SEA Fund has so far participated in six early-stage funding rounds since last year
Its latest investment was in Mumbai-based fintech startup AdvaRisk, announced this week
SEA Fund's focus is on startups in healthcare, fintech, agritech, media, hardware and embedded systems
When it comes to early-stage seed funding, the Indian startup ecosystem is going through a slowdown. The ruling government has boasted about setting up an INR 20K Cr seed fund by 2024 on multiple times, but with early-stage angel and seed investment drying up, the government’s ambitious plan looks unsustainable at this time.
If we look at the data around startup launches, India has seen over 49K startups founded till date, of which, 10K shut shop (as of September 2018), with a majority of these shutdowns taking place at the seed stage, often called the most crucial stage of the startup life-cycle.
Based on research by DataLabs by Inc42, it can be observed that the number of startups funded at the seed stage plunged by 39.74% to 329 in 2018, when compared to the pre angel tax era of 2017, where around 546 seed-stage startups were funded. And 2019 was no different than last year. The data further shows that the count of startups funded at the seed stage in H1-2019 was 38.92% lower than the half-yearly average of 219 from 2014-2018.
In such an investment climate, startups and entrepreneurs are finding it harder to get investors on board, while investors are taking fewer risks. But it’s not all doom and gloom. Early-stage funds such as SEA Fund are continuing to back startups at seed and early stages, which is going against the trend of investments reserved for growth-stage startups. And startups could find the key to getting seed funding through the investment outlook of such funds, which still have faith in the seed-stage ecosystem.
SEA Fund: Helping Early-Stage Founders Execute
Talking to Inc42 recently, SEA Fund managing partners Manoj Kumar Agarwal and Mayuresh Raut said the fund is all about finding the right kind of founders. “The stage at which we invest founders need help in executing, the financial engineering aspects take over once they have acquired a certain size and we believe this plays to our strengths.”
An early-stage fund with a mandate to invest up to $300K in multiple tranches, SEA Fund — short for ‘Salamander Excubator Angel (SEA) Fund’ — has made six investments in early-stage startups, with the latest one being fraud investigation startup AdvaRisk, where it participated with investors such as Sprout Venture Partners, Unicorn Ventures, Indian Angel Network (IAN) and marquee angel investors. With an average ticket size of $80K, SEA Fund is on the verge of closing two more deals, the duo told Inc42.
Mumbai-based AdvaRisk’s AI-driven platform is solving a major problem in the Indian lending and banking context at present. That of fraud prevention, detection and recovery in the loan portfolio of digital lending companies. With many lending companies now coming under the scanner over loan defaults, this tool could help bring in efficiency in the credit market, even as technology changes the credit models.
“Our mission is to help the next set of technical founders, with small amounts of early capital in getting to market to build efficient and scalable businesses.”
SEA Fund started investing earlier last year with its first two investments coming in the pre-series round for content discovery platform Wigzo. Raut and Agarwal admitted that it was not a particularly early deal, but since then its investments have been relatively early on in startups such as Clootrack, Finsall, Bestdoc and AdvaRisk. “We expect all other portfolio startups to raise the next round in the next six to 12 months,” Raut added. SEA Fund has also initiated work on a larger second fund which would get operational in 2020.
In its next phase of investments, SEA Fund is evaluating an AI-based enterprise SaaS company, a sports tech venture and also a couple of interesting fintech ventures, which the duo would not name due to confidentiality reasons. “They are all Pre-Series A and have raised some money from angel investors. Fintech and the whole India stack is another area that will be a focus area. We have two investments in this sector and will continue to deploy disproportionate sums in this space.”
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Finding The Investor-Founder Fit
According to Agarwal, the key to SEA Fund’s investments have been in identifying the right founders that have worked on the ground and have the market data on which they build their products and services. But it’s also about seeing the other parts of the business, such as the team and the knowledge quotient.
“We choose to bet on people. We look for founders who possess proprietary knowledge and are working on a problem we understand. teams that have an interdisciplinary mix, people with an indistinguishable flame that usually comes from some sort of adversity and an indistinguishable drive that they want to prove other people wrong,” he said.
To explain the philosophy better, Raut added that startups could either be innovating in one direction or innovating in such a manner that it transcends technologies, domains, expertise and skills. Put simply, it’s all about the impact that the startup can have on the ecosystem, society and the market.
“Directional innovation improves a product in fairly predictable steps, along a well-defined dimension. The rewards for this are fairly predictable. Intersectional innovations, on the other hand, change the world in leaps along new directions when diverse skill sets, cultures, disciplines and industries intersect.”
Agarwal and Raut were both quite clear that SEA Fund is looking for startups with founders that have already experienced the entrepreneurial life and are taking a second or third stab at it. “Startups have the odds stacked against them and given the nature of the beast, there are limited stabs that investors can take at being successful.”
That’s why the fund’s focus is on returning founders with non-obvious market opportunities. Raut added that returning founders bring experience from their successes and failures, and have gone through a trial by fire.
Backing Startups With “India For India” Play
Another key for startups at an early stage is identifying how large the market is for their products or services. Agarwal said that going beyond this, the timing for products is also crucial. And sometimes the idea may not be right for the time being, but it could have a good shot in the future and could disrupt the market. The first clear marker for SEA Fund is the domestic market-fit.
“We value an India for India play that can be scaled to similar markets initially, and subsequently globally. Healthcare, fintech, agritech, media, hardware and embedded systems are some of the industries that we have invested in or will in the future. We are also looking at how machine learning and deep technology are deployed to build startups that operate in the enterprise and consumer space.”
Coming to the question of seed-stage funding and the crunch of capital, Raut added that the government’s efforts such as Atal Incubators and Fund of Funds, MSME initiatives have enabled the rise of the ecosystem. “A lot more needs to be in the area of taxation both in terms of incentivising investing in startups in the form of tax benefits and also in the form of long-term capital gain. We expect positive movement in this space in the next year or two,” Raut added about the government’s policies.
India’s mature software industry and IT services legacy mean young professionals have handled extremely demanding customers using cutting-edge technologies. This has also enabled this cohort to identify gaps in the market. “Mid-career professionals are now branching out on their own and building products that can be used to tackle problems unique to India and at the same time, taken to the world. The frictionless nature of the Internet has led to centralisation and gate-keeping in the consumer space [by leading players], even as it has led to a dramatic rise in competition in the enterprise space.”
According to Agarwal and Raut, these two factors are a precursor to the expected boom in the enterprise SaaS space, which is underscored by the rise of Druva and Icertis to the unicorn club this year. “We have two investments in this space [enterprise SaaS] and will continue to invest more here. This is very exciting for us.”
Disclaimer: SEA Fund is an investor in Ideope Media Private Limited, which owns and operates Inc42.