Better Capital: 2022 Annual Letter

Welcome to our 2022 annual letter. Our annual letters are a way for us to capture our thoughts and ideas and learnings today to be able to reflect on them later — so these are really written for us internally at Better but published openly to keep us honest!

2022 was a mixed bag of good and hard but a great year of learning and a net positive for us and our portfolio, I believe.

We did our first Better Founders Forum Annual in Bangalore in March 2022 and this picture below captures our tribe and the vibe :)

If you are new to Better, in a nutshell, Better Capital is an early-stage venture firm focused on investing in Indian teams building for India and for global markets. You can see more here: our website, our portfolio, why founders choose Better, and our annual letters.

2022 in Numbers

Let’s jump in. 2022 was a challenging year for venture capital & startups by all measures and a tougher one for India as the largest cohort of founders India has ever had were forced to experience what a truly bearish global sentiment “feels like”. That meant all plans had to be revised, our time allocation changed completely and it affected how we thought about new and follow-on investments. The one saving grace was the quality of new founding teams which continued to get better & better — and it was clear these teams were unfazed by the bear market and were intent on building. I loved that part the most — hard times bring out the best people and the best in them. So I am proud of our 2022 portfolio and have deep respect for our teams who started up this year. Here’s what 2022 ended up with in numbers :)

• We made 53 new investments and 31 follow-on investments for a total of 84 investments
• Of the 53 new investments, 7 companies raised a marked-up follow-on round within this year.
• We invested a total of $30M+ across the 84 investments in 2022 via our fund and SPVs.
• We stayed focused on being the first money-in with our lead check in 29 pre-seed rounds and participating check in 23 seed rounds.
• SaaS/Software remained our largest sector with 15 new investments. Climatetech and Healthtech were the new significant additive sectors as we had begun working on these in 2021.
• Open become our 2nd unicorn — more on this below.
• We completed 5 years of investing and are glad to see our performance holding up strong — details below.
• We had 6 successful exits (full & partial, some in process) in 2022.
• We saw 5 companies who went down fighting for variety of reasons including lack of PMF, co-founder conflict, and inability to raise follow-on capital.

2022 in Charts

Here’s our 2022 activity in perspective via our usual charts so you can see where we are going and how 2022 compared to past years and what more.

If you look at the chart below, you’ll see that 2021 was an outlier year and we are broadly returning back to a somewhat expected pace with our 2022 number. A lot depends on overall macro as well as the quality of startups so we rarely have a target for the number of investments & never will.

In spite of a tough 2022 for follow-on rounds, we saw 31 follow-on rounds in portfolio companies and have several that are in the early to mid stages of raising their follow-ons.

We stayed the course on our stage focus and were part of the first round of capital in the majority of our investments — led pre-seeds and participated in seeds.

We found great teams in multiple sectors in 2022 and several themes that we like including cross-border B2B, B2C commerce, and more. We continued our focus on Climatetech and Healthtech & were impressed with how fast these sectors are growing and the top-notch founders they are attracting.

Open become a unicorn and our cumulative count went up to 2 — it’s just a milestone in company building and we are product and excited for what Slice and Open, our 2 unicorns, will become over the next several years.

Performance

We don’t officially report performance numbers but share directional context to cover the performance aspect around all our activity. We have 3 separate capital pools: US SPVs Fund, India SPVs Fund, and our venture fund 1, Better Capital Ventures I.

Our US SPVs Fund is the largest in size, currently has 105 companies, and has performed well so far over 5 years though the bulk of the portfolio is less than 2 years old and the effective duration is just over one year. Here’s how its performance (multiple) stacked compared to ALL global deals data tracked and consolidated by Angellist. See the chart below:

Our India SPVs Fund is much smaller in size & currently has 84 companies. It has fared well too and its effective duration is approximately 2.5 years. See the chart below:

Better Capital Ventures I is just over $20M. We will have more directional performance data in a year or two but 20 of the fund’s investments already raised a marked-up follow-on round.

We have invested a total of just over $80M over 5 years across 200+ unique companies with an effective duration of approximately 2 years. We are happy with the performance staying strong over these 5 years, excited & bullish about the portfolio overall, and looking forward to many companies breaking out over the next several years.

The Theme of Caution & Getting Foundational Basics Right

We started 2022 with a feeling of caution because valuations, over-optimism, and greed all seemed to be at their peaks. The dot-com bust in 2001 taught me what comes next so the morning Russia invaded Ukraine, I felt the urge to warn our founders with a quick and simple Whatsapp message (see below). Unfortunately, things only got worse from there as we saw multiple macro issues drive us into more and more bearish sentiment. I was just one of the many inputs our founders were taking and internalizing but I am glad that almost all of them moved sooner or later to sharply re-align their plans based on a new reality of a slower and more bearish venture capital market. A lot went on behind the scenes, of course, but we saved ourselves from a lot of pain by acting early and decisively. “Can we do better?” I kept asking and kept pushing everyone to build the strongest foundation to not just last out the bear market but eventually thrive. It was also helpful to get everyone to ask all the hard questions ahead of time, internalize all the bad news and be clear of the market opportunity and the re-aligned plan to win it. It was a hard but valuable experience.

First Journey from Pre-seed to Unicorn

We had a very special milestone in mid-2022 when our very first investment as Better Capital — a pre-seed check in SME neobank Open — raised a strong Series D at just over $1B in valuation to become India’s 100th unicorn! We went from Pre-seed in Q1 2018 to $1B in Q2 2022 and couldn’t be more proud of this team & company — and fortunate to be an early believer. We invested early at pre-seed and doubled down on Seed, Series A, and Series B based on a clear and continued conviction. Open is positioned well to continue to become the largest SME banking infrastructure provider in India & Asia.

Better Capital’s 1st Investment. India’s 100th Unicorn.

2022 Summary, Reflection & Learning

Early-stage investing never stops teaching you and while every year is different, 2022 was especially unique because we had to navigate a tough and hard-to-forecast year with a large portfolio where companies were in widely different stages from pre-seed to growth — every problem was differently hard :) Here’s a snapshot of what we went through:

• We learned more about our founders in 2022 than in any year prior because adversity shows one’s character in its rawest form — we were able to see the people choices we had made, value systems we had aligned, and more in action and were incredibly glad to find that we are largely super right in our choices. There is no right or wrong in my mind — just aligned or not aligned and we felt supreme alignment with our founders as we navigated the year. This is so important but hard to test in good times. Fingers crossed for continued value system alignment!
• When we invest in pre-seed, we are forced to ask all the hard questions, be brutally honest and be clear about what business we are in, are we seeing it clearly month after month, and what we need to do to build a long-term sustainable business. Every founder was forced to do this in 2022 and not delay these questions by raising follow-on rounds — this was a net positive effect of the bearish sentiment in 2022. I think, as a portfolio, we are looking stronger than before.
• We solidified our belief that in Fintech, infrastructure is a far stronger bet than consumer and doubled down on it. In consumer Fintech, we’ve maintained that there are only a few ways to monetize and everyone will do everything eventually — they will just lead with a different product wedge: a neobank, a card, a UPI app, a saving app, etc. Lowering of long-term CAC won’t happen without getting the product right as cashback and other such methods are shortlived at best. 2023 will be telling about this subject.
• Edtech and Healthtech are massive segments that we continue to like but also believe that they are very hard to “rapidly scale” and the right model in both these segments may be to “scale sanely”. Both segments are unlikely to get to scale via digital channels alone and will be very very omnichannel and we will likely see this in full action in 2023. This also means teams who have an “offline-founder-fit” will figure it out while others who don’t have it might struggle. We are keen to watch & learn.
• We loved the quality of new teams we saw starting up in Climatetech in 2022 and are excited to learn with them and continue to grow our Better Tomorrow portfolio. A lot to unlock in this space but this is also the first time we are seeing investments in Climatetech at a decent scale so a lot of learnings lie ahead too.
• SaaS proved why it is a risk balancer in portfolios as we saw our SaaS companies steadily get to the next stages and raise blue chip follow-on rounds on strong core foundations. Global GTM continues to be a challenge for Indian teams though — many teams believe PLG is the way out of it but we don’t believe so. You need a PLG motion but you need a strong outbound motion too and you need to master it. We did see many of our companies get this right.
• Vertical SMB SaaS may emerge to be a very interesting sub-segment and we are learning from our portcos pursuing this. Definitely a space to watch.
• Cross Border B2B was a darling this year and understandably so — large TAMs and some interesting levers for new companies to build on. We like this space too but, as we’ve done in fintech, we focused on infrastructure for cross-border first.
• BFF — Better Founders Forum — is a simple Whatsapp group that matured a lot over 2022 and has become a massive “where I can get real help” destination for our founders to get advice & help on a wide range of issues they face every day. The time BFF saves founders is unbelievable. I feel super thankful for how all our founders have kept the BFF group high signal & how they proactively & selflessly help each other every day.
• Better+ is our network of friends, supporters, co-investors, and advisors and we systematized it to enable high-quality and relevant introductions for our founders in a frictionless double-optin manner. From bankers who solved complex problems to investor introductions that led to term sheets, we saw Better+ get to PMF in 2022 and I am looking forward to working on it more intensely in 2023. Bridge, which we use for some of our intros for the last 18–24 months, stands at 1440 contextual intros today :)
• The “get intro” link on our website is a hit — we’ve seen even growth-stage US investors come in and connect with our founders via the “get intro” link. Senior & junior candidates too. It works like a charm — value delivered straight into our founders’ inboxes. A lot more on this in 2023 to scale it.

This podcast I did with Jivraj Singh Sachar in October also captures a lot of what we’ve learned over the years at Better and how we are thinking about our India thesis going forward:

Thinking about 2023

We will be stepping into 2023 with a portfolio of companies across all stages and expect to learn even more as we navigate an unclear capital climate.

• We will continue to spend a lot more time on our existing portfolio as we see tremendous potential in a wide range of companies and believe it will be a high return on time for us and our investors. And we learn from our companies with raw data and insights — which is irreplaceable and continues to be a massive advantage.
• While we stayed price sensitive through the up cycle, we want to go back to being stricter with our pre-seed and seed entry prices as we don’t believe in joining high-priced rounds just for the “hotness” of them or any other factor. PMF risk remains the same for the hottest of the teams so we won’t underwrite a price we don’t like.
• We productized pre-seed in India over the past few years and have many more ideas to make that first round of capital even more frictionless and high quality for founders. We will experiment with several new ideas around this in 2023.
• We have a deep fintech and edtech portfolio and don’t expect to see dramatic new opportunities that our existing portfolio won’t cover — so we will be looking to learn from what gets unlocked by the current cohort. A lot to be proven at scale in both segments.
• We remain extremely committed to SaaS, API, AI, and Infrastructure Software and will continue to find sub-sectors we love and double down. For example, we invested in multiple companies in the broader privacy and security space over the past 18 months & saw all of them do very well in the pre-seed to Seed/A stage journies. We will hunt for new sub-segments in 2023 and have some early ideas that look exciting.
• We started on Climatetech and Healthtech over the last year or two and both segments are now starting to look very interesting — large and clear markets and we intend to double down on both these segments. They aren’t very large segments yet so we don’t expect to see plenty of opportunities that are investible but know a few gaps where we are and will keep looking.
• The opportunists have fleed crypto which is a good thing but the series of problems in 2022 for crypto means that we will have a very slow year ahead. Everyone who is long is heads-down-building and there is a lot to do. We have a very high-quality cohort of companies across infrastructure, Defi, gaming, and creator economy and we will focus on learning from them.
• ChatGPT unleashed creative building that reminds me of the vibe at the beginning of Web 2.0 — a cliche, but we do think 2023 will be an interesting year for generative AI-first companies. Analytical AI companies will mature further in 2023. We have a bunch of early bets in the overall space and intend to watch this closely.
• Our local and global co-investor network was incredibly valuable to our founders for running high-quality and efficient fundraising processes. In 2023, we intend to nurture and grow our co-investor network globally to make sure our best companies have access to a wide range of investors and are able to find like-minded partners to bring into their companies.
• Our India-for-world SaaS & software portfolio is significant now and we are hoping to work on a series of projects in 2023 to address the constantly recurring needs we see these companies face from visa to US GTM to US hiring to building advisory boards and more. I am excited to work on these projects in 2023.
• At our fund and portfolio size, we are starting to test the limits of our lean model. It has scaled well but we want it to continue to scale so we are putting together several systems and processes in place to allow us to manage our large portfolio with greater ease. Just growing the team is not necessarily the only right solution for us — we want to instead focus on systems that help us manage our growing portfolio. A lot of work on this in 2023.
• One of the things we think about at Better is constantly innovating on the capital structure so that we can connect like-minded investors to the best venture opportunities. We will continue with our pre-seed/seed funds (Ventures I, II…) and our Continuity SPVs (for follow-on rounds) but also partner with several new generation capital ideas to make doubling down in our companies more scalable and investing more accessible/tangible for our investors with greater visibility.
• We remain excited about the market opportunity for India — to build for India as well as to build for the world. But like I said on the CNBC show below, we just need to pace ourselves to unlock the market opportunity. If you run faster & try to grow unnaturally, you’ll just crash & burn. All our founders are super aligned with this so we remain long and bullish on our India thesis!

Live: Discussing 2022, Pondering 2023

We wrapped up the year with a session on CNBC’s YoungTurks with Shereen Bhan and early-stage co-investors from Lightspeed and Beenext discussing how 2022 went for each of us and what we felt about 2023. In a nutshell, the macro for India venture hasn’t looked better — founder quality, market opportunity, and compounding of learning happened at a fast pace narrowing the Silicon Valley-India knowledge gap. Give it a listen!

Thank you

I continue to be grateful for the journey we are on at Better Capital. I feel like I’ve learned more in the last 5 years than in the 15 years before and can’t wait for what lies ahead. 2022 was a tough year but a fulfilling one. Tough times strengthen bonds they say — that’s exactly what happened with our founders. And, we continue to be overwhelmed by the support from the broader community of founders, operators, co-investors, and more. Thank you & Happy Holidays!