Inside the mind of the fintech VC | Beams Fintech Fund
Inside the mind of the fintech VC | Beams Fintech Fund
On Founder Thesis, we regularly feature stories of founders who convinced their investors back to their vision. In this episode, the tables are turned- we feature an investor who speaks about how he built his fund and investment thesis.
Sagar Agarvwal is a veteran venture investor with over 15 years of experience. He has built one of India's pioneering fintech-focused venture capital firms- Beams Fintech Fund.
Beams Fintech Fund has been recognized for its approach of recognizing areas where portfolio companies may lack access and working with its investors to bridge those gaps.
Its focus on fintech has played a significant role in the creation of two soonicorns.
Sagar talks about building Beams Fintech Fund and how he identifies the most promising companies to invest in.
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Additional readings:-
1.How Beams’ fintech-focused approach helped create two more soonicorns in India
2.Venture Catalysts’ Beams Fintech Fund Crosses Halfway Mark, Plans Two New Deals
4.India’s first Fintech-focused Growth Capital Fund, Beams FinTech Fund looks towards Middle East
Read the text version of the episode :-
Sagar: Hi Everyone. This is Sagar Agarwal, co-founder and managing partner of Beams FinTech Fund.
It's been 17 years I've been in this business of private equity and venture capital investing.
We used to have the dinner table conversations in the family about financial markets investing and all of that. And that led to obviously interest into the space. And as I was finishing my graduation as everybody applies for IIM, and the IIT right, I also did my drill. I joined SP Jain for my masters, and then fortunate enough to start my career with private equity campus placement straight up at firm, which was based in Dubai. And I started my private venture equity investing in that year itself in year 16 to 17 years now in that journey.
Akshay: So for people who haven't heard of evolvence!
Sagar: It's not an Indian firm. It's a Middle East based private equity fund. And they were entering into India in 2005, 6, 7. Because India was coined as the Bricks Nation right in 2005, 6, 7, and India was one of those emerging market golden bird. Which everybody wanted to invest money. So we were also one of the Middle Eastern guys who wanted to enter India, and that's the time the Middle East firms started looking at India more seriously.
And we set up a private equity fund in India, and that's where the evolvence of journey started, started by a gentleman called Carl Maherry, who was one of the members of the royal family of Abu Dhabi.
Akshay: So, I believe The India side of the business was like being led by you.
Sagar: We were three partners Akshay. And the fund in the platform, me and gentleman and three of us used to run the India part of the operations pretty much, and we set up a team of six people on the ground. So we were 10 of us who were building the platform from 2017 onwards. And in that journey we built the private equity fund, 250 million dollars. We deployed in India. We invested across multiple sectors, some consumer healthcare, financial services, infrastructure, real estate manufacturing. We invested money in that and that did very well for us. And then 2014 years when we launched the fund 2, so 6 and 8 year journey later we launched fund 2 much more. Focused towards sectors that we understand, which is consumer healthcare, financial services.
We moved out sectors which were tough to underwrite from an Indian standpoint, right, which is infrastructure, real estate, manufacturing, it was longer investments. Requires a longer journey to make money on it. So we decided to move out all of these sectors and only focus on three sectors. Smaller fund, $75 million dollars fund.
So between fund 1 and fund 2, we build a $325 million platform portfolio for investing and $60 million of site pockets, almost $385 million to $390 million of capital that was raised and deployed in India during my journey of 13 years. We did a lot of tech equity. Private equity guys generally invest in traditional businesses and venture capital invest in, right, so we were the ones cross private equity, traditional investing, tech investing, so that was 12 year journey. The experience went through global financial crisis policy paralysis of Congress in 2011. People tantrum in the US in 13, 14 oil prices at $45. Demonetization in India, moving, coming to power. UPI are getting launched are becoming prevalent?
ILFS crashed. DHFL crashed. And then Covid came in. So in my journey of 16, 17 years, there's been a bunch of black events and they're a lot more now than what they wrote earlier. People use business cycles is seven years but I said business cycles is three years.
Akshay: Okay. So I wanna zoom in and get you to clarify some of the things you said. What do you mean by side pockets?
Sagar: Side pockets is basically are investors co-investing with us in the companies that we are investing in. It's co-inverst got from the investors.
Akshay: Okay. Why did FinTech outperform the other sectors? There's probably some sort of a macro answer to this. I wanna understand that. Like why is FinTech doing better for is it that you chose good bets? Or is it that fundamentally FinTech is a better sector to invest in?
Sagar: Combination of both we ended up choosing right beds, right point number one and second.
Akshay: Which one did you invest in at involvements?
Sagar: So we invested in SSKN Corp, which is a used commercial vehicle lender. We invested in the small finance bank, we invested in Central Forex, we invested in the XYOX systems. We invested in Citi Union Bank of Punjab. So bunch of such investments. The reason is that if you look at the economic structure globally 1:3 of our GDP globally directly comes from financial. If you look at the rate in the public markets, also nearly 25% of the public market weight globally is financial services. Okay. It's the backbone of every economy, whether you talk about agriculture, healthcare, education, commerce, logistics automotive property, every sector has a backbone of financial services, which would be payment lending. The secularity of the sector is much more bigger than the secularity other sector. It's the only sector which cuts across the sectors. And it is not a winner take all, and the sector's not a winner take market, You do not have just one HDFC bank, and then you don't have any other financial institution.
So that's the difference. Like if you have one player which causes the market it's not a winner. Take all market.
Akshay: At Evolvence, what was the way in which you would choose companies? What was the investment thesis?
Sagar: At Evolvence. I always at the philosophy that you map the sector out from day one. Okay. These are the 10 different segments within any sector. Financial services, consumer healthcare, and look at both. At the 10 different segments, different segments. Look at the value chain of those or 10 different segments, who's making the most profit pool in that value chain? And then you go and invest in the leaders that profit pool, value chain. So you bring the sector to the team and then look at the entire value chain and look at the top players in that value chain and people who are making the most money and then create a short list of companies. And then based on that, talk to the founders, build a relationship, build a network, and then individually invest in them. That's how we invested. Not to mention you get companies from bankers, lawyers, advisors, consultants, you get companies from peer fund managers. So there was all of those combination to. Identify the deals and validate your thesis consistently. You have to take a macro call and you have to take a bottom up call at the same time.
Akshay: Can you give an example of an investment and what was the macro call you took there? And what was the bottoms up approach, which made you bullish and, and how that got validated over time.
Sagar: So give you an example of my favorite company, SK fincorp. We were very clear that lending to SMBs is a large problem in India that needs to be solved. SMBs can be lend money through toward three different truths. One, you can do coal gold to them, which is a large industry. Second, you can do loan against property or premise. You take their property, you take the premise, and you provide a loan against them. Third thing is that you can give them working capital finance to supply chain. And fourth thing you can do is give them loan against their pickup trucks and vehicles. Which they're using for their own business productivity. These are four different geographies. The s financing all you credit to somebody's saying that, Hey, Used for your business. Which is the most risky one? So I have never been a big fan of unsecured lending. I've always been fan of secured lending. Secured lending there were four options. Gold loan commercial vehicle financing, or pickup truck financing property financing. And lastly You talk about supply chain financing. So I chose commercial vehicle financing of pick up from financing as the most important sector. Cause it's an asset back sector. You can repos the vehicle, the guy defaults. You pay 35% of your money upfront, by the time and then get the 60% mortgage done. So your in the game already. Plus you're earning money from the vehicle. It's not a dead asset. It's a productive asset for you. So if that productivity of the asset doesn't go, then you don't make money. And lastly e-commerce was catching up in India.
2015, 16, 17. E-commerce was catching up big time. We were very clear that they're gonna be large amount of warehouses in India. Multimodel warehouses gonna be a large part of logistics, which will be required. Transportation gonna be large part of it. Last mile delivery is gonna become very big in India.
For all of that, you need pickup trucks. You need guys who are small fleet operators, small owners who will provide their pickup trucks to these e-commerce players in the contract model. So the demand is gonna substantially grow up. Pickup trucks are, you'll be surprised to know pickup trucks are used in construction activities a lot more in India, pickup trucks are used, used in delivery of people and delivery of good.
Akshay: Very versatile. In India the usage is a lot more versatile than in the west. Interesting. You said that did a crossover of a PE investing in a tech firm, which was traditionally a VC used to invest in tech firms. What is the technical difference between a VC and a PE?
Sagar: So I divide the stage into two categories. Early stage and growth stage right, and late stage. So early stage is what venture capitals generally, venture capital guys generally dominate. Growth stage is what we see and pay both do it and what. And late Stage is what private equity does only.
That's the 3D market of the sector. Venture capital tries to identify new edge sectors, sunrise sectors, tech businesses. The growth stage, which is a middle market where pay and VC both play. VC Will provide more capital to their own companies and growth stages, but pay will provide capital to tech companies also and traditional businesses.
And stage guys only provide largely used to provide capital to traditional businesses, and now they're coming into tech also. So that was a crossover we did from becoming a traditional PE investor to becoming a traditional tech investor. Like example, I'll give you difference. If you're investing in a PTM, it's a PC bet technique.
If you're investing in manual, it's a PE bet. Two different business models. So that's all you're investing in. A bank is a PE model. If you're investing in a FinTech, it's a BC model. So it's a crossover between PE and VC.
Akshay: Is there a difference in check sizes? What kind of checks are PE rights and what kind of checks are VC rights?
Sagar: It all comes down the stage to be very true. If you do early stage investing, your check sizes will be 150 million dollars. You do goup stage is a middle stage 5 to 15 million dollars, if you do late share 35, 50 million dollars. It's more akin to the state than akin to the The size of the company, all the, and obviously multiple factors. Size of the company, the journey of the company, evaluations of growth. All of that matters. Sometimes early stage company end up raising hundred check, So there multiple factors. The check size, the ticket size, but a switch spot is 1, 2, 3 for early five 15 for 35.
Akshay: So, tell me about the next step in your journey when you decided to start your own fund which is Beams. What was the trigger for you to become an entrepreneur and take that up, and what was the journey of that zero to one journey of setting up teams?
Sagar: Wow. It's been a, it's been an interesting rollercoaster journey to set up Beams. So 19 when I spent 13 years at Evolvements, right, or 12, 13 years at evolvement, and now I was very clear that the space that I like the most is financial services and FinTech.
The space, which is done very well in India is that sector demoralization had happened. UPI had happened. A lot had happened. Internet was made pre prevalent in term 16, right by Motori. So that 16 through 19 I saw a massive adoption of financial services online. And I was very clear that FinTech is gonna be large sector. And if you look at the manager landscape in India, there's of single fund manager who's doing FinTech and financial services at growth stages. There are a lot of managers are doing early stage and then doing FinTech. There are a lot of managers who were doing state financial services, but there was nobody was doing crossover.
Private equity and venture capital and a combination of FinTech and financial services. So to solve that problem, right, and to really think about that as an option. Which is when I decided to move in 2019 to create this platform. And 19, 20, 21, 22, 23, it's been five odd, the first people I've partnered with or joined hands with, was a group called Venture Catalyst, where I decided to partner with them as my shareholders, my partners, my crew GPS in the fund. And I brought them on board primarily because they're an early stage platform, in India and I was really a blue stage platform. So you don't need to go reinvent. You already have the ecosystem in place. So you can. Look at the entire spectrum and say who's doing what? Right? And company's gonna become larger eventually. So that was the two, thesis for me to first partner with Venture Catalysts as a group. And then once you partnered with Venture Catalysts as a group. They came as a shareholder. I brought other gentleman called he's the veteran in financial service in FinTech space. He's the first.
I think one of the Earlie payments founders in India built a company called Its Cash, Tts Card sold to eBIC in the us right? So, 16, 17, 13 14, building financial service in finTech. FinTech was new in India. He the founding member of FinTech Council of India. So it brings the depth of experience. So three of us came together to build this platform. And then idea was to build an build a team of people come up with a strategy, come come up with a strategy to deploy capital, come up with a strategy to allocate money build a portfolio, raise capital. So, 19, 20, 21, 3 years was all of that laying infrastructure, building blocks laying the rails of what beans will look like, identifying the name, registering the trademark, the brand name. All of that was the journey from 19 20 21.
Akshay: Okay. For a regular startup, there are like some, key hurdles you cross as you are going through that zero to one journey, like finding product market fit, finding investors building a product, building a team, and so on. What is it like for setting up a venture fund? What are those hurdles that you need to cross? What are those early challenges that you face when you're setting up a venture fund?
Sagar: I would say we are not any, we're not different than any other entrepreneur in the market. The same thing when you're coming to the market, when there're already 900 funds out there in the market.
You have to create your position in the market. Then why do we need a FinTech fund? Right? What, it's when you're a fund manager. Akshay, you are doing two things. You're convincing the investor to put money with you, and you're convincing the founder to take your money. It's not like you said, the capital and money goes to, money comes to you and money goes to companies. No, you have to convince both the sides of the table. You have to convince people to come and join you and believe in your strategy in a great platform solving a large problem. So that all of those conversation and challenges. That any entrepreneur goes. We have the same thing. We had rejections from investors saying that, Hey why do we need a FinTech fund? I have enough funds in my portfolio. We have the same thing from a new from an entrepreneur saying that, what is Beams? It's a new name. I don't know whether do you have a investing in the past? Should we take your capital or not? How create value? How you gonna create what checks can you write right? Same thing when you're hiring a team member. They're like, oh, I dunno how much capital you have. Will you be able to survive? Will you be able to grow? Right? So all of that Akshay that entrepreneur goes through, we went through everything.
We built a very institutional platform to solve that problem. Starting with the investors first. Investors wanted to see the kind of people who were there on the platform. So build a team of very solid people. And we are now almost 11 people on the ground. We have four partners, seven member team, 11 people on the ground, people coming with very rich experience of financial service.
They've done operating experience, they've got investing experience, they've got exit experience, they've got private equity, they've got venture capital, you name it, and they've got the experience. They're a team today. So one of the best teams, I would say in the market, who knows financial service a thing.
Second, we started inviting CXOs. And the CEOs of various companies to become our mentors and advisors in the fund. And these are people from banks and BFIs insurance companies, FinTech companies, DFI right on the advisory board of the fund. Right? So bring, create a institutional layer so that founders can see up pleople and look beyond us and see for all the thing.
That's the second layer I've built to convince investors that, this is, people who advising the fund beyond us. And the third layer, I built Akshay, is an institutional layer. I started bringing banks and BFIs companies FinTech, invest in the fund. Look at the reverse map. I'm first asking them to invest in me and then I'll go invest in the others.
And that was a thesis. It's like a story where people wouldn't wanna, believe saying that if you're investing in the fund and you invest company, how does benefit us? Right? So explaining to the bank the thesis behind why you should be investing in a fund like ours and you.
Partner with portfolio Company, with my company is the thesis that I built. I learned it from a comp fund in the called So us, as you know, is one of the oldest markets in the FinTech space. Europe is like second oldest market, China's third oldest market, and more than 100 FinTech funds in the US and 80 FinTech funds in UK and China. We have non in India. So making that thesis and people believe that once you come on the platform, we'll be able to create value. And when you go and present to investor, Hey, this is not just solve running the fund. We've got four partners, seven member team, we've got an CXO layer, we've got institutional Layer.
This is the kind of infrastructure we've built. 30 different sets of people who are helping pick and choose the right investments. And then going and telling the founder the same thing. Hey, this is not a investing capital. Its Beams. Right? That mean a combination, confluence, bunch of factors.
So that's the journey and same thing we to do with the talent hiring as well. But today, yeah, I think we're very happy with the team that we have and we're very happy with the investors that we are very blessed and we are very happy with the portfolio companies we have.
Akshay: How much time did it take you to like and like possibly the closing of fund one would be when you would have like, is proof of like, in a startup you say proof of product market fit.
So something similar here would've been the proof of everything you put in
Sagar: 2019, 20, 21, 22. So three. Wow. That's like three years plus. Just to get the product.
Akshay: And what was the size of fund one?
Sagar: This is currently we're deploying out of fund one. It's a 120 million fund, 900 crores. Okay. That's a fund one we are deploying out of. And we have raised more than 60%, 70, 65% of the capital already. And we've done four investments already in the pharmacy.
Akshay: When you say fund one is 120 million is that your intended amount or is that committed amount?
What does that mean?
Sagar: So the way fund works actually that people commit capital to the fund. And then we draw down the money from investors over two or three years. So you don't put that entire money on day one. It's a commitment that you give to the fund manager saying that this is my amount of investment I wanna do in the fund. And that's how you draw down the money 2 and half in year..
Akshay: So 120 million is the committed amount? That's correct. Commit from investors. Ok. Does it ever happen that someone doesn't live up to the commitment?
Sagar: Well, it's always a case. That people, a lot of people the intention is never to not live up to the commitment. I think sometimes what happens is that there's challenges, there's capital else in somthing else. Cannot honor the commitment. I will not say, not honor the commitment, but cannot honor the commitment in that situation. We have to find an alternate buyer for their shares, right, and find a new investor. It'll not happen to beam yet. You know, it's not happened to us. People have, happily deployed capital and on double on beam.
So, so far we are okay. And we're confident that, more and more investors are joining the bandwagon with us.
Akshay: Okay. Amazing. And these investors are like Indian institutions or like, all over the world or?
Sagar: So we've got a very good mix. We've got 80% of the capital from India and 20% of the capital from outside India. Its a combination of institutions, family offices corporates, HNIs.. 60% of the capital is institutional is 60, 65%. 30, 35% Is family offices and corporates and 15,10% is more individuals.
Akshay: Okay. Got it. So, you were talking of a very impressive board of advisors, which you've built up. What's in it for them? Do they also invest money or like why does one sign up to be an advisor at a fund?
Sagar: One, I think it's more than the incentive for them. So they're, these guys are generally very well to do guys. And they're at senior positions, CXO positions in their own journey. So they don't sign up to just be, they don't sign up to just be advisor and mentor. I think, one, they believe that they can give it back to the community. They can guide the younger entrepreneurs or the new age entrepreneurs to build businesses better. Secondly, we also, they're, they're clearly investors in the. Alignment of interest auto automatically happens for them to support our companies in the journey as well. Right? So both those things happen at the same time. So one is the not just to invest capital, but to also provide something back to the community. Society has the founders or the two primary reasons no matter what I offer them, sufficient for them.
Akshay: Okay. Got it. Amazing. So, let's talk about some of the investments you've done under Beams. And again, if you could talk me through the way you explained about why SK and how that turned out to be brilliant. Can you talk me through of the investments you've done at, what was the thesis behind those investments?
Sagar: Absolutely. So we've done now we've done four investments and let me just put a step back and tell you why and how we invest in be Right that's more important than the company specifically. So, Beams strategies always been, actually we do in companies that we have a conviction on.
So we create invest of 12 companies in this fund. We not invest more than 12 companies in one fund. What we've done is that we've identified 30 odd teams within the FinTech space that we like the most. And we've looked at 30, 30 odd teams from the perspective of what their journey looks like from an 10 perspective. Sector's gonna pan out right in 10 years is how big the sectors gonna become, how large the sectors gonna become. So keeping that in mind with shortlisted 30 odd sectors and you've top three companies who are grown stage companies in that 30 sector.
Akshay: Some of those 30 sectors, if you can.
Sagar: Yeah, so to give you perspectives.
For instance, payment, lending, insurance, and wealth. Is the four sectors. Then you have the agriculture, healthcare B2B commerce education. You've got automotive property. Logistics, other six sectors. Then you have the FinTech infrastructure, which has banking solutions, lending stack, collection stack. Co-lending Stack. So all this stacks for the bank. So like identified 30 large opportunities which you can create from them, And we shorlisted 150 companies which meets criteria revenue. minimum in India, that's where we start to look at an inflection point in the business. We believe the company start hitting 18 of revenue started an inflection point from a product market, from a management team perspective, from a founding team perspective, from a supply chain ecosystem has figured out that Techstar was figured out.
They raised three to four round capital in the middle, five 60 hours. They're built up market positioning. Akshay, you're a number one, number two, number three player. So when those factors come together, I call the 10x journey from 100 crores to 1000 crores is a 10x journey that any investor wants to go through.
That's the journey that Beams wants to come into. That's the journey we invest into. 100 to 1000 crore journey, growth stage companies, 30 odd teams, one 150 company. That's the way we shortlisted the entire landscape and market mapping. And within that, right then we started double clicking on all the companies, all the 150 companies, the space that I the most like all of was consumer banking and Citibank had just exited the market by selling their consumer banking business to access for 1.6 billion dollars. And having been invested in banks in the past bank of Punjab, I was very clear that there's a need to create a new wage consumer bank in the market. You cannot just have a traditional consumer bank in the market. We are the top five or six banks. People don't associate with seven, the eight banks so easily. It's not their first preference. And the 30 year old guy who's working in a tech industry startup industry doesn't. But for him, he's looking for an Uber cool experience, smart experience Instagram experience on a bank. With chops of a bank. And this is where we looked at all the players in the market. And we found Neo as a team, which was building very consumer oriented, consumer focused product in the premier banking segment, in the mass banking segment, in the blue collar workforce segment.
And they've been doing this for. Seven years before we invested. Right? And they've gone through the journey of covid, they've gone through the journey of trying multiple products and raising some capital and iteration and multiple iterations. And they finally found product market fit in all three categories from the mass banking perspective, from the premium banking perspective. Blue collar workforce perspective. They found product market in all the three categories and that's why the numbers was stacking up. The team was stacking up. The founders was phenomenal. Both founders from consumer banking experience into new experence right. India will have their digital banks. India will have, who will get the digital. I not, there's no framework for it, but is it gonna stop? Of course not. Will there be an opportunity in the future? Certainly, yes. Can Neo be one of those guys who can actually get a digital banking license and become a digital bank of India? I think there's definitely a potential for that.
Akshay: Okay, amazing. And how much did you invest in Neo?
Sagar: So we invested 7 million dollars in Neo.
Akshay: Okay. Sounds like a small amount considering your 120 million fund, like you, you've kept like you will continue to invest as a raise more capital. Like that's the reason.
Sagar: No. So, Akshay in this fund we'll do 10 million per company and 12 companies one 20 million. So 10 million. What we will invest in any company along with my co-investor, which is what I was talking to you about, side pockets, right along with the co-investor. We'll put another 3 to 5 million in each company. You think about the total allocation to is up to 15 million from my 10 from the fund, and 5 from my co investor. That allows you to get a reasonably decent position in the fund. So the company for that matter. So we invest.
Akshay: Is it important to have this discipline that I will not invest more than this much amount in a company? It could be that you lose an opportunity, it's a great company, although there is a risk also that you may end up taking on more risk by investing too much in one company, which doesn't pan out. But like how important is it to have this kind of discipline that I will not invest more than 10 million in my fund on one company?
Sagar: I think extremely important. When you're creating a portfolio you don't think about the portfolio. You cannot think about companies. Companies are part of the portfolio. When you're investing in 12 companies, you have to think about the right allocation of eight to 9%, 10% in one company. You need to give the right diversification of the fund. You need to give the right allocation to each of the companies, the fund. If you're gonna go and put 15% of the fund in one company and then remaining into the other company, that company doesn't for whatever reason.
And your fund is going to substantially underperform. So portfolio creation is very important. And portfolio strategy is very important. So we look at it from that perspective. Are we creating the right portfolio? Are we creating the right allocation to each and every company? You don't want to over-allocate. You don't wanna allocate at the same time. So that should only different. And that's how we decided to allocate 10 million per company. At any point in time, no company will redefine the fund, but there's always opportunity for a company to outperform.
Akshay: Okay, interesting. What is the regulatory risk when investing in consumer banking? And I believe Neo had some hiccup recently with their travel card because of the bank, which was issuing that travel card. And so like how big is the regulatory risk here in, in this space, specifically consumer banking.
Sagar: So, consumer like today, consumer banking cause you're dealing with end customers. And essentially our central bank is more concerned about protecting end consumer. For them in central Bank, the money of the money of the consumer, the deposit for the consumer is very important. And for them to take, to protect them, they will do everything so for them, first they want everybody to be licensed. Everybody do undertake a license and operate, Audit every quarter. Audit every quarter and not just audit every quarter, but follow the due regulation and processes everything. The first thing to become consumer banking is you need a consumer banking license, a commercial banking license from RBI then only can build it. So follow that matter, because digital bank license are not available. RBI, Neo decided to partner number with six banks. And the bank to use to build an infrastructure along with them as a digital platform. So an extremely regulated sector requires licenses of multiple forms and versions. Banks store don't have to commercial banking license, they multiple search licenses.
Akshay: Do you see regulatory risk as a material risk or as a minor risk? Like, when you evaluate in this space.
Sagar: Regulatory, always large. Akshay, but there are ways to mitigate the regulatory. Can Neo, if you don't get a banking license, can you get other licenses? Right? Can you get an NBSC license? Can you get a PPL license? Can you get an 82 license? Can you get truck payment aggregator license?
You can get other licenses. Still do much order of the world that a bank does, except then you cannot take deposits. Which is what we need partnership with other banks. If you don't, if you're not necessarily doing just deposits. You can do everything that a bank can do. Yes. Deposit is the most important pool of the capital at a bank.
And based on that deposit, you lend money to other people. So that's the difference. But, regulatory risk, we were very clear that because they're partners with banks. They're not building these products independently. There were some sort of regulatory support that we had in the job.
Akshay: Okay. So banks typically earn through two ways. One is like transaction fees, like to facilitate transactions. There will be certain charges. And second is the interest rate spread. Like you get funds at a certain rate, you lend them out at a higher rate. How does Neo work?
Sagar: Neo a lot of people come in and ask me this question that, how does Neo earn money? Right? So I have to be careful what I say on the podcast. The first thing that you do. When you show a debit card or a credit card or a four card to any consumer. The consumer's gonna go swipe that card, he's gonna use that card to withdraw money, or he is gonna go and use it. Swipe that card right as you swipe that card. A transaction fee transaction. If youll like the product, if you user of the product. You will, you'll start swiping the card everywhere. And that's when I'll start making money on every transaction, every business. So transaction revenue is obviously the biggest. Revenue for the Neo.
And then cause you're able to Ghana deposits from the customers. The banks give you revenue share on multiple products, financial services, you get revenue share and you get transaction fees, both of them. As a bank. If you think about it, 40% banking revenues come from fee income and 60% come from lending income. So for Neo also today, because Neo does not have the deposit business and the lending business right now and is coming from the fee. Can that eventually become a 60 40 ratio, is a question that we asking.
Akshay: Okay. Interesting. What are some of the other, investments that you can talk about?
Sagar: We did invest in Pro Cap, which is a leading supply chain finance company based sort of Delhi run by Himashu and Pallavi husband, wife, and come with a lot of experience under their build. Both of them in the SMB financing space had shared with you. SK was invested from the thesis that we will provide e-commerce with this thing. And supply chain is from the perspective that. As the commerce business becomes more and more digitized. There'll be a lot of capital and lot of digitization happening in the commerce business the next 10 years, and you need people who can do supply chain financing's a again, from a different Same thing if you come to the third investment, we have invested in a com. We are investing in a company called Cred Genix, which is in the collection infrastructure space. They enable banks to collect loans that they've given out to customers. The entire communication toolbox has been provided by Cred Genix to bank financial institution whether it's a bank, whether it's a FinTech, all of them together. Right, provided collection infrastructure tool and box financial institution and the fourth company we investing right now, we closing insurance, which is the largest insurance distribution aggregation platform in India. Segment, supply chain finance collections and digital banking, consumer banking and the is the same.
There's a large problem to be solved. There's a market leader, there's a great team, there's a great founding team. Numbers stack up the stack. Kenya was very visible. Exits are very clear from right, and that's how we decide to invest in opportunities. The fund fund will also be vey simpler
Akshay: Okay. It's interesting that I've somehow managed to interview all these founders like Pro Caps, Cred genix, Insurance Deko and Neo all have been on the show previously, so maybe listeners might find those episodes interesting.
Absolutely yeah. So, I wanna understand from you more about like what advice would you give to founders who are building what is it? So, there's something like a founder market fit concept and, you would be evaluating founders in a certain way to decide what makes them worthy of your investment. What is the lens which you evaluate founders, and what makes a founder really appealing?
Sagar: I think experience. Nothing beats the experience. Actually, if you have the relevant experience, you've built it over the past. 15 years, 20 years, you've gone through the journey, you've gone through the grind of dealing with RBI.
You've gone through the grind of dealing with cycles in the market, business cycles in the market, and you've built an organization. That gives me the confidence that you have the chops to build a larger organization. You have a clarity of thought. You have a vision, which is very clear. You can lay on the vision of paper, and you have the execution lever to prove that vision, how you'll achieve that vision. So clarity of thought, experience gone through the journey. Relevant, build a very strong organization, able to attract talent, ability to build culture within the organization. Equity. Give them ownership control, decentralization. A lot of things come together Akshay when you look, pick and choose, Hey, what are you building and why should we invest with the founder? Right? So I just don't look at it in isolation or silo. I say, what have you done? What are you doing? How have you built? What's your journey been? And you've put together two and two, a founder advocate the capability to build a large organization. Think about the best talent that's there in the market. Share your equity with the team. Make them part of your journey. Make them, give them a sense of belonging.
Give them a sense of a culture following to your organization. That's when you'll see a large outcome. Get the right chops in place. Get the right vision in place. Find, delivers, build the levers. That's when we automatically will become the most sought after founders in the market. And some of the big guys are already doing it.
Akshay: What do you mean by the levers here? Like, find the levers. Build the levers. These can you gimme some examples?
Sagar: For example, for Neo, just to take an example of Neo. NEO has to build a premier banking business, mass banking business with Blue collars.
You need partnership with banks to build that, you need to innovative products. So have you partnered with enough banks? Are you able to convince enough banks to come and partner with you? Are the integrations steep enough? Right? Have you done those partnerships? Have you launched products? Have you been able to convince the customers to use your products? Right? So that's the levers to build the business. Are you, do you have marketing team in place? Do you have a accounting finance team in place? Do you have the. Do you have the tech team in place? Right? How do you construct your team in terms of how much should we take? How much should be customer service? How much should be marketing? How much should be branding? Where do you spend your money? So these are lever to build a business.
Akshay: What are some of the mistakes that founders end up making at the growth stage? When they're raising like between that 5 to 15 million kind of raise not every company which raises that money, ends up being a success. So what are some of the things which go wrong? Is it like market forces purely, or is it at times wrong decisions by the founder.
Sagar: My perspective actually is that. All founders are very good founders. They're smart founders, they're hardworking guys. They have the vision, they have the capabilities.
I think the difference between the ones who get the escape velocity and the people who do not get the escape velocity for whatever reason. I primarily think is the execution strategy of the business. Need to get the execution strategy business absolutely correct. Right? You'll need to monetize a business model.
You need to have the teachers that this is a financial services business. This is not a Tech business. Tech is on top of that. FinTech is fin first, take second. It's not tech first and fin second. So I always tell founders, if you think about financial services and how do financial institutions make money. Think about that. And now you go and a platform or a business model or a product around it and then raise growth capital on it. And then I use technology as efficiency enabler in the market. To build a larger outcome. That's when the will happen. When you raising growth capital, it's very easy to through the money. But you need to have an eye on return, on investment, on every capital that you spend, where you're spending, who you are spending with, and why you're spending that capital. What is the outcome going to be? What you need to bring people on board. You cannot, you need to have an experimental experiments going on, but you cannot be burning money through experiments.
You cannot do aggressive acquisition approach statements. You need to understand your capability to acquire Capability to integrate those businesses, manage those businesses. Why your team strong enough. So there's bunch of things which result into faster growth and bunch of things not into faster growth. Capital is just a buyproduct. A capital is just a raw material, but how do you use that capital and bring efficient in the business? The most important conversation that we have, founders to think about it every day, internalize, come back and create.
Akshay: Interesting. You said that unsecured lending is an area you you're not gonna ever invest in. Why is that? Like, that's a pretty large opportunity in itself.
Sagar: Ever in our industry. But it's a very tricky situation. When you give money, somebody to, like, if I give money to Akshay. I don't know Akshay. Right? How am I gonna recover money from Akshay when you're doing unsecured lending, you are not lending to server, you're lending to thousands of Akshay and servers at different start off income, different, lifestyle, different journeys.
And now you are hoping that this is gonna pay money. You obviously the collection infrastructure and the underwriting models in place. Yes. End consumer. So the challenge unsecured lending, a lot of people are saying that it's okay for my first loan to be not profitable. I think that's a wrong way to approach it. Why should you on the first loan be not profitable? Every loan that you, every money that you do allow should generate a return on investment for you and should add your balance sheet. So I think some founders have done a very good job in the consumer lending space and the unsecured lending space in the SMB category. But sustainably creating a large outcome is very difficult. And we know that from the past experience in China US India, that you need to have a more secure strategy towards lending and a secure strategy towards electiions. So I'm evaluating, businesses. I'm still looking to come across lending.
Akshay: You said some founders have done a good job of setting up an unsecured lending business. Who are those founders that you think have done.
Sagar: I think founders have done very good job. Money founders have done very good job. Credly founders have done very good job. Those three or four founders. And I think Lending Card is doing an interesting job in the market. Actually was doing a good job in the market. Founders, bunch of them done a good job. But can you have hundred plus companies in this category? Absolute. We are lot of companies right now who are done. Good job.
Akshay: It's interesting, the names you've mentioned are not the most high profile ones in the lending space the most high profile ones are either like, say, payment like the UPI apps, UPI businesses enabling.
Sagar: So the phone pay from the PayTM of the world Akshay are payment platforms and they're sourcing loans for banks and financial institution partners. They don't lend on their own balance sheet. The lending, yeah, the lending is done by these guys. The ones who are actually have an license, a platform play to lend money. All the banks in the bank. So, You are these are not the most high profile names, but in the next five years, you'll see them as the most high profile name in the FinTech lending space for that market.
Akshay: Okay. Okay. And what about these businesses which have data as the mode for lending?
Sagar: I don't think having data is only solution to lend money. I think data is one piece of the variable. To underwrite the lending. You need to have a lot more information. You need to control the flow of capital. You need to control the flow of money. In the journey of lending.
So why do you think payment companies have, cause they have access to cash flow of the underlying borrow, the underlying moreover. That's where they're able to lend more effectively just by having data doesn't really help you collect money. Lending is a more collections business and lending business. So I think correct. I think they need to be part of the journey of the business from a transaction perspective, which is commerce. Or payments or some sort of a solution which is being utilized on a daily basis, then you'll be able to collect, effectively, you can underwrite for sure. But again, underwriting is one part of the puzzle or combination of onboarding, underwriting, lending, collecting at same time.
Akshay: And because of the importance of collections is why Cred Genix would've been an appealing investment for you?
Sagar: Absolutely, Absolutely. Lending is like everybody wants to lend money. Somebody has to build a collection stock.
Akshay: Okay. Interesting. So, there is like this general belief that we are going through a funding winter. Do you agree with that?
Sagar: So, funding winter is definitely there Akshay yeah. Funding winter from the perspective of the founders who have not been able to perform right, we'll find it difficult to raise capital. A lot of smart founders raised capital in 2022, so they are now okay this year and next year.
But people who have raised in 2020 and 2021 are coming back to the market and if they have not been able to prove the business model or got hundred product market fit or not, are not able to show operational profitability to some funds. They will have difficult to raise capital. It's not that capital is not there. There's more than 15 million of dry powder with Indian private equity capital fund managers. But because they want people to perform and the founders to show better operational metrics is why the capital has been slowed down. Obviously, valuations have corrected globally, public market, private market valuations have corrected and that reflects the pricing. And that's why investors also holding the holding the populations longer for them because they know that the pricing is, can be far more attractive than what is being asked by the founder. So it's all, about can you hold on longer and get the best value for your price. And the business that you're buying.
Akshay: Interesting. Should a founder accept a down round, like, a lot of startups go through all sorts of gymnastics to avoid a down round what's your view on that?
Sagar: I think the round, first of all, we should not increase the evaluation to an expectation, which we cannot meet. When you increase the evaluation and then you have to produce the numbers to catch up the valuation, which is also the challenge founders to not keep increasing the valuation just because you wanna. Raise new round or show markup for your previous investors. I always believe that capital and building the organization is more important than valuation. And if you believe in your, and you've. But you should be able to build businesses so whether it's a down ground or an upground, I don't think about that. I think are you building a good business and does a capital business and the whatever value she comes in.
Akshay: Okay. Can you share some of your mistakes as an investor? Maybe you passed up on something or maybe you thought this was a good investment and it turned out not to be. Like, what have been your own mistakes? What have you learned from them?
Sagar: We as investors get carried away. As I said, when you look at a 10 year journey, we build a lot of numbers and castles in the air. And we underwrite those assumptions and we invest in those companies sometimes. And yeah, sometimes you overestimate your understanding of the business. Sometimes you overestimate your understanding of the numbers. And then you fundamentally go wrong and thesis some of those opportunities. And cause happened to us in the past, happened to me in the past as well, where you can't do about what you've underwritten now it's all about fixing the business. And you fix it in the timeframe. Maybe not, maybe, yes. So, Trying to overestimate the opportunity in the market is the biggest mistake that we all do.
Akshay: How do you build your understanding of businesses? Because you said one of the biggest reasons for wrong bets is you overestimate your understanding of the business. And so, how do you build an understanding of a business because it might take a founder like, a couple of years to. Get a good understanding of a business, which you have a month at best, to develop? How do you do that?
Sagar: We build a thesis, like as I shared with you, the 30 teams right in the front. So I've been, we've been looking at all the companies, early stage, growth stage, late stage companies, the 30 teams.
We keep double checking every month, every quarter in the segment. What are the players, what are they doing? What's the feedback coming along? How the sector performing, how the team is performing, why is it performing? What are the challenges? How are people overcoming the challenges? How has a particular founder fixed those challenges?
So is it constant evolution. Also, being a sector focus fund allows me to, on the sector a lot more in detail. I can spend more and more time on this thesis and more and more time on payments, lending, insurance, agricul, healthcare, education, commerce. I can just double click, keep double clicking on it and say now we know what works and what doesn't work. So by being a sector focused strategy, it allows you to keep reading deeper and build your thesis on segments. And it's more of a validation when you look at the company and the founder and say, Hey you know all the challenges and you fixed all the challenges. So we like the opportunity that you invested in. And despite that, you underwrite the risk sometimes. So, you try to increase your understanding and every day is a new learning in a business that we are in. Even today. When we meet founders, we learn something new every day, right, of how to look at things. So it's a constant learning exercise for us at the same time.
Akshay: Okay. Amazing. Do you reach out to companies for investing in them or is it generally always inbound?
Sagar: We do all outbound reach outs. We reach out to everybody in the market, we want first people out there at the door talking to them, understanding the business models, trying to underwrite their thesis, trying to underwrite our own thesis. So we, we do very proactive reach outs. We do very proactive follow ups. So it's been a constant exercise for us. It's not new, so we've been doing this for a long time. We don't wait for companies come to, obviously a lot of inbounds as well, but we do a lot of outbounds as well.
Akshay: Okay. How does a typical work week, how does your time split look like? Like what percentage of your time is spent in meeting founders, or what percentage of your time is spent in reading reports.
Sagar: I think. 25% of my time goes in meeting founders at least, if not more. 2 days in a week would probably go in. Meeting founders two, one to two days is just trying to understand the industry a lot more. Understanding sectors, understanding segments, understanding challenges. One to two days just meeting industry folks and trying to understand what they're seeing and what they're underwriting. And obviously one to two days goes in continuously fundraising at the same time. So it's a multiple factors and multiple things that come together to mind the outcome. So yeah, it's quite well split right now between all of these different segments.
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