Former Cisco Systems Inc. director Pratik Bose, who recently joined Indian Angel Network (IAN) as the managing partner of its maiden fund, which has a corpus of Rs350 crore, says there is no dearth of funding opportunities for young start-ups. Angel investments in the country are on the rise, with a 20% increase in the number of active investors this year.
“IAN’s fund will be transformational for the early-stage ecosystem—we will become the single largest platform for seed and early-stage investing which will be willing to write an entrepreneur a Rs25 lakh cheque when they start and would be capable of writing cheques of Rs50 crore if they continue to do well," Singapore-based Bose said in an interview. IAN’s inaugural fund announced its first close at Rs175 crore in April. Edited excerpts:
Last month, you left Cisco to become the managing partner of IAN’s newly announced fund. What got you to join the Delhi-based angel investors group?
As is true in an early-stage investment, the important factors were the team, the platform and the market. (IAN co-founder) Saurabh Srivastava, who is recognized as one of the founding fathers of private venture capital (VC) in India, and I have collaborated for years now... The IAN Fund has brought together stalwarts like (Infosys Ltd co-founder) Kris Gopalakrishnan, (chairman and co-founder of Narayana Health) Devi Shetty, (chairman of Hero Enterprise) Sunil Munjal, several successful entrepreneurs, industry leaders and investors together who have the same vision of taking the entrepreneurial culture of our country to the next level in India and globally. In the calendar years 2014, 2015 and 2016, IAN invested over $32 million in around 60 deals. Now, with the IAN Fund, we aim to create the country’s largest horizontal platform for seed- and early-stage investments. This fund is exactly what the ecosystem needs as this will bring a paradigm shift for start-ups.
Looking at the investment landscape, as early-stage investors consolidate existing portfolios, has the lull in investments, particularly in critical series A stage, hurt the country’s start-ups?
In fact, I believe there’s much to cheer for the young start-ups, and yes, there is more to be done, which is why the IAN Fund was formed to expand to series A as well. While early-stage investors have exited and brought in much needed liquidity, they have made way for later-stage investors to come in. I see no dearth in funding opportunities for the young start-ups. In fact, angel investments are on the rise, with a 20% increase in the number of active investors this year.
With many large VCs having vacated the series A space in the past 18 months, do you think this presents new VC firms, and funds like yours have great a opportunity to bag upcoming start-ups early?
Indeed, we realized that between angel investments and VC investments there is a big gap, and that is in series A. Over a nine-year period, IAN achieved a gross IRR (internal rate of return) of 32 %, across 104 companies; this was an excellent return, given the high-risk investments. This meant we were doing something right and so creation of the fund was a natural next step. The fund, therefore, will leverage all the strengths of the angel network, extend the runway for our companies to grow, it will become the single largest platform for seed- and early-stage investing. This fund will be transformational for the early-stage ecosystem. We will become the single largest platform for seed- and early-stage investing which will be willing to write an entrepreneur a Rs25 lakh cheque when they start and will be capable of writing cheques of Rs50 crore if they continue to do well.
It is India’s strong angel community which has resulted in a good amount of deals coming through for its VCs. How long can angels sustain this in the absence of good exit stories?
Over 8,000 entrepreneurs reach out to IAN each year—over a nine-year period, IAN has achieved a gross IRR of 32% per annum, across 104 companies. We are positive that this trend will continue even in 2017. Final exits are still coming forth—early-stage investors are exiting, making way for late-stage investors. More recently, WOW Momos gave to some of its investors a highly profitable exit with an IRR of nearly 50% in less than 18 months. For IAN, 15 companies have already given cash exits and another 12 have raised next round monies with excellent increase in valuations. Most mainstream Indian and global VCs—like Sequoia, Nexus, Matrix Partners, Tenaya, IDG, Kalaari, USF, Accel, Inventus—have done a follow-on round in IAN’s portfolio companies or co-invested with it.
For Indian start-ups, the pain point is the series B space. With the new fund, can IAN play in this space? But overall, how big is this an issue in this region, considering series B and C rounds are critical for successful start-ups to achieve scale and become regional and global firms? When do you see more VCs emerge in the series B and C space in this region?
The IAN platform—IAN and IAN Fund—along with co-investor partners would enable investments of around Rs1,500 crore in 160-odd companies over the next four years. In 10 years, the IAN platform and the co-investor partners we bring in would have brought together Rs5,000 crore in 500 companies. In pre-series A and series A investments, our existing collaborators with VCs such as Sequoia, SAIF and Accel who have invested in follow-on rounds of IAN portfolio will now not only get more support and collaboration from our platform, but will benefit from an even greater curated set of co-investment opportunities. At the same time they will find a willing hands-on partner and co-investor to strengthen their early-stage bets.
A common complaint is that while dry powder is available, the seed and series A stages are not producing requisite deal flows, which involve start-ups with original ideas and innovation and are solving local problems, for deployment. Do you agree?
I wouldn’t completely agree. As I said before, our engine sees over 8,000 deals per year; what follows is a robust, multi-tiered process for shortlisting, which brings down the number to say 40 companies in which we eventually invest. As a matter of fact, we have portfolio companies ranging from traditional sectors like IT (information technology) services to solid waste management to e-commerce and new growing sectors like AI (artificial intelligence), IoT (Internet of Things), fintech to those having social impact.
For companies raising capital, what does IAN bring to the table in addition to capital?
The IAN Fund has access to the most comprehensive organized network of industry leaders, experts and investors in the country and co-investor base with deep relationships in the ecosystem. LPs (limited partners) of IAN also form the doyen of Indian industrial and entrepreneurial success and India Inc. We bring a well-connected and focused full-time team with decades of seed- and early-stage investing.
How do you see the start-up ecosystem in South-East Asia (SEA)? Singapore had a huge lead over other countries, but has it been able to build on it?
Definitely, it is reflected by the growing number of local investors as well as the quality of the teams and the platforms they are building. In this it is important to note that Singapore Inc. continues to play an ever-growing role of enablement, investment and policy which makes continuous impact.
You have seen the start-up ecosystems evolve across India and South-East Asia. What are the similarities and what are the major differences?
Both ecosystems have matured to the extent of having not only its first set of unicorns, but also an initial set of strategic M&As (mergers and acquisitions) and public market exits. Another unique similarity of India and South-East Asia as a whole is the diversity of the market, which gives a unique global destination to test and scale a variety of customer bases. On the difference side, VC has been flowing into India for a longer time than South-East Asia and that you see in reflecting in the size of the differentiated talent pool in India which is being accessed by the global ecosystem.
What are the big learnings that the ecosystem in South-East Asia can take from a market like India?
Investors need to be patient with respect to the exit and their time of holding a stake in the company... hands-on models are here to stay and have to be a necessary component at scale. Meanwhile, start-ups should keep an eye on the revenue model and margins in the long run, which means they should focus on scalability and look towards multiple geographical markets with similarities.
Finally, in India, we have learned diversity and commonality in scalability from Day One, by addressing rollouts from tier-I to tier-III cities. This is true when you take a rollout in Indonesia, Thailand, the Philippines and Myanmar—all of which have their unique nuances and economic size and growth.
Dry powder with private equity firms/VCs active in India stands close to a six-year high of $7.1 billion, according to data from private deal tracker Preqin. Does this suggest an improved fund-raising environment? Or does this suggest a lack of strong deal flows, or even a lack of confidence to deploy capital in India, considering the negative news that start-ups there have been attracting for a while now?
It reflects both a more thoughtful investor base with a maturing strategy to reflect the evolution of the entrepreneurial ecosystem and, in fact, a continued vote of confidence as an investment destination. This is reflected in the change in the strategy of fund allocation for better RoI (return on investment) and risk diversification. A greater focus on B2B (business-to-business) companies, more number of small ticket-size investments, mixed portfolio of companies—are the current key characteristics. IAN believes that although there is more money coming into the country, it will find its way only into quality ventures. IAN Fund has bucked the trend—by raising its first-close funds primarily from domestic sources, from both individual and institutional investors, like Yes Bank Ltd, IIFL, etc., and a handful of overseas investors like the US and Singapore.
The government is already working towards building India into a start-up hub. There are various policy-related issues that are being ironed out, while there needs to be a sustained effort from all stakeholders to ensure a conducive environment for companies and make domestic investment more attractive. At the same time, we are seeing an increasing number of global corporates and investors getting more interested in early-stage investments here.
What are the trends in the start-up space in India and South-East Asia that one should watch out for?
First, investors with value-add capabilities at scale will continue to attract the best of entrepreneurs and lead to success in a virtuous loop. Second, start-ups will address multiple cross-border markets much earlier than they used to. Other trends include the next stage of evolution of India and South-East Asia both as a market as well as a global destination for core innovation...