Tiger Global coming at early-stage investing is good for us: Fundamentum's Sanjeev Aggarwal and Ashish Kumar

The flurry of private market investments over the last two years that led to a mismatch in valuations of high-growth technology companies compelled Nandan Nilekani's Fundamentum Partnership to stay away from any new investment in 2021 as the firm couldn't find companies where it thought it would be able to generate returns, according to top officials at the venture capital (VC) firm.

In 2021, the deal velocity was significantly higher and the time taken for due diligence was ‘far shorter,’ which led to the VC going slow on its investments, said Ashish Kumar and Sanjeev Aggarwal, co-founders and general partners at Fundamentum Partnership, in an interview with Moneycontrol.

Fundamentum recently raised its second fund of $227 million to invest in growth-stage and early-stage startups in India and according to Aggarwal and Kumar, the company plans to deploy the entire fund in about 36-40 months or three-and-a-half years as compared to its first fund of $100 million which was deployed in a little over four-and-a-half years. This time it also plans to invest in around 12 start-ups, double what it had invested from the first fund.

Some of its current portfolio start-ups include Pharmeasy, Spinny, FarEye, RailYatri, Probo to name a few. In a chat with Moneycontrol, the two officials also outlined their game plan for the new fund, the sectors that they are bullish on and how Fundamentum looks at growth-stage funding in India. Edited excerpts:

How would you like to position yourself as a VC fund? What stages will you be targeting with this new fund?

Aggarwal: We believe that the middle is the missing link in capitalisation in the country, which we are trying to fill. This came from my learning at Helion, where we found that after seed and series A funding it was very hard for our portfolio companies to really raise growth capital and invest heavily. It had to come from somebody sitting internationally trying to compare investing in India versus China or Brazil or other countries.

I think the only two other firms that have a very similar strategy to us — Bertelsmann and Bessemer — and both of them as you know are international firms. So we are very unique as a locally owned, grown Series B, C funding company, originating from India, for India and done by entrepreneurs for entrepreneurs. So that is how we like to position ourselves.

How do you look at the competition in this space? What are your thoughts on Tiger Global and SoftBank, two of the world’s largest VC investors, coming in at early-stages, doing Series A rounds and Series B rounds, which wasn’t the case until last year?

Kumar: I don't think Softbank is coming in that early from what I know, Tiger indeed has come in very early and that’s actually good news for us because at this point in time we are sitting on an all-time high deal flow. If everyone does not invest, and nobody invests even in the early-stages, you know what would happen in two years.

Whatever companies are getting money now will be available in the next two years (for us). But a lot of this is getting solved by what you're saying (Tiger Global coming in early). So we are genuinely very happy doing them doing it.

Aggarwal: Tiger and SoftBank do tend to vary their strategy with time. They do not stick to one strategy. When they came in 2006, they wrote a lot of Series A cheques alongside us, and then they move to late-stage and now they are moving back to early-stage.

The problem is that when you have $6-7 billion of capital under management, it's very hard to deploy that in early-stages. Because the cheque size is very small, you will need to do thousands of deals to be able to deploy that fund. In a way, your strategy is determined by your fund size.

So either Tiger should reduce its fund size, but if it doesn’t and stays with the fund size of billions of dollars, it might do a few Series A deals but eventually have to go back to late-stage investing otherwise it will have an unyielding portfolio.

You mentioned a lot of deals happened last year as there was a fear of missing out among VC firms. Fundamentum did not do a single deal in the whole of 2021. Was that the reason for you to not do any deal as deals were happening at much higher valuations and assets were not tracking fundamentals?

Kumar: Yeah, absolutely, that was the exact reason why we stayed away. We probably worked the hardest, because the deal velocity was significantly larger, time to diligence was far shorter, and we did actually tailor our diligence strategy to also adjust to that deep velocity. But we weren't finding companies where we thought that the fund would be able to make money.

The companies were, of course, better but the valuations were just completely off the whack.

So we did pro-rata (investments) in our own portfolio companies, which raised capital but we did not do a new round. In the last eight months now we have done four deals so far, two we already have announced and two we will be announcing, so this is when we think that it is a great time to deploy.

With a lot of early-stage VCs having dry powder and Tiger Global also coming in early, do you think valuations will inflate at early-stages and hit your investment prospects at growth stages as companies will be sitting already on high valuations?

Kumar: I don't actually see that happening too much. I can tell you data about both the US and India. In the US, Series A rounds are happening at flat valuations. Even though people are coming in early, they are saying let's do a flat round and maybe a little more increment from what it was in the previous round.

In India also definitely rounds are not happening at higher levels than what it was in 2021. It is lower than in 2021. But is it similar to 2019 or 2018, is a question that we may ask. If I were to compare, let's say valuations, vis-a-vis four years back, it will be higher, but if I were to compare valuations over the last two years, then I think it will be lower.

It makes sense to compare it with the last four years because the digital penetration has increased and the entrepreneur’s visibility is higher, so the company can also grow faster. So there's a little bit of startup inflation that will happen, which will be more in line with the economy than any artificial inflation.

Fundamentum’s last fund of $100 million was allocated over four years, with the firm investing in about eight startups. What’s the game plan for this fund and how do you assess the deployment of the previous fund? Any key learnings?

Kumar: So the first one was deployed over a time of four years because the number of companies available at Series A and Series B was much smaller than what we are seeing today.

When we're looking at deal flow at this point in time, the number of deals in series B is three to four times what it was available four to five years back. So the funnel has gotten deeper. It has also gone broader because there used to be like five sectors five years back where value creation was possible. Now there are 10 sectors, and when I say large value creation, I'm saying billion-dollar enterprise valuation.

Given the current macro environment, we would actually accelerate our investment pace and do more. My sense is between three or three-and-a-half years the entire fund deployment should happen.

What will be the strategy behind investing in companies? You have said earlier that you would look to invest in companies that can diversify their business model whenever required, just as Pharmeasy did. Will that strategy continue with this fund?

Kumar: Our understanding is that considering where the Indian economy is, if you stay true to the market that you start with and do not look at any adjacent market or any adjacent profit goal, you will probably be able to create maybe $4-5 billion valuation or enterprise market-cap company. But entrepreneurs are not happy with that, they want to create even larger companies.

I think, in the next 10-15 years, we would be able to see many $50 billion companies coming out of India. I think it's very important for any company to sequence it (pivots) right and you can’t be doing this all in one go.

Whenever we are investing in any company, the least expectation from any founder or entrepreneur is that over the next four-five years stay focused on your current market, and then just be very market-facing because the markets also change a lot more rapidly and then be aware of what does it require for you to go further.

What sectors are you bullish on?

Kumar: From a sector perspective, I will say we will do something that is very similar to what we have done. But SaaS (software-as-a-service) is a space where we will go slightly deeper this time than in the past. That's primarily because of the deal flow of the last two years. Almost 40-45 percent of the deals were all in (early-stage) SaaS.

So naturally, you know, those are the companies which are available to us in series B. So that's one sector that we will go to a lot more. The second is healthcare, we continue to remain very bullish on the space.

The third sector that we have in our mind is companies building apps for Bharat, for the next 400 million internet users. I think in the last four or five years, we probably saw a lot of users coming in from these areas but not enough monetization. But now we are seeing that there are some interesting entrepreneurs, great people, building these businesses who have not only figured out a way to get to these users but also be able to monetize it.

Could you share a few models and use cases that Fundamentum is interested in investing in right now?

Kumar: So digital content is one sector that we are pretty excited about. I think we will end up making investments in that space. We are also excited about companies which are monetizing through subscriptions. When you look at the next 400 million users, advertisement revenue does not really add up in general. That revenue is very targeted to two or three companies like Google and Facebook and it is even harder to monetize the next 400 million users. But the same users are a lot more monetizable using subscriptions. Thanks to platforms and applications like UPI this will now be possible.

The second is agritech, which started in India maybe four or five years back. Initially, we saw a lot of companies targeting farmers who are slightly underprivileged. Our learning, in general, has been that it is very difficult to monetize from people who themselves are struggling to make ends meet.

Now, what has happened is, over the last couple of years or so, typically as any industry evolves, some entrepreneurs are starting to target farmers and commodities, where the revenues are higher. When you're dealing with rich farmers, and the moment you get into those commodities, there are better monetization channels.

Two of your biggest portfolio companies to date have been Pharmeasy and Spinny. Pharmeasy has withdrawn its IPO recently citing market conditions. Do you think there was a valuation mismatch last year when Pharmeasy filed its draft papers?

Kumar: So there was a valuation mismatch for all companies. The point I think Sanjeev was making, in the beginning, was that companies were raising capital three months later at double the valuation, which clearly is not sustainable, so all the companies were guilty of that.

I actually think that Pharmeasy is a significantly better company than most companies out there. Of course, we are biased and the reason why we invested was because we were biased and we thought that the business is great. In my opinion, what you are hearing about Pharmeasy, you will probably hear the same thing about many other unicorns.

So now, people are saying that maybe all technology companies are overvalued and partially I agree. So partially, all technology companies, probably at later stages, are overvalued. And it is just a matter of growing. The same thing is happening in public markets as well.

In terms of the broader sector, what themes do you think will do well in the near term, especially new technologies like blockchain and crypto?

Kumar: Given where the regulatory environment is and typically any industry goes through its own maturity. So, at least how we look at it is that the first set of companies may not be the best set that has been created.

A lot of these companies are getting created at this point in time, so in the next five-seven years, I think you will see outstanding companies. Given where India is, whatever talent is and our regulatory environment, we think a lot of these technology infrastructure companies on the blockchain will be a lot more interesting than the application companies.

People are still figuring out use cases (in application companies). There are some interesting models, but I would think they're probably early at this point of time.

So will you be investing in any of these companies?

Kumar: Yeah, so we will absolutely look at anything interesting on the blockchain infrastructure side like infrastructure technology tools etc. We will be very glad to look at those.

Will Fundamentum be looking at exiting some of the companies it has invested in over the last five years?

Aggarwal: We are actually long-term investors. And we believe that in India, it takes about a decade to build a billion-dollar-plus company. When we come in at Series B and Series C, we typically stay invested for five to seven years. We begin to look at exiting a company to actually help build a company for the long haul.

Our current vintage, on average, is only about three years from the first fund. So there is a lot of time for building. We believe that in India all the operating leverage comes after five years, once your business model is established and you have scaled up. This is a period of doing all the heavy lifting so that five years down the road we can begin to harvest these transactions.

Kumar: And when he said you need 10 years to build a billion dollar, effectively he meant a billion-dollar revenue company, just to be clear.