How small-town capital is pursuing startup dreams

Anurag Maloo has a warehousing and hotel business in modern-day Seoni in Madhya Pradesh. He had been on the lookout for new investment options when he first heard about the world of startups five years ago. Until then, the riskiest part of his investment pie would be the money he pumped into the stock market.

“It all started in 2016 when I was (first) introduced to the potential investment opportunities in startups. Since then, I have only increased my exposure in the segment," said Maloo who has invested in more than 20 startups. The 45-year-old has even made successful exits from half-a-dozen of them. The exits have given him an average return of 2.5 times after a holding period of 2-3 years.

Almost 300 kilometres away, in Maharashtra’s Amravati, chartered accountant Mayur Zanwar, 40, launched his own startup—TruScholar—in 2019. The underlying product is based on blockchain technology, a protocol for recording and storing information that is impervious to hackers.

Zanwar also decided to put money in other startups. Till date, he has invested in nearly 20 ventures. He liquidated all of his real estate holdings last year to increase his bets on the startup segment and aims to invest in as many as 30 early-stage ventures by the end of 2021.

“I am bullish on technology…not just pure-play technology, but tech-based solutions in sectors ranging from health, education and media to finance. I look at the financial summary, the founder team, the problem-solving solution that the firm provides and the growth projections. Then, I invest," said Zanwar.

Maloo and Zanwar are just two among thousands of such individuals across small-town India, who have suddenly started looking at startups as a full-fledged asset class. For these new-age investors based in tier-2 and tier-3 cities such as Rajkot, Siliguri and Surat, early-stage seed funding is a lucrative, albeit risky, new avenue. It offers a potential toehold into India’s booming new economy sectors.

The ticket size is often small—the average investment per startup could be as low as ₹5 lakh. Relatively younger startups like Explara, Yulu, Dailyninja, Confirmtkt or PeeSafe are the main targets. Aiding this phenomenon is the parallel rise of platforms which aim to make startup investing simpler.

Seed stage investing

Anup Agarwal has a diversified business in Raipur, the capital city of Chhattisgarh. The city is known for its steel industry, but Agarwal has interests in various other sectors, including construction, education and power.

“I have invested in as many as 50 startups ever since I started investing. I have also made one successful exit from (payment services firm) BharatPe. I plan to only increase my investments," said Agarwal.

The startup sector has gained sheen in the backdrop of increased volatility in other asset classes, such as equities and gold. In the current calendar year, around 15 startups have already attained unicorn status in India—a huge jump from the 11 new unicorns of 2020. Startups with a valuation of over $1 billion are referred to as unicorn startups.

Naturally, platforms that facilitate investment in startups have seen a significant jump in client registrations, particularly from far-flung towns, with some pegging the share of such small-town investors at around 30% of the overall client base.

Bengaluru-based LetsVenture, which facilitates investments in growth-stage startups, has over 6,700 registered investors on the platform. “Since last year, we have been onboarding new investors at a pace that is nearly 2.5 times higher than our historical average," said Shanti Mohan, co-founder and chief executive officer of LetsVenture.

The process of investing in a startup through online platforms is fairly simple. One needs to sign up on the platform, which requires a KYC (Know Your Customer) registration. The registered investors get access to the pitch decks of a slew of startups that are looking to raise funds through the platform. The platforms typically charge a membership fee while facilitating the investment process.

LetsVenture has a portfolio value of over $2 billion, featuring more than 350 startups. “There are thriving business communities in most non-metro towns and these businessmen understand business and how a business can be created," said Mohan.

“While they like to invest in businesses, they do not (always) have proper access. More importantly, there is a lot of capital in such towns that can be channelized towards proper investment avenues," she added.

A Nasscom report from January 2021 identified early-stage investment in startups as one of the key priority areas wherein there is room for growth and improvement. It could also end up strengthening the overall startup ecosystem.

“Seed-stage investments in India are less than 10% of the total investment that is raised each year. It has stagnated in the range of $400-500 million per annum," stated the report. “Angel investors are a critical part of the ecosystem flywheel, for they provide risk capital, experience, and expertise for very early-stage founders. The current structure…is heavily tilted towards institutional investors. Innovative measures are needed to encourage the participation of individual investors," it added.

Industry executives say that the major roadblock in making non-metro investors join the startup growth story is the awareness levels among them. Historically, such investors have looked at traditional asset classes like real estate and gold as the preferred form of investment.

Incidentally, the covid-19 pandemic has been a blessing in disguise for the segment because the nationwide lockdown of 2020 and also the more recent regional restrictions in the aftermath of the second wave of infections made people aware of the potential impact of digital disruption across various sectors.

Going beyond the hubs

Getting new investors on board from non-metro towns has also been aided by the fact that the startup landscape itself is undergoing change. The Nasscom report highlighted the fact that 2020 saw a “marked increase in startups beyond (the) established startup hubs" like Bengaluru, Delhi, Mumbai, Pune, Chennai and Hyderabad.

Cities like Ahmedabad, Jaipur, Kolkata, Kochi, Thiruvananthapuram, Kanpur and Indore are among the new crop of cities that are emerging as hubs. “With continued policy support, expansion of local communities, and a shift to remote work, we can expect more success stories, including unicorns, from across the country," said the Nasscom report.

According to data from Tracxn, a business intelligence platform, nearly 3,700 startups were launched from tier-2 and tier-3 cities in 2020, which cumulatively raised as much as $3 billion from investors. In the current year until May, a total of 120 startups have been founded in such towns. Cumulatively, these startups have raised as much as $2.25 billion, showing that the per-deal average has increased in 2021. Among sectors, the consumer technology vertical saw the highest number of new ventures in the last couple of years. It was followed by fintech, food/agriculture and travel/hospitality.

Data from the Department for Promotion of Industry and Internal Trade (DPIIT) shows that all the states and Union territories have at least one startup which is recognized by the department. The total number of such ventures is pegged at nearly 50,000.

More than 16,000 new startups were registered in 2020-21. According to available data, Maharashtra has the maximum number of startups at 9,335, followed by Karnataka (6,556), Delhi (6,158), Uttar Pradesh (4,414), Gujarat (3,049) and Haryana (2,768). Startups have also created as many as 180,000 jobs in 2020-21, more than 12% higher than the previous fiscal’s 160,000 jobs. Job opportunities created by startups have nearly doubled between 2018-19 and 2020-21.

Call for caution

Some industry executives say that startups, especially the early-stage ones, had been deprived of capital for long and it is a positive sign that new investors are looking at them as a lucrative investment opportunity. But they also warn that startups do not share the same characteristics of other asset classes like stocks, mutual funds, gold or real estate. If a startup gets a bad set of investors, then, it could even ruin the venture, they say.

“Historically, early-stage startups have been capital-deprived in our country as the pace of capital availability in India did not grow at the same pace that the startup ecosystem grew. India has a genuine startup story," said Manish Kumar, founder of Grex, a digital transaction platform for startups.

“While an increase in the number of potential investors is a good sign for startups, these ventures (also) need seasoned investors or one who understands the nuances of start-up investing. This is really important as, at times, the success or failure of a venture could depend on its investors. If there is a frequent churn in the list of investors of a particular startup, it could be detrimental to the venture’s long-term growth potential," added Kumar.

Sanjay Mehta, founder and partner of 100X.VC, a platform for early-stage startup investing, agreed. He says that putting money in a startup is a sophisticated form of investment which requires extensive due diligence because there are quite a few risks are involved. “There are a lot of instances when startup investments are wrongly sold as a wealth product," Mehta said. “One shouldn’t invest in a startup unless he or she understands the venture or the product. More often than not, investors invest purely based on the pitch deck or the advice of the so-called incubator or accelerator," he said further.

Trend with staying power

The democratization of startup investing has been underway for quite some time now with more investors joining the bandwagon over the years. Industry executives have agreed unanimously that the trend is here to stay and will be sustained over the long term. They cite some of the recent wealth reports that highlight the fact that the interiors of the country are home to a sizeable number of affluent Indians who hold a huge amount of untapped wealth.

“…startup investments are gradually gaining a foothold in the investment spectrum of the wealthy," stated the recently released Hurun India Wealth Report 2020, in which nearly 12% of the respondents mentioned startups in their wealth allocation preference.

Public equity and real estate were the only two asset classes that saw a mention by a higher number of respondents. Respondents expect “real estate, alternative investment funds and startups… to witness a positive movement in the next three years," added the report.

Interestingly, newer forms of fund-raising are also gaining prominence across the world, which supports the belief that the degree of democratization will only increase. The US Securities and Exchange Commission (SEC), for example, recently increased the annual maximum limit for funds that can be raised via crowd funding to $5 million from $1 million.

“These developments only strengthen the theory that new investment behaviours are secular permanent trends that will only increase in quantum with the passage of time," said Grex’s Manish Kumar.