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Archive for the ‘PE/VC’ Category

Ratan Tata is right – very few disruptive startups get funded

Posted by fairval on October 12, 2017

One of the few industry captains to have taken seriously to start-up investing, Ratan Tata recently rued that there are very few disruptive startups in India. “I don’t think we have as many really disruptive startups in India as we do overseas,” said Tata.

We couldn’t agree more with Mr Tata, atleast in the lifesciences space, where we focus more compared to other areas. The funding scenario is lifesciences start-up space is truly appalling, to put it bluntly.

We had written 2 years ago, on the poor scenario in funding of R&D startups in pharma. Nothing has changed in R&D funding in pharma. USA and Isreal each see 50-70 pre-revenue R&D startups get Series A funding in pharma. In India, we are lucky to see 1-2 deals in a year.

In healthcare, the scenario is equally poor. Considerable funding has gone into so called ‘health-tech’. Most of them have zero innovation. Take e-pharmacies for example. They are all following the same cookie-cutter ecommerce formula which the Flipkarts and Amazons have created. But there are significant differences in the market in which Flipkart operates, and pharma retail. Several Flipkart categories have 30-50% gross margins (pre-discount). In Pharma, retail markets are around 20%, and governed by DPCO regulation. So if you offer a 20% discount, you are operating at zero gross margin (and actually negative, if you are delivering from the neighbourhood retailer).

But e-pharmacies are still better than some other segments which have got considerable funding. You atleast need to order medicines frequently, so there is some chance of habit formation, which is what perhaps the discounters are trying to achieve. Whether they can survive till they figure out how to make money is another matter.

Some other segments are even worse. Home healthcare for ex. This is a low margin staffing type business, with huge service quality issues. One really has to wonder how this is scalable.

How about ‘booking doctor appointments’? In real life, there is no business like this. You pay a doctor, you don’t pay someone to get an appointment with the doctor, over and above doctor fees. Therefore the doctor should be paying in return for getting appointments. Have doctors been doing that in the past, as an established business practice? Not really. So this is a business which requires behaviour change, and creation of a market which does not exist, yet. But more than one startups have bene funded here, and with big money; this is akin to funding a market size of zero. The leader may survive, but may need to augment its revenue model.

Coming back the innovation issue, we have consistently found innovative startups in healthcare find it very difficult to get funding. The poor entrepreneur will get the same response “show more traction”.

Tata further said, “The government should and could play a major role in (developing India’s startup ecosystem)”. That is perhaps the only hope for spurring innovation in healthcare / pharma space. In fact, government is doing quite a bit here. The BIRAC (Biotechnology Industry Research Assistance Council) program, run by Department of Biotechnology (DBT), now in its sixth year, is quite active, granting out maybe 50-100 grants per year. A recent release said – BIRAC has provided financial and mentoring support to more than 500 companies, and nearly 500 young entrepreneurs and startups.

The problem happens after that. There appear to be many promising startups which are struggling with the issue – what after BIRAC?


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VC/PE deal space continues to see slowdown

Posted by fairval on December 14, 2016

Amount of investment in Indian VC/PE (and angel) space continues to see slowdown. This is from data for Jan-Nov’16 (Source: http://www.indiabusinessreports.com)


YTD amount is just over USD8B, down 38% over last year, while deal count is down as well.

The decline is sharpest in internet based businesses, where investment is this year is just about a third of last year.

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Is it a real business, or is it a Po*#x*

Posted by fairval on October 13, 2016

As part of our transaction advisory work, we do considerable work in pharma / healthcare space. We also have our own angel platform which invests solely in pharma / heatlhcare startups. In this, we have several HNIs who are business owners from the same space – pharma / healthcare.

In other words, we regularly meet and talk to people operating in this space. Often these meetings come about when we are representing a client from healthcare industry, and on its behalf are talking to either a fund or HNI for funding.

In the last one month, in 3 separate meetings, we got asked roughly the same thing (about our clients) – is it a real business, or is it a P*#$@+?  No reflection on the clients, but is there something not quite right with this company they want to compare it with? From being the toast of the startup world, why are several people seemingly bad mouthing it?

We have no idea of whats going on with this company, but lets see if this becomes one of these standard questions one must ask a startup – are you a real business, or a P*#$@+?

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Deals slowdown strikes again in May’16

Posted by fairval on June 8, 2016

2016 so for continues to see less VC/PE activity compared to 2016. Reported investments fell again in May. YTD amount is down 22%



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‘Delivery food tech’ is not happening, but other food tech may work

Posted by fairval on February 25, 2016

The Economic Times carries an article today carrying an article referring to Mahesh Murthy’s (a seed investor) where he talks about how food tech companies will never make money.

First, one needs to clarify this word ‘Food Tech’ – which has become a much abused one. This word is getting applied indiscriminately to a lot of businesses. We can see a few distinct slivers within this segment:

  1. Delivery logistics businesses – these are companies like Food Panda, Tiny Owl, Swiggy etc. This is largely a logistics business, though they also generate demand. The consumer says ‘I want to order food, lets go to foodpanda site, order etc..’. These sites list restaurants from where they will deliver food, within a certain radius. They have offered freebies to consumers to attract demand. Zomato is slightly different, since it started largely as a advertising platform, not really food delivery business, though. When Zomato entered food delivery in Mar’15, it may have been an afterthought, though it has structured the business differently. It does not deliver on its own. It seems to simply take order for a local restaurant (choices based on the customer’s address) and the local restaurant delivers. Will it be big for Zomato? Don’t think so. Zomato is largely about fine dining listings, not your average neighbourhood place. People are not going to order home delivery from fine dining.


  1. Delivery only restaurant businesses – these are companies like iTiffin, of iChef, Holachef, which make their own food, but don’t offer dine in. These are actually somewhat like Domino’s, except ordering process is via an app, not over a phone which one normally uses for Domino’s. The difference from Dominos is that these guys typically have 1 or more central kitchens, which a customer does not see. Dominos on the other hand has retail outlets, where it does not quite encourage you to eat, but they serve as local spokes from where delivery occurs. Box8 appears to be doing this to some extent. Saw 1-2 Box8 outlets in Mumbai, which don’t appear to be dine ins, more like local delivery spokes.


  1. Food aggregators – there is a slight difference from 1. These don’t aggregate branded restaurants, they aggregate home kitchens, or caterers at best. There seem to be several such startups in each large city, like Mumsmenu.com in Chennai, Cyberchef in Gurgaon,

Much of the discussion has been around category 1, which has also attracted the most money. We agree with Mahesh on that. It is hard to see how a Food Panda or Tiny Owl are going to create business value.

Check their economics. We believe their gross margin is about 10%. From this, they have to manage all their costs – cost of delivery and money collection, demand generation, CRM, and HO costs. When will it work? When the order size is large. Ideally Rs 2000 per order on an average. Is it happening? We don’t know, but we doubt it. Orders more than Rs 2000 or more will be rare. If per person cost is Rs 500 or more, that borders fine dining quality food. For that, people will go out. If it is everyday food – singly guys order dinner for instance, or a family that some day does not want to cook, and is not going out either – those don’t result is expensive orders. Per spend in such cases will be less than Rs 200. Think about it – if you spending more than Rs 500 per head, you would rather step out, enjoy service and let someone else clean the dishes afterwards.

From a Zomato conference call transcript: Our average ticket price is about Rs.600 per order and what I have heard, I mean what I have heard for our competitors is that it is about Rs.225 for them.

Don’t think there would be such a wide disparity, but our point holds – you are not going to get large orders in home delivery. Ergo, there is no business if you try to deliver. Maybe it can work the way Zomato is doing it – just order taking.

Categories 2 and 3, however, make a lot of sense. As we said, category 2 is like Dominos, but does require lot of spends in demand generation. Hence, it needs strongly differentiated product. For ex, we doubt ‘biryani at home’ kind of businesses (a recent deal) are really strong enough to create that differentiation. iTiffin and iChef are both highly differentiated. iChef has also done a transaction with Brand Capital, realising the need for creating demand and building a brand.

Category 3 also has promise, since the available gross margins will be more than what you get in Category 1. So the worst segment has got money, and has tarnished the word ‘food tech’.

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Jan’16 sees USD800m of VC/PE deals

Posted by fairval on February 13, 2016

Better than Dec’15, which say USD667m, but last 2 months (Dec and Jan) are slower than general trend in 2015.

Number of disclosed deals remains robust, at 85.



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VC/PE investments for 2015 close at ~USD 14B

Posted by fairval on January 12, 2016


Eight years after 2007, when India Inc absorbed ~USD18B of VC/PE investment, the sector once again saw robust activity in the year gone by. Total VC/PE investment hit almost USD14B, the second best year in the history of VC/PE investments in India.

In contrast, in 2014, total reported investment was ~USD9B, from 381 deals. Total reported deals were 556, around 178 did not report amount of investment. In 2015, total deals reported were 881, of which 300 did not disclose amount invested.

These numbers may not necessarily match with figures from some other sources, we have noticed some other numbers which are larger than India Business Reports’ number. The reason could be people are counting within VC/PE  numbers, deals which aren’t exactly what we would call a VC or a PE deal. For example, we don’t see how a strategic investment qualifies as venture capital. Or an investment in a company outside India, even though the source of money could be from India.


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The LP displeasure at AVIGO – what may have caused it?

Posted by fairval on October 25, 2015

Last week several business papers like The Economic Times and Mint reported a rare kind of event – Limited Partners of a PE fund trying to chuck out the fund managers. Such events are certainly ‘extreme’ events.

An article in Mint says that LP displeasure was driven by poor performance. It seems Avigo management team or General Partners returned only 30% of the $125 million in capital raised as part of the Avigo SME II fund in 2005.

Separately, The Economic Times reported that LPs had sued Avigo for negligence and mismanagement of funds. Achal Ghai, the managing partner of the fund has been asked to leave and global investor Siguler Guff headed by Praneet Singh in India is now managing the show

According to ET, the tensions started in the second fund where almost 75 per cent of the fund was invested in Tecpro Group. The fund had invested in Tecpro Systems which got listed post investment, as well as some unlisted group companies. From ET article — “The fund managers did not sell the stake even when the stock rose five fold. Today the value is down by 60 per cent,” said a fourth person involved in the issue. The Tecpro stock had reached a high of Rs 454 per share in 2010, but is currently languishing at Rs 7.19 per share.

The articles in both Mint and ET don’t quite make it clear exactly what was the LP’s core issue. For ex, was it:

  1. So much exposure to one Group? Normally, any investment vehicle sets upper limit to the amount of investment it may make behind a single entity or management. 75% to one group, if true, is probably unheard of. However, the GP’s must have taken clearance from LPs before investing, so the extra ordinary allocation to Tecpro could not have been the main cause of distress.
  2. Or was it failure to sell in the listed company when the price was high? Is this what is meant by ‘mismanagement’ as quoted by ET.
  3. Or is there more to it? What, for instance, was ‘negligence’? Failure to sell does not sound like negligence.

I was checking out Tecpro financial’s sometime in FY12. Around that time, its revenue was around Rs 2500 crore. The company was growing strongly, at around 30% CAGR.

There was one item in its balance sheet which was rather unusual. At that time, its receivables figure was quite high, almost equal to 12 month of sales. If I remember correctly, one reason why this was bloated was that the company was carrying around Rs 800crore plus of ‘retention money’ within receivables.

This needs a bit of explanation. Tecpro was in the EPC business. In this, the customer pays in stages, partly at start, and then at milestones. When you commission the project, the total customer payment will typically be around 90%. Customers tend to retain around 10% for a year – to see of the project is delivering as per specs. This suggests retention money in sundry debtors should be around 1 year of retention ideally.

Rs 800 crore kind of retention money should equate to a revenue delivered of around Rs 8000 crore. But that was equal to almost 5 years of revenue. Or to put it differently, the company’s retention money ideally should have been around Rs 250-300 crore.

So the amount on the books appeared way too high. Why was that so? Now Avigo representatives were on the board. I suppose they would be aware of this issue as well. What was their stance about this? Wonder if this was also among the issues LPs had with the GP team? Was this one of the issues around the ‘negligence’ concern reported in ET.

PS: The papers have subsequently reported an out of court settlement between GPs and LPs

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VC/PE investment in 2015 overtakes calendar 2014

Posted by fairval on September 7, 2015

Acche din are  certainly here for Angel – VC – PE space.

  • YTD 2015 investment stands at around USD 9.1b, 5% more than the figure of USD 8.7b reported in entire calendar 2014.
  • Monthly investments in private equity seem to have picked up sharply in India. After 91 reported transactions in July, another 80 transactions were reported in August’15
  • The total deal count in Jan-Aug 15 stands at 529, almost 60% higher than the same period last year.


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Incredibly shallow VC scene for Pharma R&D in India

Posted by fairval on May 17, 2015

India pharma is touted as a big success, but what it does is not much better than Indian IT – low cost work with negligible innovation. There is no simply appetite for pharma R&D in India – not amongst companies, and perhaps as a corollary, not amongst VCs either.

At Wisdomsmith we took on fund raising mandates for 2 R&D firms in the last one year (Wisdomsmith Advisors’ main sector of focus is pharma/healthcare). One was looking for seed funding, and the other for Series A. While we could find and investor for the seed one (strategic), the Series A one has been a struggle. None of the pharma focussed VC funds we talked to, are currently investing in pure play R&D companies.

This despite our firm belief that our client could emerge as the most exciting pharma R&D company in India. This company is doing some globally cutting edge work, has a brilliant business model, and is close to a major breakthrough. It has raised seed funding, has got several government R&D grants, has shown incredible progress from meagre funding, but when it comes to Series A, no takers.

We then talked to several US based biotech funds we know. They said – “great company, but we can’t invest in India. No focus on India”. In other words, if you are a US based biotech VC, India is not on your horizon. And mind you, there are maybe 30 such funds in the US, focussed ONLY on pharma/biotech deals, quite willing to back early stage companies. But not one of them is looking at India.

The purpose of this post is not to rant. I wanted to present some data to show how bad the situation is – the vast chasm in funding ability of a pure play R&D biotech in India (basically zero), versus the US.

Check the chart below. The 10 year data below shows that atleast 60 pharma/biotech startups get Series A funding EVERY YEAR in the US. In India, how many got last year – NONE. Over 700 (747 to be precise) starts-ups got Series A funding in the US over the last 10 years. How many in India? Maybe 10.

(And this is just Series A. Total deal count in this period is ~2000, some of which would be follow-on. In India, all rounds put together may not cross even 20)

Source: Venture Funding of Therapeutic Innovation, by David Thomas and Chad Wessel

Source: Venture Funding of Therapeutic Innovation, by David Thomas and Chad Wessel

And where does the Series A money go? As can be seen from the chart on the left, mostly for new drug discovery (~82%), not for ‘Drug Improvement R&D’. Annually, over USD 1B. In contrast, in India, VC funds have invested maybe around USD50m in 10 years in backing R&D firms.

Source: Venture Funding of Therapeutic Innovation, by David Thomas and Chad Wessel

Source: Venture Funding of Therapeutic Innovation, by David Thomas and Chad Wessel

The chart on the right further shows the risk taking ability in the US. More than half the money goes into pre-clinical stage companies. In India?…well, let’s not talk about it.

Will this change? Quite unlikely, in the foreseeable future. Unless we have something like-

  • The Government allocates say USD 250m per annum for VC investments in pure-play pharma/biotech R&D firms, gives it to say 5 funds like ICICI, Kotak etc; they invest on a purely commercial basis
  • Pharma promoters like say those of Sun/Lupin/Zydus etc set up funds to back third party pure-play R&D companies. While they may have burnt money inside their companies, that does not mean they will lose in a VC like set up. Perhaps doing R&D internally was a wrong idea in the first place.
  • It could also be a combination of the 2. Government can match $ for $ money deployed by privately set up VC funds.

Posted in PE/VC, Pharma and Lifesciences, Research and Development | 2 Comments »