it’s hard to deny the role of students in future building.
As I went to build gC, we also learnt a few more important things.
1. Students are systematically ignored, but they still thrive. We have $220B+ unicorns by value in India, out of which more than $86B has a student founder. Many VCs evaluate founders' basis “their background” as a metric to value the company. It creates a largely delusional sense of valuation. People with “pedigree” & “top corporate” or “top start-up” experience are valued more, because we feel these people will have statistically higher chances of succeeding. They are smarter, they know how to run a company, launch products etc. But to get that, there’s one huge expense. You miss out on radicalism. You miss out on the “outlier” effects that create VC returns.
Small companies didn’t become large just by doing ok-ok things on all aspects, they also had a function that was 100X better. People, when institutionalised too much over mitigate the risk to the extent they cut out avenues for 100x returns.
Out of unicorns in India, student start-ups (~39%) generated higher returns as compared to people with experienced folks (more than 50x). While CRED and Oyo both are unicorns, Oyo returned much more capital to earlier investors than what CRED did.
When you remove all kinds of proxies, you remove the noise. Students, when they build, know they are facing this systemic challenge of not having fancied proxies. And as a result, when they build, our bet is it’s much more magical than any other kind of project.
2. Bargaining power depends not on reality, but on nuisance. In early stage (idea, pre-revenue), someone who worked at Flipkart, Bain for 2 years and went to an IIM will never accept a $500k valuation to their startup regardless of the business realities. This nuisance comes from ego, entitlement, and a system that allows them to bargain on a rational yet meaningless ground. Students, especially those who don’t have much pedigree, have to disassociate themselves from their business valuation. This largely reduces their bargaining power even if they have a powerful underlying business. And this becomes the reason why student unicorns are able to return more money - because someone negotiated really well when the student was not aware of their “self value” & “market” realities.
3. Lastly, there are 2 ways to fund your business: raise (equity/ debt) or make revenue. Raising is institutional in nature, meaning there are well organised and centrally rational (read: “thesis”) beings to make investment decisions. Funding your company from revenue means dealing with the one key stakeholder: customer.
Now here’s the startling part, most VC funded companies have pedigreed institutions (>70%). This number drops for successful businesses that bootstrapped and did not raise early stage financing (at idea, pre-revenue). This reveals a startling fact: business skill if centered around customers is not driven by IIT/IIM. Business, if driven around valuations & institutional raising (early) is dependent on VC. The latter category thinks their customer is a VC, and their objective is to make them happy. The former has the objective true to business: make someone’s life better.
We believe in students & we have to navigate the system to make sure that their projects, that can change the world, get funded.
Here's to the crazy ones, the misfits, the rebels, the troublemakers, the round pegs in the square holes ... The ones who see things differently -- they're not fond of rules ... You can quote them, disagree with them, glorify or vilify them, but the only thing you can't do is ignore them because they change things ... They push the human race forward, and while some may see them as the crazy ones, we see genius, because the ones who are crazy enough to think that they can change the world are the ones who do - Steve Jobs