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"There's never been a better time to be an entrepreneur…"

How is the entrepreneurial ecosystem evolving? Divyang Arora, newest member of the One Globe Forum Advisory Board, shares his insights.
BY BrainGain Magazine Staff Writer |   24-12-2020

How is the entrepreneurial ecosystem evolving
Image credit: Gerd Altmann from Pixabay

A seasoned investor, operator and technology enthusiast, Divyang Arora is the newest addition to the One Globe Forum advisory board. The Forum is organized by BrainGain Global and is one of the leading platforms exploring the intersection of policy and governance with technology, entrepreneurship, education and social responsibility.

Divyang, who has an MBA from Harvard University, is deeply interested in different models of entrepreneurship and capacity-building for entrepreneurs. He spoke to BrainGain Magazine about the entrepreneurial ecosystem.

Here are edited excerpts from the conversation

  1. What have been some of major changes in the entrepreneurial ecosystem in the last few years?

    A major change in the entrepreneurship ecosystem has been the increasing availability of capital in the last 2 decades which has led to some interesting changes in the investing ecosystem. There were a handful of VC firms that used to be the gatekeepers of capital till almost the beginning of this century. As some of the earlier technology firms became household names and produced massive returns for their investors, early stage investing became more widespread and institutionalized as an asset class.

    This led to an abundance of capital flowing into it – across sectors, stages and geographies. Many new firms have been created and players who were not traditionally VC investors have now started investing. Examples of these would be family offices who now invest directly, public market investors investing in ventures such as Tiger Global and Maverick Capital among others and the rise of Corporate Venture Capital (CVC) – venture arms of companies such as Intel Capital and Qualcomm Ventures among others.

     
  2. And what has been the impact of this on the venture ecosystem?

    One development as a result of this has been that investors have started going more downstream to find good ideas and teams. This has been a direct consequence of competition for ventures early on in their development. Investors now routinely have teams that either look for promising ideas in colleges directly or partner with a college fund. An example is the Dorm Room Fund created by First Round Capital which is run entirely by undergraduate and graduate students.

    Another is that investors have tried to use their network and resources in innovative ways to get access to proprietary deal flow. Sequoia Capital’s Scout program which started about a decade ago is well known in this regard. They partnered with the founders of their portfolio companies and encouraged them to write checks to friends within their network who were considering starting companies. This allowed them to utilize their existing network of founders to find proprietary deals one of which was Uber, another, Zynga.

     
  3. Your thoughts on the direct implications of this for capacity building of entrepreneurs?

    I think it’s never been a better time to be an entrepreneur. The overall entrepreneurial ecosystem is more mature now and there are multiple capacity building avenues that have become widespread in order to find promising entrepreneurs and ideas. There are well known examples such as accelerators and incubators for teams with ideas.

    However, there are now programs such as the Entrepreneur-in-Residence (EiR) Program and the Venture Studio model which don’t even require a fully formed idea or team. This has been most helpful to those who want to pursue entrepreneurial opportunities yet still desire some structure and support to get their venture off the ground.

     
  4. What is the EiR program and how has this helped build capacity of entrepreneurs?

    Entrepreneur-in-Residence program is usually a position with a Venture Capital firm where the entrepreneur can develop their next idea. The firms typically bring on someone with a proven track record – seasoned industry executives, repeat founders with a good first exit or an early employee at a high growth startup. They provide the EiR with a combination of the following – salary, office space, access to their network and a potential seed investment once the venture starts. In return, they benefit from the EiR’s experience – help with portfolio support, bringing in new deals, evaluating existing ones.

    Increasingly, multiple institutions have started offering this program beyond just VC firms. Companies trying to launch an innovative product, universities, even government agencies are offering a version of this role. It’s a win-win for both sides. Aspiring entrepreneurs get a support system with the resources of an organization behind them with which to build their next venture. The organizations are able to utilize the entrepreneurs’ network and experience in return.

     
  5. And the Venture Studio?

    The Venture Studio model is relatively newer in terms of its widespread prevalence as compared to the EiR. A venture studio is an organization which creates startups in house by providing a mix of the following: initial capital, founding entrepreneur/team, resources needed to find product-market fit in an accelerated time frame. It differs from a typical venture capital firm primarily in the respect that the ideas are generated within the studio and the founding team is usually in-house or created from within the firms’ network. Some well-known ones include Rocket Internet (primarily non-US markets), Atomic.vc which has spawned startups such as Bungalow (co-living), Hims & Hers (healthcare, in the process of merging with a SPAC) and Google X which was founded by Google to work on “Moonshot ideas” out of which came Waymo and Verily among others.

    This model provides more support especially at the initial stages around idea generation and validation. It is ideal for entrepreneurs who prefer the execution part of the entrepreneurial journey and are somewhat idea agnostic. They are happy to work in an industry of relative interest and in which they ideally have experience but are not wedded to a particular idea. Since investors take a much larger chunk of equity in this case (as the support provided is more hands-on) as compared to a traditional VC investment or even an EiR investment, the entrepreneur should be comfortable with that trade-off.

     
  6. That’s very interesting. Any other models apart from the two discussed above?

    Another very interesting entrepreneurial avenue is Entrepreneurship through Acquisition (EtA) or more commonly known as the Search Fund. The Stanford Center for Entrepreneurial Studies defines search fund as “An investment vehicle through which investors financially support an entrepreneur’s efforts to locate, acquire, manage, and grow a privately held company. The model offers relatively inexperienced professionals with limited capital resources, a quick path to managing a company in which they have a meaningful ownership position.” Although many variations exist within search funds, the most common one is where the individual raises a fund from investors to “search” for a company and then buys the company with a mix of debt and equity capital. This process typically takes 18-24 months. The individual gets a meaningful equity stake in the company, operates it for 5-7 years typically, before exiting usually by selling it to a strategic acquirer or a lower middle market private equity firm.

    Compared to the other two models of entrepreneur capacity building (Entrepreneur-in-Residence and Venture Studio) which help you launch a venture from the ground up, search funds would make you an entrepreneur through acquisition (EtA). Typically, the company for acquisition would be one with stable and recurring revenue, strong EBITDA margins, in a fragmented industry, with favorable industry trends, history of profitability and growth, low capex and multiple levers of adding value post acquisition. Generally, companies that first-time acquirers typically look for fall in the $1 - 3million EBITDA range.

     
  7. And which ones do you see working well in India? Why or why not?

    Good question. The first two models have already gained widespread traction in India in the start-up community. The start-up community in India is extremely vibrant and it has all the elements needed to make these models work – institutional capital, a mature start-up ecosystem with repeat entrepreneurs who can serve as mentors and catalysts for the overall community and most importantly, a very deep level of talent at all levels.

    The third model may take longer to take hold in India due to a few structural reasons. In the US, there is a generation of baby boomers who built great businesses and are now retiring and looking to transition their businesses to someone who can steward them. Similarly, debt capital is more easily available in the US especially under their SBA (Small Business Association) program which is usually the biggest financing resource when buying a small business. Lastly, there is a large community of search fund investors willing to take a chance on a first-time entrepreneur. The confluence of these factors makes this model ideal for the US and the absence of these to varying degrees in India makes it harder to implement it in the country.

     
  8. Any advice for students regarding entrepreneurship?

    The only advice I have for students is to seriously explore the entrepreneurial route. It’s not an all or nothing game and these models are in some ways helping institutionalize entrepreneurship as a career path as opposed to treating it like the wild wild west. Everyone has a different life story, different experiences that have shaped them and different motivations. The consequence being that we all evaluate risk and reward differently. I would urge students to deeply introspect on their motivations, weigh risk and rewards objectively and explore all the resources out there to come to a very informed decision.

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