Daybreak - What VC analysts do when there are few deals to make

Episode Date: January 26, 2024

Happy Republic Day, dear listeners.Today is a public holiday but if you're still tuning in, here is an older episode of Daybreak you might like:All the twists and turns in the journey of startups have been well-documented since VC funding began drying up over the past year or so. In the first half of 2022,  Indian startups received more than $17 billion dollars. But a year later in 2023. they just got a little over $5 billion.What’s we’ve barely heard about, though, is what is happening to the funders of these startups and their foot soldiers—the VC analysts. With the slowdown, the day-to-day responsibilities of these analysts have changed and so has their approach towards dealmaking. Tune in to find out.

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too. It's for a special announcement. For the last few months, I and Sita Raman Ganesh, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

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It would take a venture capitalist or VC fund as less as 48 hours to offer a $10 million check to a founder. VCs were notorious for their speed. They would meet a founder, take them at face value, and if they like the company, the check would be signed in a matter of days. So it comes as no surprise that the teams at the VC firm Sequoia's Bangalore office, for example, used to have 16 or even 18-hour long, grueling workdays. They couldn't afford to take more than a week to decide on investments even if they were worth millions and millions of dollars.

All of them were chasing the hottest bet, trying to beat each other in the race. And as you can imagine, it was a hyper-aggressive world. eat or be eaten almost. In the first half of 2022, Indian startups received more than $17 billion in funds. But a year later in 2023, in the same period, they just got a little over $5 billion. Suddenly, priorities seem to have changed.

What they do, how they do is not the same like before. It's changed quite drastically. Now, the focus is more on making the right kind of investments and avoiding deals that turn out to be duds. And the impact of this is being felt by the junior VCs and analysts, people who are the foot soldiers, the ones who do all the groundwork before the bosses sign the checks. So what are these VC analysts doing now that deal making is on the back burner?

What are the new strategies that they are using to build their own track records? Welcome to Daybreak, a business podcast from the Ken. I'm your host, Nickda Sharma, and I don't chase the news cycle. Instead, thrice a week on Mondays, Wednesdays and Fridays, I will come to you with one business story that is worth understanding and worth your time. All the twists and turns in the journey of startups have been well documented since VC funding began drying up over the past year or so. The thousands of layoffs and hiring freezes, the scaling down of operations,

we've heard about it all too many times. But what we've barely heard about is what is happening to the funders of these startups. You know, the likes of Sequoia Capital, India and Southeast Asia, which is now known as Peak 15 partners, Tremis, Bloom, Elevation Capital, Axel, and many other VC firms. So that is where we're going today. During the good funding days of 2021 and 2022, the top VC firms were focused on strengthening their teams, especially at junior levels. For example, peak 15 partners hired 12 new analysts during that period.

Bloom Ventures, meanwhile, got six new analysts in the same period. Bangalore-based Kalari Capital and Matrix Partners, India, which is an early backer of Ola, by the way, also made eight new junior additions each. Like I told you earlier, these were the foot soldiers of these VC funds. They did all the groundwork, they would spend their, time scouting for deals or doing due diligence. But now with the slow down the day-to-day responsibilities of these analysts have also changed. But irrespective of all this, analysts are still an

indispensable part of investment teams. They build sectoral thesis, which is a super important resource for partners who are responsible for making investment decisions for Risi firms. So now with the slow down, these analysts are spending seven 20 to 80% of their time creating market maps, industry deep dives, building community or working with portfolio companies. Now, there is no denying that bare markets or markets which see consistent price drops for a period of time might not offer opportunities for junior VC analysts to create impressive portfolios.

But they do give them an exceptional platform to learn how to build sustainable businesses. But the question is, is this what the VC's? analysts want. My colleague, the Ken reporter, Vanita Bhatnagar, spoke to a bunch of employees from Peak 15 partners, Bloom Ventures, Elevation Capital, Jungle Ventures, Tremus Capital and Axel. They spoke to us on the condition of anonymity because they are not authorized to discuss these internal matters with the media. Stay tuned to find out more. Here is what the ladder of hierarchy looks like at these VC firms. At the top, our general partners. Then come the principals who have at least six to eight years of investment expertise.

Right at the bottom are the analysts or associates. They work on a fixed salary and are usually hired by VC firms after about two years at global consultancies such as McKinsey, BCG, Bain & Company or Deloitte. When they worked during the funding boom, these analysts got to understand the nuances of deal structuring. This allowed them to get better at negotiating and get better at negotiating and grasping which terms are likely to have a greater impact on the potential returns for venture capitalists. But now, in this current deal-making slump, VC firms are implementing significant cuts

to bonuses and yearly compensation hikes. Vanita found out that from 25% last year, they are down to 8 to 10% this year. And because of this, the demand for analyst's roles has also dropped. Ria Shrof Desai, who heads people and cultured bloom ventures, said that in 2021 they would receive over 400 applications for an analyst role. But the figure is half of that now. VC firms too have slowed down the speed of hiring. But it is not all bad news for junior VCs. Yes, the analysts who work for growth stage VC firms are evaluating fewer companies, but that also means that they get to spend more time assessing them. An investment professional at Jungle Ventures told us that now they can tap subject matter

experts for deeper insights, have more conversations with founders, and design surveys for consumers to know more about the company or the product because there is no time constraint. A peak 15 executive gave us an example, and I'm quoting, if I was looking at whether a consumer brand is a go-to market product, I would earlier speak with fewer customers. may be just the people from my network. Now, I would launch a survey through an agency and get a lot more quantitative data to back it up. End quote.

And not just this. Analysts are also getting a lot more space to double down on their portfolio companies. They can provide strategic guidance, work on their financial matrix, improve their go-to-market strategy and help hire board members or key employees. All of these are important,

aspects of building a scalable and sustainable business. These experiences make these analysts more valuable resources and an attractive recruitment target for startup companies. Now, while all of this makes it sound like analysts are not losing out much because of the slowdown, we cannot forget that for analysts who want to become a general partner, dealmaking is still the most important metric. And that means many of them may not say. stick around for long enough.

Daybreak is produced from the newsroom of the Ken, India's first subscriber-focused business news platform. What you're listening to is just a small sample of our subscriber-only offerings. A full subscription unlocks daily long-form feature stories, newsletters, subscriber-only apps, and podcast extras. Head to the Ken.com and click on the red subscribe button on the top of the website. I am Snigda Sharma, your host, and today's episode was edited by my colleague. Rajiv Sien.