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DTM E52. Investor's Five Key Questions for Startups, Ideal Startup Pitch, Value Unlocking in Generative AI and more - Sonal, 3one4 Capital
From the Deep Tech Musings Podcast - Get actionable and tactical insights to take your Deep Tech startup from 0 to 1 [Idea to Traction]
Sonal is currently VP at 3one4 Capital, an early-stage VC which counts in its portfolio the likes of Licious, Jupiter, Darwinbox, and more! 3one4’s exponential growth has been driven by partnering with generational companies to transform market segments across the country. Sonal has built systems and processes at 3one4 Capital to achieve strong coverage without compromising founder or referrer experience, all while maintaining a lean investments team. In addition to managing routine investment workflows, Sonal looks at fintech, enterprise software, and deep-tech focus areas for the firm. He has been an integral part of the firm’s investments in several category-defining companies. On the episode we discuss,
Investment Thesis and Focus at 3one4 Capital
Deep Tech Definition and Startups in Portfolio
3one4 Capital's Role in Unique Startup Growth
Investing Phases' Key Considerations
Investor's Five Key Questions for Startups
Team Assessment, Flags, and Metrics
Components of an Ideal Startup Pitch
Listen to the episode here,
or on the below platforms
3one4 Capital - Website
Sonal’s viewpoint on how GenAI influences SaaS business models - Post
Twitter Episode Post - Link
Show Notes & Summary:
(2:15) Investment Thesis at 3one4 Capital
1. We take a broad view of the Indian market.
2. We have themes and areas that we spend more time in because we think they will grow faster.
3. Historically, we have pursued themes in B2B SaaS, Enterprise and SMB automation, fintech, consumer internet, and digital health.
4. We have also worked in areas such as actionable intelligence, digital media, logistics, distribution, and climate sustainability.
5. We have teams building for the Indian market or for a global opportunity.
(4:05) Investment Focus and Startup Stage
1. 3one4's latest fund (Fund IV) is worth $200 million and focuses on early-stage investments.
2. The firm invests in companies at various stages, from the idea stage to those close to product-market fit.
3. The firm typically invests between $1 million to $5 million for the initial check.
4. A significant portion of the $200 million is reserved for follow-on investments in the companies the fund has already invested in.
(5:05) Defining Deep Tech at 3one4 Capital
1. The term "deep tech" is open to interpretation and can be confusing.
2. Deep tech companies involve commercializing research breakthroughs.
3. These companies are technology-led and have unique solutions that are difficult to replicate.
4. Deep tech companies have a higher technical risk compared to growth or go-to-market risks.
5. Deep tech can be found in virtually every industry and there are opportunities to build IP-first companies in most categories.
(6:26) Deep Tech Startups in 3one4 Capital’s Portfolio
1. Dozy is a contactless remote patient monitoring company in India that uses ballistic cardiography techniques.
2. The fabric placed under the patient's bed can sense healthcare signals like blood pressure and heart rate.
3. This technology increases healthcare productivity in understaffed hospitals and improves nurse productivity.
4. The data collected allows for the development of algorithms and provides early warnings for patient escalation.
5. Exponent Energy is another company that is focused on accelerating EV adoption in India by reducing charging times for commercial vehicles to 15 minutes.
(9:48) Role of 3one4 Capital in the Growth of Unique Startups
1. The 3one4 Capital LP network is extensive and has a global reach.
2. Partnership with British International Investment has opened doors for hospital relationships.
3. Upgrading public health hospitals through the million ICU initiative will lead to increased monitoring capabilities.
4. Similar benefits have been seen through OEM relationships and access to charge point operators.
5. The partnership has enabled companies to think bigger and achieve nonlinear growth in business development.
(10:58) Key Considerations for Investing in Startups by Phases
1. Early-stage investors are looking for opportunities with manageable risks, genuine pain points, and the right team to back.
2. The state of the ecosystem and competition also play a role in investment decisions.
3. Investors also consider the opportunity cost and alignment to their timeline.
4. A typical investor aims to return their fund, so they look for companies that can grow and provide a substantial return on investment.
5. Different stages of a company's journey require different questions to be answered, focusing on product risk, market risk, and scaling risk.
(14:22) Five Key Questions That An Investor Is Looking To Answer While Investing
1. Back the Team: Assess the strength and capabilities of the team.
2. Address Genuine Pain Points: Evaluate if the solution targets a significant and authentic problem.
3. Timing and Growth Potential: Consider if the current timing offers advantages and if market conditions support rapid growth.
4. Marketing and Outcome Focus: Examine the team's understanding of marketing, distribution, and potential for a substantial outcome.
5. Milestones and Risk Mitigation: Review the presence of clear milestones for short-term progress and long-term derisking, and how they plan to utilize funding.
(16:19) Assessing the Right Team: How to Identify Potential Flags and Metrics
1. Investors often rely on gut instinct and past experience when determining if a team is headed in the right direction.
2. Evaluating the motivations, expertise, compatibility, and track record of the founding team is important.
3. The relationship between the founders and their ability to make the right decisions is crucial.
4. Shared values and vision are important factors in deciding to invest in a team.
(17:52) The Key Components of an Ideal Startup Pitch
1. It is important to consider how the message is delivered and who the entrepreneurs are speaking to.
2. Technical teams should focus less on the technical aspects of their business and more on why the problem they are solving is important and how they can mitigate risks.
3. The assumption is that the technology can work, so the focus should be on implementation and finding the right customers.
4. Startups often face barriers to adoption and growth related to market embedding and finding the right customers.
5. It is important to prioritize these considerations from the beginning of the conversation.
(19:28) Determining the Amount of Funding Startups Should Raise
1. It is beneficial for a company in the early stages to have funding from a lab environment or to raise non-dilutive grants.
2. When seeking venture capital, companies should aim to raise enough money for 18 to 24 months and agree to 18% to 22% dilution.
3. Valuations in the early stages are based on the amount of money raised and agreed-upon dilution.
4. The primary objective in the early stages is to raise capital to reach the next milestone.
5. Once revenue-led, valuations will be based on comps and benchmarks.
(21:38) 3one4 Capital's viewpoint and approach to Generative AI
1. AI has been talked about for many years, but recently there has been a transformative breakthrough.
2. The research, product, and business communities are all paying attention to AI, thanks to consumer-facing products like Chat GPT.
3. There has been a lot of innovation in AI, making it easier to prototype and deploy products quickly.
4. The open source and research communities have made advancements in multimodality, allowing for the combination of different types of data.
5. While AI is exciting, companies still need to consider economic factors and find real problems to solve with AI, rather than just applying it arbitrarily.
(26:08) The Importance of Problem-Solving and Faster Iteration in Product Development
1. The first wave of interesting and low-market-risk companies will be infrastructure companies like OpenAI and Anthropic.
2. Challenges exist in delivering these services at a large scale, including concerns like data privacy and hallucinations.
3. The immediate opportunities lie in delivering these services, while more interesting opportunities will arise in consumer or business-facing applications and integrated products.
4. Instead of simply applying AI to existing workflows, there is potential in reinventing workflows to fully utilize AI.
5. The most exciting and difficult-to-displace products will likely come from rethinking how AI is applied to existing processes.
(28:19) The Value Unlocking Potential of GenAI Lies in the End Applications
1. Starting with a problem statement and finding innovative solutions using available tools is the right approach.
2. Sam Altman’s recent interview suggests that the focus should be on practical problem-solving and applications rather than just building open AI.
3. The value lies in addressing real challenges, like cost affordability and linguistic diversity in India.
4. Foundational models emerging from India can address unique challenges such as language variety in text and audio modalities.
5. It's important to explore reasons for building AI, beyond competition with other companies.
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