Ideaspring’s Naganand Doraswamy On Bringing The Entrepreneurial Mindset To The Micro VC World

Many venture capital firms — even those of the micro VC variety — claim to be founder-first. What exactly does that mean? Is the investment conviction largely based on the entrepreneur, or are VCs talking about working more closely with founders and going beyond investing?

For Ideaspring Capital’s founder and managing partner, Naganand Doraswamy, you cannot have a founder-first approach without both these aspects. Some of that is due to his professional journey, but also because of Ideaspring’s focus on enterprise tech, where founders need to do a lot of the heavy lifting across operations in the early stage.

After starting out as an engineer at various software and tech companies in India and abroad, Doraswamy founded Lexar Networks in 2004 in Boston, which had to shut down in a few months. Soon after, he returned to India to launch Span Systems, an IT solutions company. But around the same time, he also had his first brush with investing through the Indian Angel Network.

His time as an operator and an entrepreneur is a defining quality of Ideaspring Capital’s investments, according to Doraswamy, since he claims he looks at businesses and founders very differently than someone who may be a very analytical and sharp investor but with no entrepreneurial background.

“I believe that all investors should have had some experience running a startup. That’s how you know what goes into building a business,” Doraswamy told Inc42 in a recent chat.

Launched in 2016, Ideaspring is currently investing from its second fund and has a portfolio of 20 startups. This includes companies such as Lavelle Networks, electric mobility company Numocity, security compliance firm Spanugo, workflow management startup Zapty, AR startup Whodat (acquired by BYJU’S last year), speech recognition startup Mihup among others.

The enthusiasm around the micro VC model has spurred Inc42’s next big initiative — CapitalX — where we would enable investment analysts, entrepreneurs, and angel investors, to learn the art and the science of building and managing a micro VC fund from the very people who have successfully navigated this journey.

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Calling the second fund the most crucial one in a VC’s journey, Doraswamy delves into how the promoter mindset fits into Ideaspring’s investment thesis.

Edited excerpts

Inc42: What brought you into the VC world, particularly as someone who was an entrepreneur to start with? What was the trigger point for you? 

Naganand Doraswamy: So I’m a very atypical fund manager because I started my fund only when I hit 50 you know after I did my startups. At that time I realised it’s hard to do one more startup. I thought the next best thing is a fund, because you’re still very close to the entrepreneur ecosystem which I had been part of for so long.

And my goal when I started fund one was to focus on products from India, because my experience in the US was products and that’s what I did in India. But money without mentoring and mentoring without money, both are useless. So I wanted to do both through my fund.

Inc42: What does it mean to have a fund that’s entrepreneur-focussed? How does it change your outlook? 

Naganand Doraswamy: So the first thing is I wanted to invest in products, and I wanted to do pre-revenue because that’s where the core tech is developed. And I wanted to get the startup to the point where they have $1 Mn in revenue, and then help raise the next round that I can participate in or exit.

And when you have this sharp focus, many things kind of come from that decision, including what kind of LPs, what you can promise and the fund thesis. It also helped me set the right expectations with founders.

I don’t need to see billion dollars in revenue. For us the question is do we see revenue of $8 Mn-$10 Mn? Because once the startup gets to that, I can sub-$100 Mn exit, which is good enough for a small fund.

Similarly, in the case of LPs, our targets were well defined and narrowed down to family offices and HNIs. Because there was no point in going to large institutions or endowments where the minimum check size is $25 Mn. That was more than the size of my fund.

Inc42: You spoke about the thesis being influenced by your experience as an entrepreneur. Can you delve into that? 

Naganand Doraswamy: For me a thesis is like a product-market fit. Although people would like to call me a VC, I would like to still see myself as an entrepreneur. I don’t want to say I’m a VC as much as possible.

My thought process is constantly evolving like an entrepreneur. I cannot avoid the term VC, because we are a registered firm, and people come to us for investments, but in my own mind I am a founder. So that’s the reason I call my thesis a product-market fit.

We have to be as nimble and as agile as founders to get a view of what’s happening and keep evolving. But at the same time, I am true to my core which is pre-revenue and product innovation.

Inc42: You are in your second fund now and the ecosystem has matured immensely since you started. How did this change your fundraising and did you feel the pressure to perform and deliver to your LPs? 

Naganand Doraswamy: So, firstly, we gave like 40% capital back to our LPs when we started the second fund. Okay, so that helped a lot. We had four exits out of 16 startups, which is good.

The challenges were different for each fund. Generally speaking, for the first fund, if your network is not strong, it’s very hard to show proof right away.

Even in the second fund, since we are investing at an early stage in some companies, there’s not much to show four years into the journey. It’s all on paper and showing it to new investors is hard because there’s nothing to show yet. So I think the second fund becomes very hard for this reason.

By the time you are in your second fund, you will know whether you can raise a third fund. There are enough proof points by that time to say whether you are a good fund manager. By the third fund, you’re either in it or you’re not in it.

Right now, despite the slowdown, we will not get perturbed by what’s happening in the market, as early-stage SaaS has now seen much of a variation. And of course, if the portfolio continues to show revenue that is our fundamental metric. That’s what we look at.

But yes, things change and as a VC, one of the key areas of focus for us is driving hard for the next round. Initially, we never paid as much attention to when they are going to raise the next round. We are also pushing ourselves in terms of that.

Inc42: Wouldn’t this focus on revenue result in higher pressure for the company? How do you convey this to a young founder at a pre-revenue stage? 

Naganand Doraswamy: Our tagline is ‘for entrepreneurs by entrepreneurs’, but over a period of six years, we also have realised the need to compartmentalise some aspects of being a VC. And one is that, you have to make entrepreneurs aware of the goal and that you’re doing these things in the best interest of the company.

We tell the founders once ‘we invest in 15 to 18 months, you should do the next round’. Earlier, we were okay with them not doing it in that timeframe. But now, we’re saying ‘no, you have to do it for your own good’.

Indeed, it creates pressure on founders and they need to have that pressure and they are okay with it. Seeing how they react to these expectations is also one way to assess their entrepreneurial ability.

If you’re not clocking in the MRR targets and going the extra mile, then everything gets delayed and people will lose interest in the product.

This is again because of my background as an entrepreneur. We know the competition. There are so many products out there. So there’s always a time window in which you have to execute.

Inc42: Finally, I wanted to understand how this plays into your investment decisions? 

Naganand Doraswamy: The key thing for us is talking to the prospective customers of the startup to understand how well the product fits the market’s needs. Not to say that the market will bite, but whether it has the willingness to buy.

Post-investment, we work very differently with the founders. We have a call every week with our founders to get a full picture. I know everything before I enter the board meeting. So we work very closely to understand what help the founder requires, what interventions or connections they need.

We are available as the first option to all our founders because we know what goes into making the product work. We have to be a little biassed towards helping the entrepreneur because of our experience.