Venture Capital: Has Scaled Astral Heights

Anirudh Damani, Managing Partner1.Considering the substantial growth of start-ups all over the country, how is the venture capital ecosystem being instrumental in the all-round growth of newbies?
A1.The venture capital ecosystem has kept pace to match the increasing number of start-ups that have proliferated across the country. The number of accelerators, incubators, angel investors and even venture capital funds are at an all-time high but there is so much more to be done in an economy the size of India especially with the accelerated growth that has taken place over the past 2-3 years.

2.Which are the verticals in the business ecosystem of India that are attracting more investments compared to others? Why?
A2. After a long lull, we are seeing a rapid rise in the number of B2B companies that are doing well and therefore attracting more investments. This can be attributed to three major catalysts - Jio, Demonetisation, and GST.

First, the successful launch of Jio has seen a rapid rise in the mobile internet population. The low cost of access to data has encouraged the new mobile internet user to look for goods and services to satiate his/her unmet demand, effectively making each mobile phone a retail consumption unit.

Last, before GST there were artificial barriers to entry that did not allow a small business in Punjab to compete with a small business in Kerala due to the complexity of competing in multiple states. GST has acted as a wrecking ball ending the reign of state-wise monopolies - effectively putting every business on a common competitive platform to win business from the Indian consumer.

The fact that a business can operate from a single location but compete with businesses all over India has made it imperative for businesses to adopt technology to reduce their operating costs and stay competitive or relevant.

This is where B2B companies become important as they help customers - reduce costs, increase their distribution channels and increase their reliance on technology to solve business problems. We are just seeing the start of this trend and in my opinion, Indian B2B companies will go global faster than anyone could have imagined.
3.What are the factors you look into a company before investing? Elaborate on the different stages of investments?
A3. We are an early stage investor investing at a time where the business has just started gaining traction therefore, we put a heavy emphasis on the cohesiveness and maturity of the founding team. We want our founding teams to have experience in their start-up’s area of operation and get a lot of comfort from knowing that the team has known each other for a significant amount of time.

4. What are the challenges pertaining to the venture capital industry of the country? How does a venture capitalist approach the ROI of the invested capital?
A4. The biggest issue for venture capital fund managers is the poor track record of VC funds whose returns didn’t beat those of an equity mutual fund. In fact, many VC funds have failed to return even the basic principal to their investors after an 8-10 year holding period. In perspective, the returns even from the benchmark index would be north of 15 percent.

“We Manage Our Investment Risk By Closely Monitoring The Kpis OfOur StartUp Investments”

A point to note here is that most of the VC funds that are “under-water” are the second and third funds of fund managers that had excellent returns from their first fund. Their under-performing funds are always several times larger than the initial fund but inexplicably have a different investment strategy to the one that made the first fund successful.

These issues have kept a lot of the investible capital for the VC ecosystem outside the hands of VC fund managers and in many ways led to the insistence on direct or co-investment options by investors in funds.

However, I believe once the VC funds correct their ROI radar and deliver meaningful returns, there will be a flood of investment into VC funds.

5.What are the risks involved in funding an idea and taking it to the road towards success? How is risk management done?
A5. The biggest risk is the inflexibility of the founding team to read data generated by their business and quickly adapt it to meet changing market conditions. A founding team that is inflexible and slow to adapt is on the path to self-destruction.

We manage our investment risk by closely monitoring the KPIs of our start-up investments, conducting mystery shopping campaigns and through our investment strategy of writing larger cheques for our winning investments (65 percent of our investible corpus is reserved for follow-on rounds).

6. What can be said about the growth of the venture capital industry in India? Commemorate on your assumptions on the future this industry holds in the country?
A6. As I have previously stated that the VC industry must start delivering meaningful returns by adapting itself – just like they expect their start-ups to adapt to the changing market conditions.

We must build an Indian model for investing in Indian start-ups instead of adopting the Silicon Valley approach to investing in India. Their ecosystem is way more mature. You cannot have a dollar thinking in a rupee economy.

Anirudh Damani, Managing Partner
Anirudh Is A 4th Generation Entrepreneur Who Has Been Investing In Startups Through His Family Office -Artha India Ventures, Since 2012. He Has An Impressive Portfolio With Over 60 Investments, Participation In Over 100+ Funding Rounds And A 60% Irr. Some Of His Notable Investments Include Oyo Rooms, Exotel, Coutloot, Tala And Now Floats.