In the post-Soviet era, trade flow from Russia to India was restricted to defence. That changed in the mid-2000s when Russian conglomerate Sistema Asia Fund, a proprietary venture capital fund, joined hands with Shyam Group to grab a pie of India’s telecom sector. The $10-billion entity tried its luck in the telecom and broadband market under MTS India. Its decade-long journey, however, bore little fruit. In 2012, the Supreme Court cancelled 21 of the 22 licences awarded to MTS, forcing it to down shutters. The entity was then sold off to Reliance Communications in 2016.
Despite having burnt its fingers once, Sistema hasn’t given up on India. Today, it operates from the Russian Trade Commission, close to the Russian Embassy in Delhi’s Chanakyapuri area. Sitting inside the trade commission’s office, Kirill Kozhevnikov runs the Sistema Asia Fund along with Dhruv Kapoor, managing director, Sistema Asia Capital. “During the past two to three years, we saw deal flows and the start-up ecosystem getting built in India. Nobody had a clue that by the beginning of 2018, internet users in the country would be close to 400 million,” says Kozhevnikov.
The $40-million fund was set up in 2015, with the mandate to focus on technology start-ups in India and Southeast Asia. The eight investments made by the duo so far stick to the brief — Lendingkart Technologies is a market leader in small and medium enterprise (SME) working capital lending; Licious, an online meat delivery platform; Qwikcilver Solutions is into online gifting; Wooplr into marketing, HealthifyMe and Netmeds are into healthcare and others include Mobikon and Seclore Technologies. Most of the investments have been made in the range of $2 million-5 million.
“Our math says when India will go from a $2.5-trillion to a $6-trillion economy, about $1 trillion of that will come through technology. And that tech GDP is our playing field,” says Kapoor. Experts, however, say investment in technology alone is no guarantee for success. Prerna Bhutani, partner, India Quotient, which invests in consumer tech companies, says, “We as investors love this space. But is there a real problem you are trying to solve with technology? For example, Flipkart solved the problem of checking hundreds of products sitting at home, making it a success. If there is a lot of AI and machine learning elements in your product but you are not addressing a real need, it won’t work.”
Both Kozhevnikov and Kapoor are mindful of the challenge Bhutani talks about and have split the sector into two broad themes — consumer tech and enterprise. “When we were looking at fintech, we broke it down into SME, consumer, insurance and wealth. After a market analysis, we realised that SME lending was the biggest gap in the market. Banks aren’t designed to lend and deliver small cheques.” At Lendingkart, credit disbursal is automated via AI and the collection ecosystem is tech-enabled.
Sistema’s other bet has been Licious, an online meat brand. “Our research told us that 90% of the meat market is congregated with butchers and is completely unorganised. Factors such as hygiene, right weight and right sourcing are missing and Licious solves all these problems. When we invested in the company in February 2016, they were present in just one city. Now, they have expanded operations to four cities,” informs Kapoor.
Mid-stage entry
Sistema’s strategy is to pick mid-stage companies within the technology ambit. “While we invest early-on in ventures in Russia, we realised that there was a key gap at the Series-B stage in India. There were a lot of players for seed and angel investments. If you look at Series C and D, there are large Chinese conglomerates and Amazons of the world. To compete with their capital wasn’t wise. We felt our corporate DNA blended well with the opportunity Series B presented,” explains Kozhevnikov.
The duo admits that by this stage, start-ups usually have zeroed in on their model and have passed the testing phase. This is important given that 25-30% of the start-ups shut shop between Series A and B. Sistema, thus, does away with the existential threat, focusing on scaling up operations by lending a hand with sales and marketing instead. “You are not really betting on an idea. Some traction has already been established and you are investing for scale. It is a better proposition in terms of risks,” agrees Bhutani.
It, thus, runs a Scalerator programme for its companies, with the twin motive of helping them grow faster and creating its own exit. For instance, when customer relationship management (CRM) start-up Mobikon wanted to sell their software to restaurant customers in India, Sistema came to its aid. “As a legacy of our telecom business, we have dominance in nine cities in South India. The team jumped in to help with hiring, design and networking with restaurants, acting like an outsourced arm of Mobikon and have already started converting restaurants into clients,” says Kapoor.
While funds tend to have people with operational background, Bhutani says she hasn’t come across any instance where a private equity (PE) fund was taking ownership of a function. “At the mid-stage, it’s not about entrepreneurship or tech know-how which is taken care of by institutes such as IITs and BITS Pilani. Typically, it’s the expertise to scale that is lacking. Because we have a network, this is our key differentiator,” adds Kozhevnikov.
Other start-ups are also leveraging Sistema’s distribution network in South India. “We wanted to reach out to proprietors, but about 90% of them are in Tier 2 and Tier 3 cities. Conventionally, we had been relying on direct marketing through Google ads or working with partners such as Paisabazaar to reach out. With Sistema, we found a new channel, where their 50-member team works as a strategic partner, reaching out to industry bodies and associations too,” says Vishal Chopra, chief revenue officer, Lendingkart.
Sistema’s Russian connection has also helped open doors for Indian businesses. VS Kannan Sitaram, partner, Fireside Ventures (a PE Fund that invests at an early stage) says, “Sistema can support portfolio companies with operative expertise. With a multi-country fund, there is an opportunity to cross-pollinate as well. So, the advantage is two-fold.”
Traditionally, the Russian market has been tough to crack because of complicated laws, restrictions and the language barrier. “We have been trying to help some start-ups scale internationally, especially the B2B ones. Local legislation is a huge barrier but we helped Seclore participate in a few tenders and are expecting good clients,” says Kozhevnikov.
The gift card market, where Qwikcilver operates, is fragmented in Russia, with each player trying to build its own loyalty platform. “We have a few opportunities lined up for Qwikcilver with our portfolio companies in Russia. Hopefully this year, we will see conversion,” Kozhevnikov chimes in. Similarly, Sistema has helped Wooplr with PR in Singapore, piggybacking on its network in Southeast Asia.
Risk versus return
But how big is the upside in investing in mid-stage? In the case of Flipkart, mid-stage investors also exited multiplying their investments. Such instances, however, are still few. “The fund size is usually bigger in mid-stage so you’re able to move large amount of capital at the same time. That helps; but the multiples you can make on large investments in India is not that high. While that is changing slowly, the alpha you make at an early stage is much higher and so you’re able to grow your fund with more ease,” says Bhutani.
Sitaram, too, thinks mid-size investing is a rough turf: “In mid-stage, you are taking a risk on how fast the start-up will scale. The whole burden of proving a model may not be there, but the investments may take more time to bear fruit. The amount of money required may also go up. Also, after an early-stage investing, you get to know the promoters well: you know their strengths and where they need more support. At the mid-stage, investors may or may not have the best alignment with founders.”
The Sistema duo say they look for models where there is a clear growth path. In case of Lendingkart, the working capital loan is short-term and interest charged can be as high as 27%. “We like to invest in businesses which have high gross margins. All our businesses have at least 40% gross margin, going up to 80-90%,” says Kapoor, adding that Qwikcilver is already profitable.
Sistema also syndicates with other funds to be a part of their Series B funding. They have partnered with Accel, Helion, Mayfield, and Amazon in several rounds across their investments.
The cheque size for Sistema is also set to move up. “We will increase it to $4 million-7 million and are happy to participate in future rounds also,” adds Kapoor, without divulging at what multiples the investments were made. Recently, the fund size, too, has doubled from $40 million to $80 million. The duo indicates that with traction building up, Sistema is talking to more investors and the size may go up to $120 million.
The fund is also planning to invest in eight to 10 start-ups over the next two years even as it has earmarked an exit strategy for current investments. “We want to be sure of the exit option for our companies. In Lendingkart, the company could go for an IPO because lending business is appreciated in the market. Qwikcilver, on the other hand, is an acquisition candidate,” says Kapoor, mentioning that they look at an investment horizon of five to seven years.
But to pull off a handsome exit, the fund, which has a life of seven to eight years, will need to put in extra effort. “It is too early to evaluate the impact as a lot of our investments were made last year. But we have collectively added value to the sales and marketing side. Mobikon has added new clients with our help and should be able to raise the next round faster. In just six months, we have become one of the largest partners of Lendingkart in terms of growing the book.” Sistema’s hands-on approach to investing in India clearly shows that it wants to be remembered for its second innings and not the first.
