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India Incubation Fund Need Based on our market assessment (see appendix), we believe there’s a compelling need for an early-stage India focused fund with the following characteristics:

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India Incubation Fund

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India Incubation Fund


Need

  • Based on our market assessment (see appendix), we

  • believe there’s a compelling need for an early-stage India

  • focused fund with the following characteristics:

  • Provide access to small amounts of capital ($100K-500K, in 1-2 rounds); syndicate with other funds, if more capital is required

  • Mentor founders to utilize capital & relationships to the fullest; do so for a period of 12-24 months to take companies to the next level

  • Bring in a strong network to help companies sell, develop markets, execute on technology & delivery, etc., both locally and internationally; help hire key management talent, as required

  • Bring in networks to larger VCs/strategic investors for future investments, or position companies for suitable M&A


Proposed Fund: Stage 1

  • Raise $2-3M from high net worth individuals; execute on

  • 4-5 companies, and get 1-2 early exits to validate model

  • Highlights

    • Flexibility on deal sizes, ability to exit early, etc.

    • Ready to jumpstart with commitment of $1-1.5M (Which we already have in place)

    • Limited Partners (LPs) have significant startup and VC experience; collectively, they bring in diverse sets of expertise in different technologies & markets, ranging from Internet to Chip design to Wireless & Telecomm

    • LPs to actively use their networks to help funded companies in different ways


Who should invest in this fund & why

  • High net-worth individuals who see the opportunity in

  • India but cannot themselves spend time:

  • India is touted to be the big success story for the foreseeable future.

  • However, the Investment climate is different from anywhere else; e.g., we believe world-class product companies from India will not happen soon.

  • Fair number of opportunities in IT & related sectors; however, most deals are raw & therefore need significant supervision to mature.

  • Normal investment channels are not yet in place; some VCs are making noises, but are far from ground realities; mostly interested in a few mid- to late-stage companies.

  • We believe this fund can provide a great ROI without taking too many risks, using the Differentiated services model that the fund managers understand better than most others.

  • A number of very qualified investors (with significant cross-border expertise) have already signed up.


Team

  • All the Fund Managers know & have worked with each

  • other for a very long time

  • Full-time members:

  • Subrata Mitra: BOD Mu-Sigma and Small-Device. Previously Country Manager Tavant, Founder Firewhite. 7+ years of startup experience out of India/US.

  • Prashanth Prakash: Advisor Mu-Sigma and Small-Device. Previously, Founder & CEO of Net-Kraft. 8+ years of startup experience out of India.

  • Mahendran Balachandran: Country Manager of Apple India, COO CoSystems, Inc., and Country Management Team of Tektronix India Ltd. 17 years experience out of India/Asic in Sales, Marketing, Biz Development.

  • Consulting members:

  • L.R. Narayanan: 15+ years experience in Funding, Investments and M&A. Completed over 40 transactions in Technology space over the past 10 years. Worked with leading Venture and Private Equity funds and large Corporations in IT & Technology.


Team

  • Investors (LPs) already committed:

    M.J. Aravind: Partner Artiman, Founder Daksh

    Larry Braitman: Founder Flycast, CMGI/Engage

    Kumar Ganapathy: EIR Artiman, Intel, Founder VxTel

    Ashish Gupta: Partner Woodside, Investor Daksh, Founder Junglee

    Shekhar Kirani: Founder Lightsurf

    Venk Krishnan: Founder/CEO NuWare

    Pawan Kumar: Founder/CEO vMoksha, CEO IBM Global Services, India

    Sarvesh Mahesh: Founder/CEO Tavant, Amazon

    Kushal Sacheti: Founder/CEO Galaxy

    V.A. Sastry: Founder RelQ, INFY

    Subba-rao Telidevara: Partner Actis/CDC Capital

    Raj Toleti: Founder/CEO Galvanon, Microsoft

    Advisory Board:

  • LPs: Larry Braitman, Kumar Ganapathy, Ashish Gupta, Subba-rao Telidevara

  • Prakash Iyer (Co-founder/CTO, Everypath, Inc.)


Deal Flow

  • The proposed fund would fill in an important gap, but is a

  • part of a bigger eco-system by way of deal-flows:

Incubators (IITB, IITM, IISc, IIMB, etc.) or Bigger VCs

IncubationFund($100-500Kper deal)

Exit through Acquisition

Word of Mouth / Personal contact

Incubate some Internal ideas from group

Syndicatewith others(for larger deals)

Bigger funding through mainstream VCs (e.g., $2-5M/deal). Continued association in advisory & mentoring roles

Identify US founder with ideas to incubate from India

1-2 rounds, based on growth


Funding Philosophy

  • Fund companies that have (most of) the following:

  • Founders with some track record (e.g., 6-12 months of operations) and business validation for products/services through some customer traction.

  • Sweet spot would be differentiated services (e.g., some Technology or Knowledge that makes service delivery more efficient/less replicable), since they can get higher multipliers, require relatively less capital and we have the right backgrounds to build such companies out.

  • No specific “sector” bias, as market seems too small for deal flows. However, definite focus on wireless/telecomm and consumer-facing web applications.

  • Judgment that fund managers would be able to develop good working relationship with the Founders.

  • Domains where the Fund Managers can add value, outside of funding.

  • Some preference to having India based sales model (at least for sustenance revenues/cash flows).


Our differentiator: working alongside companies to make them successful

  • Several key functions augmented by induction of Senior

  • talent:

  • Company Mentoring: Mentoring of Founders to better understand Business & Strategy, Creating a Professionally run business, etc.

  • Acquiring Strategic Customers: Strategize different sales models. Help funded companies secure strategic customers/development partners, and make them reference-able.

  • Recruitment: Recruit seasoned management talent to balance existing (founding) teams, as required.

  • Technology & Process Mentoring: Whenever possible help grow Technical assets (IP). Also, help with technical growth of team members & relieve Founders for key business roles. Similarly, enable systematic running of operations, light-weight but consistent across the company.

  • Product/Services Marketing: Whenever required, bring in talent to understand customer requirements and map product/services offerings.

  • Financial Mentoring: Controller functions to ensure smooth operations, and more strategic CFO functions (as required) for external funding, structuring of debt, etc.


Fund Structure

  • Target to complete all investments in 2 years and to return capital in 4 years

  • Total fund expenses not to exceed $300K (I.e., 10% total over 4 years)

  • Fund-Mangers Compensation:

    • For full-time involvement of 3 senior members without market salary implies upwards of $500K in opportunity costs over 4 years; for this, Fund Mangers to be provided 15% Equity, but without any hurdle

    • Additionally, Fund Manager's carry to be at 20%, after fund returns capital

  • Tentative draw down structure: 20% upfront, 20% every subsequent 6 months thereafter

  • Seek active participation from LPs on Advisory Board for deal flows, deal selection, etc. Some LPs to participate on Boards of funded companies

  • Fund managers to send out Quarterly communication to all LPs. Also, have periodic conference calls open to all LPs

  • Fund managers get additional sweat equity from companies, which is diverted to the Fund (i.e., Fund has both preferred & sweat). Some nominal consulting fees can go to Fund Managers directly for services offered to companies


Fund Structure

  • Management Fee (<$300K over 4 years)

  • Carry (15% for Salary, 20% as normal)

Fund($2-3M)

Fund Managers

  • Fund Management

  • Deal Generation

  • Funded Company Advisory/Management

Some Costs: For Management Time & Infrastructure, as used

  • Preferred Equity

  • Equivalent of Sweat in return for time spent by Managers

Companies

  • Due Diligence (pre-funding)

  • Operations, Strategy & Biz Dev Support (post-funding)

Seed Investment ($100-500K)


Involved Limited Partners

  • Active participation from our Advisory Board would provide

  • significant value. Advisory committee mainly consisting of LPs &

  • other industry leaders; individual LPs sign up for 6 months at a

  • time; expectations include:

  • Funded Company Mentoring

  • Advisory & BOD positions for funded companies

  • Increase deal flow into the fund

  • Help with company Due-diligence through expertise in certain markets / technologies, business models, etc.

  • Bringing personal networks to help funded companies attract talent & sell; create awareness about the fund & its mission, acquire future funding for companies, etc.


Example Exit Scenarios-Illustrative Only

  • Assumptions:

    • From corpus of $3M, $2M invested into 4 companies, $300K (over 4 years) for expenses and remaining ($700K) held in reserves

    • Roughly equal investments (i.e., $500K/deal)

    • Fund $200K at $1M post money, remaining $300K (say, in a $0.5M round) at $3M post; i.e., total preferred after 2 rounds: 26.7%

    • assume 10% sweat equity initially (dilutes to 8.3% after second round of funding)

    • Total equity (assume 10% dilution due to senior management hires): 31.5%

  • Exit Scenario 1

    • 1 company (in 4) makes it big; I.e., exit for $20M, others flop

    • Fund makes $6.3M (from the $2.3M used)

  • Exit Scenario 2

    • 2 companies (in 4) make it OK; I.e., exit for $15M total, others flop

    • Fund makes >$4.7M (from the $2.3M used)


Why Us?

  • Have most of the basics in place:

  • Fund managers already have proven track record in building companies from scratch, including seasoned presence in the Indian markets

  • Already working with a small set of Early stage companies (see Case Studies Sections later) in a similar high-touch model, with reasonable success

  • Active presence in India-US corridor, with great relations in US; already have an A+ team of LPs and Advisors in place, with wide startups experiences

  • Ability to source deals from India, through personal & professional network, working in collaboration with VCs, using University relations, partnering with other Incubators/Individuals, etc.

  • Ability to hire top-notch people to work with the funded companies at all levels

  • Seen as part of the Tech Entrepreneur eco system in India


Our Track Record

  • We have already executed on the fund vision by working with 3 early stage

  • companies in the US/India corridor:

  • Each assignment started out in a significantly “high-touch” mode, with fair bit of operational, strategic and fund-raising responsibilities

  • 2 out of these 3 companies have relatively less dependence on the Fund Managers as of date, with separate senior management teams in place to run operations. All achieved in 9-12 months of our involvement

  • 1 relatively recent company has some dependence, but should be self standing in another 6-9 months; senior hires already in place

  • We will attempt to include some of these companies into the Fund, by participating in their follow-on rounds

  • Going forward, Fund Managers would not be working with any new startups outside the Fund structure, in order to avoid Conflict of Interest issues


Case Studies (1)

  • Small-Device (www.small-device.com)

  • Cell-phone based Game developer out of Mumbai, India, with some access to game development contracts from European and US aggregators

  • Erasmic helped with the following:

    • Arrange seed funding from well-known US & Indian High Networth Individuals (Most of them are now investors in the fund)

    • Help with Strategy and business directions: E.g., which classes of games to build, move to Porting as a sustained business direction, Making porting somewhat technology and IP driven, as opposed to completely manual

    • Strategic access to key Business Development and other leads & resources

    • Manage operational scaling by transforming a 15 people operation into a 50 people operation in the space of 3 months


Case Studies (2)

  • Mu-Sigma (www.mu-sigma.com)

  • Founder from Chicago looking for partner in India, for services oriented business in Analytics, Statistical Modeling, Simulation, etc.

  • Erasmic helped with the following

    • Helped US based founder launch company in US and India

    • Arrange part of the seed funding through our networks

    • Interim COO role for the company, including complete back-end support in Delivery, running Indian operations, Pre-sales support, Hiring, Training, etc.

    • Scaled operations to 12+ members in India, including 2 senior managers to handle technical and operational aspects going forward

    • Strategic access to key Business Development and other leads in the US


Case Studies (3)

  • Pension Retirement Online (PRO) (www.proinc401k.com)

  • Chicago based BPO startup focused on providing Retirement Plan Processing (401K) and Administrative Services out of India

  • Erasmic helped with the following

    • Provide necessary seed funding

    • Setup operations for Daily Record Keeping and other 401K Transaction Processing type “back-office” functions

    • Hire and train staff in US 401K regulations to support entire gamut of back office processing (Mutual Fund Account Setup, Distributions, Contributions Analysis and Processing, Loan Processing, 1099-R processing and Discrimination Tests)

    • Develop tools to automate day-to-day processes both Onsite and Offshore

    • Offshore Support for Pre-sales and for Online Lead generation

    • Help close strategic partnership with US consultant to increase sales


Current Pipeline

  • Looked at 20+ deals in last 6 months. Only 3 are under active

  • consideration. Current pipeline include:

  • Search

  • Mobile Search companies

  • Resume search and matching company

  • Internet

  • Public exams based community building (Startup)

  • Travel: Rating of resorts in India

  • Netflix equivalent for India

  • Mobile

  • Mobile keywords, Birthday reminders

  • Enterprise mobility: Location services integrated with back-end Logistics systems

  • Others

  • 3D Games and Simulation software

  • Chip related ideas (Startup with US founder)

  • Enterprise: Program analysis for QA

  • Nano: Nano positioning technology

  • EMR (Electronic Medical Records) for small to medium care providers


Road Ahead: Fund, Stage-2

  • Raise $20+M from a combination of Institutional and

  • individuals, starting in 2 years after Fund-1

  • All Stage-1 LPs will have the right to invest in Stage-2


Challenges & Mitigation Plans


Next Steps

  • Expand Advisory Board/Investor pool

  • Build relationships with others in the value chain, such as India based funds, incubators, etc.

  • Approx. $1.5M commitment in place. Should be able to get rest of the money in 3-4 months

  • Figure out the outside India pieces: biz dev, marketing, sales, etc.

  • Create a strong pipeline of deals to look at on a continuous basis (quite far along on this)

  • Work with local entities to create community awareness


Appendix


Fund related Services

  • Several services would be required for this fund to be effective:

  • Due Diligence: Create a small panel of experts, who have diversity of experiences in startups and various business domains. They must approve each deal before investment

  • HR: Key part of the augmentation model would be to find the right set of senior talent to work with these companies, on an as needed basis. A panel of such people would be put together as a part of the fund itself; each available on loan to companies

  • Finance: Have internal capability to loan a CFO, who can also validate Business Models before funding. Would also help to raise bigger fund later

  • Infrastructure / Processes: Incubation space and Accounting related services

  • PR: Work with agencies in India & abroad to provide the right kind of exposure to the companies

  • Pipeline management: Have enough deals to look at, and have enough VC/other relationships to take them forward


Indian Landscape (1)

  • New technology and technology led services business entities will emerge from India in the near term

  • Increasingly, the entrepreneurs would be younger and with less upfront / direct exposure to US / Global markets

  • Main exits may continue to be through early stage M&A into larger corporations that are looking to establish Indian teams; having good technology would be a plus


Indian Landscape (2)

  • Early/Idea stage US companies would like to leverage India strategically

  • Several new business ideas (e.g., in the KPO and BPO spaces) need to leverage India in a strategic manner right from their formative stages

  • Several other startups would like to leverage Indian rates to pre-validate ideas (technically & from market perspective) before launching them in US/more expensive geographies

  • There are US entrepreneurs/startups that are keen to address Indian markets; e.g., wireless infrastructure, telecomm, video content & delivery, broadband services such as IPTV, etc.


Indian Landscape (3)

  • Venture money is in serious short-supply; Availability limited to mature deals

  • Most VCs would like to invest in the order of $1-5 M/deal at a time. Even some of the new India focused funds are $50-100M in size, and therefore must invest in larger chunks

  • Very few companies exist in India today that can absorb such quantum of funds


Indian Landscape (4)

  • Early-stage money is available, but PRIMARILY in the US

  • Several Indian angels (Industrialists from Traditional sectors) have burnt their fingers during the “.com” era, and are going to be gun shy for a while

  • It is also unlikely that Angels from Traditional sectors would fund IT/Technology companies, since other sector investments are likely to do well too, and these people would have better know-how there


Indian Landscape (5)

  • Potential investors (US based VCs, etc.) do not have feet on the street

  • It is expensive to get partners to setup a stable base in India, especially given the small number of interesting deals that are perceived as opportunities

  • For a number of Angels its not just the opportunity alone; they have emotional reasons to find ways to build long-term bridges back to India


Indian Landscape (6)

  • Early exits may be the MOST lucrative ones for some time

  • Strategic exits (e.g., need for India Play) would be the best bet, since they would provide larger multipliers. These are more likely to benefit early stage companies in the coming few years

  • In a number of cases, these exits may be TOO small for any known VC firms


Indian Landscape (7)

  • Most Indian startups would continue to need access to markets outside of India

  • While some markets will open up in India (e.g., Wireless and cell-phone related), most other startups would need to access customers outside of India

  • A significant part of building out these businesses would be to help them access new markets, lead generation, biz dev, sales and marketing outside of India


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