‘Team, practicality of business plan are what we look at, not spreadsheets'

“The quality of entrepreneurs is improving significantly year after year and I feel that the bar we have can constantly be moved up,” says Mr Prashanth Prakash, Partner, Accel Partners.

Accel is a venture capital fund that does early and growth stage investing in companies across the globe. Accel's Indian investments include Flipkart, Kaati Zone, Myntra.com, Zansaar and Trivone.

Excerpts from an interview:

What kind of companies do you invest in?

Most of the action in India is in the seed to early stage and 95 per cent of our funding would be for companies in these stages. Our initial round will be between half a million to one million dollars. No matter which company, including some of the bigger ones like Flipkart that we have funded, we like to go in with a small amount of money and over time, as the company scales up, we invest $5-7 million.

As far as the areas are concerned, the Internet is our primary space. More than 50 per cent of our investments come in some aspects of the Internet – e-commerce, media, cloud and mobile. Besides, we are also largely a consumer-centric venture fund. That way, we have even done fast food-chains because it is consumer centric. In terms of verticals, we do education and healthcare.

How do you judge the entrepreneurs before taking the plunge?

It is important that they are a team. If one has found his co-founder, we would give that a lot of weight. Between the two co-founders, they should bring all the skills to the table. It is difficult to get talent with the same level of passion that the early founders have. So the completeness of the team is important. They need not have all the experience, but need skill and capabilities.

The second thing that we look for is how well they have mapped the opportunity — have they done the reasonable mapping of competition, the complexity of the opportunity, do they have reasonable immediate short to medium term goals. The practicality of the business plan is what we look at and not what spreadsheets they have. Anybody who knows how to use spreadsheet can make projections but mapping that to a well-known set of practical milestones is essential. Finally, we see what commitment they have. It is a seven/eight-year journey on an average. Will they be able to weather the storm in this period is also what we look for.

Between the team and the idea, which one would you give more weightage to?

More for the team. The idea is anyway so nascent. It has to evolve. The capability of the team to evolve the idea is important. Ideas don't have to be something that has never been done before a lot of the ideas is about execution and in India, it is about execution against all odds.

Taking the Flipkart example, Amazon did not build a logistics service or a PayPal but in India, Flipkart had to build a payment mechanism, a Cash on Delivery (COD) facility. It also had to build its own logistics network because our courier guys either did not have the network or were not dependable. So you have to have the extraordinary capability of not only dealing with your business but also the ecosystem. The idea might fail not because you don't execute it properly but because the ecosystem is not ready.

Technology businesses require a good combination of online and offline execution capability. In India, take Naukri, for example. The 5,000-10,000 people on the field really built that business. Abroad, a business of scale can clearly be built online. Here, taking the product to market requires skills outside the core technical skills.

What are the common pitfalls for new entrepreneurs?

The classical thing they do is that they underestimate the costs and overestimate the revenues. They underestimate the process of carrying forward an idea and making it a product, and the number of iterations that are required to fine-tune the product. Also, entrepreneurship is not an up, up and up game — when they have a setback they need to pivot the model, change course and restart. But they don't believe that there can be so many course corrections. This can be detrimental to the overall outcome.

When we see them making the right course corrections and they still need a little bit more money for that, we bridge them. But if we don't see them being responsive, then we cannot bridge. Entrepreneurs have to be nimble and agile. That's what gives them an edge.

What would be your advice to entrepreneurs?

Just coming out of school, with absolutely no real-world experience is not ideal for the type of complex execution requirements in India. So I recommend that they spend a few years in real jobs. They must work in the right kind of companies where there are a lot of challenges, get the right experience, get little more depth. Between the team, reasonable amount of field experience is necessary.

The second aspect is that not enough diligence on competition is done by most of them. Why should the start up at all be there? How differentiated are they? They sometimes say that they are different in a small dimension, but they do not understand that a bigger company in the same field — one that is well funded and has the right team — will easily absorb that and kill them.

We can seed the company but people may not be willing to fund them further because they are not very different. The ability to raise future capital is a function of seeing who else is well funded in the same/adjacent spaces. The more they can really see why this company should exist, the better.