Sahil Anand has launched Cedar-IBSi Capital, India’s first fintech-focussed VC fund, and aims to secure a corpus of $30 Mn. The fund reached its first close in March 2024, raising around 40% of the target amount
Cedar-IBSi plans to invest INR 4-10 Cr in 15 early stage fintech startups and primarily targets pre-Series A businesses in B2B fintech and banktech space
“Our goal is to provide value beyond capital. Founders who raise funding from us will benefit from the extensive support bestowed by Cedar and IBSi, which will help drive sustainable growth," said Anand
Will the glory days of fintech be back with a bang post the valuation corrections and an excruciatingly long funding winter? Despite a reasonable thaw, the tailwinds have not been felt yet, and we tend to get mixed results. For instance, the fintech sector in India witnessed a 62.45% drop in funding in H1 2024, securing $809 Mn against $2.1 Bn raised in the first half of 2023 (according to Inc42 data).
But the silver lining was there, too. The country stayed among the top three funded fintech ecosystems, right after the US and the UK. More importantly, the Indian fintech opportunity has been pegged to reach $2.1 Tn by 2030, growing at an 18% CAGR.
The global fintech market also remained muted this year. According to a CB Insight report, Q2 2024 would have remained flat had it not been for two blockbuster deals. However, a decline in deal volume and average deal size indicates investors are still cautious. Although many venture capitalists think that 2024 will be the comeback year for fintech and may soon reach its pre-Covid status, the majority seems to be looking for startups that can deliver innovative and globally competitive solutions.
Sahil Anand is one of them and he claims to have struck gold by identifying the potential of a much-neglected sub-category – banktech, to be precise. Anand has launched Cedar-IBSi Capital, India’s first fintech-focussed VC fund, and aims to secure a corpus of $30 Mn. The fund reached its first close in March 2024, raising around 40% of the target amount.
While the entire corpus will be deployed in India, the fund may raise additional capital to expand its operations in the EU and the Middle East. Cedar-IBSi plans to invest INR 4-10 Cr in 15 early stage fintech startups and primarily targets pre-Series A businesses in B2B fintech and banktech space. Currently, it is building a deal pipeline and is about to make its debut investment.
Anand began his journey in 2013 with the Everstone Group, a leading private equity firm. As an investment analyst, he specialised in buyout transactions in consumer and IT services sectors and contributed significantly to Everstone’s venture capital arm.
“I was building a funnel for the work and meeting numerous founders every week as we focussed on early stage investments. This gave me significant exposure to early and late stage private equity during my time there,” he recalled.
After completing his MBA at London Business School in 2018, Anand joined his three-decade-old family business: IBS Intelligence, a financial technology research firm, and Cedar Management Consulting International, a financial technology consulting firm. But he wanted to achieve more.
In the wake of India’s demonetisation in November 2016, the fintech landscape was evolving rapidly. As the momentum continued after a temporary setback, Anand decided to make good of this trend and set up the Cedar-IBSi FinTech Lab in 2018.
The aim was to provide a ‘soft landing’ for local and global fintech companies entering the MENA and the Indian markets. More than 45 fintech companies, including Ebix, Intellect Design, Impactsure and Infosys Finacle, among others, have joined the lab and benefited.
By 2022, Anand realised that both family firms ran smoothly without his daily intervention. However, given his investment experience and his family firms’ combined expertise of 70 years, the decision to launch a VC firm was the natural next step.
“Our goal is to provide value beyond capital. Founders who raise funding from us will benefit from the extensive support bestowed by Cedar and IBSi, which will help drive sustainable growth. Although this is a maiden fund, many high-quality founders are eager to work with us, as they recognise its impact,” said Anand during a one-to-one interaction as part of Inc42’s ongoing Moneyball series.
During our conversation, we delved deep into the fund’s investment thesis, current trends within the fintech landscape and the critical importance of banktech as a fintech wave catching on rapidly. Here are the edited excerpts from the interview.
Inc42: Cedar-IBSi has positioned itself as a pure-play fintech VC fund with the focus on B2B fintech and banktech. What’s behind this niche investment thesis?
Sahil Anand: Before we discuss that, let us take a look at B2C fintech. This segment features platforms and applications that consumers can access via their devices for all sorts of transactions, be it trading, investment, loan or insurance. Therefore, companies in this space aim to acquire millions of users for their apps but primarily distribute financial services instead of developing core technologies.
Our focus is not B2C, as it is an overcrowded, intensely competitive market. The CAC [customer acquisition cost] is high, stringent regulations are in place and government agencies compete as well. For example, with the growing adoption of UPI, the government introduced BHIM to compete with private players like Paytm, PhonePe and Amazon Pay, among others. Similarly, while Visa and Mastercard dominate the market, the government-backed RuPay card has been promoted globally.
So, we prioritise B2B fintechs as they offer better economics and we have extensive experience in this space. These companies, often involved in banking technology [banktech] and related infrastructure [core systems and financial tools through which operations are managed], provide solutions, generate revenue and are profitable early on.
But things are more complex here. Even within the B2B space, you will find horizontal platforms like Razorpay and FlexiLoans. They call themselves fintech, but in reality, these are horizontal platforms helping embed financial services across industries. They are not necessarily focussing on the BFSI sector. The other category includes pure-play banktechs, startups that primarily offer software and services used by BFSI companies worldwide. This is our primary area of interest.
We are looking at banktech startups like Credgenics, Perfios and M2P so that we can leverage our deep expertise and networks to support businesses which develop innovative technologies for banks and FIs. This strategic focus allows us to identify and invest in startups with significant long-term growth potential and alignment with our vision.
Inc42: As a fintech subsect, what are the key opportunities banktech can offer Indian startups?
Sahil Anand: There will be plenty on the cards, as banktech has recently witnessed a significant shift in focus. Earlier, the spotlight was on B2C fintech, overshadowing the critical need for robust technology within the banks. But this has changed, and globally, banks are investing hundreds of millions of dollars in their systems and software every year. They also purchase 12-13 core systems annually and integrate them to support their operations.
I would say the B2C fintech disruption has run its course, with established players like Paytm, Upstox, Zerodha and others dominating all major segments. In contrast, banktech has remained relatively stagnant in the past 20 to 30 years. Traditional IT service companies are still selling their solutions across that domain. But the sector is ripe for a new wave of innovative banktech and B2B fintech offerings to drive further disruption.
Inc42: We have a limited number of banks and NBFCs in India and a growing number of startups catering to their technology needs. Will the surge in services surpass the demand anytime soon?
Sahil Anand: I don’t think so. Banktech is a versatile platform that offers software as a service to a wide range of financial institutions. These include consumer-centric and commercial banks, NBFCs and a growing number of co-operative and regional rural banks looking for technology upgrades. Insurance companies and other financial service institutions are also part of this fast-growing market.
Moreover, banktech startups need not be confined to the Indian market. The fundamental systems for core banking, treasury and payments are similar worldwide, which means these companies can easily target international markets.
Indian banktech companies typically start by partnering with the top five to seven banks in India and leverage these relationships to build credibility among Indian insurers. Once they have established a solid domestic base, they try to enter global markets such as the GCC, where banks invest heavily in technology. Additionally, markets in Malaysia, Vietnam, Singapore, Hong Kong, Sri Lanka and the EU [the region has more than 800 banks] offer significant growth potential. That’s how the whole game can be sold to 500 banks around the world.
This approach mirrors how Indian IT majors like Infosys grew by generating revenues from global banks and financial services customers. As a VC fund, we can help these banktech startups as our strength lies in our global footprint. We have offices and tech labs in many countries and a wealth of experience across international markets.
Inc42: India’s Financial Inclusion Index rose to 64.2 in March 2024, but we are well below the coveted 100%. Can B2B fintechs play a constructive role here?
Sahil Anand: To be honest, it is more like a hit-or-miss thing. Financial institutions must extend credit and services to a broader population segment to achieve better financial inclusion. Here, the core issue is not technology but the level of credit risk banks are willing to assume. If we say that a new banking technology/system, a new treasury system or a new payment solution will be more financially inclusive, it will be too much of a stretch.
The primary goal of the new banking technology, or banktech, is to enhance operational efficiency. It is not about financial inclusion but making banking more efficient. This new-age technology has the potential to improve efficiency, productivity and core operations, which may increase overall revenue. That’s an achievement from a technological standpoint.
Inc42: In that case, what horizontal and vertical SaaS solutions will be best for banktech success in the next five years?
Sahil Anand: Let us consider these one at a time for better understanding. Horizontal SaaS [industry-agnostic, general-purpose solutions] has limited scope in highly customised sectors like banktech.
Vertical SaaS is critical nowadays as banks are increasingly looking for vendors with expertise in specific use cases rather than generic, one-size-fits-all solutions. Every financial institution, whether a commercial bank, an NBFC, or an insurance platform, has a host of requirements that need to be addressed. So, they focus on service providers with deep domain knowledge and the capability of implementing solutions quickly and efficiently.
Banktech startups will do well to excel in specific use cases and master the most promising vertical SaaS solutions such as digital automation, customer lifecycle management, digital lending, wealth management, private banking and cash flow management.
Startups’ success will also hinge on nuanced execution and outstanding outcomes. For instance, five-year-old SaaS startup Credgenics now handles 11 Mn retail loan accounts and claims to have increased lenders’ resolution rates by 20% and improved debt collections by 25%.
Service providers should also ensure that they are not location-bound and may operate like implementation wizards, when needed. Earlier, sales cycles could stretch between 12 and 18 months and things were slow-paced by default. Now that new-age solutions can be implemented within 45-50 days, swift execution remains a critical mandate.
Contrary to the popular notion that banktech will saturate in the next decade, I would say the sector is still in its early stages. Addressing the pain points of decades-old technology will take at least another 20 years if the BFSI infrastructure/ecosystem has to evolve in tune with disruptive technologies.
Inc42: Talking about banktech startups, what will be the market size or revenue estimates by 2030? Can you give us an idea?
Sahil Anand: It is difficult to ascertain the market size of B2B fintech as there are no well-defined sub-sectors here. Different players offer different solutions and services tailored for FIs belonging to different categories and each solution addresses a specific issue. It is a bit chaotic. What we see here may boil down to 20 customer types with 11 different systems and businesses varying in scale from small to medium to large and located across many countries.
However, an average bank allocates 7-8% of its budget to banktech and this is steadily rising. Again, each bank typically requires around 20 different tech systems to enhance operational efficiency. The potential market becomes huge when you multiply the average banktech spending by the number of domestic and global FIs.
As we speak, a banktech startup could be selling its softwares to any bank in India and another bank located in the Maldives, thus ensuring better business growth. Unlike B2C, that is the beauty of B2B fintech or banktech.
Inc42: Overall, what will be the key trends and challenges for fintechs in India?
Sahil Anand: Even when a B2C startup identifies a niche – say, an insurer targeting women-specific schemes – large players can easily add this as a subset of their offerings or acquire the startup outright. Although B2C is primarily a no-entry zone for Cedar, we are still looking for B2C founders with a proven track record of building and scaling innovative solutions for the masses.
There are plenty of other challenges. Given the stringent government regulations, fintech companies must exercise great caution in all areas, including compliance, fundraising and navigating the competitive landscape. Banktechs should focus on developing robust software that can scale, achieve profitability and go global. Moreover, their tech products should be able to replace outdated technologies that have persisted for years.
Inc42: What will be the role of AI-GenAI in the B2B fintech space?
Sahil Anand: These are still the early days of AI adoption in the banking sector. Given their historically different data management practices, banks are gradually becoming comfortable with AI usage. They are just beginning to familiarise themselves with various external solutions for data processing and analytics [predictive, generative and what all may come up soon]. This gradual approach will ensure a smooth transition and allow necessary adjustments and adoptions.
Undoubtedly, AI will play a significant role here. However, the consensus is that the new tech cannot entirely replace the human workforce in the highly regulated financial services industry. Anything stated otherwise is an overstatement. AI remains a powerful tool that can boost productivity and enhance efficiency by 60-70%. It may even reduce headcounts by 30-50%. But human involvement will remain essential. That should provide a sense of security when people mull over the future of this industry.
Inc42: Will there be vibrant growth markets for Indian banktech startups? Please elaborate on the kind of dynamics and alignment they may find overseas.
Sahil Anand: Well, the Middle East is a promising market right now, as it hosts around 100 banks across six or seven countries. These institutions are technologically advanced, well-capitalised and helmed by a new generation of young leaders. They have a favourable view of India and share a strong cultural affinity. Many of these banks had earlier worked with Indian vendors and Indian IT majors also serviced GCC banks. Overall, they are familiar with our operational style and actively seek disruptive solutions from us.
Apart from ME markets, Southeast Asia is another region brimming with opportunities, especially countries like Indonesia, Vietnam and Sri Lanka. Of course, Singapore and Hong Kong are fiercely competitive, but the broader region holds substantial growth potential.
Targeting these regions may yield as many as 200 B2B clients for a banktech venture, resulting in an annual recurring revenue [ARR] worth INR 150-250 Cr. Subsequent expansions across the EU, the US and other Western markets may follow, leading to further growth.
This strategic focus offers a promising avenue for banktech companies aiming to scale and achieve global success.
Inc42: What about new unicorns and public listings in the B2B fintech space? What developments will be there in the short term?
Sahil Anand: We have recently seen three unicorns – Pigment, QI Tech and Cyera – which are fintechs or servicing the fintech industry. Two of these are in the US, where the market is mature. At a jurisdictional level, the US attracted two-thirds of all fintech funding during 2023 ($73.5 Bn), according to a 2024 KPMG report.
The B2B fintech sector in India is on a similar growth trajectory. We have seen companies whose revenues are burgeoning to the tune of INR 600-700 Cr+. These are set to attract late stage investors in the long run. Additionally, there are fintech SaaS companies like Trust Fintech opting for the IPO route. However, this is just the beginning.
So far, everyone has been distracted by the B2C wave instead of deep-diving into B2B, but we are getting there now. That’s why the industry is also excited about our fund, as we are all set to capture the first 10 waves of B2B fintech/banktech in India.
[Edited by Sanghamitra Mandal]
