Speciale Invest’s Arjun Rao On Micro VCs Tapping The Deeptech Opportunity 

When it comes to early investing, backing a specific niche or sector is not only about having a sharp focus but also about making the right impact. For Speciale Invest, its focus on deeptech is about backing innovation and engineering that can play a major role to play in the decade to come, and that means keeping up with the times and tech.

“India has gone through the services phase, we also created products, so in our opinion, the next wave of tech will be cutting-edge IP innovation. That evolution was very clear to us and we knew this is bound to happen,” Speciale Invest partner Arjun Rao told Inc42.

Founded in 2017 by Rao and Vishesh Rajaram, Speciale Invest is now in its second fund and has 27 active startups in its portfolio and has seen four exits till date. The duo have known each other since business school and kept in touch through their professional journey.

Managing partner Rajaram had spent a decade at VC firm Ventureast before teaming up with Rao, who had founded Travelyaari after stints at Yahoo and Ibibo. Both had also made early-stage investments as angel investors during this time and this naturally led to the founding of Speciale Invest.

In April this year, Speciale announced the final close of its second fund at INR 286 Cr to further deepen its focus on cleantech (EVs and alternative energy), advanced materials manufacturing and applications, spacetech, robotics and other emerging technologies.

Its portfolio includes startups such as Agnikul, The ePlane Company, Ultraviolette, CynLr, Qnu Labs, GalaxEye Space, Wingman, StreamAlive, Airboxr, Trainn, Uravu Labs among others.

According to Rao, early investing in deeptech startups, particularly in the Indian market, requires a greater degree of conviction given the nascency of this sector and the high risk involved in predicting the course of cutting-edge technology and the potential applications.

This also means there is a higher degree of engagement with the portfolio for product-market fit, as well as the limited partners to gain insights into go-to-market strategies and business expansion. So how exactly does Speciale Invest manage deal flow and what exactly goes into building that conviction for making the deal? Rao delved into this and more.

Edited excerpts

Inc42: So how exactly did Speciale Invest’s focus narrow around deeptech at a time when perhaps this segment was not very well understood? 

Arjun Rao: Innovation is the future for the Indian tech ecosystem. We know the history of how this has evolved — we have gone from IT services to tech products, so the next big thing was original IP-led innovation, built in India with a global outlook.

So Vishesh understood technology and startups from the venture investing angle due to his background at Ventureast. I understood technology and startups from building products and by building Travelyaari. We had a shared passion for cutting edge innovation, deep technology and early-stage investing based on our exposure and our learning.

We already knew what kind of problems founders were facing plus early-stage always excited us because we are best at helping companies go from the zero to one journey and we have pretty strong motivations and aspirations of cutting-edge technology.

Inc42: Around 2017, when you launched, there was a lot of buzz around consumer tech investments. Was there a reason you decided to focus only on B2B startups? 

Arjun Rao: The answer is simple. We knew we had a small corpus and that B2B businesses had a lot more staying power. B2C needed simply too much capital. Small pools of capital would not suffice for customer acquisition, advertising, branding and so forth.

Plus the competition was high from an investor POV, so our focus had narrowed down to B2B technology. We saw it as a whitespace. We wanted to use our experience to help companies build and launch, identify early customer segments, get the pricing right and then evolve. It played to our individual strengths — mine as operator and Vishesh as an investor — and that of our core LP network. So we arrived at our thesis — we are a deeptech-focussed fund backing B2B startups.

Inc42: What’s your take on the differentiation needed as a VC for deeptech investing? Does it mean VCs need to know the ins and outs of these emerging technologies?

Arjun Rao: First of all, nothing beats experience and time, and the number of companies because those are data points. The more data you have, the more patterns emerge you can use to build this knowledge.

It’s not like we started out with a playbook. The playbook is still evolving, and there’s no way to predict. The type of companies we are investing in are newer, they have newer issues and problems than the ones facing others at different stages.

So we approach any potential deal from the point of view of what patterns we see. Some SaaS and AI companies will have similar problems; hardware and manufacturing companies will have similar problems. So we identify themes that can help us bring our learnings from one investment to another.

Inc42: Talk to us about how your focus has evolved over the years

Arjun Rao: In our first fund, we had a strong emphasis on spacetech. We invested in four spacetech companies and we are about to invest in a fifth one. So there was some commonality and some theme and thesis within spacetech, and they all needed some similar help and by doing four investments we had understood the depth of the industry.

Similarly, we have a very strong thesis on climate tech or cleantech. We’ve invested in startups solving problems such as water, electric vehicles, battery recycling, green hydrogen and more. Again, there is a commonality here in the form of an underlying macro trend and a tailwind. Now, we have a certain playbook on SaaS, for spacetech, for AI, for climate and so on.

In other words, we used what we learnt to double down on that segment. At a certain point, the industry and the policy will align and give these early bets the right push as we are seeing in cleantech and spacetech. This means having an horizon of eight to ten years on the technology.

Inc42: Tell us about how you approached LPs after the transition into a VC model? Where did you get your first LP from? 

Arjun Rao: It’s not unlike any other VC fund — our first LP was someone we had known for over a decade, so that relationship helped raise funds from them. We’ve had a core group of LPs that have trusted us from the very beginning and backed us. For us what matters more is the relationship and building a trust level and following through with what we have promised.

Step one was framing our narrative and strategy for deploying capital. We defined the nature of companies we would invest in and how it would pay out and how we’re going to support them and make them successful. All LPs want to know this path to returns and why a fund is best suited to execute this plan.

Inc42: You hinted at how small funds need to make up for the small amounts of capital invested. What does this mean in Speciale Invest’s case and how has it evolved? 

Arjun Rao: In the first year or so we were hacking our way through this business, to put it crudely. With limited resources and time, there was some experimentation and trial and error when it comes to our systems and processes.

But as we evaluated more deals and started working with our portfolio, we put more systems in place. Now, our evaluation process is better than a year ago, and much much better than four years ago.

All processes become richer with our own experience and our learnings from our ability to support and this is not only true for the founders but also the LPs. We used to do a quarterly, half-yearly and annual report for our LPs, but now we have moved to a monthly reporting cycle, besides the quarterly and annual reports.

LPs get very consistent information from us. Both good and bad because I believe it is important to give even the bad news to people who have tasked you with their capital. Mistakes happen and we admit them and we tell them about the solutions too. About what the funnel looks like and how we might lean on certain potential deals.

Inc42: Could you elaborate on the reason behind such regular reporting to LPs?

Arjun Rao: We have unanimous decision making. Vishesh and I make the decision and then inform the LPs, but because we do monthly updates and quarterly updates, they already know what to expect. We evaluate companies for three months or six months, so we are consistently communicating that to LPs.

There are two reasons — one is just for the transparency, but also it’s a two-way street. If any one of our LPs has an interest or insight or a network effect that our portfolio or potential portfolio company can leverage, then they can respond to us and find those synergies. Our LPs have large business interests and maybe a portfolio company could be relevant for their use case.

But with the second Speciale Invest fund, we also have more entrepreneurs on board who have connections with larger institutional investors and come from backgrounds in SaaS that can help our portfolio scale up.

Don’t surprise your LPs by asking money randomly or announcing exits without notice. So we are always reporting numbers — how much of the fund has been deployed, how much more will be deployed in the rest of the year, how did the exit happen, what were the learnings  during M&A negotiations and so on. And of course, we give LPs a heads-up about calling for capital in the next quarter or two.

Inc42: How has the global economic downturn changed the dynamics between fund managers and LPs? We all know about the funding winter, but are LPs adding more pressure to exit? 

Arjun Rao: That’s the other important thing right? Particularly if you think about today’s environment and if you look back at the two pandemic years. Everything suddenly changed and we have to become used to more sudden changes. Recession, stock markets are down, revenue multiples are down within the venture world. When we have LP money with us, we have a fiduciary responsibility. So I actually think it’s the time to communicate even more, calming any fears about the macro environment or communicating changes in our strategy.

One thing many new fund managers don’t see right away is that LPs are not only invested in your fund. They might be invested in other funds in that period which might be underperforming, so their worries are justified in some sense. So our focus is always proactive communication. We are actually in the process of doing our first ever LP day in December to double down on this.

I think as the asset class is maturing in India, so are LPs. I think definitely five years ago or six years ago, when we started fundraising to now, there is a marked difference. There are more people, different sources of capital, and you know, everybody asking different types of questions. They have exposure to other funds who are also pitching to them. So competition is also leading to knowledge building.

Inc42: You have been in the market for five years now and your portfolio has grown at roughly five to six startups per year. You have raised nearly 5X in your second fund compared to the maiden fund. Are you looking at more investments with this fund? 

Arjun Rao: We have always wanted to have a sharp focus. This means putting some restrictions on ourselves to not stretch ourselves too thin. We cannot have too large a portfolio because then we won’t be staying true to our word of working closely with founders.

And there’s also a factor of our fund lifecycle. We raise each fund with a horizon of deploying the capital over four years — and in deeptech, things change within a few months so we need to have that patience to have some capital for newer and exciting opportunities two or three years down the line.

Vishesh and I can split around 15-20 startups between ourselves when it comes to portfolio management, but the rest of the team also needs to contribute. We only have six employees and a very clear structure for evaluating deals and deal flow.

I want to have 10 employees too, but what do I need to do for that besides having the budget? I need to figure out what each of those teammates will do.

How do they contribute to the fund and the Speciale Invest portfolio? Will they contribute to the deal flow? We offer all our employees carry-sharing [profit sharing], so they have to take more ownership. Because then we can create individuals who can in the future manage the full life cycle of any deal.