Entrepreneurs often ask a fairly simple sounding question "what do I need to get DFJ excited about my idea". The answer is really two-fold. There is a mix of sector-agnostic and sector-specific response. Let me focus on the sector-agnostic first. DFJ, as an investor, is focused on a blend of early to mid-stage investment (series A, B and C). Typically, an investment thesis revolves around team, technology/differentiation, traction/ validation and market size/opportunity. At an early stage, however, there often isn't much that an entrepreneur can offer. The team is incomplete, the technology may not be developed or fully baked and given that there isn’t a product or service, there isn’t any traction or revenues. What does matter at that stage is undeniable passion and an absolutely resolute attitude towards "making it happen, come what may".
A perfect example of that was DFJ's investment in Attero, emerging as a leader in the electronic waste recycling business in India. When Nitin and Rohan, brothers and co-founders approached DFJ, they had virtually nothing except a power point and a spreadsheet. But it was the passion that they exuded, and the fact that they were willing to back that passion by investing their family savings, that convinced NEA-IndoUS ventures and DFJ to put in $6million into the company. We were also convinced that the market for ewaste was enormous and growing, and that trying to replicate what Attero was planning on doing was going to be non-trivial (in essence, it’s not a business that would create many me-too's).
On the later stage front, the entrepreneur needs to be able to convince DFJ that, in a very capital efficient manner, he/she has been able to make solid progress, that the business model has either been proven or on its way to being proven, and finally that the market is large and growing. Examples of late stage investments for DFJ are companies like Cleartrip and iYogi where the capital requirement was for scaling the business, not for proving the business.
Finally, what has to be clear in the entrepreneur's mind is the overall potential (how big can it be over what period of time). Fund IX, from which DFJ is investing, is a $650 million fund. DFJ is looking to turn that into a $2billion+ return. For DFJ to get excited, the startup has to have the potential of returning at least $50 million or more to the fund. To make the math simple, assuming that DFJ owns 20 percent of a given company upon exit, the exit value of the company has to be at least $250million.. Before approaching DFJ, the entrepreneur in his/her mind needs to be convinced that the idea is big and for a larger fund, is going to "move the needle" for a fund's IRR. I have often said, that before approaching VCs, entrepreneurs should do their homework and make sure that the funds that they approach are in line with the overall business that he/she is looking to build.
Coming to the topic of specific sectors, DFJ’s name has been synonymous for years with consumer media (internet and mobile) and cleantech. Those continue to be key themes in India as well. But in addition, India holds tremendous promise in areas such as healthcare, education, logistics/distribution, and retail. I often joke that the sure shot way of making money in India is to open an institution that is a combination of a school, hospital and a temple. The key challenge that companies face in India is truly around scale. The possible online revolution holds promise (whether that happens on the PC or the mobile phone, remains to be seen), so consumer media is something that we are closely watching. Right now, a pure online play is still difficult in India. There is often a physical infrastructure required in terms of handholding, and servicing (examples are plenty in travel, matrimonial, jobs etc.). But it's a matter of when, not if, India will start hitting the types of numbers that China, for example, has shown around areas such as online gaming, ecommerce, entertainment, mobile infrastructure and applications to name a few. For PC based online penetration to get to critical mass, reliable power issues need to be addressed. In the meantime, the mobile phone may become the so-called First Screen. As connectivity improves, as feature-rich handsets become more affordable, and as new business models around new applications proliferate, the mobile revolution will continue to unfold. As an example, I was recently speaking with an entrepreneur who enables people to be able to capture voice, photos and video and send them as sms to their friends/family.
Additionally, other people can act as "mobile jockeys" broadcasting information or creating interactive mobile sessions with thousands of spectators or participants. What was astounding to me was the fact that 80percent of this company's registered user base was not in metros but in tier 2/3 towns, where more and more people can afford gprs handsets, but without reliable power, have no use for a TV or a PC, even though they have both in their homes. As a result, they resort to the mobile as the device for communication and entertainment.
Additionally, the entire BoP represents an enormous market, which provides opportunities for entrepreneurs in the same areas as mentioned above (financial services, healthcare, education, cleantech, mobile, retail…). The challenge yet again is scalability. Tapping a large yet fragmented user base holds promise but will be tough. But those who can crack it, will create large sustainable enterprises. The MFI movement is one such success story that is playing out. There will surely be others.
Bottom line: The T's (team, traction and technology) and the M (market) on the one hand are important for any business, but key to rising above the noise on the other hand is passion and conviction that are infectious. DFJ is interested in sectors that are large and growing, ideally where leveraging technology, one can build a solid trustworthy brand and create organization in an otherwise highly unorganized fragmented space.