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“Our latest investment thesis is about how we refine our investment models, if not reinvent them,” says Sarath Naru, founder and managing partner at Ventureast, as he compares the investment success stories of fund managers in the US and China to the experience in India.
An entrepreneur turned venture capitalist Naru’s journey towards the VC ecosystem was somewhat accidental and entrepreneurial. Prior to starting Ventureast, he was running a business that supplied engineering products and fashion goods from India to the US, after a stint at Procter & Gamble (US). So having worked in the US, Naru is in a position to comment on the differences between the two.
“Ironically, India has many many markets. even marketing materials have to be different. Every time we think that we are growing, we have to focus on a particular market segment, unlike in China or in the US, which is one huge market.”
Founded in 1996, Ventureast is one of the early entrants in the Indian VC ecosystem. The firm is known for investing in early-stage companies that serve underserved segments, particularly in semi-urban and rural parts of India, where technology is a differentiator.
Naru said that typically Ventureast invests in two to three subsequent rounds in a fund. For instance, in its second fund, the firm had invested 33% in seed-stage startups, followed by Series A (33%), Series B (17%) and Series C (17%) with an average check size anywhere between $3 Mn to $5 Mn.
Some of the Ventureast portfolio companies include Acko, Portea, Kissht, Sresta’s 24 Mantra, Little Eye Labs, Gland Pharma, MoEngage, Dodla Dairy and Zipgo. Currently in its fifth fund, Naru added that Ventureast plans to raise its sixth fund next year.
Inc42: You have been in the investment space since 1996. From then and now, what has changed? What are your key takeaways?
Sarath Naru: When we started, there were very few fund managers as most of them were public sector-based funds. However, today, it is very different, we have global funds, strategic funds, international funds, multinational funds etc.
Clearly, entrepreneurs have also changed dramatically.
In the last ten years, the idea of building a business where the winner takes it all is a thing of the past. For instance, you would have come across firms throwing a lot of money on one company so that the market itself becomes huge. Eventually, you expect to gain more capital. In other words, in this model, a few successes will take care of all the other failures.
Today, that is not the case as entrepreneurs themselves are the driving factor behind capital raising. On paper, an entrepreneur might be worth millions of dollars, but it is the risk-taking capabilities of an entrepreneur that sets them aside. I have seen that changing too — the entrepreneur model — and their ability to raise capital is something that is evolving. Of course, investors will have to help them, but it has become more evident than before.
Inc42: And what about from the point of view of venture capital and investors?
Sarath Naru: From a VC perspective, previously, a lot of investors got confidence because of companies such as WeWork, Amazon and Uber among others, who grew because of the ‘winner takes it all’ model. We just copy-pasted indigenous models with a little bit of appreciation today. Now, this is making a switch. It is just a matter of numbers at the end of the day for us.
Whether it is the winner takes it all model or entrepreneur-driven model, the question arises whether these models are feasible for investors. For instance, Softbank which followed the winner takes it all model, are now struggling to raise capital from their companies. Hence, the model is flawed and their startups business model is also not fair anymore.
Now, there is a rethinking of business and investment models. This whole idea of capital being the primary supply of assets has changed.
“You don’t need to be in a hurry all the time to build a great business, where you keep throwing money, without seeing how it is doing”
Inc42: Despite these changes, the challenges in the market conditions remain a big hurdle for Indian startups.
Sarath Naru: It might have become obvious by now is that it takes longer and maybe more money to build and to show that businesses can scale in India as compared to China and the US. That’s is a separate scheme altogether, which makes it challenging for both startups and VCs.
At the end of the day, everybody has expectations. Now, if you can scale fast in the US or in China, and when you start matching business models and entrepreneurs in India — it takes much longer — because of the single language, attitude towards experimentations, use of emerging technology such as blockchain, AI and more.
Ironically, India has many many markets. even marketing materials have to be different. Every time we think that we are growing, we have to focus on a particular market segment. There is a bit of a drag, in terms of scaling the business and raising capital in India. In the sense that we are moving slower compared to the rest of the world. That is the overall key takeaway from my entire journey.
I am not saying anything new. It is just that we need to show the world that we are as good as the US and China when it comes to scaling.
Inc42: How has the coronavirus pandemic impacted the portfolio and your fund?
It is quite a shocking thing. There were broad things. One is to conserve cash flows, second – take care of your employees and the third about how we can help the environment and the community in general through our portfolio or directly.
We have essentially been telling our companies to hunker down because companies which are more mature and they are building a few things again, which were already in the market like selling services and goods.
Today, for example, we had a meeting with 24Mantra saying that we need to be, you know, prepared for sales dropping. It is quite interesting that in the US, sales actually increased because there is a huge rush to the stores.
But consumption will fall, and the sales will also fall afterwards because nobody is buying anymore.
To companies that are in building mode, it was more about how the teams are taking precautions internally — how your employee and the team members are kept safe from coronavirus, how to ensure precautions such as washing hands, not touching the face etc.
We are also looking at some companies where there is a possibility for the companies to go and provide their services for coronavirus prevention and supporting consumers. For example, Portea is well-positioned to look at the situation around home quarantines and healthcare at home.
Inc42: You have invested in Acko, Portea, Kissht, 24Mantra among other startups. What is the common thread in these startups that drew you in?
Sarath Naru: Thematically, if you look at all these startups. It should be clear by now that we work with startups that help the underserved markets, where the technology plays a big differentiating factor.
We look at how companies are using tech effectively to provide services or how they are able to acquire new customers in a secure and seamless way. That is what we firmly believe in, and that is our primary essence of technology.
Clearly, we look into two aspects — entrepreneurs and technology. We don’t limit ourselves to any sectors, we are sector-agnostic.
Technology intervention is happening in a big way across the world. If you look at agriculture, technology can be used to collect data of moisture, the soil quality, requirement of the crop and more. The approach needs to be to use this data to drive better outcomes. Whenever there is an opportunity to acquire proprietary data, entrepreneurs need to look into it to build a successful business.
Particularly, that is one broad thesis that we have.
Inc42: What is the hardest thing about being a VC in the Indian startup ecosystem?
There are too many challenges but the nature of building business in India is a big one. When there is great communication and connection between founders and investors, not in the sense of being nice to each other. But in the sense that they are working together to solve the problem. That’s where businesses become successful.
I believe that every VC in India, every seed investor in India has to be actively connected with the entrepreneur, and need to figure out where they are good at, what are the challenges they are facing. We don’t tell them to do this and that. We actually put money on entrepreneurs who are good at something. Our ability lies in finding the right kind of inputs and advice, and that is something we are constantly looking for. We help them in every way possible, we connect them with the market, hire the right talent, connect them with investment bankers to raise the next round of funding.
Thematically, the primary challenge here is to figure out where we should get involved and where we shouldn’t.