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How Anirudh Damani de-risked investing in startups with a self-sustainable investment model

The entrepreneur-turned-investor has made early bets in over 70 startups from his family office.

Source: Karsten Wurth on Unsplash

After spending over a decade in the US and running an energy brokerage company for the last three years in Dallas, when 30-year-old Anirudh Damani came back to India in 2012 thinking he’d replicate that success, he couldn’t have been more wrong.

While in the US, he had set up a company in a mere 48 hours, he struggled for months just to register a corporate entity in his home country. “It was such a painful process to set up an entity in India and to go through all the regulatory and compliance processes. I wondered how people in India did business,” Anirudh, managing partner at Artha Venture Fund, a Mumbai-based early-stage VC firm, told KrASIA.

When he was about to give up and go back to the US, he met a few budding entrepreneurs and realized there were a lot of people going through the same trials and travails while building startups. The only difference was, many weren’t as privileged as he was. Hailing from a business family, Anirudh had access to capital.

His father, Ashok K Damani, and uncle, Rajkumar Damani, were well-known stockbrokers at the Bombay Stock Exchange, who set up K Damani Group in the 1980s, which now has operations across real estate, hospitality, stockbroking, and private equity investments.

It was his encounters with first-generation founders, who, in 2012 were building the Indian startup ecosystem from scratch, made Anirudh stay back in the country. But this time he donned the hat of an investor.

The first stop: Artha India Ventures

Anirudh convinced his father and uncle to lend him money from the family business to back first time entrepreneurs. But there was a caveat: he had to come up with a model that could cut down the risks that came bundled with backing early-stage startups.

To ensure the money he received from his family was preserved and that enough capital was available every month to invest, Anirudh took a page out of legendary investor Warren Buffet’s investment strategy.

“I came across an interview of Warren Buffet, where he said renewable energy is the only investment where he does not have to do anything, but it gives him money every month to invest,” he said.

In 2013, Anirudh created a smaller version of what Warren Buffet had advised. He set up Artha Energy Resources (AER), a renewable energy company, which brought and operated windmill turbines.

Investing family money in high-yielding energy assets, he ensured the capital was preserved. Anirudh then devised a strategy to use the realizations from those assets to invest in startups through his new family office, Artha India Ventures, which he set up later that year. He plowed the returns from investing in startups into buying more assets for AER.

“When the startups grew and gave me exits, I could buy more windmills, and create more cash flow for the renewable energy business. In a few rounds of exits, the business became self-funded, almost sustainable,” he said.

“In the last seven years, we have not only returned the money back to the family but also created a fund management company, all from the money we have been rotating back and forth,” he said. “Essentially, we want to keep investing in renewable energy to give us operating income to deploy into early-stage companies.”

Anirudh Damani, managing partner, Artha Venture Fund. Courtesy of Artha Venture Fund

From family office to venture fund

By 2017, when Anirudh began syndicating larger rounds in startups along with other investors, he was flooded with queries from relatives, friends, high net worth individuals (HNIs), and other family offices, who wanted him to set up a venture capital firm with them as limited partners (LPs).

However, he wasn’t as excited about starting a VC firm. “I always thought that as a VC, you can neither make money nor you can help startups, so why do that job?” he recalled. “In 2017-18, most VC funds had not even returned the capital back. In that sense, obviously, something was broken.”

To understand how VCs around the world make money, Anirudh spent almost a year and a half visiting VC funds across the US, Europe, and Southeast Asia.

“The idea was to figure out how much and how quickly we can return the money to our investors, and at the same time ensure that we create category-leading companies,” he said.

After talking to investors in other markets, he realized the problem with VC funds in India was their size. The bigger the fund gets, the lower their returns are, making it harder for them to return investors’ money.

According to him, most funds are successful in fund 1 and 2 because they are small in size and are much more cohesive. He said fund 3 is usually massive in size with multiple partners but there is hardly any change in strategy even when checks increase in size. This, he believes, ends up inflating valuations, making follow-on rounds difficult.

“If as a USD 30 million-fund, I invest USD 2 million in a company for a 15% stake, then within five years, even with a nominal 16x return, I would have returned the entire money,” he explained. “If you are a USD 300 million fund and you write a USD 2 million-check, and you return USD 30 million, it doesn’t move the needle. You need multi-billion dollar exits to be able to return the entire money.”

By 2018, Anirudh set up a USD 30 million fund under a newly-formed venture capital firm, Artha Venture Fund, backed by his family office Artha India Ventures. Its other investors included financial institution SIDBI, HNIs, listed companies, NRIs, and family offices from India, Europe, and the US.

Anirudh, along with Vinod Keni, who he met through Indian Angel Network (IAN) and roped in to join his latest venture, zeroed in on the investment strategy that centered around backing seed to Series A startups across three themes–consumption, consumption enablers, and B2B.

Moreover, both of them decided that they wanted to act as an angel but through the format of a fund.

“We didn’t want to write larger checks than what we had written as a syndicate. We wanted to stay in that ecosystem and follow-on checks in our portfolio,” he said.

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To remain relevant to startups for five years, Anirudh and Keni devised the fund strategy where they would write a check of INR 1-3 crore (USD 132,000 -396,000) initially, and take 15% equity in the company. For the portfolio companies that do well, they decided to double the check size with every follow-on round. Anirudh calls it “the 2-4-8 investment model.”

Artha Venture Fund’s mandate from its first fund is to invest in about 40 startups. Anirudh has reserved 33% of the fund money to write first checks for the startups, while the rest 67% or over USD 20 million is reserved for the follow-on rounds.

“Out of the total, we expect 20 companies to come back to us for the first follow-on round, another 10 would come back to us for the next follow-on round,” he said. “The idea is to give INR 10-15 crore (USD 1.3-2 million) per company over three rounds.”

“We are essentially telling entrepreneurs that you don’t look at us just for the first round. You come to us with the intention that for the next three rounds, we are going to be involved,” he added.

He believes that lopsided investment into winners from the portfolio makes it possible to have huge exits.

“If one out of 40 startups gives me a USD 500 million-exit, then with a 15% stake, I will have returns worth 2.5 times my fund,” he said. “Those are the odds I want to work with.”

Artha Venture Fund has made eight investments to date, while four are in pipeline. Anirudh’s target is to get 20-25 startups by the end of this financial year.

The synergy between different investment strategies

Anirudh plans to keep the size of Artha Venture’s future funds below USD 50 million. However, his bigger plan is to create a platform for these micro funds.

“We will have these USD 20-50 million funds and we will have different fund managers in about 5-10 years from now,” he said. “We will create a platform for multiple fund managers, who then would be able to deploy the money smartly and in a way, it rotates very quickly.”

As Anirudh looks to support seed to Series A investments from the venture fund, the family office, is no longer making seed investments in the country and is now only doing opportunistic Series A investments that have a higher valuation than the fund can afford. These investments are typically those which benefit the existing portfolio companies.

Moreover, the focus of the family office, where Anirudh still serves as a director, is to look at the overseas market. It has already made three investments in Israel over the last 12 months. Apart from investment opportunities in the US and the UK, Anirudh said, they are looking at the Middle East and North Africa (MENA) region, and SEA countries like the Philippines and Indonesia, where startup ecosystems are behind India, just as India is behind Israel, Singapore, or the US.

Artha India Ventures would invest in eight to 10 startups across the world per year, with three to four investments from India. After some 16 exits out of 72 investments over the last seven years, it currently has 50 portfolio companies.

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For Anirudh, who has come a long way, since forming three firms—Artha Energy Resources to ensure his family money is safely invested; Artha India Ventures, a family office to back startups; and Artha Venture Fund a dedicated VC firm–each has been a means to an end.

However, the most challenging issue that Anirudh faced during the transition was internal.

“If you are doing this full time, what about the other business. What about succession?” he said. But thankfully his parents and uncles never interfered with his decisions. In fact, they cleared the deck for him by involving other family members to take over the businesses that he was managing.

“This gave me a full-time opportunity to work on the fund for the next 10 years at least,” he added. “In many ways, that freedom really helped. Because now I have nothing else to do, but this. And I have to get successful at it.”