But, they didn’t know how, as it is not as organised in India as it is in the U.S. In this interview, Vikram Gupta talks about his journey at IvyCap Ventures, an Alumni trust-backed fund, and the venture’s unique 5 per cent give back option to the educational institutions that backed them.
Prior to setting up IvyCap Ventures, Vikram Gupta was a part of IndiaVenture Advisors Private Limited, a private equity fund management company sponsored by the Ajay Piramal Group. He had set up its healthcare fund which was India’s first fund in its space then (around 2008-09). “I tried raising capital for that fund in the international market but once the meltdown happened (the Lehman brothers), the market completely crashed. I decided to focus on the domestic market to raise capital,” recalls he. It was not easy to raise funds in that global meltdown but despite that he raised about Rs. 400 crore in a span of 18 months from 30 institutional investors and a very large number of individual investors, and he credits Ajay Piramal’s brand name as one of the factors that helped him achieve it. This gave him confidence that there was a huge potential in this segment, a vehicle for investment into alternate assets. But in that whole process, he also learnt that people were mostly investing in PE funds and not in venture capital funds. He saw a requirement for early-stage funds from young budding entrepreneurs. “But the challenge was that typically VC funds are run with small teams, maximum of 10 people, as they cannot afford more. If you have to get the right people, they are expensive and you get only 2 per cent management fees and you cannot manage a huge team with that fee,” he explains.
It is during this deliberation that an idea struck him. Without adding to his expenses, he wanted to get a large enough resource pool, which can come together without heavy overheads. He brought together the alumni of IITs and IIMs to become a part of an investment network. With this Alumni Trust as the anchor investors, he setup IvyCap Ventures in 2011, as a fund focussed on early and growth stage companies (Rs. 600 crore for its second fund.)
In this interview, he takes us through his idea of getting the professional community together, about the VC ecosystem and some interesting pointers for young entrepreneurs.
Talk to us about your idea of creating a pool of investors from the IIM and IIT alumni community and what did you aim to achieve through it?
This business is built on trust. And when I met an individual, if he was an IITian, Madras or Bombay, I didn’t have to build that trust with him. It was already there. And hence, I realised that it is a matter of getting the IIT alumni together (they are also HNIs) on one side and on the other side, there are lots of entrepreneurs who are coming from that community. So it makes natural sense to put the whole thing together. I started talking to all my hostel friends and others friends like Vishal Gauri, Ashish Wadhwani and convinced them to join me. I had also created my own database of over 65,000 IITians and over time I reached out to them. Interestingly, almost 14,000 people responded because I wrote to them with very specific requests: is this something that you would like to invest in? do you know a startup we can back? And, can you connect me with 5 more people?.
We decided to focus on Series-A or Series-B with an average ticket size ranging from Rs. 10 crore to Rs. 30 crore. We made that investment in the first fund itself and out of the 30 institutional investors who invested in Piramal fund, 15 of them invested in our first fund.
One should work on things that they are passionate about rather than trying to copy something because it creates wealth. Spend a lot of time in understanding the customer problem then come up with a real solution. Everything else will fall in place
Tell us about your giveback policy and what is your thesis behind this?
I realised that everyone was looking for a solution to give back to their Alma Mater. In India, it is not as organised as it is in the US. Even if there are individual universities who are trying to do their fund collection, people who have given back to their alma mater are not very happy, as they don’t know where their money is going. So, when we came up with the idea that a percentage of our share of the profit will be given back to the alma mater of the investor, it resonated well with them. And more importantly, this is not given back from their share of the profit but from the VC fund. The idea we proposed was that we will continue to give 80 per cent of the profit that belongs to them and out of the 20 per cent that comes to us, we will keep 15 per cent, 5 per cent we will be given back to the respective alma mater on their behalf.
Your investment philosophy is to look for entrepreneurs with professional backgrounds from leading institutions of the country. What is your reason for the same?
If investors and support system has come from the IIT and IIM ecosystem, it is natural that most of the entrepreneurs will come from there. Almost 60 per cent of the deals come from that network today. It is not that we cannot go beyond that network. It is a stated positioning statement because of which we are able to generate a large number of investment opportunities from that network. In fact, out of the first part of our 10 investments, 4 companies were from IIT, 4 from IIM and two neither.
What are the other factors you look for while investing in a company?
We use a 4-point approach. Number one, how is the space and the sector in which the company operates? Does this sector have enough room for business models like this and how much scalable this can be. Two, the entrepreneur and team. Is this the right team to capture the opportunity? We look at the maturity, experience and motivation. What problem are they solving and why? And how is the problem solving driving them? Most importantly, ethics matter a lot to us. Three, we get into specifics in terms of business model and we look at the finer details in terms of the nitty-gritties of the assumption in the business model. We look at how can we add value, what kind of mentors would be required and tap into the mentor trust (IIT, IIM and other professionals who get assigned to companies.) So we spend a lot of detail and time in analysing that and understanding where and how we can add value. Four, critical from our overall fund growth perspective is, how we get our money out of this. What is the exit route?
Tell me about a time you got lucky and unlucky as an investor?
I look at it like type one and type two errors. Type one error is where you select someone you should not have invested in and type two is where you miss something that you should have invested in. I would rather make the type 2 error than type one. I am ok to feel unlucky to have not invested in something, but I am not okay to have invested in something which comes back to bite you. You have to live with that, it is almost like choosing a life partner.
If I have to look at the time I got lucky, it is to have the right set of people around me. I got lucky to get support of the ecosystem to get access to deals, therefore giving me an opportunity to pick from a larger selection base.
The funds you invest are based on companies you come in contact with. We are fortunate to come in contact with almost everyone who matters there. This is also the reason why we have not written off a single company so far. A typical VC company would have written off 20 per cent to 30 per cent of their portfolio company every year. We have not done that for two reasons, one, the selection was right. Two, we make every effort to work with them when they are going through a down cycle.
What is it about your role that excites you?
What excites me is the opportunity to meet with the world’s best brains. I get access to any office, not just in India but anywhere in the world. When I ask for a meeting with someone whose appointment is hard to get and spending time with that person gives me a lot of satisfaction because I get to know their journey and understand how value can be created and eventually how to give it back to the society. Ultimately, it all leads back to putting India on the global map and bridging the gap between the Indian and China and India and US.
Where do you see the VC ecosystem in India 10 years from now?
On the one hand, we have macro-economic numbers which talk about growth rate, overall fundamental changes in government policies and how India aligns with some of the super powers in the world. These macro level factors are driving India towards becoming one of the biggest consumption stories in the world. There are multiple areas that are developing like retail, healthcare and education and India has tremendous opportunities to grow.
However, on the other hand, at the micro level, there are still lot of issues that one needs to address. Unless those are addressed, macro story is only a story. In five years from now, if we continue to do what we are doing, and if the government gets another term, or another government doesn’t disturb the momentum, I would say that India has the potential to challenge both US and China in their space. I expect India to produce two unicorns going forward every year. In 20 years, India would have increased her pace of growth as far as startup ecosystem is concerned.
Talk to us about your key focus areas and its growth prospects
Our focus areas have evolved. Even though we are sector agnostic, we look for opportunity in the technology industry. Pure technology – fundamentally what is driving change in global economy is the use of IOT, machine learning, AI, data analytics and so on. Along with this comes a lot of noise. If someone is doing retail business, they tie IoT to it and say they are an IoT retail company. The moment that terminology is added, an investor will talk to them. So one has to be smart in understanding what is it that you want to invest in and what is driving the change. For us, it goes back to the 4 fundamental questions that I mentioned earlier. Therefore, technology sector per se, and its application in healthcare, financial services, agriculture and education are the areas which we believe have the potential to scale using new age technologies. One most important fundamental driver that we will continue to look for is the online consumer. We continue to believe in the consumer story and believe there is a lot of value there as well. If you were to ask me to pick two or three, I will look at consumer and healthcare, assuming technology is horizontal and vertical.
According to you, what are the “yet-to-be-hot” sectors?
This ties to what will drive the world in 20 years – personalisation. The whole world is moving towards understanding you as an individual and your requirements as an individual. Even healthcare is now trying to bring medicine to a level where rather than having million dollar drugs, they are focussed on building genetics-oriented drugs. If you know your gene code, you may have specific medicine when compared to other. Take fintech, any product or service which can be customised to my needs will be my preference always. IoT, machine learning and artificial intelligence are trying to achieve that. This entire transformation from paper currency to digital is to move in a direction where everything can be mapped ultimately driving your personalisation choices.