Brief Summary
This edition of The Nutgraph talks about Kunal Shah's investment in CRED during a down round and the broader trend of "faith funding," where founders invest their own capital into their companies. It discusses how down rounds, while often seen as negative, can be healthy, and how founders investing in their own companies is becoming more accepted, especially during economic downturns. The piece also touches upon historical instances of faith funding in the Indian startup ecosystem, highlighting the changing perceptions and benefits of this practice.
- Kunal Shah invests $19 million in CRED's down round, signaling strong belief in the company.
- "Faith funding" is when founders invest their own money into their companies, acting as their own VCs.
- Down rounds are becoming more accepted, and founder investments can make companies more attractive to other investors.
Kunal Shah's Investment in CRED
The article starts by highlighting that CRED is raising $72 million from existing investors, which includes a $19 million investment from its founder, Kunal Shah. This funding round values CRED at $3.5 billion, a 45% drop from its previous $6.4 billion valuation in 2022. GIC, RTP Global, and Sophina are also participating in this round. Kunal Shah's investment is particularly noteworthy, making it one of the most significant personal investments by a founder in their own startup within the Indian ecosystem.
Down Rounds and Their Perception
Down rounds are often viewed negatively in the startup world, but the author argues that they are a normal part of the business cycle. Unlike publicly listed companies, startups are expected to only increase in valuation, which creates an unhealthy expectation. The author uses the analogy of "the great fattening followed by the great slaughter" to describe how valuations are inflated before an IPO, only to collapse afterward. The author supports down rounds as a necessary correction and highlights that Kunal Shah's investment is more interesting than the down round itself.
The Rise of Faith Funding
The author introduces the concept of "faith funding," where founders invest their own capital into their companies, essentially becoming their own VCs. This is likened to monarchs returning to the battlefield with their own wealth to defend their castle. Instead of seeking external investors, these founders fund their own vision. Historically, such actions were viewed with suspicion, but the circumstances have changed, making faith funding more acceptable and even desirable.
Historical Examples of Founder Funding
The author provides examples of founders who have funded their own companies under different circumstances. One scenario involves founders who maintain control from the start, like Sachin Bansal with Navi. Another involves distressed companies where founders increase their ownership, such as Byju Raveendran's attempt to raise funds at a significantly reduced valuation. A third example is Ritesh Agarwal of OYO, who used complex financial maneuvers to increase his stake in the company. These examples illustrate how faith funding was previously viewed with skepticism.
Changing Perceptions During Downturns
During economic downturns, VCs become more cautious, and some founders see this as an opportunity. Kunal Shah is not the only founder to invest in his own company; for instance, Gaurav Kumar of UBI invested ₹250 crores. Rajan Bajaj of Slice also invested ₹72 crores through partly paid-up shares. Faith funding has become more palatable and powerful, removing the previous taboo.
Game Theory and Founder Investments
The author explains that faith funding is a matter of game theory. When capital is abundant, founders investing in their own companies is viewed with suspicion. However, when capital is scarce and other founders are exiting, a founder who invests in their own company appears much more attractive. It signals that the founder is committed and believes in the company's future, which can attract other investors who may wonder what the founder knows that they don't.
