Mumbai-headquartered micro VC fund 100X.VC is on a mission to turn startups that are in their extreme early stages into enterprises that are ready for serious financing.
100X.VC was founded in mid-2019 by veteran angel investor Sanjay Mehta, who has backed more than 100 startups since 2011, along with Yagnesh Sanghrajka, Ninad Karpe, Shashank Randev, and Vatsal Kanakiya. The firm writes seed-stage checks for rookie founders, and mentors them to raise the next round of funding.
However, what separates this micro VC from other backers of early-stage startups is that it has come up with a new investment instrument: the firm puts money in startups and takes equity after the companies raise larger rounds.
In an interview with KrASIA, Sanghrajka, founder and chief financial officer at 100X.VC, said the VC aims to have 100 startups in its portfolio by the end of this year. It expects no less than 20-fold returns from its portfolio companies.
The following interview has been edited for brevity and clarity.
KrASIA (Kr): What’s the reason behind setting up 100X.VC?
Yagnesh Sanghrajka (YS): The number of startup founders in India has grown multifold in the last five to ten years. But most of these founders do not know how to raise funds, because they hardly have capabilities beyond their core expertise. They are not sophisticated and knowledgeable enough to get investments. That’s why there’s a very high startup failure rate not only in India, but also across the world. A mere 2–3% of startups are successful in getting funded.
That’s a huge problem and a pain point. These founders know what they want and are good at creating products, but there’s a lot that needs to happen before a startup can become a VC fundable business. Most founders do not have access to the capital, without which the growth of the company cannot sustain beyond a point.
The whole point of starting 100X.VC is to make more founders successful at fundraising. After we write them a seed check of about INR 2.5 million (USD 35,000), we nurture them and make them investment-ready. We work with them to make sure that they are able to get the next round of funding.
On the other hand, 100X.VC acts as a discovery platform for investors. We work with a lot of VCs like Sequoia, Nexus Ventures, Chiratae, StartupXseed, and Inflexor, as well as angel networks such as Indian Angel Network, Mumbai Angels, and Lead Angels. We give them a curated deal flow of very early-stage startups. So we have partnered with larger investors with a USD 100 million-plus kind of corpus, where they look at our portfolio companies, evaluate them, and invest in them.
Kr: How do you pick startups to back?
YS: We are sector-agnostic. We look at anything that has an asset-like model because we don’t want to fund startups’ capital expenditure. We would like to back businesses, wherein investment goes into scaling the business and growing the team.
The startups that we fund are very early stage. These are the guys who are looking at their first external check. These could be recently launched, pre-revenue companies, but their ideas have to be brilliant and scalable. We look at the market opportunity as well as the founding team and if it is capable of execution.
We have received a staggering 8,500 applications from founders in the last two years, from which we selected just 39. We have looked at a geographically diverse set of startups. There are startups that come to us from smaller cities like Ahmedabad, Baroda, and Calcutta, aside from the usual startup hubs like Bengaluru and Delhi.
Kr: 100X.VC uses iSAFE (India Simple Agreement for Future Equity) notes for investments. What are they? How do they work?
YS: When most VCs back companies, they gain a lot of rights that founders find very difficult. We thought the best way to address this is to create a founder-friendly document, just like Y Combinator’s SAFE (Simple Agreement for Future Equity). So we coined the India version of SAFE, iSAFE, which is legit and is recognized as per the Companies Act in India. It’s a convertible note document. We use it to invest a small check in the company for a promise for future equity. For seed checks, we generally take a 7% equity stake, which founders allot to us when they raise the next round.
It is a simple five-page investment agreement versus a 50-page document that most investors insist that founders must sign, which when they do, they get stuck with various terms in the agreement that they are not able to understand. iSAFE is completely open-source, so other investors can also use them when they invest in a company.
Kr: How does iSAFE benefit entrepreneurs?
YS: Let’s say a founder is not able to scale after the small seed check. In that case, it’s a clear write-off from our side, and the founder or the company doesn’t have to pay the money back to us. There is no principal protection. We are risking the money that we put in.
Secondly, allotment of equity only happens when the company receives a valuation. When we invest, most of the companies are at a stage where they cannot be valued properly. With some level of funding from us, they scale and raise the subsequent round at a very decent valuation, without falling prey to cheap valuations by investors and losing out too much equity. They give us 7% only after that round. When founders get a larger check to grow the business, we get our equity. That works as a win-win.
Kr: What is your business model?
YS: Our business model is completely ROI-based on exit. We make money only when we exit at a particular valuation. We don’t charge any fees from the founders or investors for the fundraising like investment bankers normally do.
Kr: At what stage do you look to exit a startup?
YS: We don’t exit for at least the first two years, because we understand that once a startup gets its next round of funding, its founders will need 18 to 24 months to make something out of that startup. We expect to see exits from the third year onward, when there is a new institutional round and the incoming investor is buying 100X.VC’s stake. But we are going to exit only when a company has raised multiple rounds and the valuation has reached a stage where we are looking at at least a 20-fold return.
That may or may not happen with most startups. So even if some of the startups fail, it is fine, because some of the outliers in the portfolio will give us more than 20-fold in returns.
At least 75% of our founders have been able to raise the next round, which has increased their chances of survival and success. We’ve invested almost USD 1.5 million so far, and our companies have cumulatively raised more than USD 6 million in funding across their second and third rounds.
Kr: What are your plans for this year?
YS: Right now, we are funding ten startups every quarter, and we would like to take this number up to 20, so that we have close to 80 deals a year. Although our aim is to do 100 startups a year, we feel confident about at least doing 70 to 75 deals this calendar year. So far, we have been backing startups from the internal money that the 100X.VC founders have put together. We would look at raising external funds when we have reached over 60 investments and some of our startups have done brilliantly in terms of raising the next round.