Lot of global investor interest in India right now: Arkam Ventures MD

We expect more foreign limited partners to put money into India, says Bala Srinivasa, MD, Arkam Ventures

Amid the current funding slowdown in the Indian start-up world, Arkam Ventures, an early-stage investment platform has announced its second fund with a target corpus of $180 million. In an interview with Aryaman Gupta, Bala Srinivasa, Managing Director, Arkam Ventures – a former Partner at Kalaari Capital, talks about the current trends at play in the Indian start-up ecosystem, from foreign investor sentiment, prevailing challenges and concerns, to the current state of private equity and venture capital in the country. Edited excerpts:

Please give an overview of your Fund I as well as the recently launched Fund II.

We launched our $106 million Fund I in February 2020. As many as 70 per cent of the investors were international, institutional LPs (limited partners), while 30 per cent were Indian. We made 16 investments from it, pre-series A through series B, and have allocated around 70 per cent of the fund, closely sticking to our thesis of Middle India Digitization. Our portfolio consists of companies across sectors, including fintech firms such as Jar, and Kreditbee, food/agritech companies like Jai-Kisan and Jumbotail, skilling companies like Smartstaff and Cusmat, as well as SaaS companies like Spotdraft and Signzy. 

Our core focus remains on sectors like financial services, healthcare, food/agritech, mobility, and skilling. Through our Fund II, we will also make investments in sectors like manufacturing technology and electric vehicles (EV). Our cheque sizes are also going to be bigger at $3 million, up from $1.5 million-2 million in our first fund. The idea is to target higher ownership and lead bigger rounds. We expect to close the fund by the end of this year, following which we will begin investments. We are targeting a total corpus of $180 million.

Was it challenging to raise a large fund amid current funding slowdown?

The fact that we are announcing this fund amid the current macroeconomic headwinds should indicate our comfort regarding investor interest in the fund. We think it is a great time (to launch a fund). There is a lot of global interest in India right now.

The large-scale domestic consumption in the country, which is closely related to our Middle India thesis, is one of the reasons international investors are looking to India. Moreover, industrial efficiency is another important factor. There is much room for technology-led innovation among Indian industries and businesses.

These two factors combined are the source of investor interest in India at the moment, even in an environment like this.

What is your take on the prevailing PE/VC environment in the Indian start-up ecosystem?

Things have slowed significantly from 2021, which was evident in 2022 itself. However, good founders are still raising promising rounds. Valuations are clearly down, in many cases by as much as 50 per cent of what they were in 2021. But that doesn’t mean there isn’t capital available for good ideas.

Moreover, the prevailing environment has also brought a level of sanity to the entire ecosystem, which, we hope, stays for the next couple of years. We don’t expect to see things taking off like they did in 2021 anytime soon.

Do you expect to see an end to the funding slowdown in the near future?

The situation is difficult at the moment but some of the best times to invest have been during a so-called “lull” in the investing environment. We expect to see a lot more capital come into play over the next several quarters. From an LP perspective, India is going to remain a destination of interest for international LPS, especially in light of the recent concerns around China and India standing out as somewhat of a bright spot in the global economy.

What are some of the major concerns among LPs at the moment?

We expect more LPs to put money into India. One of the standard questions for LPs, globally, is the interest rate environment, and whether we are slipping into a global recession – which does not seem to be the case right now.

India is, however, standing out in terms of its growth rate due to the advantage of strong domestic consumption. From an LP perspective, the allocation of capital to the VC asset class is going to continue. And when they do that, India is definitely a topic of discussion anywhere in the world. At what pace these LPs choose to wade into Indian waters is something that we will have to see.

What are some of the trends that are likely going to be at play in the Indian start-up world this year?

From a trend perspective, we expect to see a lot of activity from certain sectors that are aligned with what India needs to achieve, which is why we think areas like manufacturing technology, EVs – including EV infrastructure, battery systems, and software associated with that – are going to be key areas.

Fintech will remain a huge area of interest, simply because it is one of the largest sectors in India and there is tremendous room for a lot more innovation. This is especially evident in areas like the penetration of financial services, where we have just begun to scratch the surface. We also expect a lot more innovation in areas like food/agritech.

Once founders are able to identify the right business models, we expect things to really take off. Until then, a sliver of founders are going to continue to raise capital, even during this period of uncertainty.