Before Unicorn India Ventures, a Mumbai-based early-stage venture capital fund, invested in GenRobotics in 2017, the startup had a prototype made out of wood and cardboard. After Unicorn India Ventures came on board, the Trivandrum-based company made its first product—a robot called Bandicoot that automates manhole scavenging and eliminates manual intervention.
Anil Joshi, managing partner at Unicorn India Ventures, told KrASIA that GenRobotics is not the only startup from a tier-2 city that his firm has invested in. Their technology-focused fund has made up to eight investments in startups based in non-metro cities.
The size of the four-year-old venture firm’s first fund was INR 100 crore (USD 13.37 million), which fueled 17 investments. Some of its major investments include neobank Open, micro-lending company SmartCoin, and meditech startup NeuroEquilibrium.
Unicorn India Ventures is in the process of closing its second fund, which was launched last October and will be worth INR 400 crore. Joshi clearly stated the areas that his firm wants to focus on—deep tech, medical tech, fintech, SaaS companies, and B2B enterprise solutions. He is equally unequivocal about the segments that they want to steer clear of—e-commerce and consumer internet.
In a recent interview with KrASIA, Joshi discussed the innovation that is unfolding beyond metro cities, the trends that are shaping the startup ecosystem, and the challenges that COVID-19 has posed for Indian startups.
The following interview has been edited for brevity and clarity.
KrASIA (Kr): Why did Unicorn India Ventures start scouting for startups in tier-2 and tier-3 cities?
Anil Joshi (AJ): We started as a tech-focused fund in 2016. Having raised money from Canbank Venture Capital, which is very active in the ESDM (electronics system design and manufacturing) space, we wanted to look for startups working on hardware-based ideas. But we didn’t find any promising candidates in cities like Bangalore, Mumbai, and Delhi. Hence, we started looking at other cities. While doing so, we not only came across some innovative hardware-based startups, but also other interesting, high-growth startups.
We realized there is a much larger potential outside metro cities, so we actively scouted for startups in tier-2 and tier-3 cities, such as Jaipur, Pune, Trivandrum, and Cochin. Gradually, we started to visit other places like Bhubaneswar, and found quite a few unique startups from smaller cities. It was accidental, but turned out to be very appealing for us.
Kr: In tier-2 and tier-3 cities, what trends do you see in startups that are based there?
AJ: Startups from metros are largely looking at hot sectors and usually solve similar problems. In non-metro cities, we are seeing startups building some unique opportunities and solving very specific problems.
For instance, there is a Bhubaneshwar-based company called Milk Mantra. The company processes milk and packages it for sale along with other dairy products. This startup has raised a decent amount of money and has grown fairly well. I haven’t come across any startup in metros that has started a milk processing facility. Of course, you need a larger piece of land to do so, and that is difficult in metros.
In Jaipur, there is a Tiger Global-funded company called CultureAlley that helps people learn English. While India is a sizable market, there is a larger market outside the country for them. We have also invested in a company called Inntot that has an affordable way of digitizing analog radio. With patented technology, the company is not just selling in India, but outside India as well. It’s one of the most unique companies; it is based out of Cochin.
I think the kind of startups we are seeing are very unique. Earlier, the facilities [to start a company easily] were only available in Mumbai, Bangalore, and Delhi. But under the Startup India and Standup India program, most state governments have become very active and started building facilities to support startups. That has encouraged many entrepreneurs to build their operations in semi-urban cities. There is no hope for people to start businesses unless they have local infrastructure.
Interestingly, since Startup India and Standup India initiative was launched four years ago, a lot of states have created the infrastructure which has helped hardware startups to establish themselves. Although India may not be a ready market for such startups, at least they can get started now. Many hardware companies move overseas because that’s where the opportunities lie for growth.
Kr: Is the broader investor community also looking at startups from smaller cities?
AJ: There are some funds that are actively looking. Similar to the “fund of funds” announced by the prime minister for promoting VCs in India, many state governments have also become active and are participating in similar funds, with an objective to attract investments in startups.
For instance, there is a company called CareStack, which offers cloud-based dental practice management software. It’s a Trivandrum-based startup, which has investors like Accel. Recently, it raised money from global investors. As companies grow, bigger investors become interested. But it doesn’t make sense for bigger investors to look for direct investment opportunities in smaller towns. Investors like us, who have become active in these markets, provide a decent pipeline for bigger VCs.
Kr: How is the coronavirus going to impact Indian startups?
AJ: There might be an impact for an extended period of time. The Indian startup ecosystem is not too dependent on foreign funding. But since people are hesitating to travel within India as well, funds may not be easily accessible to startups at present. While startups can get funded, they may raise smaller amounts at valuations that are lower than expected.
These are challenging times, but this will drive many startups to come up with innovative ideas to serve their clients and cut costs. We expect to see a lot of startups to come up with new use cases and innovate to find ways to do business. So new use cases will emerge and startups will be frugal.
Kr: Which are the sectors or areas where you expect to see more innovation this year?
AJ: This year, we expect to see startups creating new use cases in sectors like fintech, insurance tech, mobility solutions around electric vehicles, medical tech, and education tech. Since the government is very keen to have smart cities and many pilot projects are going online, we expect to see IoT (Internet-of-Things) startups grow this year.
It’s an interesting trend, where incubators, organizations, and large corporations like the Ciscos and IBMs of the world come up with an idea, and they attract a lot of startups to work on theme-based solutions. They keep coming up with programs for startups to work on a specific problem. For instance, a bank may be looking for startups working on a blockchain-based financial solution. Once they find such startups and like the work they are doing, they will not only support them with initial seed capital, but also help them validate their ideas.
This used to be restricted to metros, but with infrastructure developing across India, they are reaching out to a larger audience. There is a very good possibility of a few small-town startups participating.
Kr: What is holding back the Indian VC ecosystem?
AJ: India has a lot of large investors who can write late-stage checks. But there is a gap in the Indian investment ecosystem. Either you have seed or pre-Series A investors, or you have very large investors who write Series D and E checks. There is a huge gap for Series A, B, and C funds. We don’t have many VCs in these bands. Although there is a lot of money in India, people are not so open to investing in funds, that’s why as funds grow, they look for foreign investors.
But with time, the situation will be corrected. Going forward, early-stage investors in India will raise larger funds than before, and be able to write bigger checks. For instance, our check sizes have also gone up. Earlier, we were writing checks between USD 50,000 and 100,000, but now it is typically USD 1–3 million. And we expect to have a USD 150–200 million fund over the next few years. As funds across the board grow, this will be corrected, and in time, India will have enough investors across all bands.