How Rocketship.vc’s Data-Driven Approach Helps It Secure Quality Startup Deals Even During Slowdowns

New-age tech startups have largely staggered to stay abreast of their projections post their initial public offering (IPO) journey. While late-stage firms like BYJU’S, BharatPe, and GoMechanic are struggling with corporate governance issues, there’s a noticeable scarcity of high-quality deals in the world’s third-largest startup economy.

Unfortunately, these are just a few of the many factors due to which Indian startups have experienced a more than 70% year-over-year decline in funding.

According to data compiled by Inc42, the Indian startup ecosystem raised $42 Bn in 2021 and minted 45 unicorns that very year. Further, in 2022, which is infamous for hosting the funding winter that now has overstayed its welcome for all the wrong reasons, funding plummeted 40% YoY. Despite this, Indian startups raised $25 Bn and the country entered 22 startups into the coveted unicorn club.

However, it has been a downward spiral since then, as Indian startups only managed to raise $5.4 Bn, sans even a single unicorn, in the first half of 2023

“This is because there is a scarcity of high-quality startup deals,” said Madhu Shalini Iyer, managing partner, Rocketship.vc.

Having invested in startups like Yulu, Moglix, and Nobroker, Silicon Valley-based Rocketship.vc is an early-stage fund with a focus on the global market. Interestingly, unlike many Indian VCs, Rocketship.vc is a 100% outbound fund.

What’s even more fascinating is the fact that the VC firm leverages its extensive data sets to identify high-potential startups. The investment firm employs computational algorithms to meticulously select the most promising ones from a vast pool of ventures.

So, how has the data-driven company selection approach worked out for the VC so far?
In a candid conversation with Inc42, Madhu Shalini Iyer tried to answer everything — ranging from VCs’ current investment sentiments to factors that are impacting late stage funding in the country.

However, before we delve deeper, it is pertinent to mention that the VC has readied a war chest of $125 Mn Fund III to be deployed in 2023.

Here are the edited excerpts…

Inc42: Since Rocketship.vc is 100% outbound, how does it shortlist startups?

Madhu Shalini Iyer: Rocketship’s approach to investments distinguishes itself from conventional methods. We possess an extensive dataset comprising petabytes of both static and dynamic information about numerous startups. This dataset encompasses essential details such as founder identities, investor profiles, founding dates, and locations, along with dynamic information like web data, signals from platforms like LinkedIn and Twitter, and any web mentions.

This intricate dataset is applied to a single company among a staggering count of 50 Mn global contenders. Our expertise extends to crafting sophisticated algorithms that leverage this data. Through our investment journey, we’ve realised that a larger denominator of data points contributes to improved predictive accuracy and higher betting odds. Essentially, precision is enhanced when dealing with a larger scope of factors.

In essence, our methodology revolves around employing computational algorithms to meticulously select the most promising companies from a vast pool.

Inc42: But, at the early stage, online data on startups may not be that adequate. What are your thoughts?

Madhu Shalini Iyer: That’s true. Our focus lies primarily on Series A investments, as we’ve identified it to be the optimal sweet spot. We allocate a significant portion of our investments to Series A rounds, especially when there’s a substantial amount of data available, and the valuations are not overly inflated. It’s important to note that we don’t compete directly with growth-stage funds and our strategy centres around Series A and occasionally Series B investments.

Series A presents an opportune stage because it allows for the accumulation of sufficient data. However, it’s crucial to recognise that this approach is still directional, distinct from the strategies employed by public hedge funds. Data-driven public hedge funds often make calculated decisions solely based on available data, sometimes without even engaging in direct communication. Due diligence may not be as crucial for them, given the data landscape.

In our case, the process diverges. From a pool of 150 shortlisted companies each month, we initiate outbound communications. This proactive approach constitutes our deal flow, and we entirely avoid inbound inquiries. Guided by our data analysis, we reach out to the companies we’ve already developed strong convictions about. Subsequently, we aim to bolster these initial convictions through further interactions and information-gathering.

Inc42: How many startups have you planned to invest in via Fund III? Since it’s a global fund, is there any particular focus on Indian startups? Is there any change in the Fund III strategy when it comes to investing in Indian startups? 

Madhu Shalini Iyer: We are going to stick to pretty much what we did during the allocation of Fund II, which is investing in 20 to 25 startups across the globe picked by algorithms.

Fund II was about 60% emerging markets, of which approximately 50% was India. Fund III could be more or less similar to Fund I, where 40% of investments were towards emerging markets like India.

For the Fund III India Investments, the corpus has already been given. Therefore, we are more excited than ever and are following the directional signal from our algorithms, finding Indian companies.

It is pertinent to mention that we invest more than $3 Mn in Series A deals, but we are flexible. We also engage in follow-on rounds with companies that we partner with.

Inc42: Indian startup funding has witnessed a more than 75% decline since 2021. Has there been a change in your funding strategy? How do you look at the funding winter? 

Madhu Shalini Iyer: Our data has been telling us that certain sectors are doing better than others. Some of these sectors are deeptech, climate tech, predictive AI, EVs, and spacetech. So, yes, there has been a certain shift.

Other factors that indicate a robust ecosystem in the longer run are the emergence of founders from tier II and II cities of India, the macroeconomic landscape and the country’s GDP.

The fact that there’s a dearth of funding cannot be denied. The funding winter has also been triggered in the absence of investor exits. We are now looking forward to some of the IPOs next year.

Inc42: Despite sitting on massive amounts of dry powder reserves, investors are shying away from deploying capital. How do you see this? 

Madhu Shalini Iyer:

I’ll be frank here. The reality is that the quality of startups isn’t yet meeting our expectations. While we are actively engaging with numerous promising startups, not all of them make it through our pipelines successfully.

It’s a variable situation — sometimes the alignment is there and sometimes not. Our eagerness to invest remains intact, but we maintain a high threshold for what we consider investable quality.

Presently, a lot is happening in the early-stage space, yet we’re not encountering an abundance of truly exceptional companies.

Undoubtedly, there are a few standout companies, but we haven’t executed any investment decisions as of now. Our approach remains cautious, and we’re adopting a watchful stance. The situation might gain more clarity once the IPO landscape stabilises. The companies emerging during this period will be particularly intriguing to observe.

Meanwhile, we’re consistently in conversations with potential investment candidates, thoroughly examining each opportunity before making any moves.

Inc42: Has the funding winter slowed down your investments?

Madhu Shalini Iyer: Yes. This sentiment is similar across the VC landscape, and every VC would concur. I say this with complete candour and transparency. Our stringent criteria for investments contribute to this acknowledgement.

Are we enthusiastic about the prospects? Absolutely. Allow me to clarify — our engagement isn’t merely an exercise in gauging the market environment, we’re driven by a genuine desire to invest.

Our interactions with potential investment candidates are guided by a strong intention to allocate funds. We actively consider every company that emerges as a strong contender within our pipelines. Our goal is to forge partnerships with these companies, grounded in our commitment to making impactful investments.

Inc42: You spoke about IPOs. But, Indian tech startups have performed poorly in the post-IPO phase. Who according to you was not ready — startups or the market?

Madhu Shalini Iyer: I believe that there’s a need for further action, and it’s always encouraging to witness the government’s proactive efforts in streamlining these aspects. Rigorous regulatory adjustments hold considerable importance in ensuring a healthy ecosystem.

Regarding the startups’ readiness, the ongoing situation has prompted startups to engage in a reflective process and absorb crucial insights. The market has undergone a period of reckoning, leading to a rapid learning curve. Startups have absorbed valuable lessons about the essential metrics to focus on and what requires prudent attention.

This phase can indeed be regarded as a valuable learning experience. Conversations with founders highlight a newfound awareness about the importance of measured progression rather than haste, ensuring a solid foundation before moving forward.

The value of these lessons transcends theoretical teaching. While it’s too early to definitively predict if past mistakes might resurface, the crucial point is that this chapter has likely imparted lasting insights.

Whether these lessons are internalised or not remains to be seen, but the general trajectory is toward continuous improvement. Ultimately, there’s a sense of dedication to personal and collective growth. Frankly, that’s the best course of action moving forward – to constantly strive for enhancement and refinement.

Inc42: The issue of corporate governance has also impacted the late-stage Indian startup ecosystem. What’s your observation? 

Madhu Shalini Iyer: Certainly. However, this isn’t a challenge confined to startups but rather an issue encompassing the entire ecosystem. To lay the blame solely on startups would be a hasty judgment. This challenge extends its reach to VCs too. It’s incumbent upon all of us to take responsibility, learn from the experiences, and collectively evolve.

Participation at the board level plays a pivotal role in addressing these concerns. As someone who is actively engaged in several boards, I can attest that being a part of these discussions and providing constructive feedback is of paramount importance. It’s crucial to acknowledge that perception isn’t the sole consideration, and the focus should be on doing what is ethical. Overcoming adversities, including challenges like layoffs, should not deter the commitment to building and rebuilding companies as needed.

Moreover, India grapples with the issue of perception. There’s an undue concern about external opinions or judgment, which can hinder progress. This mindset needs to change, and a more assertive approach is required.

As far as early-stage startups are concerned, the emphasis often isn’t on perfection but on the process of building and evolving. This is where course corrections become pivotal.

In essence, this is a collective journey of growth and learning, encompassing startups, VCs, and the entire ecosystem. Acknowledging the challenges, embracing feedback, and having the resilience to overcome obstacles are key elements in steering this ecosystem towards a more robust and sustainable future.

Inc42: What’s been the success ratio for Rocketship.vc?

Madhu Shalini Iyer: It would be too early to evaluate Fund II. However, out of our Fund I, which was more of an experimental fund, we have seven unicorns.

Note: We at Inc42 take our ethics very seriously. More information about it can be found here.