Where angels do not fear to tread

When BharatPe was doing a ‘friends and family round’, Kashipur, Uttarakhand-based Rajeev Ghai, 67, decided to put some money in the fintech. “I only invested in it because my son told me to," Ghai said. Soon though, he was bitten by the startup bug as he observed how these small outfits were transforming the economy, and began investing in them. “India is becoming a hub for startups. We want Uttarakhand also to attract some of them," he said.

Vikas Singh, an Indore, Madhya Pradesh-based consultant, started off as an advisor to many startups. Initially, he began picking up sweat equity—a stake in exchange for advice—in some of the startups he coached. “Often, startups are not able to pay you for consulting, but they are good investments," he said. “Even if you put in ₹5-10 lakh, it becomes a good opportunity," he added. Today, Singh has gone past sweat equity and has invested his own money in three startups. One of them, a company that offers 3D printing services, is worth ₹100 crore.

Goenka, Ghai and Singh epitomize a trend among investors in India’s second-tier cities who are looking to diversify their asset allocation, and are flocking to invest in startups across the board, despite the risks involved. Many of them are from successful business families and are flush with funds. From Kanpur to Coimbatore, Nashik to Guwahati, the lure of outsized financial returns is leading these investors to get in on the ground floor with promising startups. And that has seen them back everything, from fintech, agritech and space startups to solid waste management, drone and mobility solutions providers. Helping them in this journey are tier II city-based accelerators such as Umcebo Corp, Venture Catalysts and Marwari Catalysts.

“With the next generation gradually taking over the reins of India Inc., high-net-worth individuals from tier II cities are actively allocating family wealth to various attractive global opportunities to diversify their investment portfolio," said Pratul Tandon, cofounder of Umcebo, a tech business accelerator that has been working with investors in tier II cities across India and helping them invest in startups overseas. “Tier II investors also require awareness and training on how to invest in startups, what to see in a business, how to scout for investable businesses and growth trends," Tandon added.

Beyond mutual funds

Goenka is one of the second-generation leaders at Shubham Goldiee Masale, which was started in 1980 by his father and uncle. The business is expected to be worth ₹1,200 crore in revenue this fiscal, he said. The family has assets of over ₹1,500 crore in mutual funds but Goenka feels there is merit in diversifying into the startup ecosystem. Over time, he expects to allocate ₹15-20 crore for startup investments.

Over the last few years, Goenka, 42, has immersed himself into the startup investing ecosystem and is looking to diversify his bets beyond mutual funds. “Those who are from tier II cities are better equipped to understand startups than those from bigger cities. Because we face these hurdles every day—we don’t have access to first-hand information, we don’t have access to airports, we don’t have people. We have to plan everything and everything has a cost," Goenka said. “But we haven’t had the courage or the exact information required to invest in startups. Because access to good deals in smaller cities is limited." The startup incubation centre at IIT-Kanpur was the starting point for him.

Today, Goenka is convinced that investing in startups is a good way to stay agile in business. “In our current business, you get used to having the best things, you don’t bother about the cost. But through a startup, sometimes you can see that the same thing can be done at one-tenth the cost, which is more efficient," he said.

There are certain segments Goenka is keen on investing in, especially food processing and recycling. The latter is an area that India as a nation does not pay much attention to, he said. Putting money into his convictions, Goenka’s second startup investment is in a business that recycles flowers strewn around temples in and around Kanpur into incense sticks.

The IIM effect

As with Goenka, startup incubation centres at IITs and IIMs have become the starting point for many such investors. Before investing in BharatPe, Ghai was already a sharp investor with a fair bit of success in the stock market. Ghai’s views about startups began taking shape when Kashipur got its own IIM in 2012, allowing the institution to become a rallying point for local investors and industry bodies. As the president of Uttarakhand’s industry chamber, he began galvanizing the local investing community through the incubation center, which is now nearly five years old.

An engineering graduate from Chandigarh, Ghai owns companies that are into timber processing. He also owns three fuel stations in Kashipur. His children live in the US but Ghai is active in Uttarakhand through the local industry chamber. He has so far invested in six startups through Venture Catalysts, a Mumbai-based startup incubator that also has an angel network. Venture Catalysts invests in early-stage startups through various funds and has been tapping tier II markets actively in recent years.

Ghai is encouraging others within his immediate community in Kashipur to also look at startups as an asset class. “One should take this risk," he said about startup investing. “It will take time, because we have to shift them from the ups and downs of the stock market towards startups. Young people have been investing in property. Many investors have 50% of their funds in bank FDs (fixed deposits). It will happen as they grow more confident that they can earn from startups."

Eventually, Ghai says 15% of his total investments could be in startups. In December, he invested in Agnikul, a space startup, a sector he has become excited about. “Agriculture is one of the good sectors. I like service sectors in agriculture. I am also searching for good companies in drones as I think it is an upcoming sector," he said.

Ghai doesn’t plan to invest in other fintechs as he thinks they will have to eventually compete with banks and it would be hard to make money. He invested in Blu Smart Mobility, a ridesharing app that solely uses electric vehicles (EVs), in 2021.

Untapped funds

Guwahati-based Debajit Chaliha always wanted to invest in startups, but never had the time or the inclination to research them. A product of Delhi’s St Stephen’s College, Chaliha has been working with his family business, DKD Marketing, in Guwahati since 1994. The family owns Korangani Tea, a tea brand in Assam, and has some interests in airport retail. It also had a tea plantation, which was sold last year.

“I thought about investing in startups, but did not want to put in the time as there is a lot of research required. When Venture Catalysts approached me, I thought it fit the bill because they were doing the work, they were shortlisting the companies and screening the investments. This suited me very well," he said.

“There is a lot of untapped money in tier II cities," said Chaliha. “But there is not much awareness about the startup ecosystem or why startups need so much money. From a traditional business standpoint, it does not make sense because there is no profit," he explained.

Chaliha is interested in fintech, agritech as well as cleantech companies and has made some investments in these niche firms. One such agritech startup is Hesa, which helps connect farmers with markets for their produce, banks for financial assistance, and insurance companies for risk cover. He is also invested in an e-commerce platform called Gabbardeals.

“These investments do not necessarily have any links to my line of work. I am looking at them as an investment opportunity, with the potential to earn in the medium to long term," he said.

“EVs are something that are going to become big. But I am not getting into that segment just now... let some churning happen; some companies will fall by the wayside," he said. He does, however, regret not putting some money into Blu Smart Mobility, as the startup has grown well in recent years. He is also an investor in a fund floated by Venture Catalysts. Eventually, Chaliha would like to see 20% of his assets invested in startups.

Try, try again

Like Tandon’s Umcebo and Venture Catalysts, there are other professional networks that are active in tier II investor set-ups. One such network is Marwari Catalysts, founded by Sushil Sharma.

Sharma first invested in startups in 2018, with little success. Three of his four startup investments failed to take off because they did not have a proper team or a thesis in place. The fourth startup was broadly successful, but didn’t provide Sharma any meaningful return on investment because he did not have a proper share purchase agreement in place. He just got his principal investment back.

“I realized that I should not invest only on the basis of emotion," he said. By January 2020, he had registered his accelerator, Marwari Catalysts, having decided that was the better way forward. “Since then, we have had four successful exits from investments, and three partial exits over the last three years. There has been only one failure," Sharma said.

Marwari Catalysts has so far invested in over 50 startups. Sharma himself has put around ₹6 crore into various startups on his own. The accelerator has interests in climate change and sustainability startups, direct-to-consumer ventures, as well as startups in the professional working space.

This has been a turnaround of sorts not just for Sharma but also his family. When he first started dabbling in startups, his family, in-laws and friends would frequently wonder aloud what he did for a living. “We come from a simple family. Five of my brothers are farmers. It was challenging, " he said, speaking about his early initiation into the startup ecosystem.

Now, he considers himself a brand ambassador for investors from tier II cities. “Most of our startups and founders are from smaller cities like Nagpur, Nashik, Bhopal, Meerut, and others," he said. “Essentially, we are from tier II and we operate for tier II," Sharma added.

The proximity factor

The rise of accelerators has also created an ecosystem of consultants. In Indore, Singh who started out as an advisor to startups, soon realized he could do much more. In 2013, Singh started an incubator called Srijan, with the help of the Madhya Pradesh government, to coach information technology focussed startups in Madhya Pradesh.

Indore-based Metastay Ventures, a hospitality venture that also offers co-working services in addition to running hotels, is one of the startups Singh has invested in. “When we began advising them, they were not even a private limited company. Today, they are valued at ₹50 crore," he said. Instaprintz, another of his investments, offers 3D printing services and is valued at ₹100 crore, he said.

Singh also has investments in a solid waste management business and is keen to get into renewables, drones and recycling.

“Proximity is something that is important and valuable for investors. For instance, we won’t invest in international startups, where we have no connect," he said. “My plan—I will be investing in around 10 startups that can be taken to ₹100 crore valuation. We are interested only in those startups where we can add strategic value, either in terms of knowledge or connections. That will be good enough money for me," he said.

At a time when the funding taps elsewhere have dried up, the focus on valuation rather than the profits will be music to the ears of many founders.