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This Indian fund is eyeing local versions of Chinese businesses

The VC firm invests only when it has the confirmation that a Chinese investor will also invest in a follow-up round.

Picture credit: Venture Gurukool

Venture Gurukool, a five-year-old Indian investment company has devoted its last three years in identifying businesses in India with similar successful models in China or other Southeast Asian nations. Following this notion, the investor has invested in 14 such startups till now that range from social media, fintech, shared economy, travel, health tech, among others.

There is one more clause that this Gurugram-based investment firm always ensures it ticks off before writing a cheque: an interest from a Chinese investor to either invest in the same round or a confirmation of investment in the next round.

To chase such companies domestically and showcase its portfolio companies to Chinese investors, it organizes an annual ‘roadshow’ series running in several cities in China, from Bejing, Shanghai, to Shenzhen.

Venture Gurukool said starting next year it is going to focus on Japanese business models as well. We got in touch with its founder Mahendra Swarup to understand his investment psyche.

The below excerpts are edited for clarity and brevity:

KrASIA (Kr): What is the reason you are after the Indian versions of Chinese successful businesses?

Mahendra Swarup (MS): In our fund, we believe in this thesis that China is about seven to ten years ahead of India, in terms of how it handles digital assets and ventures. We believe India is on the cusp of same growth trajectory because mobile penetration has reached at almost the same level as China’s. Data costs are coming down, which is probably the lowest in the world.

We are also now looking at domestic deep- and high-tech companies to see if there are any commonalities between what they are doing and what’s happening in some of the other economies such as Israel among others. But China remains our main focus.

Since we have certain positioning, many startups come to us and say we have a model that is similar to so and so Chinese model. Many fintech companies for example, are actually modeled on some fintech companies in China. A lot of health tech companies are also largely similar to the model of a few Chinese counterparts.

We assist entrepreneurs and ecosystem; we identify good founders and mentor them. We add value to their company and get their business up and running.

For more mature startups we help them raise money and we also invest where we see an opportunity of an investor co-existing either with us at the same stage or a later stage.

Kr: How many companies have you invested in and at what stage do you come in?

MS: We already have a portfolio of about 14 odd companies including four deals that we did this year. We mostly invest during the seed stage of a company.

We are a bit choosy in terms of picking our portfolio companies. Our model is pretty clear, till we are convinced that we would be having interests from a Chinese investor or a strategic investor we would not invest. One of the purposes of us coming to China every year is actually to showcase our deal flow and the companies we are considering investing in.

Normally what Chinese VCs do is they ask us to do the seed stage and then they would come after six months or a year once the company has achieved few numbers or certain landmarks.

There are two kinds of setup that we have: one is where we invest on our own; apart from this we have our network companies that we mentor, offering them shared services as well as helping them raise money. Those companies are slightly more mature as they come to us when they are looking for Series A and B rounds.

We have helped close to about 70 companies till now in terms of raising funds and find key people from the industry to grow the team.

Kr: What is your revenue model when you work with non-portfolio companies?

MS: We take equity or sweat equity in the companies in which we don’t invest our own hard cash. And then we also take a success fee like any other investment bankers. So, we have two paths for us. One is pure venture capital part which only looks at investments, and then there is investment banking part which helps startups reach out to Chinese investors and other people in the ecosystem. Actually, we don’t reach out to investors in India. We only reach out to investors overseas, especially in Southeast Asia and Asia region.

Mahendra Swarup, Founder, Venture Gurukool

Kr: Do you go after any specific sectors?

MS: We have invested in all kinds of models, retail, social media, ad-tech, among others. We go after companies that have a transactional revenue model and runs a service that affects day-to-day economy. Like Chinese economy is transactional. Volumes of transaction is important for us.

We have just invested in a laundry company. Chinese laundry companies if you see, they are a couple of billion-dollar valuation companies. There is a rapid urbanization happening in India and for millennials in urban cities, one of their biggest pain point is laundry.

Our estimate is that the laundry market in India is USD 36 billion in size and only about 2% is in the organized sector. So, there is a huge opportunity to organize the unorganized.

Kr: Since you go after Chinese VCs to invest in your portfolio companies, would it be right to say you are making it easier for Chinese investors to find deal flow in India?

MS: Some of the Chinese investors who come to India independently do face some problem in finding good deals, because they have no establishment here. The reason is that unlike Silicon Valley-based VC funds who have established themselves with Indian partners and entrepreneurs, Chinese VCs haven’t done that yet. Now we do have four to five Chinese VC funds who have got a few associates in Bangalore or in Delhi, but they are largely still lone investors. Walk-in deals don’t happen.

We do provide a good funnel to them who come here with the intention to find interesting deals.

Kr: Do you think Alibaba, Tencent, and SoftBank have gone slow in their investments in India?

MS: The big cheque writers are not aggressive, because it’s not like Venture Gurukool which is writing four to five cheques every year or even more. When you are talking about investment of USD 100 and 150 million, then obviously you don’t have that kind of deep investment opportunities in India. There are not very many startups that need that kind of money.

Every growth sector has got covered by them. If you look at fintech, both Alibaba, Softbank, and Tencent have made their bets, same for the e-commerce sector. They will make only one to two big investments in one sector, unlike others.

I would say Indian startup ecosystem is unable to keep pace with the capital which is coming to India. There aren’t many big dreamers in India. We need more startups with larger dreams.

SoftBank, Alibaba, and Tencent will not hold back. If you see SoftBank, they have USD 100 billion fund, even if they got hit by WeWork and Uber, that’s no dent in their business. That’s just USD 6.5 billion which they have written-off in terms of loss. They have a long way to go. Recently, Alibaba did a very successful IPO in Hong Kong, and all that money will come to India because there is no place else, except a few emerging markets in Southeast Asia.