Going Beyond Tier 1: The Story Behind Venture Catalysts And Its Focus On Startup Ecosystem In Tier 2, Tier 3 Cities

When Mumbai-based Venture Catalysts launched itself as India’s first seed investment and innovation platform in December 2015, the idea was to improve the ‘Innovation Quotient’ in India.

Two years down the line, in 2017, the early stage investment firm managed to close over 33 investments worth $49.5 Mn (INR 315 Cr), about 10 times the investments that they had made in 2016. Dr. Apoorv Ranjan Sharma, co-founder and President Venture Catalysts, stated that “This has become possible as India, as a startup nation, is at an inflexion point.”

The co-founder of Venture Catalysts also claimed, “The entire ecosystem is poised on the brink of a major transformation. High Net Worth Individuals (HNIs) from Tier II and Tier III cities are becoming increasingly involved within the entrepreneurial landscape as angel investors, closely mirroring the startup investment trends in the US. Only 3% of US citizens were investing in startups in 1980 but the numbers increased to 49% by 1999. This was the time when many unicorns including Amazon emerged in the US.”

Apoorv believes that India is on a similar trajectory and this is where platforms like Venture Catalysts aspire to play a key role in activating these HNIs as investors and mentors, in addition to building a robust and well-connected investor network on a pan-India level.

The seed to build an investor network on scale came from Apoorv’s earlier trysts with the startup ecosystem. Having been a partner with Venture Nursery in the past and being instrumental in nurturing startups like OYO (which gave almost a 250X exit to its early investors), Apoorv felt it was the time to launch something on a much bigger scale, to do something more in India.

It was at that time that he – along with Anil Jain, co-founder Wallfort Financial Services Ltd, Anuj Golecha, Partner at Banshi Jain & Associates and Gaurav Jain, Former Executive, Reliance Pvt. Equity, conceptualised Venture Catalysts (VCats).

Apoorv explains,

“In 2013, angel investments to the tune of $23 Bn was happening in the US. Today, it stands at around $25 Bn, close to the VC investment figures of $24 Bn. So, the angel investments figures almost hand-in-hand with those of VC investments in the US.”

Even so, with such a development, he further points out that, “In India, not even half a billion dollar investment is taking place in early-stage startups. So, while VC investing has grown over the years in India, angel investment has neither grown that much nor taken any shape in India. Moreover, angel investing is still in the hands of a few angel investors. Every year, you see the same six to seven names repeating in the top 10 angel investors in India. So I realised that if there are only say 500 angel investors, how much can they invest? Probably, half a billion at the maximum,” Apoorv added.

But, given that India’s population is three times the population of the US and the fact that it has set a goal of nurturing 10,000 startups to develop as a startup nation, where is the money that these startups require going to materialise from? What will these startups do if they don’t have the capital to survive?

It is these thoughts that led to the genesis of Venture Catalysts as a platform where mainstream investors, the business community and the SME segment, can start investing in startups.

Fulfilling The Vision Of A Startup Nation By Focusing On Tier II And Tier III Cities

While most incubators, accelerators and early-stage investment firms focus on Tier I cities of Mumbai, Delhi and Bengaluru alone, Venture Catalysts decided to go into the interiors and permeate the Tier II and Tier III cities.

Venture Catalysts is currently operational in seven cities across India. Besides the top metro cities like Delhi, Mumbai, Bengaluru and Kolkata, it also has a presence in Lucknow, Raipur, and Surat. And there’s a clear motive behind this.

The early-stage investment firm believes that the strong growth and traction that upcoming ventures in hitherto untapped markets like Pune, Ahmedabad, Surat and Jaipur have registered of late, demonstrates the entrepreneurial potential that still remains untapped across different clusters in India.

To make headway in these cities, the firm had to first focus on educating the investors about startups as an asset class. Apoorv explains,

“It was difficult for them to understand startups as an asset class. It required a minimum of three months pitch for them to understand and then only, they started investing. Hence, the biggest challenge was educating them. Once that achieved, they become equally informed investors as the others.”

In order to bring awareness about startups, Venture Catalysts took the recourse of roadshows meeting people in cities like Raipur, Jaipur and the likes to make them understand what are startups and how does this asset class work.

Then, it started mobilising investors from Tier II cities like Surat, Raipur, Jaipur, Lucknow and Kanpur. Here, Apoorv points out that while investors in these places have $7.86 Mn (INR 50 Cr+) kind of money to invest but they do not have any awareness about this asset class. That’s why this asset class was almost a walking dead in the last ten years.

Thus, Venture Catalysts has just focussed on these investors in the last two years, bringing in some $27.83 Mn (INR177 Cr) in investments from about the 3,000 HNIs in its fold now, the majority of them belonging to Tier II and Tier III cities.

“All we did was to make them realise that startups are a powerful asset class and can give much more return than any other asset class. And this is what I believe will fulfil the vision of a startup nation of 10,000 + startups rather than just having a handful of angel investors,” said Apoorv.

Apoorv believes that the vision can only be materialised when there are 10,000 angel investors ready to invest, there are ways the government incentivises them and it encompasses HNIs in Tier II and Tier III cities where the real money is; not just limited to Mumbai and Delhi alone.

How Different Are Startups And Investors In Tier II Rung Cities Compared To Their Tier I Neighbours?

Apoorv believes that the low talent and operational costs in Tier II and Tier III cities are a major reason why startups situated in these regions are able to achieve better unit economics than their peers in metros and Tier I cities.

Also, where they stand out, he believes, is in the originality of their ideas. He reveals, “Startups in Tier II and Tier III cities are much more focussed on getting the commercial aspect. They have high aspirations. These are original ideas. We have seen a lot of copy paste ideas in Tier I cities but we see fresh ideas in Tier II and Tier III cities.”

And there have been a couple of success stories along the way too. In 2016, for instance, the firm invested in Ahmedabad-based Beardo and DSYH and Pune-based AppSay.

Ahmedabad-based Beardo was founded in October 2015 by Ashutosh Valani and Priyank Shah. It provides hair and body-care offerings to men. It began with beard oils and currently, the range includes beard washes, beard balm, beard and hair growth oil, serum, face washes, beard and hair wax, soaps, beard combs and many more. After it raised $500K seed funding from Venture Catalysts in September 2016, and a year later Marico came knocking to acquire 45% stake in the Beardo.

Another success story is the AI-driven photography curation platform SIFTR Labs which was acquired by the Chinese mobile Internet company APUS Group, for an undisclosed amount in March last year. VCats had reportedly invested $150K in the photography curation platform in January 2016 and with this acquisition, it exited the startup with decent returns.

The Venture Catalysts Model

Apoorv believes that VCats is not an investor but rather an incubator of sorts. First, it helps the startups raise money from HNIs and then it supports and develops them for a period ranging from six to twelve months.

“We give them real-time help to build their businesses. It is not a theoretical incubation program. It is a more practical program on developing business, on developing strategy,” he reveals.

Normally, Venture Catalysts facilitates $100K-$500K of investments in early-stage startups against 13%-25% stake.

As per Apoorv, the way VCats pick up startups is also different. “We are picking startups from Kolkata, from Hyderabad, Jaipur, etc. In the last 10 years, the angel investing system that developed has become obsolete now, with the same set of angels doing the majority of deals. We are giving a fresh life to this ecosystem by bringing in these new investors,” he adds.

These investors then facilitate opening new doors for startups, as these HNIs are people with a substantial business network and can actually open doors for these startups. Also, with some having an international presence, they can help get orders from international businesses to these startups in the true sense. So, getting business for startups that they fund does not remain that big a challenge.

While Apoorv did not disclose the percentage fees charged by VCats, however, he said that the firm follows two models of monetisation, first being the membership-based model and secondly, it also charges facilitation fees from investors for every investment they make. In all, in the year 2017, it helped to close 33 investments worth $49.5 Mn (INR 315 Cr), compared to $5.21 Mn (INR 33.1 Cr) in 2016.

Currently present in seven cities in India and two outside India (Qatar and Middle East), Venture Catalysts is looking to raise that number to 16 in 2018. And one thing remains clear – those numbers will be more in Tier II cities.

Or as Apoorv puts it,

“When we go to a Tier II city, we look at developing the ecosystem. Because essentially, we are more of ecosystem developers than investors.”

In this direction, the integrated incubator also announced a two-day Startup Bootcamp in Uttar Pradesh in association with TiE Lucknow last week. The event provided 20+ startups in the region a platform to interact with and learn from domain experts, business leaders and established entrepreneurs, empowering them with the knowledge that they need to achieve growth and scale.

Also for 2018, the early stage investment firm will focus on sectors like Blockchain technology, the F&B sector, FMCG, consumer focussed businesses and healthcare which it has shied away from till now. It was in this direction that the angel network platform has facilitated an undisclosed amount of investment in foodtech startup The Bohri Kitchen last month.

A Look At The Changing Startup Funding Scenario In India

As per Inc42 Datalabs, Indian tech startups raised a total of $13.5 Bn funding in 2017 across 885 deals. The funding amount is almost 3X than what it was in 2016, while deals were 7.14% less. Additionally, when one looks at the seed funding data, over $157 Mn was invested across 507 seed funding deals in 2017. Barring 2017, seed funding witnessed uptick in the number of deals since 2014. It grew by 900% in 2015 and 145% in 2016 in comparison to the previous years. But it fell by 200% in 2017.

The rise of platforms like Venture Catalysts also point out to the growing trend of platforms coming into play as far as fundraising is concerned. While in 2014, there were just eight such platforms which enabled startup funding, the year 2017 saw some 27 networks and platforms coming into play. The year 2014 had seen some 15 deals which were led by or achieved through such platforms and in 2017, this number went on to 70+ (disclosed deals).

These platforms have helped investors and startups alike. In the context of investors who face a huge trouble finding good deals, these platforms aid in getting them a pool of good deals on one side and on the other hand, in context of startups – they are instrumental in the process of finding investors for funding. Secondly, with most of the paperwork being handled by these platforms, fundraising becomes easier.

Given the fact that Venture Catalysts is keener to expand its base in Tier II and Tier III cities this year, it is in a unique position to cement itself as a formidable early stage-early investment firm to reckon with in the burgeoning ecosystem in these cities. How far it is able to sustain the momentum in 2018, will be interesting to watch out for.