Raju Rishi on VC Investing in Companies


On Friday, January 19, 2013, OLC attended the Hatchery's event on venture capitalists featuring Raju Rishi, an experienced technology entrepreneur and executive that helps early-stage startups become successful. He has founded two companies and served as an advisor on numerous startups.


Raju Rishi of Sigma Partners gave a brief introduction about himself—how he worked for Bell industries in the 90s and that he now focuses on mobile industries. Sigma Partners was founded in 1984 and has a long, seasoned history through positive and negative bubbles. It is considered within the top 10 venture capitalist firms in the country, but due to its relative lack of action in marketing, it is relatively unknown outside the VC and entrepreneurial space. The group has raised over $4.5 billion in capital since 1984. Its latest fund on the East coast was created because Sigma wanted a New York City office, but West Coast didn't want to be part of it, so funding was raised separately.

Rishi said that Sigma's investment thesis ranges from series A and series B funding. Sometimes they do seed investing, but not all the time. "Only when it is compelling, typically for people who they've invested with in the past." Typically Sigma has around $150 million in funding and looks for about $1 to $5 million in series A funding. "No one in Sigma is an investment banker. We are all entrepreneurs," Rishi said.

"We look at tech—services tech is okay, but we don't look at companies that need a lot of capitalization like FDA-approved or semiconductors," he said, "We're not fly-by-night guys. When we invest, we're betting on the team because we believe that they can navigate. Our due diligence goes a little deeper than the others."

Rishi explained that there are four stages of business: 1) Yourself and co-founders. "Business and consumer problems need to get solved. Raise money and create early instances of the product," Rishi said. "Also, vet your value proposition." 2) "Prove the value exists. Repeat the value proposition. Prove that this isn't a one-off. You're hardening the product a little bit," he said. "Be attentive to the market." 3) "Try to scale," Rishi said. "Observe the knobs and dials of the business. Know what you want to be able to measure things at a precise level." 4) Rishi said to look to scale through business partnerships.

When comparing current angel investing to angel investing 10 years ago, Rishi said, "From what I've seen 10 years ago, the angel ecosystem wasn't as rich as it is now. It was $10 to $20,000 if not more than that. You'd get bona fide VCs involved. Now the New York and LA ecosystem is rich. People were pulling out of the markets, but a lot of people were making enough money and some intelligent people started investing in startups."

"You hear about Series A Crunch," Rishi said. "A lot of people have gotten funded when they haven't vetted their value proposition to a degree and that's not good." He outlined three ways that Sigma works to counteract that and how they categorize companies: 1) team, 2) market status, 3) product—features, application, and is it a stand-alone product, 4) competition, 5) business model. He also gave four stages of what a startup looks like. The very first stage, which he called "Phase 0," is the idea and the founding team trying to validate the business. The next step was to repeat and prove that the business has value. The third step was the transition from repeating to scaling. Finally, the business is to scale in different ways—vertical or through partners trying to sell the product. Rishi, however, said the "companies fail because they try to do too much work." Companies need to focus. He acknowledged that there is "a lot of pressure to scale, but you need to resist that as long as you can. Figure out where the scale point should go."

Rishi expanded on companies, saying, "Look at companies or teams closely especially in earlier rounds because a lot of early-stage companies pivot and it's the team that really makes things come together."

He also defined what a Series A Crunch was, explaining that it is when there are more startups that needs Series A funding, but there aren't enough VCs to help fund them. "People need to understand," Rishi said, "they need to understand that there are questions that need to be considered: What do you need to prove in this stage to get next round of funding—or to be profitable? If you're not thinking discretely about that, you will be sorely disappointed."

To read last month's recap: http://www.officeleasecenter.com/articles/december-14th-2012-the-hatchery--new-york-dot-comers-featuring-espncoms-john-kosner.html