Scouting for B2B, SaaS businesses: IvyCap's Vikram Gupta

IvyCap Ventures Advisors Pvt. Ltd, an early to mid-stage venture capital firm founded by Vikram Gupta in 2011, has raised two funds till date.

Its first, closed in 2012 with a corpus of Rs 240 crore, is now fully deployed across 10 investments. These include agri-tech firm RML AgTech Pvt. Ltd (formerly known as Reuters Market Light), risk management firm Aujas Networks Pvt. Ltd and online retailers eShakti.com and Purplle.com.

The Mumbai-based firm is currently deploying capital from its second fund of Rs 550 crore. Some of the investments include product rental marketplace GrabOnRent and fintech startup ftcash.

Last year in September, it received approval from markets regulator the Securities and Exchange Board of India to set up a venture debt fund with a target size of Rs 500 crore.

In a conversation with TechCircle, Gupta highlights his views on how emerging technology can play a vital role in sectors such as healthcare and fintech and how the startup ecosystem has evolved over time. Edited excerpts:

How has India’s startup ecosystem evolved since IvyCap’s inception?

Some VC funds, which started with very small fund sizes, are now either raising their third fund or have already raised one, which also means that the size of the fund has also increased, signaling a positive sign.

When I started a private equity fund with Ajay Piramal in 2008, there was no VC fund at that time. Even angel investments were very few. This whole thing started sporadically with Mumbai Angels and Indian Angel Network investing small chunks in startups. With some success, teams broke out and started their own fund. Now, with the Flipkart acquisition by Walmart and money coming in through ESOPs, people have received a lot of capital and they are again investing back in the startup ecosystem.

How much of the second fund have you deployed and what does your exit pipeline look like?

About 30% of the second fund is already deployed. Another 25% is already committed and in the next 12 months, we should have deployed most the fund.

We have already exited digital marketing startup Sokrati and returned the money to investors. We might announce an exit next month. We expect one exit every quarter going forward. We are also exploring different models where we would see secondary interest in our fund as well.

Do you prefer investing in any particular sector? Which ones haven’t seen any traction lately?

I am bullish on any particular technology that is able to solve problems in any sector, especially, healthcare, fintech and consumer. Also within technology as a vertical, we are going after B2B, software-as-a-service and enterprise businesses.

I’m struggling in the agri-tech space. There’s huge gap in this sector and I would like to see quality entrepreneurs here. We need to generate more acceleration programmes, and incubation activities focused on building and scaling agri-tech businesses. We haven’t witnessed actual product development in India. We are yet to see a Microsoft or Google coming out of India, which is predominantly a service market.

Your first and second funds were sector agnostic, but you’re investing in the deep tech segment across industries. Can you explain the objective behind this strategy?

On one hand, deep tech is where the sector doesn’t matter and the technology can be used in any space such as artificial intelligence, Internet of Things (IoT) or helping business-to-business (B2B) companies. On the other hand, there are tech companies which are vertical focused and leverage deep tech in a customer or product-focused segment. For example, there’s a healthcare company collating doctors’s prescription and linking to pathology labs, pharmacies, etc. where tech is used to solve those problems.

There’s a huge opportunity to use deep tech in healthcare, especially in terms of digitising patient data. The biggest bottleneck was a doctor’s prescription data. Hospitals have been working on their tech platforms in silos and not a single one has emerged as a multi-billion dollar business in the healthcare space. But if you build a platform that’s interconnected and centres around patients or doctors, then one can apply all kinds of technology whether it’s IoT, AI, machine learning or blockchain.

Similarly, fintech is another area where deep tech has played a great role and will continue to do so. Robotics is another important solution, which is being used in the wealth management space.

As a VC with a five-year time frame, I would avoid investing in businesses where the tech is excellent as (tech that isn’t well-developed) would pay off only 15-20 years from now.

Tell us about the angel tax and other regulatory issues affecting startups. As an investor, how do you solve these issues?

On the government side, many positive things have happened. The Modi government introduced the startup policy in 2016, which was a positive move, facilitating the ease of doing business in India. The challenge lies in execution. The most burning example currently is around angel tax. Some of our companies are struggling because of such taxes. They tend to lose focus on their business as they have to meet tax officers. They are already struggling with their business models.

We have made some recommendations at various forums. There are other issues related to policies such as guidelines around the definition of a startup, angel fund or an alternative investment fund (AIF). The positive thing is that the government at least wants to listen to the problems mentioned by various bodies. Even the media has published enough.

The other issue is around regulations. Favorable laws will encourage the Limited Partners (LP) ecosystem in India. For example, SIDBI has a Rs 10,000-crore fund to solely invest in startups. We are the only VC fund in the country to have raised money from 22 home grown institutions, otherwise, the banks in India are penalised if they invest in VC funds. Any investment in the venture capital asset class is treated as capital market exposure, which has a risk assessment of 2.5 times because of the expectation of generating 25% returns.

There has to be a mindset of creating an ecosystem of funds in the country and allocating that capital in various sectors. This will bring more dollar money into India. The last two years were significantly good in terms of exits as we saw with Flipkart, SoftBank and other Chinese funds investing in Indian companies. Now, even Russian funds are interested in India. The underlining demand will keep creating businesses. We need a good pool of diversified funds. Companies, after the growth stage or after a certain level, are struggling to raise follow-on capital, so there is some gap which I’m sure is now being filled up by some investors.

This interview is part of our InvestorSpeak series in which leading angel, seed or venture investors share their insights on the startup ecosystem in India.