Neil Banerjee
As India witnesses a start-up boom, venture capitalists are keeping a close eye on it as they are the ones seeding the financial fronts of the new and upcoming start-ups. SME Futures talks to Anirudh A Damani about how Artha identifies the strong points of the companies that they are interested in and how these pluses are nurtured till fruition.
Excerpts from the interview:
What kind of investments are you looking to make from the family office?
We invest in companies at a unique inflection stage. We come in at the late seed (early-revenue stage) stage, and we keep a sizeable amount, i.e., 70 per cent, for follow-on rounds to double down on our best investments up to their Series A round. We recently launched a ‘Winner’s fund’ that will allow us to continue backing our best investments through their Series B & C rounds.
The ventures that we invest in should meet our 4 core principles. Starting with number one – are they solving a real human problem? What is the problem that is getting solved? Who are you solving it for? Is the focus on the bottom or the top of the pyramid? Finally, are people willing to pay for the problem to be solved?
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That leads to our second investment principle. What are the unit economics, and can the venture scale? You might have something unique and essential to solve, but the market for it might be tiny. Venture investing is about scaling quickly, and that’s where the investment capital will flow.
Third, we want to see businesses that have a significant moat. I’m not talking about an IP-led moat, even though we have several deep-tech companies in our portfolio. We want to know why customers would keep coming back and the switching cost for them.
If you look at Apple as an example, it used to be difficult to make a transition from an Apple device to an Android one. Android has made it easy to port over from Apple to eliminate the high switching costs. However, Apple continues to command 40 per cent of the revenues and 75 per cent of the operating profits of the global smartphone market, despite holding less than a 15 per cent market share in total mobile phone shipments. This is why Apple has a $2 trillion market cap and holds a moat that I’d have loved to have been an early investor in!
The fourth and final principle is technology. We believe that technology is a tool, not the backbone of the businesses we invest in. Therefore, we like to see companies use innovative technology to make things cheaper, simpler, faster and more accurate, but not as the core reason for the business’s existence.
Those are the 4 core investment principles we’ve built our portfolio on, which have held us in good stead over the last decade.
What Environmental, Social, and Governance (ESG) filters do you apply to investments in the family office?
Because we have gone after solving real-world problems, we’ve developed a reasonably broad start-up portfolio ranging from microlending, circular economy, and employment generation to communities for women in leadership roles.
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For instance, we have one company that collects flowers offered to the deities in Indian temples and converts them into incense sticks instead of letting them be thrown away in the water bodies. In fact, we made this investment without any ESG mandate. However, they have taken a small amount of money and delivered an excellent result for us, monetarily as well as on the ESG parameters!
Therefore, while we don’t have a mandate and never consciously applied an ESG filter, we figured out, looking backwards, that we were delivering a solid ESG and investment return without having to use one. We realized that looking at a venture through an ESG filter before evaluating its necessity to the consumer can be like putting the cart before the horse because we want to meet the criteria of the ESG filters before we look at the problem!
There is an ongoing discussion around the low participation of women in the investment/VC space. How do you see this problem?
In our 108-company portfolio, we have 30+ women-led start-ups, which is almost 28 per cent of our entire portfolio. A Bloomberg report stated that just 2 per cent of the VC money raised last year went to women founders. We must be doing something right to be 14x better than the most vibrant ecosystem in the world.
Reaching here has been a unique journey because we do not have any mandate or minimum threshold to meet in terms of gender participation in our founders mix. However, as an organisation we choose to select the best founders that we can find for a problem, regardless of their gender. Therefore, I refuse to treat a female founder any differently than a male founder.
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This approach is probably the reason for why 4 out of the 7 leadership members at our fund are female. We just choose the best person for the job, regardless of whether they have an extra X chromosome or not!
How do you define sustainable investing in the PE/VC space? How do you implement the same?
PE/VC investors, especially the later-stage ones, should be investing only for growth when the target company has already displayed positive unit economics with clear evidence of product market fit. Only then does it make sense to pour in the ‘gasoline’ of high-cost PE/VC funds.
If a company is not making money on every sale today and does not have clear plans to do so, what is the use of making it big? Eventually, their biggest customer will be the VC investor because they, not the customer, are paying to keep the doors open!
Do you see start-ups pivoting to more sustainable models in the coming 3-4 years?
The primary dharma of a company is to make profits. That is the most fundamental law of a business! Even a street hawker will stop selling an item if no profit is generated. Then, why should the rules differ for companies led by much more educated people with MBAs and PhDs?
See, making cash profits is the model that a founder should follow. What we’ve had over the last few years is abnormal due to the massive printing of money fuelling a huge major bull run! Those excesses have led to a few unfortunate cases where billions of dollars of investor wealth have disappeared because the founders didn’t build those businesses on sound fundamentals.
Now the investor community is swinging the pendulum in evaluating businesses, looking at them as though there would be low or zero growth. It is an extreme reaction, but this reaction will change once start-ups start surprising investors with substantial revenues by throwing out free cash flow. Then the cycle will start again.
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Does sustainability cause start-ups to reassess their models so that they can make the same margins?
It does if they are building a product or service that focuses on their core customer, i.e., the 16 per cent that comprises of innovators and early adopters of their overall target market. These customers influence the choices and preferences of the majority of the market. In Simon Sinek’s book ‘Start With Why’, you can read more about the Law of Diffusion of Innovation – a must-read for founders!
However, when founders concentrate on achieving scale before they have locked in their core audience, they must bend backwards to the point of snapping the spine of their product positioning. Therefore, the most sustainable way to do business is to concentrate your efforts on that part of your target segment which has the highest need and the most excitement for your product or service. Any attempt to get loved by everyone in your target segment is a recipe for disaster!
