Seeding tech-based start-ups with funds

Anil Joshi, Founder and Managing Partner, Unicorn India Ventures, learnt the ropes of investing in start-ups when he was part of the Artheon group.

His three-year stint at Mumbai Angels gave him greater insights into the science of investing, laying the ground for him to start his own venture capital firm, which invests in companies with a strong technology focus at the seed and early stage. “The prime objective of Unicorn is to invest in technology-based companies. We look at businesses which are leveraging digital,” says Anil.

Unicorn India Ventures raised its first fund, of ₹100 crore, from domestic investors. The first fund has been fully invested, in 17 companies, of which Unicorn has got a “good exit” from one company – Boxx AI. It is looking at more exits or partial exits in a few other companies. According to Anil, Unicorn is now in the process of raising its second fund, of ₹400 crore, and has achieved first close of around ₹100 crore, also from domestic investors. The fund will look to raise money from international investors also, now that it has a track record to show.

The first fund was largely focussed on the seed stage and pre-Series A. With the second fund, Unicorn India Ventures will look at seed, pre-Series A and Series A stages.

Anil agrees that the distinction between seed and pre-Series A has got blurred over the years. For instance, Unicorn India Ventures wrote cheques of ₹1-3 crore for the seed stage from the first fund. This has now grown to ₹3-5 crore. Cheques in the pre-Series A stage are now of the order of ₹5-10 crore. “We will keep doing what we have been doing. We have also realised that there are opportunities available where companies are not able to go to Series A for want of money – say, around $1 million (₹7 crore). That gap we would like to fill. We would like to identify these companies and accelerate their growth,” says Anil.

According to him, the VC firm will pick up stakes of around 15 per cent in the companies it invests in. Most often, it will be the first institutional investor in the ventures. A larger second fund does not mean that Unicorn will invest in a significantly higher number of companies. It will, says Anil, invest in around 22 companies from the second fund, writing larger initial cheques, backing the winners with larger amounts.

“Fund two, we will build a portfolio of 20-22 companies. We will use 20-22 per cent of the fund to build this portfolio and the rest of the money will be used to back the winners,” says Anil.

He adds, “if we are investing in 20 companies, we believe at least 6-8 companies would have the potential to absorb bigger cheques. We think a successful company can raise up to ₹40 crore from us. We think two companies will be around ₹40 crore, couple more around ₹30 crore and the rest will be between ₹5 crore and ₹30 crore.”

Exit strategy

On the exit strategy, Anil says Unicorn will invest up to the Series B and C stages and start looking for exits from the Series D stage.

According to him, there are many reasons for the increase in cheque sizes at the seed and pre-Series A stages. One, product companies need to hire the best engineers to build out the product. Good engineers don’t come cheap. You can still do the same thing with less money, but that will take a longer time, points out Anil. Apart from the cost of hiring high calibre talent, the cost of infrastructure, says Anil, has also gone up, even with shared workplaces. Also, product companies take a slightly longer time than services companies to gain traction. They have to build the product, iterate it, go to the market and fine tune it, and get steady paying customers.

He agrees that larger VC firms have started investing at the seed and pre-Series A stages and this does impact the valuations for those like Unicorn. But, says Anil, this is a validation of what seed and early-stage funds have been doing. Also, there can be more than one company in the same space in the B2B segment solving different problems. Unlike consumer internet companies, it is not a case of winner takes all. There is enough space for more than one player in the B2B space. “The market is quite large,” he adds. According to him, Unicorn India Ventures has a fund in the UK, jointly with Ascension, called the Unicorn Ascension EIS Fund. This is an evergreen, open-ended fund that will raise £3-5 million every year and invest in 6-7 companies annually. Anil’s Co-founder Bhaskar Majumdar is based in London and the overseas fund was set up to leverage his presence there.

“We did it to support our own portfolio, but then we realised there is potential for us to invest in high-end technology companies there, which will not only help us build a portfolio there, but also help in cross-border opportunities. One portfolio company based in India is actively interacting with a portfolio company in the UK,” says Anil.