Mumbai based venture capital firm India Quotient (IQ) raised investor commitments worth $64 million last month for its fourth fund. The fund has a final target corpus of $80 million. The seed-to-Series A stages focused investor has backed startups such as fintech Lendingkart, social media platform ShareChat and D2C (direct to consumer) cosmetics brands Sugar Cosmetics.
Founded in 2012 by Anand Lunia and Madhukar Sinha, IQ added Gagan Goyal, founder of Thinklabs Technosolutions, one of the country’s first robotics learning startups, as a partner in 2017. Goyal was elevated to general partner at the firm in February this year.
In an interview with TechCircle, the former entrepreneur and prolific angel investor, spoke about the firm’s current goals, fund expansion, the prevailing unicorn run and IPO (initial public offering) possibilities within the portfolio.
IQ just raised $64 million for the fourth fund from domestic investors. What kind of appetite are you seeing currently among limited partners (LP)?
The market is very bullish right now, from venture capital firms who are doing rounds in their companies to the public markets. The LP side is the same. Things are good for everyone. I will not say that we are great and that's why it is happening for us, but we have performance also. And, because of the current market situation, we are getting very good response. We didn't think that we would consider it, but now we are thinking of slightly expanding the fund.
Tell us more about the fund expansion plans.
We had targeted an $80 million fund. We already got commitments worth around $64-$65 million and we have more commitments. But we are just holding on to those commitments and trying to optimize on the institutional capital. We have paused our domestic fundraising and we have asked people to hold on for some time. I think the institutional people generally take longer time. And now with Covid, foreign institutional investors have only just started traveling and going to offices.
We are hoping that in the next three to six months, if our currently active conversations with large fund-of-funds and endowments close on time, then we'll take their money, and depending on that, we may increase our fund from $80 million to $100 million.
They (fund-of-funds, endowments) do have a minimum cheque size criterion. If that doesn't happen in our favour, for whatever reason, then we'll take this domestic capital, and then we will not increase our fund size.
Fundamentally, we are very clear that having a small size of fund has its own benefits. That is where we stand. We have announced the first close, we have received the money, and we have started investing from Fund IV. We have committed investments to four companies, some closed or in the process of closing.
Will there be any major changes in the investing strategy with Fund IV?
Our strategy for this fund remains the same, which is to target seed or pre-seed stage companies. That is what we've done in our previous funds also. We are also not changing any of our strategy from a cheque size point of view. We'll be writing the same $250,000 to $1 million cheques. Obviously earlier there were more $250,000 to $500,000 cheques but now the market is slightly competitive. So, we may end up putting maybe investing $1 million on day one, but this is the first cheque size.
What kind of companies have you backed so far from Fund IV?
One is in insurance, another is in gaming, one is into software for SMBs (small and medium businesses). We are focusing on SMB technology as a space where you create either a software or a tool and ultimately either you charge for the software or create a business on top of it. And, the fourth company is into livestock, animal husbandry, and farmers’ marketplace.
What are the dynamics of raising capital from overseas and institutional LPs?
I think the benefit of institutional capital is not the cheque size. The bigger reason for institutional capital is that they understand your asset class. They understand that venture investing takes time and there are a lot of misses. But again, you get one hit, and that one is so big, that it returns a fund multiple times.
Secondly, institutional capital partners, just like we create a portfolio of companies, create portfolio of funds. And, they also invest in a firm’s successive funds, so that they get a mix of the portfolio. But the challenge is that they are they need a minimum fund size as a criterion. Typically, a $60-$100 million fund is on the lower side and is difficult for them.
Any specific sectors you are particularly bullish on?
I have a strong belief that SaaS for India will emerge out of India. A lot of people talk about SaaS for US. There are good companies now which are unicorns and almost becoming decacorns, but they all are serving global audiences largely in the US and Europe. I have a strong feeling that for developing countries like India and Indonesia, no one has built differentiated SaaS products. This software is not on desktops, this has to work on mobile… and I already have a few companies in my portfolio.
What is your take on the current IPO run vis-a-vis your portfolio of companies and otherwise?
From an IPO point of view, Lendingkart will go for an IPO. They should go. Most likely I think in the next 1-2 years.
In the current market, the definition of IPO is changing. A lot of these companies that are going public are not making real money. I think we all know that all companies are overvalued, whether IPO or non-IPO, and that is fine. Eventually they have to deliver the returns and justify their valuation so I think that is fine. But whether this built-up public market and the retail investor will respond, will accept this non-profitability, I think time will tell. I'm also curious to see how things shape up. If it shapes up well, a lot of other companies too have the potential to think about that as a path.
As an entrepreneur, if you ask me, not as an investor, I believe in companies making profit and growing with cash-positive cash flow, eventually. I want to see that happening, these companies have to do that, if not today, tomorrow, they will they have to do that.