Kenko Health In Catch-22: Investor Deadlock Puts Insurtech Startup On Thin Ice

For Mumbai-based Kenko Health, the future was always about insurance. The founders — Aniruddha Sen and Dhiraj Goel — launched Kenko Health in 2019 after spending more than two decades collectively in the sector.

The idea was to make health insurance more affordable and healthcare more accessible through deeper insurance penetration. But without an insurance licence from the Insurance Regulatory and Development Authority (IRDA), Kenko’s go-to-market strategy was built around a quasi-insurance model.

But the goal was always insurance. And given the background of the founders and the large value creation opportunity in insurance, Kenko attracted the attention of major investors.

By early 2022, it had already raised more than $13 Mn from Peak XV Partners, Beenext, Orios Venture Partners, angel fund Waveform Ventures, accelerator 9 Unicorns and the likes of Jupiter cofounder Jitendra Gupta, CRED founder Kunal Shah, Pine Labs CEO Amrish Rau as angel investors.

Buoyed by this capital, Kenko seemed to have cracked the revenue model for its subscription-based health plans for consumers. This is a quasi-insurance product, which covers outpatient department (OPD) benefits during hospitalisation as well as medicine purchases.

As we see in its official filings, Kenko’s revenue grew from roughly INR 5 Cr in FY22 to INR 85 Cr in FY23 (17X growth), even though the net loss almost tripled to INR 68 Cr from INR 24 Cr in the previous year. But given that this was just the third full fiscal year in its lifetime, there were encouraging signs of growth.

In fact, things couldn’t have looked better for the company when it was about to raise close to INR 220 Cr ($27 Mn+) in June 2023 from Healthquad, B Capital, Bertelsmann and other large institutional funds as indicated by its regulatory filings. Armed with this, the startup was hoping to clear the capital requirements threshold for insurance.

But this is also where things came undone for Kenko — not only did the Series B not go through, but Kenko is left in a difficult Catch-22 position.

Right now, the insurance goal is looking more and more out of reach for Kenko, according to sources close to the shareholder group and the founders of the company.

Insurance Hurdles Derail Kenko

“Kenko approached IRDA and the regulator was of the opinion that while any company is free to raise capital from VCs, the easiest path to a licence is having an Indian entity with domestic capital as the lead investor. We were told that the insurance regulator was very specific in asking for domestic capital backing new insurance players,” one source close to the investor group told Inc42 last month.

But discussions between the management and the existing shareholders have resulted in discord, Inc42 has learnt over the past two months.

In particular, some shareholders are displeased with the restructuring proposal, which they believe leaves them with very little value for the capital already invested.

It must be noted that Peak XV Partners (investing as Sequoia Capital India & Southeast Asia) is Kenko’s lead external shareholder having led its Series A round. Peak XV is followed by Orios Venture Partners and Beenext in terms of shareholding.

Inc42 sent questions to Kenko Health’s cofounders Sen and Goel separately in early May 2024, as well as its existing shareholders. CEO Sen did not respond to our questions sent on email or follow-up text messages.

On the shareholder side, only one investor responded to our questions but declined to comment.

Other sources close to the investor and management group at Kenko spoke to us on the condition of anonymity. And the problem, we were informed, began roughly a year ago when the company had to rethink what investors it brings on.

Having to change its fundraising strategy in the middle of a key round in August 2023 was a major blow for Kenko. It had seen commitments from marquee investors such as B Capital, Healthquad and Bertelsmann and turning them down was never going to be easy.

While there was real confidence about Kenko’s future because of the founders’ pedigree and the revenue growth, even the best of founders cannot adjust as quickly as Sen and Goel had to.

Another source, who has seen the company’s journey closely, added, “Getting a big commitment in the middle of a funding winter was not easy. And then the company had to shift its focus to Indian investors, specially family offices or large corporations. The founders had to tell large VCs and investors to hold on.”

Beyond the need to bring in domestic investors, the corporate structure of Kenko also posed some problems as the insurance business had to be run by a new entity which was created only in 2022, whereas the current operations are handled by the parent company Redkenko Health Tech Private Limited from 2019.

Focus Turns To Domestic Investors

Raising from Indian family offices sounds simple enough — HNIs and family-run corporations are increasingly looking to diversify their portfolio and back startups. In fact, HNIs and family offices are also backing large funds in India as limited partners. So the regulator’s stipulation was not unusual.

Even in a tough market for fundraising, Kenko is said to have seen interest from two large family offices in India. One of them is still in talks with the company on how to proceed. According to the ET report on the state of Kenko, the company had received a term sheet from Hero Group.

Inc42 could not verify whether Hero Group had prepared a term sheet for the investment. However, it is the contours and the structure of this deal that has forced Kenko Health into a Catch-22.

Firstly, the incoming investor has to get the go-ahead from Kenko’s existing shareholders for the proposed new structure. Existing investors have to give approvals to their revised equity holdings.

In this case, Kenko Health had to restructure its entire cap table. Existing shareholders would have had to relinquish some stake in this restructure and dilute equity in favour of any incoming investor.

“Some of the shareholders felt they needed to be either adequately compensated through some kind of returns for backing the startup when it did not have a licence, and others were wary of whether the resultant equity dilution would essentially leave them with a really small piece of the company,” one of the key shareholders in Kenko told Inc42.

Even if shareholders agree prima facie, the specific terms of the deal could become a problem later on as talks advance, added another source close to the group of existing shareholders in the company.

Another source close to the investor group added, “The company has to first get shareholder approval for a new investor. Even if there is a consensus on dilution, there might be differences in terms governing information or anti-dilution rights in the new deal.”

Talks between the founders and representatives of the family office are said to have been going on for months, with no real headway in either direction. Nothing is certain, but if things take a lot of time, the family office may back off, another person close to the company’s management told Inc42.

The Compliance Bar For Investing In Insurance

What complicates the matter more is that Kenko would only be an attractive investment opportunity if it could get the insurance licence.

Getting the regulatory nod depended on a large domestic investor coming in as the lead shareholder. However, even this may not guarantee a licence, and with no such guarantees, this is a risky bet for any incoming investor.

“There was no doubt on the execution side of things. The founders are a perfect fit for insurance but the company needs the licence to prove it. And regulators can reject applications for a number of reasons. Even the likes of Paytm or PhonePe are waiting for an insurer licence,” added the cofounder of a Bengaluru-based insurance tech startup.

To get the general insurance licence, Kenko registered a new entity called Kenko General Insurance Limited in May 2022. One of the requirements for an insurer licence is that the entity has to clearly state the word ‘insurance’ in its registered name. The new corporate entity would essentially carry out the business of insurance for the Kenko group.

While it was the holding company Redkenko Health Tech Private Limited that raised the funds till date, any new capital was set to be invested towards the insurance play.

Under the restructuring proposed by founders, existing shareholders would be given shares in Kenko General Insurance Limited in lieu of their shares in Redkenko Health Tech Private Limited, the current main entity.

 

There are of course other eligibility criteria for prospective insurance companies, including capital requirement of between INR 100 Cr and INR 200 Cr depending on the segment and insurance model.

Perhaps the most critical eligibility requirements are to do with the shareholding of the investors and promoters.

While 100% FDI is allowed in the insurance space, there are a number of restrictions on how much shareholding each investor can have, and this changes depending on the number of insurers these investors have invested in, as per the updated regulations as of December 2022.

To steer clear of the hurdles posed by these restrictions, companies applying for an insurance licence are often advised to have a clear domestic lead investor as well as significant equity holding for the promoter group — in this case, founders and the lead investor.

 

Further, companies that have been rejected by IRDA have to wait between two and five years before reapplying for a licence. Plus, in certain cases, reapplication is not allowed if the licence bid is rejected.

So Kenko could not afford to rush the deal and slip up in any manner when it comes to the eligibility criteria.  Given IRDA’s requirements, in many ways, restructuring at Kenko is being forced due to regulatory reasons. The founders have very little room to manoeuvre in this non-bargainable position.

Massive Opportunity Waiting To Be Unlocked

The best option for the founders was getting Kenko Health’s various investors on the same page about dilution, but this is proving to be difficult. Three out of the five institutional shareholders in the company are against the proposed restructuring, while several other investors seem to be on-board.

An existing shareholder, who was not completely in favour of the deal, told us on the condition of anonymity, “We have been open to any new investment in the company, subject to the offer being fair to all parties, non-discriminatory & consistent with the terms of shareholder agreements.”

So what has led to the disagreements and is the deal proposed by the company to existing shareholders and the incoming investor unfair?

“As far as the deal proposed by the company under the new structure, up to 75% of the equity would be held by the incoming investor, the founders would have a large enough single-digit stake, while other existing investors would see dilution from their current positions. In some cases, they would end up seeing their stake reduced by 4X or 5X,” claimed another source close to the existing investor group.

The problem, of course, is that such a dilution would give many existing investors a smaller piece of the company, albeit one that could potentially become much larger than Kenko Health in its current state.

One investor who has assessed Kenko in the past year said that most VC funds would rather have a small stake in a large company with an insurance licence, rather than a large piece of a company that had very limited prospects without this licence.

“Typically speaking, in the insurance business, given the low penetration in India, valuations tend to be higher than other fintech segments. There’s also a bigger IPO opportunity for investors with a registered insurance company than for a healthtech company that is quasi-insurance like Kenko right now,” we were told.

An insurance licence is only handed out on the condition that investor and promoter shares stay locked in for a period of at least years since the time of IRDA registration. It is only during a public issue that insurance companies can suspend the staggered lock-in periods for investors and promoters.

So the IPO opportunity is in fact critical for investors in the insurance space if they are to see returns before the lock-in period.

However, the potential for things to go wrong in the meanwhile is one of the reasons that some existing investors are wary of restructuring the cap table. For one, there’s no guarantee of an insurance licence even if the shareholding is resolved.

That’s not to say that all existing investors are opposed to the proposed changes.

According to one source close to a fund that has backed Kenko, “The vision from the beginning was around insurance and these are the realities of working in the insurance business. Yes, there is an equity dilution, but the deal is fair if you look at the long-term value.”

Kenko’s Future Uninsured

At the moment, however, there is no certainty of any deal materialising. The founders are still in talks with domestic family offices for a deal that works for all parties involved.

If these talks fail to materialise into an investment, Kenko Health has to swallow a bitter pill. The company laid off 20% of its workforce in August 2023, just after its bid to raise INR 220 Cr from foreign VCs failed due to potential regulatory hurdles.

Soon after that Kenko Health raised INR 10 Cr in venture debt from Blacksoil as per regulatory filings. And then in January and February this year, existing investors — Waveform, Peak XV, Orios, Beenext and 9 Unicorns — infused INR 12 Cr in the company as a bridge round, show the company’s filings with the Ministry of Corporate Affairs.

Without the insurance licence in place, Kenko’s future rests on how sustainably it can scale up its health plan subscription play, if it chooses to stay operational.

Sources indicate that another round of layoffs is underway at Kenko. This is because Kenko has to save costs to repay debt obligations as well as pending employee costs and other operational expenses for its current business in FY24.

Employees have taken to LinkedIn to raise concerns about unpaid dues after being laid off in April 2024. Customers are claiming that the company has withheld reimbursements for OPD costs incurred while their plans were active.

Kenko did not respond to our questions about these dues to customers or its former employees.

While the revenue growth in FY23 is encouraging, the company’s biggest expenses are insurance costs, benefit payouts and employee benefit costs. It spent INR 42 Cr, INR 37 Cr and INR 35 Cr respectively in this regard. The layoffs in 2023 would have reduced the employee benefit costs in FY24, but the other two costs are directly linked to revenue growth, and cutting them would mean taking a bath on overall growth.

In other words, while Kenko set out to build an insurance business, at the moment, its costs are like a B2C healthcare middleman that works with insurance providers.

As per FY23 filings, the company has over INR 42 Cr in the bank and it looks like Much of this reserve was exhausted during the course of FY24. This can be understood by the fact that the company raised debt from Blacksoil, and got a bridge round in early 2024, as stated above.

Some sources close to the company expressed optimism that a deal may be cracked with the new investor given that the business had good traction with users till FY23. But this optimism is not shared by all close to the company. While some are opposed to the deal, others are left with little to no recourse but to write off the investment if the new deal does not go through.

And in case the startup is unable to resolve this situation, it stands to lose out on all the value it had created in the past four years. So in a sense, Kenko is in a make-or-break situation and the startup has no insurance to fall back on.