Iron Pillar is a tech-focused fund that was founded in 2016 and closed its first fund of INR 200 Cr in 2017. It has already made two investments — one in Bluestone Jewellery, an online jeweller feeling website, and NowFloats Technologies, a SaaS startup focusing on SMEs.
But after that, everything seemed quiet at the venture fund, founded by Sameer Nath, who formerly headed global financial services at Citi Bank’s mergers and acquisitions and technology investment banking business in India, and Anand Prasanna, who headed investment bank Morgan Creek’s business in Asia.
“It’s all about our startup journey,” says Nath, speaking with Inc42 at his penthouse, which overlooks the sea, in Bandra, Mumbai.
According to Nath, Iron Pillar is not just a first-time fund but also consists of a first-time team. “After making our initial two investments, we decided to concentrate on raising the fund in 2017,” Nath says.
Iron Pillar is a specialist venture growth fund that is sector agnostic and invests in tech companies that have already gone in for their series A funding round. It usually hands out cheques worth between $5 Mn-$10 Mn.
“We have really come back into the market,” says Nath, adding that two more deals will be announced by the end of the year.
Indian tech startups saw a 47% decline in the total funding amount to $3 Bn, which was invested across 372 deals, in H1 of 2018 compared to H1 2017
But if we compare the Q1 2018 and Q2 2018 figures, there was an increase in both the funding amount as well as the number of deals in the second quarter till June 22, according to the Inc42 Datalabs’ Indian Tech Startup Funding Report H1 2018
Talking about this, Nath admits that getting valuations right is the number one concern for Iron Pillar and says the fund hasn’t participated in “very competitive” deals. He adds that this does not mean it is averse to “hot” companies.
Nath is already thinking about a second fund but before he gets more involved he wants to take a breather for a couple of months.
Here are excerpts of this week’s Moneyball with Sameer Nath, Managing Partner at Iron Pillar.
Inc42: What made you take a step back from deal making for a significant portion of time between 2017-2018 ?
Sameer Nath: It’s all about our startup journey. As we said before, we’re not just a first-time fund but also a first-time team. After making our initial two investments, we decided to concentrate on raising the first fund in 2017, which meant a lot of trips to the US, and now we have a globally diversified LP (Limited Partners) base. This has given us the conviction that we have enough capital to invest.
So, the deals that I have mentioned have closed and there is a steady pipeline ahead.
Inc42: Did you underestimate the fund requirements when you started this journey?
Sameer Nath: The Indian market is maturing but there have been liquidity gaps along the way from a cyclical or stage perspective. Nobody today will tell you there is a gap in early stage fundings as you have many players there today , but this isn’t the case in the area we operate in. We would like to think that we are the first specialist venture growth fund. I think we can easily make an impact with our first fund and, certainly, the second fund will be larger.
Because of space we are in, it’s not about the capital but about doing 10 good deals, partnering with the right entrepreneurs and picking the right spaces.
Capital can be great in certain spaces and in our area of operation, there is space for several more funds. The pipeline from Series A is now bubbling up into B, C, and D.
Inc42: You partnered with Chinese investment conglomerate Fosun in 2016. What’s going on with that?
Sameer Nath: I wouldn’t call it a strategic partnership but it is something that we want to work together on. This is capital that is available for co-investments in certain companies and its relation to the funds we have raised is separate.
It’s a significant amount that is involved. But to proceed further, there has to be a convergence with us on the core strategy. For example, they (Fosun) want to do larger deals and we are comfortable with that but, equally, we don’t want to give up on the $5 Mn in a $10-15 Mn Series B round, which is too small for them.
So, we have to find that balance. But, having said that, because of their knowledge of the Chinese sectors, it would be wonderful to have them as quasi-strategic investors because they bring all that experience from China to the company. We would love to find a couple of those situations and work with them.
Inc42: What sort of companies are you investing in?
Sameer Nath: We are a specialist venture growth fund and so we come in after Series A. So typically, that is early Series B in some cases and more mature Series B. So, we are talking about cheque sizes of $5 Mn-$10 Mn. That’s our sweet spot, that’s where think we can make a difference and where the attractive opportunity in the market exists.
We think of tech as very broadly defined. Nowfloats is a SaaS Player for SMEs in India and our other investment, Bluestone, is an online consumer brand for jewellery, but it’s online first and moving slowly to omnichannel.
Our the fourth deal is going to be healthtech and we’re about to sign the term sheet on our fifth deal.
I think we have a point of view but as growth investors, it is fundamentally backing solid businesses which are past the early stage risks, the product is well proven, and capital efficiency is on point.
Inc42: So is Iron Pillar sector agnostic, what is your thesis?
Sameer Nath: We are comfortable with tech-enabled businesses or even deep tech, but I don’t think we decide thematically and say to ourselves that out of the 10 deals, four have to be in a particular segment and the rest have to divide between other segments.
I think in the short term, the pipeline is a little bit skewed towards B2B because, yes, consumer companies are terrific from a long-term point of view but in the short term we still have to see some of that growth play out and valuations are always a challenge.
We have studied fintech in some depth…we are looking at gaming, content but tech is the overlapping theme.
The ratio of partners to portfolio is very different for us, wherein the companies get more attention and we are very hands on.
Inc42: What is the range of your investment and how much stake do you look at taking?
Sameer Nath: We invest between $5-$10 Mn. The stake size depends…if it is an early (series) B, we could be as high as 15%-20%. But if it’s a more mature (series) C or D, we might be in the mid to high single digits. So, I don’t think there is a fixed view on minimum ownership percentage but board seats, alignments with the entrepreneurs and the existing investors and a clear roadmap of growth (that matter).
Inc42: How obsessed are you guys with technology?
Sameer Nath: We’re not too obsessed with technology but I would add a caveat when it comes to deep tech play, where we will need to do the technical due diligence and validation.
In one of the deals that we have been working on, we actually went outside the core team because we wanted validation of certain aspects.
But, yes, about other businesses, it’s more along the lines of how do we get this business to the next level. Is it marketing, is it production, or sales, and, particularly, do we have what they need.
Inc42: How do you see the growth stage space in India? Have we completed a cycle in terms of unicorns and the new ones are yet to emerge?
Sameer Nath: I would say that it is a very attractive space to be in right now. We are sitting between early stage venture and a set of private equity firms. Even if some new funds come in, it will take a lot for the competition to build up. Just look at the case of early stage investing and how long it took for it to get here today. I would say that we are very far from a bubble; most of the funds which have been announced recently have not even been raised. So there is enough to do here.
For us, we cannot afford to get into fads. I think for us, we will wait for and see who are the winners and, yes, sometimes they may be too pricey for us but, at other times, we can play them.
It will be great for us to be that bridge where we can find companies that can continue to attract liquidity.
Inc42: A lot of the funding is getting to the bigger fishes and the trickle down is very low? What do you think of this?
Sameer Nath: Yes, big deals dominate actual capital and media headlines. This never tells the whole story. In the funding frenzy and build up before, there were good companies that didn’t get funded. I think that is less so now and there are more funds with a better understanding of what it takes to scale a business successfully.
Inc42: A lot of capital is coming in. Are you worried about the high valuations?
Sameer Nath: I think that is one of our biggest challenges is staying disciplined in our valuations and we have been using that as a mantra from Day 1. This will be an ongoing change.
There is going to be more competition in the growth space and we will have to be vigilant. The competitive deals are the ones where you end up paying more…you have one month and there are 10 terms sheets involved. It’s very hard to tell the entrepreneur to take my valuation because I can do XYZ for you.
We haven’t participated in these very competitive deals…that’s not to say that we will never do a hot company, but it’s just that you tend to end paying more.
Inc42: Any updates on the performance of existing portfolios?
Sameer Nath: Both (startups) have evolved very well in regard to their market conditions. NowFloats is a clear leader in the space that it is in. It is not easy to sell to SMBs in India and it has taken them some time to find the exact organisation from the sales perspective.
Bluestone is on the cusp of an inflection point when it comes to omnichannel. Both of them are going to need one more round of capital to break even and then they can control their own destiny as they solidify their market leadership.
Inc42: How did you manage to get Tim Draper, who is one of the greatest global VC icon, on your advisory board?
Sameer Nath: It’s wonderful to have Tim on board. The connect was actually from Mohanjit Jolly who worked for nine years at Draper Fisher Jurvetson venture firm where he worked closely with Tim when he was running the India operations.
We always thought of getting our bosses on our advisory board. So, my boss at Citi — Ben Druskin — who is also a veteran of Citi Investment Banking and just retired last year, is also on the board. Ben is a legendary technology dealmaker.
Inc42: What are some of the challenges you are facing?
Sameer Nath: One is the startup journey and building your own business and the second is the venture growth business. They’re two separate things and both of them take up a lot of my time.
Valuations will have to be in the top three (challenges), followed by strengthening existing partnerships and building a collective network to put in place folks who can actually help us for that three- to five-year investment horizon.
Inc42: What are your tips for people looking to pitch?
Sameer Nath: I have really enjoyed those entrepreneur meetings where it’s a conversation, where the entrepreneur can walk me through how they got started, how they built the business, and where they are going to go.
I want to understand how self-aware the entrepreneur is and how they see that journey.