Become a Creator today!Start creating today - Share your story with the world!
Start for free
00:00:00
00:00:01
Inside the mind of the fintech VC | Sagar Agarvwal @ Beams Fintech Fund
316 Plays2 years ago
Sagar, a veteran venture investor, has built one of India's pioneering fintech-focused venture capital firms. He talks about why he decided to focus on investing in fintech startups and how he identifies the most promising companies to invest in. This is a must-listen conversation for fintech founders who want to understand the investor psyche and evaluate how investable their business is.
Read the text version of the episode here.
Read more about Beams Fintech Fund:-
1.How Beams’ fintech-focused approach helped create two more soonicorns in India
2.Venture Catalysts’ Beams Fintech Fund Crosses Halfway Mark, Plans Two New Deals
4.India’s first Fintech-focused Growth Capital Fund, Beams FinTech Fund looks towards Middle East
Recommended
Transcript
Introduction to Podcast and Guest
00:00:00
Speaker
Hi everyone, this is Salar Birovald, co-founder and managing partner of Beam Syntax Fund.
00:00:17
Speaker
As a regular listener of the founder thesis podcast, you would have heard the stories of hundreds of founders talking about how they convinced investors to back their vision. In this episode, we turn the tables and feature an investor, talking about how he built his fund and his investment thesis.
Understanding Investor Perspectives for Fintech Founders
00:00:34
Speaker
In this episode of the Founder Thesis Podcast, your host Akshay Dutt talks to Sagar Agarwal, who founded one of India's first fintech-focused venture capital firm, Beams Fintech Fund. Sagar has spent more than a decade and a half as a venture investor, and in this candid conversation, he talks about why he decided to focus on investing in fintech startups and his process for shortlisting the companies he wants to bet on.
00:00:58
Speaker
This is a must listen conversation for fintech founders who want to understand the investor's psyche and evaluate how investable their business is. Stay tuned and subscribe to the Founder Thesis Podcast on any audio streaming app to expand your horizons and learn from veteran business leaders.
Sagar Agarwal's Career Journey into Fintech
00:01:22
Speaker
It's been 17 years I've been in this business of private equity and venture capital investing. We used to have the dinner table conversations in the family about financial markets, investing and all of that. And that led to obviously an interest into the space, right? And I was finished by graduation and everybody applies for IM and the IITs, right? IM and the hours and the autism.
00:01:43
Speaker
I also did my June, right? I joined SPJN for my master's and then fortunate enough to start my career with private equity. So I got my campus placement straight up at a firm called Evolvents, which was basically Dubai. And we started our career. I started my private equity venture investing from that year itself in 2006, 2007. And now it's been 16, 17 years now in that journey. So for people who haven't heard of Evolvents,
00:02:07
Speaker
It's not an Indian form. It's a Middle East based private equity fund. And they were entering into India in 2005, 6, 7 because India was coined as the BRIDGE nation, right, in 567. And India was one of those emerging market golden world, right, which everybody wanted to invest money.
00:02:26
Speaker
So we were also one of the Middle Eastern guys who wanted to enter India, and that's the time the Middle East firm started looking at India more seriously, and we set up a private equity fund in India.
Sector Focus and Investment Strategies
00:02:34
Speaker
And that's where the involvement of the journey started. That was started by a gentleman called Khaled Mahary, who was one of the members of the Royal Family of Abu Dhabi.
00:02:42
Speaker
So, I believe the India side of the business was being led by you. To be very true, you were three partners, Akshay and the fund and the platform, me and two of the gentlemen. And three of us used to run the India part of the operations pretty much. And we set up a team of six people on the ground. So, we were ten of nine of us. We were building a platform from 2008 onwards, right?
00:03:01
Speaker
In that journey, we made the priority fund to $50 million. We deployed in India. We invested across multiple sectors, some consumer health care, financial services, infrastructure, real estate, manufacturing, right? Anything under the rules that in 10, eight and nine, seven and eight were bullish. We invested money in that, and that did very well for us.
00:03:22
Speaker
14 years when we launched the fund too. So six, seven year journey later, we launched one too much more focused towards sectors that we understand which is consumer health and financial services. We moved out sectors which were tough to underwrite from an Indian standpoint, which is infrastructure, real estate, manufacturing.
00:03:38
Speaker
The long-distance investments require a longer journey to make money on it. So we decided to move out all of these sectors and only focus on three sectors. We need a smaller fund, $70, $75 or a million fund. So between fund 1 and fund 2, we built a $325 million platform portfolio for investing and $60 million of site buckets, almost $385 million, $390 million of capital that was raised and deployed in India during my journey of 13 years of development. We did a lot of tech
00:04:06
Speaker
private equity. Private equity guys generally invest in traditional businesses and venture capital and invest in tech, right? So we were the ones to cross over between the private equity, traditional investing, tech investing.
Resilience of Fintech and Strategic Choices
00:04:17
Speaker
So that was a 12, 13 year journey, the experience where actual global financial crisis, policy paralysis of Congress in 2010-11.
00:04:26
Speaker
Deepak Antrim in the US in 13-14. Oil prices at $145. Demodernization in India. Modi coming to power. UBI getting launched. An R becoming prevalent. IFS crashed. DHFL crashed. And then COVID came in. So in my journey of 16-17 years, there's been a bunch of max-on events. And there are a lot more now than what they were earlier.
00:04:47
Speaker
People used to say business cycles are 7 years. I say business cycles are now 3 years. Okay. So I want to zoom in and get you to clarify some of the things you said. What do you mean by side pockets? Side pockets is basically our investors go investing with us in the companies that we are investing in. Okay. Yeah, it's going from the investor.
00:05:04
Speaker
Got it. Okay. Why did fintech outperform the other sectors? There's probably some sort of a macro answer to this. I want to understand that. Like why is fintech doing better for, is it that you chose good bets or is it that fundamentally fintech is a better sector to invest in?
00:05:21
Speaker
Combination of both, we ended up choosing right bets, point number one. And second, which one did you invest in at Evolvents? We invested in SK Fincore, which is a huge commercial vehicle lender. We invested in the small finance bank. We invested in Centrum Forex. We invested in the Zilog Systems. We invested in the student bank of Punjab. So, a bunch of such investments we did while I was involved in it. Sarva, we invested in for that matter.
00:05:48
Speaker
The reason is that if you look at the economic structure globally, one third of our GDP globally directly comes from financial. If you look at the rate in the public markets also, nearly 25% of the public market rate globally is financial services. It's the backbone of every economy, whether you talk about agriculture, healthcare, education, commerce, logistics, automotive property, every sector has a backbone of financial services, which will get payment, lending and insurance.
00:06:16
Speaker
The secularity of the sector is much more bigger than the secularity of the sector. It's the only sector which controls all the sectors. And it is not a winner-take-all. And the sector is not a winner-take-all market. You don't have just one HDSE buying, and then you don't have any other financial institution. But that's the difference. If you have one player which controls the market, it's not a winner-take-all market. Interesting. At Evolvement, what was the way in which you would choose companies? What was the investment thesis?
00:06:41
Speaker
I always have the philosophy that you map the sector out from day one. These are the 10 different segments within any sector, financial services, consumer health, and look at both the sides. You look at the 10 different segments and look at the player in the 10 different segments, look at the value chain of those 10 different segments.
00:07:01
Speaker
Who's making the most profit pool in that value chain? And then you go and invest in the leaders that profit pool value chain. So you bring the sector to the T and then look at the entire value chain and look at the top player in that value chain and people who are making the most money and then create a shortlist of companies.
00:07:17
Speaker
And then based on that, talk to the founders, build a relationship, build a network, and then go individually and invest in them. That's how we have certainly invested. Not to mention you get companies from bankers, lawyers, advisors, consultants, you get companies from peer fund managers. So there was all of those combination to identify the deals and validate your thesis consistently.
00:07:39
Speaker
You ask if you have a macro call and you need to take a bottom-up call at the same time. Can you give an example of an investment and what was the macro call you took there and what was the bottoms-up approach which made you bullish and how that got validated over time? I'll give you an example of my favorite company SKF and GORP. We were very clear that lending to SMBs is a large problem in India that needs to be solved. SMBs can be lent money through towards three different routes.
00:08:04
Speaker
One, you can do foreign loans to them, which is a large industry. Second, you can go loan against property or premise, right? You take that property, you take the premise, and you provide a loan against to them. Third thing is that you can give them working capital finance to supply chain, right? And fourth thing you can do is give them loan against their pickup trucks and vehicles, right? Which they are using for their own business productivity, right? These are four different geographies in the SME finance name, or you can open any credit to somebody's bank account saying that, hey, use for your business, right?
00:08:32
Speaker
which is the most risky one. So I have never been a big fan of unsecured lending. I've always been fan of secured lending. In secured lending, there were four options, right? Gold loan, commercial vehicle financing or pickup truck financing, property financing. And lastly, you talk about supply chain financing, right?
00:08:47
Speaker
So I chose commercial vehicle financing or pickup truck financing as the most important sector because it's an asset backed sector. You can repossess the vehicle if the guy defaults, right? You pay 35-40% of your money upfront, buy the vehicle, right? And then give the 60% mortgage
Inception of Beams Fintech Fund
00:09:02
Speaker
done. So you are in the game already. Plus you're earning money from the vehicle, right? It's not a dead asset, it's a productive asset for you. So if the productivity of the asset doesn't go, then you don't make money, right? And lastly, e-commerce was catching up in India.
00:09:15
Speaker
15, 16, 17, e-commerce was canceling a big time. We were very clear that there are going to be a large amount of warehouses in India. Multi-modal warehouses. There are going to be a large part of logistics which will be required. Transportation is going to be a large part of it. Last month, delivery is going to become very big in India. For all of that, you need pickup trucks. You need guys who are small-street operators, small-street owners, who will provide their pickup trucks to these e-commerce players in a contracted model. The demand is going to substantially grow up.
00:09:41
Speaker
Pickup trucks are used in construction activities a lot more in India. The government trucks are used in delivery of people, right? In delivery of goods. Yeah, they're very versatile. In India, the usage is a lot more versatile than in the West. Interesting. You said that I did a crossover of a PE investing in a tech firm, which was traditionally a VC, used to invest in tech firms. What is the technical difference between a VC and a PE? So I divide these into two categories, early stage and growth stage.
00:10:09
Speaker
and lead state. So, lead state is what venture capitalists generally dominate. Growth state is what we see and we both do it. And lead state is what private equity does only. That's the three demarcations of the sector. Venture capital tries to identify new edge sectors, sunrise sectors, tank businesses. The growth stage, which is the middle market,
00:10:31
Speaker
where PE and VC won't play, right? VC will provide more capital to their own companies in growth stages, while PE will provide capital to tech companies also, and traditional investors. And Leastage guys only provide largely used to provide capital for traditional businesses, and now they're coming to tech companies also, right? So that was a crossover we did from becoming a traditional PE investor to becoming a traditional PE tech investor, right? Like, for example, I'll give you the difference. If you're investing in a PTM, it's a VC-like technique.
00:11:11
Speaker
Is there a difference in check sizes? What kind of checks a PE writes and what kind of checks a VC writes?
00:11:19
Speaker
It all comes down to the stage to be very joke, right? If you do early stage investing, your trade size would be $1 to $3 million. If you do growth stage, which is a middle stage, $5 to $15 million. And if you do late stage, $25 to $15 million, right? It's more akin to the stage than akin to the size of the company and obviously,
00:11:37
Speaker
multiple factor sides of the company, the journey of the company, the valuations of growth, right? All of that matters. Sometimes you have early stage company, but eventually and everything, 100 million dollar check. So there are multiple factors which are combined, the check size, the ticket size, but a sweet spot is 1, 2, 3, 4, early, 5, 2, 15, from the keys and 30, 50, 50, 50.
00:11:56
Speaker
Okay, got it. Interesting. So tell me about the next step in your journey when you decided to start your own fund, which is Beams. What was the trigger for you to become an entrepreneur and take that up? And what was the journey of that zero to one journey of setting up Beams? It's been an interesting roller coaster journey to set up Beams, right?
00:12:15
Speaker
So in 19 when I spent 13 years at Evolve and tried out 12-13 years at Evolve, I was very clear that the space that I like the most is financial services and FinTech. The space which is done very well in India is that type. So, demonetization happened, UPI had happened, Agar had happened. Internet was made prevalent in 2016 by Motivai. So, 16-19, I saw a massive adoption of financial services online, right?
00:12:40
Speaker
And I was very clear that FinTech is going to be a large sector. And if you look at the manager landscape in India, there's a lot of single fund manager who's doing FinTech and financial services at growth stages, right? There are a lot of managers who are doing early stage and then doing FinTech. There are a lot of managers who are doing reach stage and financial services. But there was nobody who was doing a crossover between private equity and venture capital and a combination of FinTech and financial services.
00:12:59
Speaker
So to solve that problem, right? And to really think about that as an option, right? Which is why I decided to move into 2019, create this platform. And the 19, 20, 21, 22, 23, it's been five of the first people I have partnered with or joined hands with, right? It was a group called Winter Catalyst.
00:13:17
Speaker
where I decided to partner with them as my shareholders, my partners, my cool GPs in the fund, right? And I brought them on board, primarily because they are an early stage platform, right in India. And I was really a real stage platform, right? So you don't need to reinvent the wheel. You already have the early city ecosystem in place, right? So you can look at the entire spectrum and say, who's doing what, right? And actually the company's got to become larger.
00:13:39
Speaker
eventually. So that was the two pieces for me. Joe was first partner with Venture Partners as a group. And then once you partnered with Venture Partners as a group, right, they came as a shareholder. I brought out a gentleman called Lhamid, right. He's the veteran in financial service, Infantech space. He's the first, I think one of the earliest payments founders in India, build a company called It's Cash, It's Card, sold it to eBix in the US, right.
00:14:03
Speaker
So it was sold in 16, 17, 14, 14 years of building financial services in Fintech. And Fintech was new in India, right? He's the founding member of Fintech convergence council, payment council of India. So he brings the depth of experience. So three of us came together to build this platform.
00:14:19
Speaker
And when the idea was to build a team of people, come up with a strategy, come up with a strategy to deploy capital, come up with a strategy to allocate money, build a portfolio, raise capital. So 1920, 21, three years was all of that laying infrastructure, building blocks, laying the rails of what it means to look like, not identifying the name, registering the trademark, the brand name, right?
Building the Beams Team and Platform
00:14:43
Speaker
All of that, right? It was a journey from 1920, 21.
00:14:46
Speaker
Okay. For a regular startup, there are like some key hurdles you cross as you're going through that zero to one journey, like finding product market fit, finding investor, building a product, building a team and so on. What is it like for setting up a venture? What are those hurdles that you need to cross? What are those early challenges that you face when you're setting up a venture fund?
00:15:07
Speaker
I would say we are not different than any other entrepreneur in the market, right? In the same thing, when you're coming to the market, when there are already 900 funds out there in the market, right? You have to read your position in the market, then why do we need a FinTech fund, right? When you're a fund manager, right, Akshay, you're doing two things. You're convincing the investor to put money with you and you're convincing the founder to take your money. It's not like you're sort of a capital and money comes to you and money goes to companies. No, you have to convince both the side of the table, right?
00:15:36
Speaker
You have to convince people to come and join you and believe in your vision, believe in your strategy, believe in your pieces, and you're solving a large problem. So that all of those conversations and challenges that any entrepreneur goes, we have the same thing. We have projections from investors saying that, hey, why do we need a FinTech fund? I have enough funds in my portfolio. We have the same thing from an entrepreneur saying that
00:15:59
Speaker
What is Beams? It's a new name. I don't know whether... Do you have a track record of investing in the past? Do you take your capital or not? How are you going to create value? How are you going to create... What checks can you write? Same thing when you're hiring a team member, they're like, oh, I don't know how much capital you have. Will you be able to survive? Will you be able to grow homes? So all of that, actually, we went through everything. We built a very institutional platform to solve that problem of checks.
00:16:23
Speaker
Starting with the investors first, investors wanted to see the kind of people who are there on the platform. So we built a team of very solid people. We are now almost 11 people on the ground. We have four partners, seven number team, 11 people on the ground. People coming with very, very rich experience of financial services. Right. They have done operating experience. They've got investing experience. They've got exit experience. They've got private equity. They've got venture capital. You name it. And they've got the experience of the team today. Right.
00:16:46
Speaker
So one of the best teams I would say in the market who knows financial tourism in FinTech. So again, we started inviting CXOs and CEOs of various companies to become our mentors and advisors in the fund. And these are people from banks, NBFI, insurance companies, FinTech companies, DFIs, right?
00:17:02
Speaker
This is the advisory board of the fund, and this is the mentor board of the fund. We've got now 12 very senior folks from British and Gushar Maath PTM to Gushar Spatil of CC Avenue, Gushar Mehta, Vinci Bheem, Raji Sharma, G of KP Global, Raji Rajan from US Bank. So that's the kind of folks we started bringing together.
00:17:22
Speaker
create a more institutional layer so that founders can see people that they can look up to also beyond us and ask the right question. And these are the built larger organizations, they're not retired people, they're built larger organizations, they're active in their role. That's the second layer of build to convince investors that
00:17:39
Speaker
And this is the kind of people who are going to be advising the fund beyond us.
Investment Structure and Strategy
00:17:43
Speaker
And the third layer I built, Akshay, is an institutional layer. I started bringing banks, NBFI's, and Jordan's companies, and fintech companies to invest in the fund. Look at the reverse map. I'm of course asking them to invest in me, and then I will go and invest in the others, right?
00:17:56
Speaker
And that was a story where people wouldn't want to believe saying that if you are investing in the fund and you're going to invest in the other company, that would benefit us. So explaining to the bank the thesis behind why you should be investing in a fund like ours and how you can partner with my portfolio company is the thesis that I built. I learned it from a fund in the US. So the US, as you know,
00:18:22
Speaker
We're one of the oldest markets in the fintech space. Europe is the second oldest market. China is the third oldest market. And there are more than 100 fintech funds in the US and 80 fintech funds in the UK and China. We have none in India. So making that thesis and people believe that once you come on the platform, we'll be able to create a value. And when you go and present to investor, hey, this is not just our own running the funds. We've got four partners.
00:18:47
Speaker
our seven-member team, we've got a CXO layer, we've got institutional layers. This is the kind of infrastructure we've built, right? 30 or different sets of people who are helping pick and choose the right investments, right? And then going and getting the founder the same thing, hey, this is not just our investing company, it's Veeam's, right? I mean, these are combination consoles, a bunch of factors, right? But that's the journey and same thing we had to do with the Calend hiring as well.
00:19:10
Speaker
But today, yeah, I think we're very happy with the team that we have and we're very happy with the investors we have. We are very blessed and we're very happy with the portfolio companies we have. How much time did it take you to like, and like possibly the closing of Fundone would be when you would have like, is proof of like in a startup, you say proof of product market rate. So something similar here would have been the proof of everything you put in. 20, 21, 22. So three, wow, that's like three years plus.
00:19:38
Speaker
Right. And what was the size of Fun1? This is currently we're deploying out of Fun1. It's a $120 million fund, 900 crores, right? That's a Fun1 we're deploying out of. And we have raised more than 65% of the capital already, right? And we've done four investments already in the funds.
00:19:58
Speaker
So, when you say FundOne is 120 million, is that your intended amount or is that committed amount? What does that mean? So, the way FundOne works is that people commit capital to the fund, right? And then we draw down the money from investors over two or three years, right? So, you don't put that entire money on D1. It's a commitment that you give to the FundOne saying that this is my amount of investment I want to do in the fund. And that's how you draw down the money over two and a half, three years.
00:20:23
Speaker
So 120 million is the commitment from investors. Does it ever happen that someone doesn't live up to the commitment? Well, it's always at least right. A lot of people, the intention is never to not live up to the commitment. I think sometimes what happens is that there's really challenges, there's change of market, there's capital required, something else. So there aren't real times when it happens where people don't know, cannot honor the commitment. I would not say not honor the commitment, but in order to honor the commitment,
00:20:53
Speaker
In that situation, we have to find an alternate buyer for their shares and find a new investor. It has not happened to beams yet. It's not happened to us. People have heavily deployed capital and gone double down on beams. So far, we are okay. And they're confident that more and more investors are joining the bandwagon with us.
00:21:12
Speaker
And these investors are like Indian institutions all over the world. So we've got a very good mix. We've got 80% of the capital from India and 20% of the capital from outside India. It's a combination of institutions, family offices, corporates, H&Is, ultra H&Is. 60% of the capital is institutional, 60-65. 35% is family offices and corporates. And 15%, 10-15% is more individuals, right? H&Is, ultra H&Is. OK. OK.
00:21:42
Speaker
So you were talking of a very impressive board of advisors which you've built up. What's in it for them? Do they also invest money? Why does one sign up to be an advisor at a fund?
00:21:54
Speaker
One, I think it's more than the incentive for them, right? So they are these very generally very well-to-do guys, right? And they are senior position, CXA position, and they are on their own journey. So they don't sign up to just be advisor and mentor. I think one, they believe that they can give it back to the community, right? They can guide the younger entrepreneurs or the new age entrepreneurs to build businesses better.
00:22:19
Speaker
Second day, we also, they are clearly firstly investors in the fund, right? So when, because they invest in the fund, alignment of interest automatically happens for them to support our companies in their journey as well, right? So both those things happen at the same time. So one is the, not just to invest capital, but to also provide something back to the community society as the younger founders of the two primary reasons, no matter what I offered, I'm ready to not be sufficient for that.
Beams' Investment Themes and Specific Investments
00:22:43
Speaker
Right. Okay. Got it. Amazing.
00:22:44
Speaker
So let's talk about some of the investments you've done under BEAMS. And again, if you could talk me through the way you explained about YSK and how that turned out to be a brilliant bet. Can you talk me through some of the investments you've done at BEAMS? What was the thesis behind those investments?
00:23:00
Speaker
Absolutely, so we've done now we've done four investments, actually, and beams, right? Let me just put a step back and tell you why and how we invest in beams, right? That's more important than the company specifically. So beam strategy has always been actually we will do conjugated bets in companies, and we have a conviction on so you know, we could invest your 12 companies in this part, we're not investing more than 12 companies in the fund, right? What we've done is that we've identified 30 odd teams within the FinTech space that we like the most, right?
00:23:28
Speaker
And we've looked at 30-odd teams from the perspective of what their journey looks like from the next 10 years. Well, whether sector is going to pan out in 10 years, how big the sector is going to become, how large the sector is going to become. So keeping that in mind, we've shortlisted 30-odd sectors. And we've gone and picked and chosen top three companies who are growth-free companies in that category sector. What are some of those 30 sectors, if you can?
00:23:54
Speaker
So to give you a perspective, for instance, payment lending insurance and wealth, right? As the four centers, right? Then you have the agriculture, healthcare, V2B commerce, education, you've got automotive property, right? Logistics, other than the six centers, right? Then you have the Fintech infrastructure, which has whole banking solutions, lending stack, collection stack, co-lending stack, right? So all these tasks for the banks and agencies. So like just to identify 30 or large opportunities that you can create from
00:24:23
Speaker
And we've shortlisted 150 companies which made the growth stage criteria for us. So what is growth stage for us? The one which is generating 8200 crores of revenue, minimum in India. That's where we start to get an inflation point in the business. We believe the company will start to take 8200 crores of revenue, start getting an inflation point from our product market side, from our management team perspective, from our farming team perspective, from our
00:24:45
Speaker
the supply chain ecosystem has figured out, the tech stack has figured out, they have raised 3 to 4 rounds of capital, they've been in the journey for 5-6 years. They have built a market positioning, right Ashraf? You know you've got a number one, number two, number three player, right? So when those factors come together, I call the 10x journey, the 100 crore to
00:25:03
Speaker
1000 crore is a 10x journey that any investor wants to go through. That's the journey that memes wants to come into. That's the journey we invest into. 100 crore to 1000 crore journey, growth stage companies, 30 odd themes, 150. That's the way we shortlisted the entire landscape and market mapping. And within that, right, then we started double clicking on all the companies or all the 150 companies.
00:25:27
Speaker
The space that I like the most right amongst all of this was consumer banking. And Sydney bank had just exited the market by selling their consumer banking business to access for 1.6 billion dollars. And having been invested in banks in the past for so many of them and the bank of the jobs.
00:25:46
Speaker
I was very keen on that there's a need to create a new edge consumer bank in the market. You cannot just have a traditional consumer bank in the market. It's beyond the top five or six banks. People don't associate with seven or eight banks so easily. It's not their first preference. As a 25, 30-year-old guy who's working in tech industry and startup industry doesn't want to go off to HDMC. It's so straightforward. He may go to HDMC or another state bank of India, but it's in the neighborhood.
00:26:12
Speaker
But for him, he's looking for an uber-cool experience, an auto experience, an Instagram experience on a bank, right, with chalks of a bank. And this is where we looked at all the players in the market and we found NIO as a team, which was building very consumer-oriented, consumer-focused product. In the premium banking segment, in the mass banking segment, in the blue-collar workforce segment,
00:26:32
Speaker
And they have been doing this for seven years before we invested. And they've gone through the journey of COVID. They've gone through the journey of trying multiple products and raising some capital and iteration and multiple iterations. And they've finally found product market swings in all three categories.
00:26:47
Speaker
From the mass banking perspective, from the premium banking perspective and the blue collar workforce perspective, they found product market in all the three categories and that's why the numbers were stacking up, the team was stacking up, the purpose of the founders was phenomenal.
Risk Management and Diversification
00:27:00
Speaker
Both the founders came from consumer banking and consumer data experience. And my view was very clear, 10 years online, India will have their digital banks. India will have a couple of banks who will get the digital banking life.
00:27:11
Speaker
I don't believe there's no framework for it, but is it going to stop? Of course not. There will be an opportunity in the future. Certainly, yes. Can NIO be one of those guys who can actually get a digital banking license and become a digital bank of India? I think there's definitely a potential for that. Okay. Amazing. And how much did you invest in NIO?
00:27:27
Speaker
We invested $7 million in you. Sounds like a small amount considering your $120 million fund. You will continue to invest as a raise more capital. That's the reason. Actually, in this fund, we'll do $10 million per company and 12 companies won $20 million. So $10 million is what we will invest in any company. Along with my co-investors, which is what I was talking to you about side pockets, along with the co-investors, we put another $3 to $5 million in each company.
00:27:55
Speaker
So if you think about the total allocation, though, NIO is up to $15 million from my 10 from the fund and five from my co-investor, right? That allows you to get a reasonably decent position in the fund, right? So all in the company for that matter. So that's the upside that we want to write and investigate.
00:28:10
Speaker
Is it important to have this discipline that I will not invest more than this much amount in a company? It could be that you lose an opportunity. It's a great company. Although there is a risk also that you may end up taking on more risk by investing too much in one company, which doesn't pan out. But how important is it to have this kind of discipline that I will not invest more than 10 million in my fund on one company?
00:28:33
Speaker
I think extremely important when you're creating a portfolio, you have to think about the portfolio. You cannot think about companies, right? Companies are a part of the portfolio. When you're investing in 12 companies, you have to think about the right allocation of 8 to 9%, 10% in one company, right? You need to give the right diversification in the fund. You need to give the right allocation to each of the companies in the fund.
00:28:51
Speaker
If you're going to grow and put 15% of the fund in one company and then remaining in the other company, that company doesn't perform for whatever reason. Fund is going to come substantially under the fund. Portfolio creation is very important. And portfolio strategy is very important. So we look at it from that perspective. Are we creating the right portfolio? Are we creating the right allocation to each and every company? You don't want to over-allocate, you don't want to under-allocate at the same time.
00:29:17
Speaker
So that's the only difference. And that's how we decided to allocate about $10 million per company, $12 million, $120 million.
Regulatory Challenges and Risk Mitigation
00:29:23
Speaker
Any point of them, no company will redefine the fund, but there's always an opportunity for a company to outperform. Okay. Interesting. What is the regulatory risk when investing in consumer banking? And I believe Niho had some hiccup recently with their travel card because of the bank, which was issuing that travel card. And so like, like how big is the regulatory risk?
00:29:45
Speaker
here in this space, specifically consumer banking? Well, today, consumer banking is dealing with end customers, right? And essentially, our central bank is more concerned about protecting the end consumer, right? For them, in the central bank, the money of the consumer, the deposit of the consumer is very important.
00:30:05
Speaker
And for them to protect them, they will do everything, right? So for them, first they want everybody to be licensed, right? Everybody to undertake a license and operate audit every quarter, right? Audit every quarter and not just audit every quarter, but
00:30:21
Speaker
follow the duo regulation and processes, everything, right? The first thing to do with consumer banking is that you need to consume a banking license, a commercial banking license from RBI, then only to unveil it, right? So for that matter, because digital banking are not available, RBI, NIO decided to partner with six banks, right? And the bank to use, to build an infrastructure along with them as a digital banking platform, right? So the extremely regulated sector requires licenses of multiple forms and versions, right? Banks don't have just a commercial banking license, they have multiple search licenses.
00:30:51
Speaker
Do you see regulatory risk as a material risk or as a minor risk when you evaluate in this space? Regulatory risk is always large. But there are ways to mitigate the regulatory risk. Can NIO, if you don't get a banking license, can you get other licenses? Can you get an NBSC license? Can you get a PPR license? Can you get an 82 license? Can you get a payment allocated license? You can get other licenses, still do majority of the work that a bank does, except that you cannot take deposits.
00:31:16
Speaker
which is what we need partnership with other banks, right? If you don't, if you're not necessarily doing just deposits, right, you can do everything that a bank can do. Yes, deposit is the most important pool of the capital that a bank and based on that deposit you lend money to other people, right? That's the difference. But regulatory risk, we were very clear that because they are partners with banks, right, they're not building these products independently, there was some sort of religious support that we had in the chat.
00:31:40
Speaker
So, banks typically earn through two ways. One is transaction fees. To facilitate transactions, there will be certain charges. And second is the interest rate spread. You get funds at a certain rate, you lend them out at a higher rate. How does New York earn?
00:31:55
Speaker
A lot of people come in and ask me this question, how do I earn money? So I have to be careful with what I say over here on the podcast. The first thing that you do, when you show a debit card or a credit card or a forex card to any consumer, the consumer is going to go swipe that card. He's going to use that card to withdraw money. He's not going to go and use it to swipe that card. You swipe that card to the transaction fee that I generated on every transaction.
00:32:18
Speaker
If you like the product, if you're a user of the product, you will start swiping the card everywhere and that's when I will start making money on every transaction, every business. So, transaction revenue is obviously the biggest revenue for the Neo, right?
00:32:34
Speaker
Because you're able to garner deposits from the customer, the banks give you revenue share on multiple other products and variety services, you get revenue share and you get transaction fees, both of them. As a bank, if you think about it, 40% of banking revenues come from fee income and 60% come from lending income. So for NIO also today, because NIO doesn't have a deposit business, the lending business right now, and 100% is coming from the fee income.
Fintech Revenue Models
00:32:57
Speaker
Can that eventually become a 50-40 ratio is a question that we ask.
00:33:00
Speaker
Okay, interesting. What are some of the other investments that you can talk about? We do invest in Procap, which is a leading supply chain finance company based out of Delhi, run by Himanchu and Pallavi, husband wife, right? And come with a lot of experience under their belt, both of them in BHME financing space, and then share with you SKOs, investors from the thesis decks, we will provide e-commerce with other things and supply chainers from the perspective that
00:33:25
Speaker
As the commerce business becomes more and more digitized, right? There'll be a lot of capital and a lot of digitization happening in the commerce business in the next 10 years, and you need people who can do supply chain financing in the journey. It's a singular story on the SME financing space again, just from a different lens. Same thing if you come to a third investment. We have invested, we are investing in a company called Kregenix, which is in the collection infrastructure space, right?
00:33:46
Speaker
They enable banks to collect loans that they've given out to customers, right? The entire communication toolbox has been provided by Tregenix too, Tagging Financial Institution, whether it's an NBSC, whether it's a bank, whether it's a FinTech, all of them together, right? Provide a collection infrastructure tool and box tools, a bank and financial institution. And the whole company, we are investing right now as we're closing our speakers insurance stake hook, which is the largest insurance distribution aggregation platform in India.
00:34:13
Speaker
Those are the four different segments, insurance, supplies and finance, collections, and the digital banking, consumer banking. And the teachers remain the same. There's a large problem to be solved. There's a market leader. There's a great team. There's a great founding team, numbers stack up. The joining stacks are 10-year stories that are visible. Exits are very clear from here. And that's how I decided to invest in these four opportunities. And the remaining eight teams in the fund will also be very similar.
00:34:35
Speaker
Okay, it's interesting that I've somehow managed to interview all these founders like PropCap, Credgenics, Insurance Deco, and NIO. All have been on the show previously. So maybe listeners might find those episodes interesting. Okay, got it. Very interesting. So I want to understand from you more about like what advice would you give to founders who are building
00:34:58
Speaker
What is it? So there's something like a founder market fit concept and you would be evaluating founders in a certain way to decide what makes them worthy of your
Assessing Founders' Potential
00:35:07
Speaker
investment. What is the lens at which you evaluate founders and what makes a founder really appealing? I think experience.
00:35:14
Speaker
Right? Nothing beats the experience of share. If you have the relevant experience, you've built it over the past, right? 15 years, 20 years, you've gone through the journey. You want to the grind of dealing with RBI. You've gone through the grind of dealing with cycles in the market, business cycles in the market, and you build an organization, right? That gives me the confidence that you have the chops to build a lot of organizations. You have a clarity of thought, your vision, which is very clear. You can lay down the vision of the paper.
00:35:39
Speaker
And you have the execution levers to prove that vision, how you will achieve that vision, right? So clarity of thought, experience, gone through the journey, relevance, build a very strong organization, able to attract talent, ability to build culture within the organization, plan equity, right? Give them ownership, control, decentralization, right?
00:35:58
Speaker
A lot of things come together actually when you look at it and choose, hey, what are you building and why should we invest to the founder? So I just don't look at it as isolation or silo. I say, what have you done? What are you doing? How have you built? What's your journey been? And you put together two and two as a founder, have the capability to build a large organization. Think about the best talent that's there in the market, share your equity with the team, make them part of your journey, make them give them a sense of belonging.
00:36:21
Speaker
You have a sense of a cult following to your organization, right? That's when you will see a large outcome. Get the right chops in place, get the right vision in place, find the levers, build the levers, right?
Challenges at Growth Stages
00:36:32
Speaker
That's when we automatically become the most just one of the founders in the market.
00:36:36
Speaker
Some of the big guys are already doing it. What do you mean by the levers here? Like find the levers, build the levers. Can you give me some examples? What could the levers be like? For Neo, right? Just to take an example of Neo. Neo has to build a premier writing business, mass banking business in the Google.
00:36:52
Speaker
You need partnership with banks to build that. You need to innovate on products. So have you partnered with enough banks? Are you able to convince enough banks to come and partner with you? Are the integrations cheap enough? Have you done those partnerships? Have you launched programs? Have you been able to convince the customers to use your products?
00:37:08
Speaker
So that's the levers to build the business, right? Do you have a marketing team in place? Do you have an accounting finance team in place? Do you have the tech team in place? How do you construct your team? How much should be tech? How much should be customer service? How much should be marketing? How much should be branding? Where do you spend your money? So these are levers to build a business.
00:37:28
Speaker
What are some of the mistakes that founders end up making at the growth stage when they're raising like between that 5 to 15 million kind of raise? Not every company which raises that money ends up being a success. So what are some of the things which go wrong? Is it like market forces purely or is it at times wrong decisions by the founder?
00:37:47
Speaker
My perspective actually is that all founders are very good founders. They're smart founders, they're hardworking guys, they have the vision, they have the capabilities. I think the difference between the ones who get the escape velocity and the people who do not get the escape velocity for whatever reason, I primarily think is the execution strategy of the business.
00:38:04
Speaker
You need to get the execution strategy, which is absolutely correct, right? You need to monetize the business model. You need to have the teachers that this is a financial services business, this is not a tech business. Tank is on top of that, right? Think first, think second. It's not tank first and think second.
00:38:19
Speaker
They always tell founders, if you think about financial services, how do financial institutions make money? Think about that. And now you go and create a platform or a business model or a product around it, and then raise growth capital on it. And then use technology as efficiency enabler in the market to build a larger outcome. That's when the magic will happen.
00:38:39
Speaker
When you are raising growth capital, it's very easy to burn through the money and where you just spend money.
Complexities in Financial Services Investments
00:38:44
Speaker
But you need to have an eye on investment on every capital that you spend, where you're spending, who you're spending with, and why you're spending that capital. What is the outcome going to be, what you need to bring people on board. You cannot, you need to have an experimental experiments going on, but you cannot be burning money to experiment. You cannot do aggressive acquisition of growth status.
00:39:04
Speaker
You need to understand, y'all keep the beat of our businesses, right? You need to integrate those businesses, manage those businesses. Why your team is strong enough. There's a bunch of things which result into faster growth and a bunch of things which do not result into faster growth, right? Capital is just a by-product. Capital is just a raw material. But how do you use that capital to be efficient in the business? The most important conversation that we have found is to think about it every day, internalize, come back and create. Interesting.
00:39:30
Speaker
You said that unsecured lending is an area you're not going to ever invest in. Why is that? That's a pretty large opportunity in itself, right?
00:39:39
Speaker
as we say, never in our industry. But it's a very tricky situation, right? When you give money somebody to, like, if I give money to Akshay, I don't know Akshay, right? How are you going to recover my Akshay? When you're doing unsecured lending, you're not lending to Akshay Sahar, you're lending to thousands of Akshay Sahars, and different startup income, different lifestyle, different journeys, right? And now you're hoping that this guy is going to pay me money, and you obviously have a tax tax in the collection infrastructure.
00:40:08
Speaker
and the onboarding journey and the KYC journey. You have the underwriting models in place. Yes, but the integrity intended to be of the end consumer. So the challenge that you're lending, a lot of people are saying that it's okay for my first loan to be not profitable. I think that's a wrong way to approach it. Why should you on the first loan be not profitable? Every loan that you, every money that you roll out should generate an investment for you and actually your balance sheet, right? So I think some founders have done a very good job on the consumer lending
00:40:35
Speaker
space and the secure lending space in the SMB category. But sustainability creating a large outcome is very, very different. And we know that from the past experience in China, US, India, that you need to have a more secure strategy towards lending and a more secure strategy towards collections. So I'm still evaluating businesses. I'm still looking for the best opportunities that come across my way that I can actually invest in our secure lending business.
00:40:57
Speaker
You said some founders have done a good job of setting up an unsecured lending business. Who are those founders that you think have done a rich business? I think these founding founders have done a very good job, right? Money group founders have done a very good job. Credit B founders have done a very good job, right? Most three or four founders are, I think, lending card is doing an interesting job in the market. He was doing a good job in the markets. There are four, five good founders. I mean, there are lots of them who have done a good job. But can you have 100-plus companies in this category, absolutely, right? We have to bring a lot of companies right now who are in this job.
00:41:27
Speaker
It's interesting, the names you've mentioned are not the most high-profile ones in the lending space. Like the most high-profile ones are either like, say, payment, like the UPI apps, UPI businesses. Yeah, even Bharatpay on the B2B side.
00:41:43
Speaker
So the phone payers and the pay teams at the whole luxury are payment platforms and they're sourcing loans for banks and financial institution partners. They don't lend them their own balance sheet, right? The lending, yeah, so the lending is done by these guys, right? The ones who are actually have an NBSC license and platform pay to lend money, right? Or the banks at the back, right? So you're right, these are not the most high profile names, but in the next five years you will see them as the most high profile names in the FinTech lending space for them.
00:42:09
Speaker
Okay. Okay. And what about these businesses which have data as the mode for lending, like say the CATA book and these kinds of okay credit? I don't think having data is only a solution to lend money, right? I think data is one piece of the variable to underwrite the lending. And you need to have a lot more information. You need to control the flow of capital. You need to control the flow of money, right? In the journey of lending, right? So why do you think payment companies have access to cash of the underlying borrower, right?
00:42:38
Speaker
that's why we are able to lend more effectively. Just by having data doesn't really help you collect money. Lending is a more collective business than a lending business. I think they need to be part of the journey of the business, either from a transaction perspective, which is commerce, or payments, or some sort of a solution, which is being utilized on a daily basis, then you will be able to lend and collect effectively. You can underwrite for sure.
00:43:02
Speaker
But again, underwriting is one big part of the puzzle of giving loans. It's a combination of onboarding, underwriting, lending, collecting,
Funding Landscape for Startups
00:43:13
Speaker
et cetera. And because of the importance of collections is why TretGenx would have been an appealing investment for you. Absolutely. Lending is like... Everybody wants to lend money. Somebody has to build a collection stack. Right. Okay. Interesting. So there is like this general belief that we are going through a funding winter. Do you agree with that?
00:43:32
Speaker
So funding winter is definitely there right Akshay. Yeah funding winter from the perspective of the founders who have not been able to perform right will find it difficult to raise capital. A lot of smart founders raised capital in 2022 so they are now okay we'll see you on the next year.
00:43:47
Speaker
But people who are raising 2020 and 2021 are coming back to the market. And if they have not been able to prove their business model or got a hundred product market straight or are not able to show operational profitably into some sense, right, they will have difficulty to raise capital. It's not that capital is not there. There's more than $15 million of dry powder with Indian private and venture capital fund managers. But because they want people to perform and the founders to show better operational metrics is why the capital has been slowed down. Obviously, valuation of credit globally, public market, private market valuation of credit.
00:44:17
Speaker
And that reflects in the pricing aspect. And that's why they should also hold the conversation longer for them because we know that the pricing can be far more attractive than what has been asked by the founders. So it's all about can you hold on longer and get the best value for your price and the business that you're buying.
00:44:35
Speaker
interesting. Should a founder accept a down round? A lot of startups go through all sorts of gymnastics to avoid a down round. What's your view on that? I think the round, first of all, we should not increase the valuation to an expectation, which we cannot meet. Once you increase the valuation down, then you have to produce the numbers to catch up the valuation, which is always a challenge. I always tell founders to not keep increasing the valuation just because you want to raise new round or show markup for your previous investors. I always believe that
00:45:02
Speaker
Capital and building the organization is more important than valuation and the up and down. If you believe in your version and if you've got mistakes in the past, now you take capital and lower valuation, take it. But you should be able to build businesses. So whether it's a down-ground or an up-ground, I don't think about that. I think I am building a good business. I mean, where does the capital help you to build business and whatever valuation it
Learning from Investment Mistakes
00:45:22
Speaker
comes in.
00:45:22
Speaker
Okay. Can you share some of your mistakes as an investor? Maybe you passed up on something or maybe you thought this is a good investment and it turned out not to be like, what have been your own mistakes? What have you learned from them? We as investors get carried away, right? As I said, when you get a 10 year journey, we build a lot of numbers and castles in the air, right? And we underwrite those assumptions and we invest in those companies sometimes, right?
00:45:48
Speaker
And yeah, sometimes you overestimate your understanding of the business, sometimes you overestimate your understanding of the numbers, right? And then fundamentally go around and teach us some of those opportunities, right? And it has happened to us in the past, happened to me in the past as well, when you can't do about what you want to return. Now it's all about fixing the business, right? Can you fix it in the timeframe? Maybe not, maybe yes, right?
00:46:09
Speaker
trying to overestimate the opportunity in the market is a biggest mistake that we all do. How do you build your understanding of businesses? Because you said one of the biggest reasons for wrong bets is you overestimate your understanding of the business. And so how do you build an understanding of a business? Because it might take a founder like a couple of years, get a good understanding of a business, which you have a month at best to develop.
00:46:33
Speaker
How do you do that? But in the thesis, as I shared with you, there are 30 themes in the fund. We've been looking at all the companies, early stage, early stage, early stage companies in the 30 themes. We keep double clicking every month, every quarter, in the segment, who are the players, what are they doing, what's the feedback coming along, how the sector is performing, how the theme is performing, why is it performing, what are the challenges, how are people overcoming the challenges, and how has a particular founder fixed those challenges. So it's a constant evolution. Also being a factor focus fund allows me to keep on the sector a lot more in detail.
00:47:02
Speaker
I can spend more and more time on this thesis and spend more and more time on payments, lending, insurance, health care, education, downwards, right? I can just double click, keep double clicking on it and say, how we know what works and what doesn't work, right? So when we go check the focus strategy, it allows you to keep reading deeper and read the thesis on
Proactive Investment Approach
00:47:20
Speaker
segment. And it's more of a validation when you look at the company and the founder and say, hey, you know all the challenges and you switched all the challenges. So we like the options that you invested in. And despite that, you want to write the risks sometimes, right?
00:47:32
Speaker
You try to increase your understanding and every day is a new learning in a business that we are in. Even today, when we meet founders, we learn something new every day of how to look at things. So it's a constant learning exercise for us at the same time. Okay, amazing. Do you reach out to companies for investing in them or is it generally always inbound?
00:47:49
Speaker
Oh no, we do outbound reach outs. We reach out to everybody in the market, right? We want to be the first people out there at the door, talking to them, understanding the business models, right? Trying to underwrite their thesis, trying to underwrite our own thesis. So we do very proactive reach outs. We do very proactive follow-ups, right? So it's been a constant exercise for us. It's not new. So we've been doing this for a long time. We don't wait for companies to come to our door. Obviously we get a lot of inbound as well, but we do a lot of
Conclusion and Listener Engagement
00:48:13
Speaker
outbound as well.
00:48:13
Speaker
Okay. How does a typical work week, how does your time split look like? Like what percentage of your time is spent in meeting founders or what percentage of your time is spent in reading reports? I think 25% of my time goes in meeting founders at least if not more. Two days in a week would probably go in meeting founders.
00:48:34
Speaker
One to two days is just trying to understand the industry a lot more, right? Understanding sector, understanding segment, understanding challenges. One to two days is just meeting industry folks and trying to understand what they are seeing, what they are underwriting, right? And obviously one to two days goes and continuously fundraising at the same time, right? So it's multiple factors and multiple things that come together to determine the outcome. So yeah, it's quite well split right now between all of these different segments. And that brings us to the end of this conversation.
00:49:00
Speaker
I want to ask you for a favor now. Did you like listening to the show? I'd love to hear your feedback about it. Do you have your own startup ideas? I'd love to hear them. Do you have questions for any of the guests that you heard about in the show? I'd love to get your questions and pass them on to the guests. Write to me at ad at the podium dot in. That's ad at t h e p o d i u m dot in.