Jyotsna Krishnan
Last year, our head of marketing was given a specific goal when we decided to actively talk about our investment philosophy and impact investing within the ecosystem. The goal was not to increase the number of pipeline opportunities coming our way, but rather to reduce them. This might seem unusual for a firm that has recently closed its largest fund to date, the 5th fund for Elevar, and is actively seeking investment opportunities.
Why then are we aiming for a focused pipeline? The answer lies in our unique approach to investing. We are not interested in being a high-volume deal shop that makes a certain number of investments per partner each year. Instead, at the fund level, we are focused on partnering with only 12-15 exceptional founders who are dedicated to building businesses that provide essential services to underserved customers, at scale. We believe that this in itself has the potential to unlock significant value and create scalable impact. Our strategy is to work closely with these founders to maximise success, which is why we are highly selective when it comes to new investee companies.
Historically, this approach has translated into an average of only 3 investments per year for us, which is a relatively low count compared to early-stage funds. So what does our process look like leading up to these 2-3 investments? Let’s examine it more closely:
Of every thousand proposals that we receive, a dedicated team evaluates and narrows them down to around 100. This initial filter is based on two primary criteria: the alignment of the founders with our customer thesis and their ability to execute on that thesis, as demonstrated by their professional track record. We then proceed to arrange meetings with the shortlisted founders.
We prefer to conduct the first meeting in person at our office, with at least one senior person present from Elevar. In addition, a partner would definitely meet the founders, if not in the first interaction then definitely in the second one (assuming the conversation progresses). Such involvement from top leadership is uncommon for initial engagement stages with an investment firm. This is important to note, as there have been instances where founders have not taken these initial meetings seriously enough and arrived underprepared or with incomplete representation of the founders in the discussions.
In our view, this first meeting is crucial for us to make a decision and assess the likelihood of an investment becoming one of our top priorities at any given time. It helps us maintain discipline and saves time for founders by minimising information requests for investments with low probabilities.
Out of the 100 companies we meet, approximately 25 that demonstrate a strong sense of alignment with our values and objectives are prioritised. With these companies, we usually proceed to a field or market visit. This step takes place before delving into detailed analyses such as spreadsheets, business projections, and tech demonstrations. The purpose is not to understand the market per se but to gain insights into the founder’s approach to the end customer and determine if it aligns with our philosophy of customer centricity and grassroots understanding.
This stage, combined with basic information requests regarding the team and high-level projections, helps us decide whether to allocate resources for further business diligence. For context, keep in mind that most of our team’s bandwidth is dedicated to portfolio management and towards working with existing companies rather than evaluating new opportunities.
Following this stage, we typically shortlist around 10-15 companies per year for a deep dive. This stage involves a two-way underwriting process where founders underwrite us (as to whether we are the right investors for them) and we underwrite founders and the business. This process is crucial, considering the long-term journey ahead. We believe that nothing undermines a venture’s journey more than misaligned cap tables and stakeholders, and we are unwilling to compromise on such fundamental aspects to hastily secure a deal. We want to ensure that there are no questions raised about the relationship or our decision to invest during externally challenging circumstances.
The two-way underwriting concludes with the issuance of a term sheet. Our investment decision-making process is internal and agile, with a clear understanding of long-term implications. We do not walk away or renegotiate term sheets from a commercial standpoint, nor do we engage in competitive bidding. Oh, and we don’t make the dreaded ‘exclusivity’ clause legally binding either! Whether the term sheet is shopped around or not is a good test of the level of mutual trust and understanding, and we would rather discover something like this ahead of wiring money.
After the term sheet is finalised, the responsibility of progressing towards actual funding lies in the hands of the founders. At this stage, the information and discussions from previous conversations undergo a formal third-party financial and legal diligence process. This process involves validating historical numbers, verifying contracts and ensuring proper business, legal and regulatory compliance. However, the projections provided by the founders are internally reviewed and not subject to third-party diligence. We have encountered only a few unfortunate instances where diligence findings resulted in the investment falling through due to inaccuracies in material aspects disclosed during the pre-term sheet phase.
Sounds like an intense process? Yes, but considering our strategy of close and active engagement with each portfolio company to maximise outcomes, we believe it is crucial to establish a strong foundation for a long-lasting relationship. We strive to maintain our low loss ratio on investments, which is a lot more comparable to late stage private equity investments.
As a final note, we believe it is only fair that founders also have a process to evaluate us. Therefore, we strongly encourage you to visit this section on our website and review the answer to the question “What kind of entrepreneur would Elevar love to speak to?” This will help you determine if your venture aligns with our investment criteria before reaching out to us.
So, yes, we are intentionally seeking fewer pipeline opportunities. Our goal is to significantly reduce the 1000+ pitches we receive, while simultaneously enhancing the quality of the approximately 100 founders we meet, ultimately resulting in 2-3 phenomenal investments per year!