The ‘valley of death’ is a common phrase in startup lingo. It is the stage at which a startup is operational but doesn’t have meaningful revenues as yet. It’s brutal and many startup die at this stage. And to get through this, startups have to focus on day today execution even as it takes to aim to create long term impact.
“Paris is beautiful, but you’ve got to get off at Normandy first. Everybody dies at Normandy beach,” says Hemant Mohapatra, Partner at Lightspeed Venture Partners. Normandy being the valley of death. That’s one way to put it. And for startups looking to grow their business, or rather — get off Normandy and change the world — we bring you an episode with Mohapatra, who has worked with Google and a16z and several startups. In this episode, we talk about the India opportunity, breaks down how an entrepreneur should approach the fundraising process, and tells us why hire for skills over passion.
Q. Tell us about your journey that led you to become an investor.
A. I grew up in Northern India and later studied engineering in Bombay (Mumbai now). In 2003 I left for the US for a PhD, which I dropped midway to join AMD as an engineer. I was with AMD for about five-six years. Then I moved to the UK for an MBA and then I joined Google. I was at Google for five years working in Google Cloud which was a fairly nascent product back then and also at Google X where experimental products like Waymo and Loon come out of.
After Google, I moved to Andreessen Horowitz, a Silicon Valley-based investor, where I focused on early seed stage and Series-A investment for enterprise and SaaS companies in the Valley.
I finally returned to India, in 2018 to join Lightspeed and have been here ever since.
I wasn’t planning to be an investor. I ended up working with a lot of early-stage founders as part of my work at Google and then I began enjoying the fast-paced, high learning curve orientation on the job.
Q. What’s your investment philosophy and what sectors are you most bullish about?
A. My preference is to learn aggressively. Over the years I’ve tried hard to learn new things quickly. When I speak to a founder I absorb and retain as much as I can about the vision and the company. My goal is to wait patiently for what excites me because when I know a lot about a particular subject, what excites me tends to be more often than not the right thing.
It’s less about what new ideas are coming online. Those tend to happen infrequently in the venture business. It happens a lot more frequently in pure science. In venture, the same things keep coming back and it’s about trying to find out what the right timing for that particular company is.
Now during Covid opportunities are accelerating. In SaaS, we’re seeing a lot more people coming online with far more urgency than we have ever seen before. Education is another industry I’m bullish about. We’re also seeing a lot of exploration in highly regulated industries, like FinTech, as well as HealthTech. Before, if you were in the US, and you were a certified doctor in one state, you couldn’t practice in a different state, all that went out of the door because of Covid. Once you cross those regulatory boundaries no matter which country you’re in, it’s hard to put the cat back into the bag. We’re seeing a lot of acceleration across the board except for some fundamental areas like travelling, hospitality, airlines, and a bunch of other physical heavy businesses.
Q. What do you look for in founders and the market when you invest? Do you take a hands-on or hands-off approach with founders you invest in?
A. I expect founders who pitch to me to have a vision for a billion-dollar revenue company. At that scale, it’s about surviving long enough to solve a large enough problem at a global scale.
I look for founders who are deeply embedded in their problem space and have a strong and personal connection to the problem they’re trying to solve. This shows in how they answer questions, how obsessive they’re about their customers, how much it pains them to lose one customer, and how they track market trends and competitors.
On the market side I prefer tailwind markets there has to be a clear ‘why now’. If not clear early signs of pull from the market, which could then extend to the rest of the world someday. This pull could be in terms of timing, or the pull could be in terms of a difficult technical problem that if solved will lead to a large untapped market opening up. Which is the case for companies like Next Billion or Pixxel Space.
People talk about founders having a ‘right to win’ but it’s important to look at how the business is being built and why this business is going to be relevant. Because that gives the founder the ‘right to play’ the game. The right to win is a secondary question at the early stages.
When it comes to being hands-on or hands-off we adjust our approach to what is needed, when it is needed and at what stage the founders are at. Sometimes we are invited to be hands-on and we should be ready for it. And then sometimes we are asked to be hands-off in which case we should be comfortable and know what would still add value when we’re not hands-off.
Q. When you pick companies, do they approach you inbound or outbound?
A. We do a mix of both. At Lightspeed we’re fortunate to have brand recognition in the market and also because of the founder goodwill that we get we see most of the companies in this market.
We’re outbound in specific sectors where different partners have either prior relationships with the potential founders or they have sector-specific points of views where they are doing systematic prospecting. We have programmatic prospecting through the usual channels. What’s trending on GitHub, who’s hiring the most quickly, and is out there in the market. Based on that we go and do a bit of outbound.
Q. What do you look for in a pitch deck? Are there any red flags that you would like to point out?
A. I look for three things- clarity, urgency and depth. This is as much a function of what you put on the slides as what you keep off the slides and tell a story around.
Red flags for me are unprepared founders that think of fundraising pitches as compulsions, founders that cannot articulate the long term vision and founders that don’t have a short term plan. I always say to my founders that “Paris is beautiful, but you’ve got to get off at Normandy first. Everybody dies at Normandy beach.”Have a long term vision, but certainly have a short-term plan.
Q. How do founders approach the fundraising conversation?
A. As a founder fundraising is one of the three things you have got to do. The other two are hiring and setting up the strategic vision and narrative for the company. Everything else needs to be delegated to people that are better than you at doing those things, engineering, product, sales and marketing.
Founders often tend to underestimate how long the fundraising process can be. If you’re reaching the 10 to 20 million raise size it takes a long time to raise that much capital.
First of all, prepare a list of your dream investors. Good to have investors that you will be excited and happy to work with. Then have a list of backup investors. These are not bad investors. They’re just not your first choice picks. They’re a stepping stone to somebody else. Your goal is to get funded at the end of the day.
Secondly, prepare all the material you need that is pertinent to the state of your business that you need to show investors. The more prepared you are, the better impression you’ll make. For early-stage, it is a lot about the team, market and Minimum Viable Products (MVPs). I love product demos and customer testimonials at that stage.
For later-stage show signals of product-market fit because that’s what you’re raising on top of. Build a folder with Profit & Loss (P&L) statements, projections, sales team efficiency, and marketing funnel efficiency. Figure out what your product roadmap needs to look like, what your technical road map needs to look like, have a plan to hire across all skill sets within the company and all functional verticals within the company. Start conversations early, especially if you’re raising $20 million and above.
As you get into pitches make sure you have practised the story. Run it through other founders, friends, and mentors so start conversations early and prepare well that’s the third thing.
Fourth, I would expect you to be at least 20 to 30% less efficient and your business to be underperforming by 20 to 30% when you’re fundraising so you need to get back to business as soon as you can.
Try to get all the introduction meetings done in a week. Start weeding out the investors that are not moving fast enough, they’re not asking you questions after the meeting, they haven’t discussed next steps and so on. Focus all of your energy on those investors that are already excited about your business. They’re asking for customer introductions, they’re asking for founder references and so on.
This is your primary pool and you’ve got to convert one of these people. Set a timeline make sure that you tell everybody your timeline depending on your deal size and make sure that you are running these discussions on a proper timeline.
I always worry when founders come and tell me that they’re raising $2 million by the end of the next quarter. Don’t set the wrong expectations in terms of timeframe. Make sure that you’re getting all the meetings done fully front-loaded, cut the fat out, focus all of the energy into the potentials and time-bound it to maybe three to four weeks at best.
Q. What metrics do you look at when investing in companies?
A. It depends because, for the most part, we don’t have any metrics to look at especially in the early stages.
I like demos, especially for companies that are in deeper enterprise SaaS. Demos speak a lot. I look at the current and future product roadmap quite deeply and how this roadmap compares against existing incumbents. I also look at core day zero technical advantages. What have you built that is difficult to build or hasn’t been built yet? I spend time interviewing the CTOs and CPOs if they have any. Mostly it’s with founders or co-founders.
In terms of KPIs if they’re available I focus on the usual revenue KPIs like the growth of revenue. I look at Net Revenue Retention and Gross Revenue Retention, typically I like to see 110%-120% NRR and 80% GRR. I look at churn, for SMB’s 1-3% churn per month is ok, I’m even fine with 10% churn per month as long as you’re growing 30%-40% on the other side. In the enterprise and SaaS category, I prefer 3% churn.
I focus more on segment-specific PMF rather than PMF. I like to know about the nature of the PMF. Is it for SMBs or enterprises?
I look at sales efficiencies, how efficient every single salesperson is, how efficient have you been in cutting out fat from your sales engine? What does your sales cycle look like? Have they been shrinking or expanding? I look at marketing efficiencies quite a lot. What does the top of the funnel look like? How expensive is it? How defensible is it?
I look at conversions from the top of the funnel to the bottom, analyse where the drop-offs happen and what can be fixed. All of this is historical data over time, not point in time numbers. I like to see at least three to six months of data behind those numbers if and when available.
Q. What’s your approach when it comes to hiring at the early stage?
A. I hire for skills over passion. In the early days, I like hiring people that are like a sniper bullet. They know exactly what the target is and they’re going to hit it every single time. I don’t like a shotgun approach. If they have the passion that’s great but I always hire for skills.
Q. How do you approach hiring at the core functional areas?
A. I always advise founders that “don’t hire for what you need now, hire for what you are going to need six months from now’’ and most people don’t get this right often enough.
You have to lead the sales effort for the first $1 mn – $2 mn. Listen to the customers directly, get shouted at by the customers directly, hear all the pushback from the customers and build a mental map of what works and what doesn’t work. After you do this, hire your first junior salesperson or mid-level salesperson. Post $2 million revenue you can hire your first sales leader. I prefer to hire hungry people who are essentially coin-operated machines: you give them a goal and you pay them well when they hit the goal, and they tend to hit the goal.
Marketing is a much more complicated beast because there are different flavours to it. There’s a brand proposition, there’s product marketing, there’s performance marketing, there’s growth marketing. You can do a lot and it gets confusing for a lot of founders.
Involve growth marketing when you’re going from $1 mn, $2 mn to about $4 mn $5 million in a year only if you think the market is pulling hard enough for you to go from $2 million to $ 10 million in a year.
Founders tend to underinvest in narrative building marketing exercises, you have to have a land grab motion ready especially if you’re in a fast-growing category where incumbents are going to adapt quickly and new players are going to come in quickly,
You have to be in front of everybody doing crazy stuff like the Freshworks ‘Failsforce’ blimp. Spend time building the narrative for the company and the business. Your brand helps your inbound, and your performance marketing because people are now looking for you, your organic growth gets better, your Cost of Acquisition (CAC) comes down and so on.
Regarding finance, get a finance controller within a million dollars of revenue. You don’t have to get a CFO or a VP of Finance, but get a CFA certified accountant in the business to do your contracts.
I’ve seen companies that have reached $30, $50 million in Annual Recurring Revenue (ARR) that have no clue what revenue they have. Is it recurring? Is it auto-renewable? Is it negotiated year on year? People have no clue and an accountant will help you so get them early.
Design is a thing that Indian SaaS founders don’t tend to emphasize much on and this is such an important piece people miss. Design aesthetics and design mindset across the company is one of the key missing pieces in us building the next generation of top-quality world-class enterprise SaaS products.
Q. What were some key learnings for you that you didn’t know when you were starting?
A. One is that enterprises don’t buy a single product, they buy platforms. Consumers may buy products but enterprises buy platforms and platforms come with a suite of products, they come with solutions, with customer support, a roadmap that the enterprises can buy into and a pricing plan that is relevant to the enterprise so you have to build your company from the get-go as a platform.
The second thing is that distribution is almost more important than any advantages you may have, or you may think you have in product and technology. Algorithms do not make businesses, sales make businesses. Distribution advantages are an important part of what you need to figure out.
The third thing is to spend on sales and marketing. I’ve spoken to founders where a $1 spent in sales and marketing gets them $8 in revenue in a quarter from now. That is ridiculous, you are losing money at the table if you’re spending $1 to get $8. I tell them that spending $3 might get you $20 but they don’t. Companies that have reached Product Market Fit (PMF) and then under invest in sales and marketing end up staying niche players or they get taken down by somebody else or they get acquired.
Spend money to make money, spend money to retain your customers. Build platforms, build a strong distribution, know what your distribution model is going to look like a year from now and then double down on sales and marketing especially if you have reached PMF.
Q. What’s your favourite book on entrepreneurship?
A. ‘The Hard Thing About Hard Things’ by Ben Horowitz. It’s not about entrepreneurship. It’s more about founders, and their journeys and what you take out of that journey is your prerogative.
Q. How can people reach out to you?
A. Twitter is great. My DM’s are always open.