Seed-funding and nurturing product innovation start-ups

For Naganand Doraswamy, who had wide experience of working in IT product companies, it was but natural that he should want to do something in the product space. He had sold a company he had co-founded to a Norwegian company and was thinking of what to do next. He was actively involved in the start-up ecosystem in Bengaluru and his choice was either start another company on his own or work closely with start-ups. He chose the latter and decided to launch a fund that will invest in product innovation ventures. “My background is all product innovation and in 2014-15, we started talking about production innovation in India,” says Naganand, 52.

His initial plan was to raise about ₹60 crore, invest about ₹3 crore in each venture, provide space to them and help them grow. But over 6-8 months, he refined the idea and decided to raise a larger corpus, ditched the idea of giving space to the ventures, and realised that just giving the start-ups seed money will not be enough and that he will have to participate in the next round also. That is when Naganand decided to double the size of the fund, to ₹125 crore. Ideaspring Capital came into being in 2015, with TV Mohandas Pai, former Infosys Director, coming in as anchor investor.

Innovation space

Ideaspring Capital, of which Naganand is a Managing Partner, achieved first close in June 2016. “We reformed the thesis and said let us do a ₹125-crore or a $20-million fund, invest in 15-18 seed-stage companies, put another ₹5 crore ($750,000) in the companies in the next round and see if we can create an impact in the product innovation space in India,” says Naganand. Arihant Patni and Amit Patni came on board.

According to Naganand, there were not too many investors who understood the product innovation space; there were many who understood and invested in the business innovation space. “There were a few areas where I thought the (product innovation) start-ups could use some intervention. Whether it is product management, marketing, building for global scale, understanding what the customer wants, whether the customer is going to pay for the product and the product-market fit,” he says.

Naganand, who had himself been an entrepreneur before turning investor, says Ideaspring works closely with the entrepreneurs, making it quite clear to the founders that they have the experience and can help them out in various areas. “We get them to write the plan for the product. We need to get them to write their product specification. We are deeply involved till they raise Series A,” he says.

Ideaspring has invested in five companies, including one based in Palo Alto, California, US, and a couple more are in the pipeline. “By the time we hit our second anniversary, we should have done eight. Our thesis is we will do 4-6 a year,” says Naganand. The first cheque will be in the ₹3.3-4 crore range and in the follow-on round, will put in about ₹5 crore.

“We are open with the stake. Our key criterion is more on, with the money we give, they should get to a point where they should raise the next round.

“They need to show us the path and the plan, that they have enough traction to raise the next round,” he says. Ideaspring will look for part exit at Series B and then in Series C.

Focus on India

According to him, Ideaspring’s thesis is to look at companies in India, though it has invested in one US-based company. That, says Naganand, was because the fund wanted visibility in Silicon Valley. “We will not actively look for US investments.” The VC firm will continue to focus only on the product innovation space. Unlike business innovation companies, those in the product innovation space are IP intensive in the beginning and become operationally intensive later.

Product innovation companies, says Naganand, can be built with lesser capital than business innovation ones, mostly because of the customer acquisition cost. “You will get paying customers for your product and that sales can be done through contacts, whereas in business innovation, the only way to reach customers is through advertisements. So, customer acquisition costs will go up, he says.”