Mohan Kumar and Nishant Rao: A Dynamic Duo Transforming India’s Startup Funding Ecosystem

Mohan Kumar and Nishant Rao are not just seasoned investors; they’re visionary storytellers in the world of start-up funding. With decades of experience and an unparalleled perspective, their journey in the Indian start-up ecosystem has been nothing short of extraordinary. In the midst of a funding frenzy that engulfed India’s start-up landscape, Kumar, a corporate leader with two decades of experience, including a role as the Corporate Vice President of Motorola, and Rao, who contributed significantly to Freshworks and LinkedIn, set out to change the game. This “insane” funding scene unfolded in the wake of the pandemic, where SaaS companies, benefiting from the world’s growing reliance on software solutions, saw their valuations skyrocket.

Prior to 2018, the valuation multiples for SaaS companies were typically seven to ten times their revenue. Market leaders might have pushed this to 15 times. However, during the pandemic, SaaS companies started commanding 40x and, in some cases, even 100x revenue multiples. Hedge funds, such as the renowned Tiger Global, swiftly realized the potential and “gatecrashed” the funding party, leading to a significant shift in the funding narrative. Kumar and Rao initiated their journey with Avataar Venture Partners, a fund dedicated to growth-stage SaaS and B2B companies. Their aim was to address a gap in the market for late-stage funding, particularly for Series C and D rounds. Additionally, they recognized the need for a team of experts with hands-on experience to guide B2B and SaaS companies in their scaling journey.

However, there was a missing piece to the puzzle. The duo returned to the drawing board to understand the precise funding requirements for building a $100 million recurring revenue SaaS company in India. Their findings, extrapolated from the U.S. market, showed that it typically took $1 to acquire 50 cents of revenue and that a $100 million company raised around $150-200 million in funding. Translating these findings into the Indian context led to two significant conclusions. First, for every $1 of revenue, a company should ideally raise a maximum of $1 in capital. For a company aiming to cross the $100 million mark, raising over $100 million was not necessary. This insight prompted Avataar to cut cheques ranging from $30-35 million, which would provide enough capital for these companies to reach $60-70 million or potentially even $100 million in revenue.

The pandemic altered the dynamics further, causing an unprecedented shift in valuations. Kumar shared the experience of evaluating two HR tech companies with similar revenue trajectories, one based in India and the other in Silicon Valley. However, the Indian start-up received an inflated term sheet valuing it at $300 million, an astonishing 40 times its revenue. Kumar’s decision to stay away from this bidding war highlights the challenges posed by excessive capital injection.

While founders should not decline high-value rounds, Kumar emphasized their responsibility to use the capital prudently and meet the heightened expectations. A common pitfall is when founders indulge in unnecessary expenditures and fail to maintain fiscal discipline, leading to potential crises when funding becomes scarce. Excessive capital availability also attracted individuals with limited passion and commitment into the entrepreneurial ecosystem. Start-ups were no longer reserved for the brave and passionate; everyone had access to funding. This ultimately led to a differentiation problem when distinguishing genuine founders from the opportunistic ones.

Returning to Avataar’s mission, Kumar and Rao provided insights into the traits they seek in start-ups at Series C and D stages. They emphasized the value of having a co-founder to share the entrepreneurial journey’s challenges. Building a strong team, including key positions like CEO, CTO, and heads of products, sales, revenue, and engineering, was deemed crucial. Equally important was the founder’s ability to attract individuals more skilled than themselves. This ability to scale the team is often a make-or-break factor. The Avataar journey has been enriched by Kumar’s familiarity with founders from his previous stint at Norwest, which led to successful deals with companies like Capillary and ElasticRun. In the SaaS industry, international market expansion is vital, and Avataar encourages start-ups to move beyond India to achieve scale.

While the Indian SaaS ecosystem is flourishing, Mohan Kumar and Nishant Rao remind us that being an investor is about more than just providing funds. Their pedigree and mentorship can often be as valuable as the capital itself, and with their experienced guidance, the future of the Indian start-up scene looks incredibly promising.