If one were to glance into the world of startups, it wouldn’t be surprising that first impression they got of venture capitalists would be, “People with a lot of money that constantly throw it at startups” That sentence is correct, except the part about them constantly throwing money at startups. That’s what we learned when we took a look inside a not-so-young VC firm in Sri Lanka called Third Lane Ventures.
An old boy of S.Thomas’ College, Mount Lavinia who loves exploring the world of numbers. Having completed his A/L’s Sanjiv Ahangama entered the world of finance as an intern at John Keells Holdings. After two months, he moved to PWC & then HSBC where he served as a Summer Analyst. These experiences gave him a first-hand look into the world of finance.
Armed with these experiences, Sanjiv left Sri Lanka to pursue his degree in Economics at the University of New South Wales. It was here that his love for finance met entrepreneurship and technology. Sanjiv had noticed that were many students at UNSW building their own startups.
Yet they didn’t have any form of support whatsoever. So Sanjiv teamed up with fellow students and decided to build an incubator. Thus, the Incubator Capital Group was born in 2013 to offer financial, technical, legal, and marketing support for the startups.
The program continued for 2 years. “But it wasn’t a real incubator. Rather it was more of an advisory group since we didn’t have any funding,” says Sanjiv. Yet that didn’t mean there was no funding for these startups. Incubator Capital had partnered with the Sydney Seed Fund, which meant its startups did have a shot at obtaining funding from investors.
Fast forward to 2015, Sanjiv had graduated with a Masters in Finance. He then decided to move to the UK where he once again worked as an intern at Laxey Partners. This was a family office in the UK that operated as a Hedge Fund & Venture Capital firm. Sanjiv enjoyed his time helping manage the investments of this family office. But he couldn’t extend his visa and decided to return to Sri Lanka.
“Without investors, accelerators, and entrepreneurs you don’t have startups. You need everyone to have a successful ecosystem” – Sanjiv Ahangama
When he returned to Sri Lanka, Sanjiv asked himself, “Should I be a part of one business or be a build multiple businesses?” He discussed the idea with his father, Sudarshan Ahangama, and the two decided to set up their own family office. One of the operations of this family office would be a Venture Capital fund.
They took the name of the road they were living on and Third Lane Ventures was born. This would be a Venture Capital firm that would invest in early-stage startups. Sanjiv would serve as the Managing Director of the fund. In this role, he would vet potential startups, prepare contracts to finalize investments, and offer them his support. Meanwhile, other aspects such as legal and accounting operations would be outsourced.
Fast forward to present day, Third Lane Ventures is two years old. Sanjiv shared that the size of its fund is currently $1.5 million, which they’re looking at investing over the upcoming six months. But given their risk appetite, they won’t be investing individually in big raises. “I get many pitches from startups seeking several millions of dollars. In such cases, I work together with other local investors & funds overseas in these instances.,” says Sanjiv.
So what startups have they invested in thus far? Currently, the Third Lane Ventures portfolio consists of Alakazam, Glitteray, Moneyworkz Technologies, and Elixir Cold Pressed Juices. Among these investments, Elixir Juices is a business where Sanjiv is not only an investor but also a co-founder.
Describing his investment philosophy, Sanjiv said, “I look at whether the business has the potential to be scalable both locally and globally. So the portfolio has a bunch of technology businesses. But some like Elixir Juices, while being a non-technology business, I believe still has the potential for scalability. As an investor, it helps to have such businesses to diversify your portfolio.”
“Raise before you need to raise or you lose leverage as a founder because you’re desperate.” – Sanjiv Ahangama
But how exactly does Sanjiv identify whether these businesses are scalable? He keeps a checklist, which he carries to every pitch. However, he admits that a lot of pitches he sees in Sri Lanka are not at the right standard, “I might sit through a pitch that lasts an hour and not understand it.” So what does an ideal pitch look like?
For Sanjiv, the ideal pitch is one similar to those seen at Startup Weekends. Everything important explained within 10 minutes. Keep it short, talk about the idea, who will use it, and how you’ll make money. But the most important thing when pitching according to Sanjiv is, “You need to show the person you’re pitching to that you can execute the idea.”
“Giving up $5 million to get a good investor is worth millions.” – Sanjiv Ahangama
Furthermore, Third Lane Ventures prefers to invest in founders that aren’t obsessed with the numbers. Sanjiv explains that sometimes an investor might think a company is worth $80 million. But the founder may believe the company is worth $100 million. And so the founder says no. Sanjiv believes making such a decision means losing out on a potentially good investor.
Despite being two years old, Third Lane Ventures only has four startups in their portfolio. Furthermore, many of these deals were closed in the past 18 months. So one might wonder, “What exactly have they been up to for the past two years?” The answer to that question is research.
For any VC, the majority of their time is spent listening to pitches. After listening to these pitches, they go through the process of vetting the startups thoroughly. This typically ends with the VC saying no and focusing on managing their existing startups. “That is the bulk of the work. To sign a cheque is easy but to do it for the right startup is the hard one,” says Sanjiv.
“Ideas are cheap. You can find business ideas online. But executing them is the hard part.” – Sanjiv Ahangama
Furthermore, even after signing the cheque, the VC (or any investor) won’t make money any time soon. “The return horizons for a VC or any investor is 3 to 5 years,” explains Sanjiv. This is because while startups gain profits in between, the point investors would see a profit is when the startup gets acquired or goes for an IPO. And since Third Lane Ventures only made their investments recently, it’ll be a few years before they start making money.
For Third Lane Ventures, the challenges it faces immediately, are those shared by the industry. One of those, which isn’t spoken of enough according to Sanjiv is the process of having an IPO in Sri Lanka. In case you’re lost, an IPO is when a private company or corporation raises investment capital by offering its stock to the public for the first time.
For startups, an IPO is a big milestone on the road to success. For some entrepreneurs, it is the definition of success. However, the process of carrying out an IPO in Sri Lanka is challenging. It’s true that the Colombo Stock Exchange has an option for smaller companies interested in offering their shares to the public. This is the Diri Savi Board.
However, to be listed on the Diri Savi Board, a business needs to have a capital of Rs. 100 million. Among the other requirements, a business would also need to show positive net assets on financials.
If a business wishes to be listed on the main board of the Colombo Stock Exchange, then it needs to have a capital of Rs. 500 million. It would also need to show 3 years of net profits. And among the other requirements, the business must show positive net assets on its financial statements.
It takes a lot of money to be listed on the Colombo Stock Exchange. But once listed on the stock exchange, it’s easy to remain there even if a business isn’t making money. Yet it can be years before startups start seeing profits. But for startups, an IPO is a mark of success.
Sanjiv argues that Sri Lanka needs to do more to facilitate this. He explains this saying, “Startups can only raise so much money here. So they’ll eventually have to look to Singapore or the US. I get many pitch decks from startups seeking millions of dollars. But they can’t do that in Sri Lanka because the money isn’t there.”
Additionally, the startup ecosystem can get adversely affected by poor quality startups. For instance, if too many investors get absorbed by the hype of startups, invest and then lose money. Once they’ve burnt their hands they lose their taste for startups. They will then stop investing in startups and go back to looking at safe investments like apartments and fixed deposits.
This is something that terrifies Sanjiv. As such he argues that there is a need for a strong filter. Like Y-Combinator in the US, this filter should give investors some confidence when investing in startups. To create such a filter is why Third Lane Ventures is aiming to start its own accelerator program in the coming months, in partnership with Colombo Cooperative.
The accelerator program for the “founding batch” will begin the first week of October 2018. Anyone interested in joining can apply at tlvsquared.com. The initial batch is expected to have 10 startups. These startups will work closely with a mentor panel and have scheduled meetings with an advisory panel consisting of industry leaders.
Additionally, they would have access to a desk at a coworking space and have weekly networking events with speakers sharing insights on different topics. All of this would continue for a period of three months. At the end of it, there would be a “demo day” where the startups showcase what they’ve built and can pitch to a panel of invite-only investors in the ecosystem.
It’s a tried and tested concept but Sanjiv admits that it’s not foolproof. He elaborates on this saying, “It’s tricky to figure out if a founder is willing to walk on glass to make the startup a success. That’s why there’s a lot of opportunity for accelerators in the market. They allow you to improve the quality of startups in the ecosystem, thereby reducing the risk for investors.”
“At the end of the day, it’s all about networks and network effects,” says Sanjiv. He argues that the traditional sectors like banking can survive on their own as long as they have customers. However, at our current stage, Sri Lanka’s startup ecosystem is only taking off. As such, it requires collaboration to take many ideas off the ground.
Yet, when it comes to entrepreneurship in Sri Lanka Sanjiv believes, “It’s become trendy. I’m not sure if it’s a good thing or a bad thing. But something trendy means everyone will want to be a part of it.”
Will that translate into disruptive startups that VC’s like Third Lane Ventures can accelerate towards an IPO? If the process becomes easier, then hopefully yes.
Homepage image credits: WIRED
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