MedTech, creator economy are the hottest industries emerging since Covid outbreak: Capital-A

Covid-19 brought in silver lining for many entrepreneurs with venture capital entities taking a keen interest on the blooming startups ecosystem in the country. But indigenous investment companies warn off a worrying trend of global investors offering valuation without any negotiations with the entrepreneurs. Bizz Buzz spoke with Ankit Kedia, founder and lead investor, Capital-A, a venture fund for seed to early-stage meaningful startups to understand the ecosystem of both venture funding and emerging startup businesses in India

India is attracting one of the highest amounts of private equity (PE) capital and venture capital (VC). Even though the entire venture capital in the AUM (Assets under management) in the world is only five per cent and 95 per cent is private equity. Given there is so much action happening around this space, it's (venture funding) is waiting to explode not just grow. Markets in EU, US, in the last 2-3 decades, have matured to such an extent that the next big geography is Asia and South-East Asia where that venture capitals will concentrate on

What are your thoughts on venture funding accelerating in India in the past decade?

The kind of situation that we have right now, India is attracting one of the highest amounts of private equity capital and venture capital. Even though the entire venture capital in the AUM (assets under management) in the world is only five per cent and 95 per cent is private equity (PE). Given there is so much action happening around this space, it's (venture funding) is waiting to explode not just grow. Markets in EU, US, in the last 2-3 decades, have matured to such an extent that the next big geography is Asia and South-East Asia where that venture capitals will concentrate on.

Your company, Capital A, began its operations amid pandemic this year. How has been the investment experience so far?

We conceptualised the fund in the last one year, and formally launched it in July this year. But for my investing experience over the last three years as an Angel Investor-turned-VC, I will say that a lot of startups were highly fortunate to get Covid alignments both in a sustainable fashion and some of them perhaps opportunistic deals of Covid, so either it has normalised or gone back to pre-Covid levels. For example, Direct to Consumer (D2C) companies focused on wellness and Ayurveda and performed very well, but the good ones who rode on the wave of Covid performed well enough to attract large number of users, a large customer have also become loyal also.

Similarly, in EdTech, people who did not know that English language could be learnt on applications, or virtually, this is something which became a norm and not an exception during Covid time. But people who suffered were companies in the HoReCa segment and cloud kitchen because they were not able to get the right resources and manpower to run their outlets. Companies highly dependent on offline sales, in the retail shops, did not have an online strategy. So, the quick ones built an online presence immediately and those dependent on offline distribution could not adapt so quickly.

What is the primary revenue generation model of your company?

When we invest in a company, we have a clear process of how we evaluate, assess, and pass a deal. Every time we invest in a company, we have our ticket size that's fixed. For example, we fall in the entire micro–Venture Capital space, so our cheque size range between $50,000 to $5,00,000. We pick up equity anything between 3 to 10 per cent depending upon what stage we are investing in. If we are in a pre-revenue stage, our target is to atleast pick up 8-10 per cent equity. In a pre-series, we try to pick up 3 to 5 per cent equity.

Every time we invest, we define a horizon on our window of investment and upto to 3 to 5 years is what we look at for exit depending upon the sector. Right now, Fintech is a very hot sector. So, chances of secondary exit are lot quicker than other sectors provided we are able to make the right bets on the right investments. Revenue is, basically, we target atleast 30 per cent of Internal Rate of Return (IRR) for our money that we invest in which comes in usually 3 to 5 years of period.

So, what are some of the challenges you have come across in the Indian market?

There are a lot of challenges. Given that there is so much action happening in the venture capital space, there is also a high risk of going wrong if we do not do our diligence properly. One thing we focus on very strongly is the background of the founder and their ability to execute the vision that they have put in their presentation. There can be a mismatch of what an entrepreneur presents and what they are. Second challenge is sourcing the right type of deals and investments that is becoming very rare. It is because there is much competition in the venture capital space with the global funds coming in. And because these global investors have deep pockets, they do two things in their capacity. First, they give the valuation that the start-ups ask for upfront without negotiation or secondly, they invest without diligence which is what we call in the industry Pray-and-Work.

Now, this is where VCs like us are going after meaningful founders, and start-ups. The spirit of entrepreneurs gets defeated in our evaluation process of good founders, because the entrepreneurs come in with a high benchmark for valuation which global funders tend to offer.

In your view, which are some of the industries or segments which have picked up since global outbreak of Covid-19?

I think medical, MedTech or anything to do with social commerce, these are the hottest sectors that will really hit the ball out of the park. In MedTech what has happened is there are companies which are solving deep problems. During Covid, people have realised that we may have best of the doctors, hospitals, we may not have the right type of technology upgradation, which has been pending for a long time.

The Medical Council of India also has been formulating their curriculum for quite some time, but it (upgradation) takes its own time. India has a population of 1.35 billion people and to pass a policy it may take some time, but there are a lot of interesting entrepreneurs who are coming up with various innovation in the medical devices space. Some of them challenging the norms of the large medical equipment manufacturers in the US and Europe and coming up with upgraded version of the devices while integrating artificial intelligence and machine learning. Another sector is creator economy, where you see so many creators around the country today. Today, if you ask a young person what they would like to become in the future, he/she would say they want to become a creator maybe on social media. And the social media industry is working hard to monetise them.

As of today, how many start-ups have you engaged with for venture funding. And what is the targeted number in the upcoming financial year?

We have a diverse mix of 8 companies in our portfolio. Some in D2C space in Ayurveda, another is an EdTech company. We also have companies in TravelTech, beverages, medical device company. So far, we have deployed $2 million cumulatively. We have carved out a fund for $20 million over the next five years. This is all proprietary capital, which means I have not raised funds from limited partners (LP). This gives me flexibility of choosing the right deals and I'm not under pressure from LPs to keep investing and go after a certain sector. Our target is to do two investments every month, which means 20 to 25 companies by 2022-23.

Technological advancement might still be a challenge for some industry segments. Your thoughts on the start-up ecosystem in the country with technological disadvantages?

I will not say there is lacking technological advancement. I think we require reorganising. India is the tech capital in the world where our software engineers, techies are doing incredible job globally. What happens is at times they don't get the right resources which could channelise their energy. Which is where many venture capitals are coming up with their own accelerators programme and incubation programmes, where they bank on the innovator's capabilities and their ideas. And if government is able to give grants to them then there are certain technology-oriented funds which sponsor certain kind of technologies. So, if such initiatives can be formalised that will become a lot better. And some of this orientation has to come from the government where we can really leverage on the tech talent of our country.