Ritesh Banglani Of Stellaris On The Metrics That Matter In Early-Stage Startup Investing

This article is part of The Product Summit 2020, India’s largest virtual product conference which took place on October 10 & October 11. 

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“When I was around 28 years old, I used to work as a product manager at a startup. And I would see these VC associates, who were roughly my age, walk into our board meetings wearing smart suits, sounding intelligent and somehow important. They would ask our founders difficult, strategic questions. It was all very glamorous!” said Ritesh Banglani, partner, Stellaris Venture Partners.

With his interest piqued, Banglani decided to give the VC world a try — after all, it would help him learn about different sectors every day. At this point, he had already worked as a product manager in tech companies such as Cisco and Adobe where he developed online and mobile consumer products, roles which came calling on the back of his IIT Delhi and INSEAD credentials. 

In 2010, he entered the venture capital world, taking up the position of partner at Helion Venture Partners where he led investments in companies such as cab aggregator TaxiForSure, India’s first stem cell bank Lifecell, and online dating platform Trulymadly, among others.

As a partner at Stellaris, Banglani has kept his focus on early-stage investments and led bets on scooter rental app Vogo, online doctor consulting platform mFine, hospital network Ayu Health, and education financing platform Propelld to name a few. 

While he came into the industry attracted by the aura around VCs, what got him to become a full-time investor was the opportunity to spend time with founders and learn about different industries.

“That glamour wears off very, very quickly. In reality, like every other job you have to keep your head down and do the same thing over and over. It’s also one of those jobs where you cannot hide — every decision you make follows you throughout your career,” said Banglani.

His VC career has been helped by his product management stints which taught him that one never has enough resources to please everyone and trying to do that would land a startup in a product soup. 

“There are no good or bad product decisions. There are only decisions where you have to sacrifice one or another desirable outcome,” the seasoned investor said.

That is the crux of making many business and life decisions and product management is an accelerated form of learning that kind of decision making, an art that might take years to learn otherwise, according to him. 

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Betting On A Market And Founder’s Product Decisions 

Masayoshi Son, the founder of SoftBank and one of the most storied investors of our times, often made investment decisions based on the aura that a founder exuded. His first investment in ecommerce giant Alibaba was when it didn’t even have a clear product-market fit. 

Though it turned out to be a massive success and Son became a legend, this method hasn’t been financially prudent as shown by the experiences with WeWork, which has been consigned to the sidelines after a huge IPO meltdown, plus the shutdowns in SoftBank-funded high-profile startups such as an ecommerce startup Brandless, dog-walking Wag, robot pizza delivery company Zume and Getaround, a car-sharing startup. 

It just goes to show that what may work in one sector may not work everywhere, so at the early stage investors are largely split into those who back the founder and those who trust the market.  

Banglani isn’t an investor who is only convinced by a founder’s aura or lack thereof. Instead, he looks at a mix of two factors — the strength of the market and the decision-making process of a founder with respect to products. 

“Poor markets are brutal — it is very hard for even a great team to succeed in a market that’s not there yet. Great markets are much more forgiving — you can recover even if you make major strategy or execution mistakes,” Banglani, who will be speaking at Inc42 and TPF’s The Product Summit on October 11th, told us.

With respect to product decisions, the features and functionalities don’t matter at the beginning— rather as a VC, he tries to gauge what led the founders to prioritise one goal over another.

Elaborating on this philosophy, the now-seasoned investor added, “Products always evolve over time. At an early stage, product quality is more a signal of the founder’s capabilities and priorities than of any fit with market needs.” 

For instance, when scooter rental startup Vogo was pitching to him, Banglani grilled founder and CEO Anand Ayyadurai on a certain decision that would sacrifice user experience but improve revenues. 

But Ayyadurai stuck to his guns and was adamant that the right thing to do was build customer loyalty rather than hanker after short term unit economics, a metric that’s typically poor for almost all startups in their early stage. The strategy seems to have paid off as two years after Stellaris made an early-stage bet, the startup has completed over 5 Mn trips in Bengaluru, Hyderabad, Manipal, and Mysuru. It has raised over $178 Mn in funding to date, the latest round being amid the pandemic which eroded its business 10%-15% in April.

The Role Of Metrics In Early Stage

It is very difficult to forecast the trend of unit economics for an early-stage startup — even if there is a short term trend that it is improving, it is bound to slide once again when a startup raises funding for growth.

“In the early stages, we are giving startups the capital to invest in growth ahead of economics and to iterate on the customer experience. That can seem expensive and wasteful in hindsight, but that is okay. A large outcome can often justify such wastefulness.” said Banglani.

This is why metrics don’t play as much of a role at this stage as they do in later rounds. By the time you hit series B, metrics such as retention start becoming more important, because, by that time, VCs expect the product-market fit to be there.

“Once a startup hits series C, you want unit economics to either be proven or be on a trajectory of getting proven quickly,” according to him.

There are two types of metrics that are important for any tech startup: those that show how much customers love a product and the ones that reveal the growth of the user base. 

The measure of customer delight comes either directly in the form of the net promoter score or indirectly in the form of numbers such as retention, virality, increasing spend, or conversion to paying customers. 

For the second kind, metrics such as daily active users, monthly active users, number of downloads, annual recurring revenue among others are generally seen. Banglani also uses some of these metrics for early-stage investments but not to judge the absolute level of traction but gauge the trajectory of growth for the potential portfolio addition. 

“Say you have sold five licences in month one, has that five become seven, nine and 20 progressively. It is not the absolute level of 20, or 35, or 200 that matters at the early stage, it is more the slope of the graph. That tells us if there’s meat in the value proposition,” he told Inc42.

Zeroing In On Money Matters

Two metrics that VCs consider crucial to determining the financial viability of a tech startup are the customer acquisition cost (CAC) and lifetime value (LTV) of users. The CAC is ideally calculated as the sum of discounts, credits, referrals, and marketing money spent to acquire each user whereas the LTV of a user is the net profit generated from a consumer over the entire life cycle on a platform. 

Like every other investor, Banglani too models these metrics but he focuses more on the value being created for a customer. “LTV-to-CAC is just a framework to assess the value added by the product. It is useful in some cases but not the holy grail it is often made out to be. At an early stage it is hard to assess both CAC and LTV, so I like to rely on simpler and more intuitive ways to assess value-added, like product gross margins, customer retention and CSAT scores,” he said.

For instance, if a grocery delivery app is selling rice, it will have very little gross margin but if an ecommerce portal selling a mobile phone is likely to have a much higher gross margin.

He illustrates the importance of value creation with the example of an online services provider, “If a carpenter charges INR 150 per hour, and you’re selling that service for INR 160 per hour, all it tells me is that you are not really being able to add much value in the middle or the customer doesn’t attribute that value to you.”

In trying to create greater value for a customer and attract more users, tech startups often sacrifice their burn rate — the pace at which they use VC money to finance costs before generating positive cash flow.

“It is an important metric but it is important to examine the source of the burn. I believe that there is good burn and bad burn, and these definitions change with time. The absolute burn rate is only relevant to your runway and survivability. It doesn’t tell me anything about the quality of the business,” said Banglani.

He posed a hypothetical problem to us: Suppose three startups are burning INR 10 Cr a month — Company A has not yet figured out its product-market fit and has to sell its product below cost to attract more customers, while Company B has proved that it makes its business with each customer profitable within 6 months. Meanwhile, there’s a Company C that has figured out both product-market fit and scalability of its model as it is making money on each unit of good sold. 

“Even if all three companies are burning the same amount of money, that doesn’t mean they are all at the same point in their evolution. I would argue that there will be a line of investors outside Company C’s offices since they have figured out the important things,” Banglani said, explaining the thesis.

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Keeping Track Of The Monetisation 

While the basic premise of VC investing is accelerating the growth of the company even though it might mean letting go of other financial metrics in the short term, it’s important to have a plan chalked out for monetisation.

“What scares me most is an entrepreneur who doesn’t even have a plan for monetisation. Because that entrepreneur has not thought about making money,” Banglani quipped.

However, a certain monetisation model may not work at a later stage and a tech startup might need to tweak it with another model such as selling analytics on top data being created or shifting priority to corporate customers.

“If someone gives me a plan that eventually doesn’t work, that is acceptable. But at the time it is presented, the plan needs to have some basis. It needs to be grounded in research or direct experience or some proxy data, or at the very least sound internal logic. I am fully willing to go along for the ride, but I need the confidence that my driver has a plan and is willing to adjust it based on what he sees out the window. Blind drivers scare me,” he added.

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This article is part of The Product Summit 2020, India’s largest virtual product conference which took place on October 10 & October 11, supported by Amplitude, AWS, Dell Technologies, and DigitalOcean.

Missed TPS 2020? To access the exclusive TPS Session recordings, PPTs and upcoming sessions on products, click here!