VC Growth In India In 2023

“Venture Capital is 90 per cent luck and 10 per cent skill. But don’t try it without that 10 per cent.” Richie Benaud

Okay. Richie didn’t say this about venture capital. He had cricket captaincy in mind. But his thoughts are equally applicable on most things in life, especially investing. We always tend to forget the oversized role of fortune in successful investments.

The greatest investors are skillful. But they are also luckier than others. You can’t become a good investor if you don’t have the skill. But not all skillful people are equally successful. Luck is important.

Why am I talking about this?

Venture Capital industry is going through a tough phase. The media is full of stories of billion dollars startups struggling to survive and trying to raise more money to stay afloat. We also are seeing several high profile cases of top level frauds.

Sequoia Capital name has been popping up a lot lately. Quite a few of their portfolio companies are mired in controversy. Go Mechanic is just the latest example. Outlook Business published a long article on Sequoia’s misfortunes.

Although the authors mention some good points like lack of due diligence in startups, VC’s mindset of growing by burning capital and their obsession with valuations, most of the article is a comment on the working style of Shailendra Singh, Sequoia’s top guy in India. Although I won’t call it a personal attack on Singh, one does get the impression from the article that Singh is responsible for everything that’s bad with Sequoia.

I would imagine a similar article crediting Singh’s exceptional intelligence and fortitude in good times. Journalists like to sensationalise. That’s their modus operandi of getting eyeballs.

But as readers, we should know better. Singh suddenly has not become a poor VC because his portfolio companies are blowing up. He isn’t totally responsible for all their failures like he wasn’t completely responsible for their successes.

We are ignoring the impact of luck. In good times, investments do well. In bad times, investments go poor. Individuals can’t influence it to a large extent.

I am shocked to learn these benchmarks of monthly growth and retention rates (after a VC analyzed over 100 social apps) and I feel most Indian apps will fail to make the cut. Andreesen Horowitz has done a detailed benchmarking on GROWTH, ENGAGEMENT and RETENTION numbers using hundreds of early-stage social media apps to come up with the following benchmarks.

To my mind, these can be applied with some modification to communities being built by startup founders for their D2C / SaaS startups as well.

👉🏼 Growth in Daily Active Users (DAU)
20% monthly is okay
35% monthly is good
50% monthly is great

👉🏼 Ideally, almost all of this growth should come organically. This is because social apps often can’t monetize until later, so they don’t have as much cash to burn on paid marketing. More intuitively, social apps should be inherently viral, with users wanting to invite their friends to make the experience even better.

👉🏼 If more than 10–20% of your users are coming from paid sources at the early stages, you’ll likely want to rethink your acquisition strategy.

👉🏼 Engagement may be measured through the ratio: DAU / MAU
25% is okay
40% is good
50% is great

👉🏼 Another metric to look at for engagement is the L-ness curve.

This metric looks at the distribution of users by number of days active over a certain time period, and can be measured on either a weekly or monthly basis. For example, on a weekly basis, how many of your WAUs are active one day per week, two days per week, three days per week, and so on.

👉🏼 L5 or active 5 days in a week ratio should be at least 30%, good at 40% and great at 50%

👉🏼 Now let’s look at Retention, which is measured as and called n-day retention. For example — if you have 100 users sign up for your app today, and 25 of those users use the app 30 days from now, your day 30 retention is 25%. “Great” benchmark for n-day retention is 70% at d1, 50% at d7, and 30% at d30.

So, the higher your n count is, or the longer your time period of measurement is, the more valuable your metrics are.

With the growth and retention rates I see, I feel a massive list of social / community apps would fail to make the cut… Let me know if you know an app that is in the good or great category consistently over a 12–18 month period.

Resources in India are almost 1/3rd of global resources, however, Indian companies today are raising almost the same as European and US companies in the seed stages. And this is leading to over capitalisation, and further inefficiency.

It is always exciting to raise more capital if you are offered (social validation, thrill etc.), and today this is also coming at lower cost/dilution than before. So ultimately, in terms of economics, a founder is not losing much and it is tempting to take more capital. And in my view if you are offered more capital then you should take it as well.

But it is important to ensure that fund use doesn’t change dramatically just because you were offered some extra cash. Extra cash should be seen as a rainy day fund rather than using it to systematically change the org chart and create inefficiencies in the organization.