Episode 107 / March 8, 2021
Starting as an angel investor, developing an understanding of spaces and sourcing potential deals with Arun Venkatachalam
In this episode, we chat with Arun Venkatachalam, who comes from the Murugappa Group – family, and is also an active Angel Investor.
Arun has invested in 25+ companies including Posist, ZoomCar, ZestMoney, AdPushup among others. And he has also got successful exits from companies like Innov8 CoWorking (acquired by OYO Rooms), Yourbus (acquired by Naspers/Ibibo Group), Endless Robotics (acquired by Mojay) etc.
During the podcast, he also shares how he initially invested in equity markets to build his own capital, which he later invested in his studies and his portfolio companies.
For anyone looking to start up as an Angel investor, this conversation can be of great value. From gaining a deep understanding of a particular space to sourcing potential deals, to making your first investment, this podcast will really help you start and build.
00:55 – Belonging to Murugappa Group (Family Enterprise); starting in Investment Banking
04:56 – Initial investments as an Angel investor
07:42 – “In order to be an expert down the line, someone has to start somewhere.”
12:50 – Creating an impact on Cap-table
25:21 – Investing in Recykal; creating impact because of ESG
28:01 – Advice for a first time Angel investor
32:12 – Having a conservative approach as an Angel investor
34:32 – “Opportunity isn’t in running with the herd, it’s always in running against the herd.”
36:51 – Finding investment deals as a first-time investor
39:17 – Having a nuanced view while investing in Fintech
Read the full transcript here:
Hi, this is Siddhartha Ahluwalia, welcome to the 100x Entrepreneur podcast. Today I have with me, Arun Venkatachalam. Arun is a very well known angel investor with 25 plus investments which include Zetwerk recently raised 200 million, Industry Buying, Zestmoney, Jupiter money, CityMall. Arun has also six successful exits to his name, which include YourBus acquired by Naspers, Innov8 Coworking, acquired by Oyo Rooms, PharmEasy acquire, and secondary sales. Arun, welcome to the podcast.
Thanks for having me, very nice. to meet you well.
Arun, I am intrigued, what do you do for a living?
Well, I’ll just track back a little bit. So basically, I’m born and brought up in Chennai. And most I’ve actually not been there for the last only been in China for two of the last, you know, 12-13 years, I mostly studied in England, and worked in Bombay and London, for the most part. So unlike many others, my route to getting into early stage technology investing was actually a different one from other people. So basically, my family runs a bunch of old school businesses, not really tech heavy, based out of Chennai, the group is called the Murugappa Group. We’ve got interest in agriculture, financial services, and manufacturing. The group has nine listed companies, they’re all professionally managed. And because it’s professionally managed, as a family members we were told that, you know, there’s no, you know, it’s always fine and nice to go work with the family. But the first three years, you got to go work somebody else, right. And I always had an interest in financial services. And those days in investment banking was the cool thing to do, right. So I decided to do that. So, as a result, I did it and I worked for Enam securities in Bombay, which became Axis Capital, then I worked for Lazard. I eventually went post MBA at London Business School, I worked for an asset management firm called Habrok Capital. But in that whole process, I realized that look, most of the publicly listed universe in India is this family, family businesses much like my own, but in 2010, one out of 10 companies was not family promoted. And I had a theory that by 2013, it would it would reverse only one out of 10 IPOs will actually be family business IPOs. The rest would be you know, VC in the back. So I said that, Okay, that was the case. And then, you know, India tech was just sort of taking off. And those days, you know, I went to, you know, Monish Chokhani, who used to run Enam Securities, and I said, hey, look, we have this TMT business. And on this technology side all the time, you guys are only talking about IT services. What about product? What about actual businesses that are selling in India to Indians and Indian companies selling product abroad? And most of the tech guys, we’re just doing IT services stuff, and I found this rather bizarre. So he was kind enough to say, Hey, why don’t you just represent the firm in some of these VC circle events and stuff, this is 2011 and at that time, only, like from 40 people will attend these events, it was too nascent in early so I got an early opportunity to kind of start and those days you will probably less than like what 40 30- 40 angel investors in the whole country. So is that okay? It looks like you know, a nascent industry, very few people are willing to put capital in, maybe I should start so I said, I will do it. But my capital really came from investing in public stock markets. I happen to be lucky enough to invest in a company called Bajaj Auto Finance, in 2009, which became Bajaj finance. You know, it could have been the greatest investment of all time, but, you know, it went up, it just constantly kept going up, I sold it 33 times, and every time I sold it, it went up some more, but, you know, it looked good, it helped finance some of my business school. And it also gave me the capital to first go and invest in early stage technology businesses, because then, you know, at 22 you know, obviously, though, there is some, you know, family money and surplus to put towards, you know, to this, you know, we’re, you know, at the end of the day, we’re just conservative South Indian people from Chennai, so, I was not going to just get the opportunity to go crazy. So as a result, you know, I said, Okay, fine, I’m going to risk it, did I risk whatever I’ve made myself, and then I’ll start and before I move on, and we discuss everything, I have to, you know, give credit to the first guy I invested in, and that’s Ashish Tulsian of Posist and you know, Ashish is now a bit of a dawn in the whole Indian ecosystem. But But those days, you know, Ashish was a nobody, you know, I was a nobody. But we were all just excited about what was going to happen. So I told Ashish the most fortuitous thing of that investment was that, you know, the first person I invested in, was Ashish. And that was actually just a really good experience. Right? Had it not worked in it had been a sour experience with somebody else, I may have just stopped early stage, right. So for me, the first foot in the door was a very important one. And then I just kept building and you know, eight years on, I’ve done a bunch of stuff since then.
And what were the top 10 investments which you are the first 10 investments, I would say,
I have to think but basically, early on, it was Posist, then it was YourBus, which basically got acquired by Ibibo. But these were companies from the Morpheus incubator, right. And I knew that Sameer and the Morpheus would have done a bit of DD on their own, so I didn’t have to do all of it myself. So it was quite okay to start there. Right. Because nobody knew too much what was happening at that point, you know, then eventually, a few others came. You know, zoomcar got to meet Greg, and found out what he was doing IndustryBuying. So my family comes from a B2B, B2B business background. And those days, everyone was excited about B2C food delivery and a whole bunch of these things. I’m like, okay, B2B is interesting, but somehow no one wants to talk about it. So we got to meet Ashish. Sorry, we went to meet Swati and Rahul at Industry Buying. And then, you know, that was a, you know, joining of hands. And from there, I said, Okay, B2B is going to be much more deeper and more interesting. And I’ll start, you know, and I just kept building on from there. And in the beginning, I tried to do everything. But over a period of time, I said, Okay, look, one needs to have a circle of competence. So, so I just tend to focus on a few but you know, for learning, sometimes it’s okay to allocate a little bit of capital into exciting new areas. So obviously, I may not be an expert, but I will ask if I can be a part of it. And that’s just the whole part of it. Right? So maybe I’ll be an expert in 15 years, I don’t know. But someone has to start somewhere. So yeah, B2B, FinTech marketplace is really where I think I do understand something. SAAS, I’d like to do more because I have, you know, the opportunity to consult with people like Ashish of Posist, Ankit Oberoi of Adpushup. All these guys, I know a great resources, so I can go and do more. And then I realized because I can’t do everything myself into consumer brands, I won’t do it. My own my own it just it just too hard. You have to just do that one in, you know, one sector all day every day. So I normally was not an LP. I used to do things direct but to consumer brands, I said, Okay, I will be an LP in Sauce VC Manu’s fund. And, you know, wherever there’s opportunity. I’ll co invest with it.
And, you know, you have some fantastic names in your portfolio, starting with Posist to sell. So, a backstory, Ashish wasn’t invested in my company called Babygogo which got exited to Sheroes. I also come from the same Morpheus gang. I was in the last batch of the Morpheus gang, so dot connects backward. And I have Ashish co- invest in several SaaS companies. What has been your largest exit till now?
So you know, I wouldn’t want to honestly put numbers, it’s just not right. And the, the, the the effort here is to just, you know, find great entrepreneurs who create value in jobs in this country. So, you know, I wouldn’t really put a number to it, it’s been healthy. I’ve pretty much got everything I’ve got out almost all the capital I put in right, which put x.
which company is this which you mentioned? Which company is your largest exit till now? Which portfolio company? Well, not, not asking numbers.
Okay. Okay. So I’ll put it this way, right. If I put X across 23 or 24 odd companies, I’ve kind of exited five to six fully, no, I’ve exited four to five fully and I think to some part exits. But the one that’s sort of healthy, I’d say a healthy exit was Zetwerk. You know, it would have been nice to carry on and, you know, keep riding that because it’s you know, it’s a beast. Yeah. But you know the truth. The truth is, you know, when a founder, founder like Srinath of Zetwerk, having delivered so much return to you in such a short period of time comes in request, you know, could you sell some in? You know, it was a very, you know, I it was already past my, you know, long term capital gains, period. And you know, it wasn’t really, it was okay. But you know, if someone’s returned you such a return in such a short period of time, you know, it’s a give and take. And because it was a request from somebody who’s just done so much. I said, Okay, you know what, please allow me to continue. But if you need me to, respectfully, I don’t mind doing so, you know, it was just a very decent conversation. And I was happy that I could do something for him a little bit. And, you know, just, I just cherished the good fortune of having, you know, him being given the opportunity to invest in him. So, yeah, it’s been healthy, but, you know, I just wished it you know, you know, I couldn’t run around with the rest, but whatever I do have remaining I, I really do want to run with it right to the end. Because you know, Zetwerk is a truly special company. And yeah, just been my good fortune, I suppose.
And let me ask, have your six or five exits return the entire capital, which you have allocated till now in startups?
Yeah, pretty much. Yeah. For the most part. Yeah. If I made of what I just did in the last six months? Yeah.
That’s great. You have been in this ecosystem. And for the longest period of time, eight to nine years? I would say now. Right? And you have been investing consistently. So for years average about two investments a year? How would you say?
So, you know, it’s not a function of average, it’s about it’s a bunch of things, right? So I’m not investing other people’s capital and just investing. Yeah, mine, and my father’s and mother’s capital. As I said, you know, we’re quite frugal people from Chennai. So, you know, we, after a point, there’s only so much you can genuinely invest, you know, spend on yourself. And if there’s more surplus, I’m not going to do it, spend it on myself, I genuinely get more happiness, you know, putting that money to work in a great entrepreneur who can create jobs and create a virtuous cycle. So me spending around some lavish holiday, we end up beyond the point really doesn’t do any difference to my life. So, yeah, I’d say that, what I have changed, you know, so that is, today, this ecosystem has matured to a point where if you are, if you’re too small, on the cap table, things are starting to get a little hard, right? Are you going to get information? You know, some people want you out? How are you going to be more meaningful? So I feel like you know, having done 25, whatever, all the investments, most of them have been reasonably, okay. You know, some have been like stellar returns, some have been category defining companies. But what I have realized in the last four years in specific is that, you know, I’m able to kind of figure out which ones have a really good chance of success, what kind of pattern recognition to, to look for in founders. And I’m, like, you know, if I can do that enough, in eight years, seems to be enough time to kind of figure it out. Maybe go big and deep into a few. So the way I look at it is, you know, now, every year, try to go big and deep into one or two. And whenever there’s something truly exciting, you know, where you can just put a little bit, I’ll do it, right. So I, so whenever there’s something interesting in SAAS, right, where I know, this business will compound slowly over 10 years. And the founder is very much like Ashish, where, you know, you know, you don’t need to raise money, like, you know, and so much just to make this model work, I’ll do it. There’s, we can talk about it later. But I’m very excited about the local space, right, and I’m going to do something over there. very nascent, but you know, truly can be game changing, I feel like because the ark is not yet built. Everyone’s kind of figuring this thing out. So I can learn and kind of try to be on top of it. And if this becomes something special, maybe it will be something I can go deep in eventually. But for now, yeah, to be meaningful on the cap table and, you know, to be, you know, important to a founder, that, you know, I’m really putting my money where my mouth is, do fewer, but do deeper, and almost behave like a micro VC. This is just my changes as the industry does change. Right? And, yeah, it’s got its pros and cons. But yeah, that’s how I’ve kind of like shifted a bit.
Today, you know, if we say, which are the top five companies in your portfolio, which you are most excited about? Like Posist is definitely one of them coz we have heard his name multiple times in our conversation.
So especially so with Posist. Yeah. So, so the beauty of Posist is, you know, I’ve invested to me and my cousin Muttu invested in 2013, and 14, no 12 and 13 or something like that, right? Since 2014. He’s not diluted me even once, right? And he’s built this entire business just on his own cash flows, right. And I think people don’t realize the value of this over time. So today, Posist stands on its own feet, and it generates enough surplus for itself. And there’ll be a point where you know, this thing is going to be so important in the larger scheme of things, the value will accrue. So I told Ashish, look, if you want to be known, you know, if the exit event or something happens only in 2025, I don’t really care. See, because I don’t own some of my capital to anybody else. Right. And if you see most of the Murugappa, group companies have compounded slowly over 50-60 years, right. And we’ve never taken money out of these companies. In fact, we just constantly reinvest in our own businesses. So you know, I’ve grown up around the mentality that it’s very good to wait over a period of time when you’re very comfortable with the founder. So I think Ashish will be a very special outcome, but you know, he’s very quiet about it. So in 2025 Well, I think you know, it will be something it will, a lot of people will be surprised how, how valuable this company might be? Right? What I would say is just to know how interesting Posist could be, take a look at a company in the US called Lightspeed POS, it’s listed in the NASDAQ. Right, and it’s listed for $9 billion. But it started off as a restaurant POS system. So you know, I and if Posist are doing a lot of work, even in developed markets and taking them head on in some contracts in cloud kitchen, a lot of special things will happen. So I think Posist is great, it’s very quiet. Another incredibly quiet business, which is just, you know, it’s a beast is Adpushup. And Adpushup, was rated the 100 and 54th, fastest growing company in the US, right. And this guy also doesn’t raise any money, he just grows. So these two guys, you know, there’s something very special that, you know, the fact that they don’t dilute and I’ll get something, I don’t mind waiting even 10 years, because it’s just, it just gives me so much joy that these guys are doing all this without having to be at the mercy of some investor the whole time. So these two are the quiet ones. ones that I think will raise money and still be category defining will be, obviously is at work. And I think what’s important with Zetwerk is, you know, I grew up around manufacturing. So when Srinath and Amrit initially started talking about it, you know, I could resonate. And now everybody’s just going gaga about this stuff. So in in Zetwerk, I still think we’re just at the cusp, right? People say, you know, unicorn, decacorn or whatever, I, if this thing goes to the moon, it’s pretty much got all the trappings of a success story, because it’s truly, you know, once in a decade, Indian company that can go global, you know, so that I think is great. There’s a company that we’ve not spoken about called Medica Bazaar. And I’ll tell you, the learning that, you know, Siddhartha was, I did an investment in B2C food delivery. And at the time, when I did it, I kind of realized, I didn’t realize you know, there were 14 something guys trying to do this at the same time. And how on earth are you going to pick the winner? Right, it was just impossible. So then when the same thing happened a few years later on B2C pharmacy, in a pharmaceutical delivery,
I was like, the same thing is going to happen again. There’s absolutely no way of figuring out which one of these guys are going to survive. And if you just do the math, basically, Reliance picked up one. And the number one guy picked up the number three guy so so it’s pretty much a two-horse game left, right. So I said you know, at that time, what was the point to go into this whole B2C thing and then burn my finger again. So then I was like, Okay, let’s go to B2B pharmaceutical or not pharmaceutical, but healthcare. And I used to do a lot of investment banking work in India in healthcare, right. I we all know, I will almost worked on a deal but it didn’t go through and being you know, being focused on public equity. I knew what was happening in this industry, like 24-25% of all net revenue was basically consumables. So I was like, Okay, how many people are doing B2B in healthcare distribution, and it turns out there was just like three or four. So I could actually do diligence on, you know, three to four, and I found the best guy. And a lot of my returns now are skewed to taking a disproportionate bet on Medica Bazaar. Right, where, you know, maybe it’s a good thing or a bad thing, I don’t know, but I’m sitting on that cap table like, like a VC. So I think when you find that opportunity to just, you know, hit it big, you just have to go, because these small checks really will not skew your returns, like, you know, so much. So, in Medica, you know, it’s, I mean, I don’t want to reveal any numbers, the founders said it on public forums. But you know, it’s, it’s, it’s a leader in B2B, you know, medical supplies distribution, by far right. So Medica, Zetwerk would be on the B2B side. And then the two FinTech companies that are super interesting. So I had the good fortune of being a founding investor at the founding stage, invest money, right. And Zestmoney pioneered buy now pay later in India. And, you know, I got to meet Lizzie and Priya, and you know, so my family actually has a bit, you know, background in lending. So NBFC, which is Cholamandalam finance has been around for 40 years, and we’ve kind of conservatively built that business. But in 2008, you know, we got into sort of unsecured personal loans. And, you know, the company really, really went through a tough time, right, the share price collapsed, we had to infuse more money, we had a JV partner that had to go. And then since then, you know, the market cap was about, you know, it fell down to about 200 crores. And then over a period of like, 12 years, or 13 years today, today, cholas, probably the third most valuable or fourth most valuable NBFC in the country, it’s got a market cap of about 42,000 crores. And it’s a leader in its space of vehicle finance and home equity. But when you’re disciplined in what you want to do, you know, it really compounds very well over time. And the beauty of why I got interested in zest Actually, there were so many people doing, but it’s very easy to scale, an unsecured personal loan book, I think I’ve seen, you know, I’ve seen it with my family. The problem with that is, you know, it’s, it’s not really a lending business, it’s actually a collections business. Right. So Lizzie and Priya, were, you know, they were actually used to work for a lending company in the UK called Wanger and Wanger really just grew that lending book so much. You know, in the end, Wanger just, you know, for a plethora of reasons really didn’t succeed. Right. So when Lizzie and Priya, were trying to build this for the second time, you know, they they came with the scars of how you build an unsecured book so quickly. So that alone was worth so much more than so many other founders have never seen a blow up. So I think zestmoney is, you know, an incredibly interesting business. If you just look at a firm Klarna and Afterpay. There’s so much to go in, buy now pay later, because millennials are shunning credit cards, and digital credit, through buy now pay later, it’s really a societal shift. You may question that whether it will work in India or not, but there is enough room in credit, right? In India, the issue is not demand is really supply of credit. So that’s there. At the same time, we’ve got the. We had the opportunity in 2019, to my uncle and I got invest in a payments business called Cashfree.
And Cashfree is a you know, as I like to say, just like Adpushup, another beast, very few times, do you see companies growing at the rate they do with such a high profitability margin? Right. And that company is kind of building the, you know, backend, API’s for the whole UPI system, right and insane product innovation on instant rates, refunds, settlements, bulk payouts, and all that. So yeah, so it just, it’s been good. I, I, there’s so many other guys that are doing something special. If I if I were to just take, you know, three names of founders who are doing some, you know, incredible stuff a little bit under the radar. So now, I think, you know, people may have heard a little bit about City Mall. And what Angas is doing, I think he’s got a very differentiated approach. People are talking with social commerce, but he was very quick to understand, you know, groceries, is a segment where, you know, there’s no returns. Everybody else was doing social commerce, you know, there’s like 20 plus percent returns, and that really just wipes out your margin. Right. So I think it’s a great model, and I wish him all the success. I went deeper into B2B marketplaces. So I took another deep bet into a circular economy startup called Recycle. And Recycle basically uses marketplace to collect. So if you’re a if you’re say, Dabur, Marico and Hindustan Lever, you are obligated to take back your packaging waste, because you put it into the market, but their core competency is not to do collection of waste. So this guy comes in the, you know, in the middle, and basically helps them take it back out. Because if they don’t and have a dossier, you actually have penalties from the government, incredible business, I think it’s going to be, you know, super exciting, because if you look at ESG, environment, social and governance, this is like the perfect ESG business, right? So I told the founder, you know, let’s just build this slowly, for 10 years, it’s going to be a beast. Yeah, I use the word beast too often. And then a third very interesting founder under the radar, I, you know, I don’t know whether it’s gonna work or not. But you know, I just love that, you know, thought process. It’s a, it’s a multiplayer gaming business out of Bangalore called Deftouch. And I realized that, you know, in most countries, you know, you can make, you know, Golf clash, Clash Royale, and so many other things. But true multiplayer in India really didn’t work for a lot of people. So these guys, and I knew that the only guy who’s gonna make it work was a guy who makes multiplayer cricket. So this was like a very binary hero or zero kind of bet. And, you know, these founders have just really been added. It’s building a game is really more of an art than a science, their artists, and you know, I don’t know whether it will work or not, but it’s another deep bet. But I truly believe that somebody will make multiplayer cricket work in this country. My only hope is it’s, it’s the Deftouch team. So yeah, I mean, they’re not in the news. But you know, I’m equally passionate about some of these as the ones that you know, you did mention.
Awesome. And right now, you have mentioned that you want to take, like very deep bets. But this is somebody who’s to start in angel investing right now, in 2021. What advice do you have for him? Or her? For example, She has one CR one crore rupees. And should she invest 5 here in 20 companies, 10 here in 10 companies or 25 here in 4 companies?
It’s really hard one because the one thing you can’t answer is how much risk appetite each person has. If you want a portfolio approach and you wanted a portfolio like return, then obviously, you should just try to be an LP in somebody else’s fund. Right, because your risk is spread. And there are rules of how much you can invest in one company. So that’s one, one thing I realized is, you know, because I started in 2012, and because there’s a track record, you know, for whatever reason, founders seem to be okay, you know, in talking to me, and, you know, wanting some access to my network, I guess they know that my capital is probably patient, because I don’t wait to anybody else. As a result, most founders are okay to take my call, and chat with me. Right? So but it’s really a function of when I started, which was 2012. So today, there are people who are getting excited, because, you know, it’s all on this, you know, Mint, Ken, you know, Entrackr, all these NBC circle, people get excited by this stuff. So, if you, if you are new and you’re entering this market, it’s, you know, it’s almost likely that you will get a deck that probably a lot of angels who have who have, who have the pick of the litter kind of passed out on, you know, passed on. So, if you’re new, and you know, you’re getting a deck, you know, I would say, don’t get too excited, because if, you know, a smart founder today has access to a lot of capital, right? A lot of angels who I work with, they also started very early along with me or their founders who kind of are very prolific, and they know they want to share stuff with me, I share stuff with them. It’s a very symbiotic relationship. But if you’re new, and you get a deck, and you get excited, I’d say, you know, take a step back, because a lot of people probably would have seen that deck and passed on it, and then it’s kind of received because had they been excited? And they said, yes, that round have been closed very quickly. Right? So what I would say is, you know, figure out your risk appetite, if you want a portfolio like return, find a great manager, you know, and just put money to work through them. Right? Because paying that carry, it’s only on success, which is perfectly fine. That’s one, if you’re if you want to do you know, portfolio allocation of sci fi 10-10 across. Yeah, I just don’t see the merit too much in that left in the ecosystem today. But if you are an expert in a certain industry, and you’re convinced this is where the industry is going to go, and you found somebody who wants to read you know, reinvent that industry. Yeah, go deep. No, I mean, that is your competence. And you’d probably have no knowledge about that industry than, you know, any VC investor. Most VC guys in India, I’d say, you know, there are a lot of generalists in this space. I don’t think there are too many specialists, as you may see in other parts of the world, especially, you know, in Israel or the US. So, when, for the most part, when it comes to marketplace marketplace in FinTech, I’m not saying I’m like, the smartest guy in the world, but in those specific cases, and in some companies, you know, the VCs, like to, you know, they want, they would like to spend time with me, so that I can tell them what I’ve seen in this space. So you are an expert in a certain space, right? don’t presume that the generalist VC would technically know more than you, if you can come in before that person and you truly believe it. Perhaps that’s where you want to go deep. But with the one caveat, go deep with somebody that you know, and trust. Because, you know, at the end of the day, because of the mortality, your relationships could sour? And if you don’t want sour relationship with somebody, don’t do
that, that’s a very fine advice Arun. Arun, how many of your companies have, you know, shut shop till now in the last eight years?
So out of the 24, 2.
really good rate. So that means you spend a lot of time with a founder, before making your own investment?
Yeah, yeah, I think, you know, my, my worry is that, you know, if, if you end up with founders who be like, Look, I have four months of runway, it works, it works, or it doesn’t work, it doesn’t work. Yeah, I tend to like this, not for me. However, if you have a founder who’s, you know, willing to zig and zag and find their footing and not be to hell bent on only doing something in one way, right. It’s more or less. So I look, I said, Look, it’s pattern recognition. I can’t write it down or give you a formula. But I guess, you know, it does turn up somewhere. And, and I’d like to think a lot of the founders that I’ve ended up working with, tend to have similar characteristics of the fact that, you know, I’m obligated to make this a reasonable business. Right. So my only request, I think, to a lot of founders is, you know, my, the biggest thing I appreciate is, if you can find a way to make it sustainable. Right? If you make it sustainable, there’s a passage in this book called The Psychology of Money by Morgan Housel. Right? The, you know, the true longevity of a business, is how much of a runway you keep for yourself. And a lot of the founders that I’ve met, we always have about nine months with them. Right? So they sleep well at night, they can take long term decisions, they’re not making they’re not doing short term cuts. You know, and that has turned up in the portfolio, for whatever reason. And yeah, returns wise, I’m happy maybe the conservative approach has given me a better than industry return. Right? So yeah, I’m quite happy with it. And you know, I don’t have to be in super hot spaces where you know, everybody and their cousin and grandmother wants to jump in. I’m so for example, with the recycling company, it’s not, it’s not something that everybody wants, you know, is excited about, but it will be something that someone’s excited about eventually. But I have no qualms in being excited about something that people don’t want to spend time on. Because for me, the opportunity is not running with the hood, it is almost always running against it. So for example, in Medica Bazaar, everybody went to the B2C pharmaceutical delivery guy, no one wanted to spend time on the B2B, you know, medical supplies. So it was like, amazing, I had time I had a choice, I had the ability to build a relationship with the founder. So I’m perfectly okay with those guys. And, you know, who wants to build a business a certain way? And yeah, I can’t say I’m, you know, searching for anything specific, but it just happens subconsciously.
How have the last eight years, you have been able to build your deal flow?
So, um, so there’s obviously everyone’s got some secret sauce. So I will never reveal the actual secret sauce of deal flow. But some of it is down to, you know, just focus. So I’ll tell you the two ways which I think everybody else can really try to get some alpha in terms of sourcing, you know, find two three spaces that you know, that you can focus, spend time and go and meet a lot of people where expecting nothing in return. I think what happens is a lot of people want to go and get into a business, go and get into an industry that’s super hot. Right? But you have to understand it gets super hot because everybody wants to get in it at that time. But if you go and meet people from an industry where you go meet a founder who doesn’t want to raise money, right? If he doesn’t, if he or she doesn’t want to raise money, that’s a great time because you’re just building a relationship in a network. Right? If, if I won’t say there are some cases where I wanted to invest in a startup, and I just couldn’t, but I still kept early. And I just thought that founder was just amazing. And I kept really good relationships with that founder. Now that founder also sends me stuff. Because, you know, everyone just kept it decent. So that founder sends me the deck of his company. Right? Then another way is, you know, if you have invested in some founders, genuinely just ask, right, who’s doing what, who can I talk to, right. And then, as I said, if you focus on a certain industry and space, in you go deep, you will figure out Look, this is connected to this, this is connected to that. So in FinTech, you have the API guy, you have the neobank guy, you’ve got some way, you know, insurance, you’ve got so many, you will just find, you know, in FinTech the tentacles, so I’d say, if you really want to alpha in sourcing, spend time in a specific sector, that irrespective of whether it’s hot or not, you like it, you spend time, go speak to people where there is no live deal, right? And build relationships with people, nothing will come in the first two years. So a lot of what I think I’m reaping is just a function of time. Right? So I’m not the smartest guy in the room, like 80% are just more intelligent than me in this business. But if the flow is there’s two ways, right? If I’m able to source in a smarter way than somebody, then I figured that out. And at the same time that, you know, opportunities are coming to me because of other people who’ve had a good experience of working with me. Right. And in that, maybe we’ll find something very interesting, right. But now, the, the hit rates, I think, here’s the funny thing. The, in the beginning in 2012, your hit rate actually could have been pretty high, because the number of companies was low, then in 2014, and 15, the hit rate was pretty low. And now because there’s just so much ability, there’s just 5, you know, 4G Internet, and then there’s the ability to, you know, build a global company out of India. So new markets open up, suddenly, the hit rates are starting to go high. But it really is a function of that quality deal pool. So I’d say, the, what brings down your ability to have a better hit rate is, you know, I wanted to edtech, I want to do B2B, you know, I want to do SAAS, I want to do this, I think the realization has to be very simple that, you know, you will lose a lot of good opportunities and deals, right? The key is don’t lose good relationships and don’t lose good contacts. And that’s a great way to start. And in one kind of thumb rule that’s patient is, don’t expect to have a winner, if you plan to do this consistently for the first four to five years, right? Because sometimes I don’t know what’s going to be a winner, what’s not, right. So you have to give it some time to figure out the winner will emerge. But you have to be you know, focused. And you can’t do this for like nine months, go on holiday for one and a half years, and then come back. People need to know that you’re serious about this for a huge period of time. And the reason I’m serious about it is because you see like my family is not going to promote any technology businesses.
Our business model is to, you know, brick and mortar, we will do, you know, value added manufacturing, we will buy a competitor who is you know, on the ropes, we’ll turn that business around, and we like to build businesses a certain way. I don’t have exposure to technology through my family business. So for me, it’s just a de risking way to come out of some of that stuff, put it into technology. And for me, that’s a long term, long term story. So I will do it for like 15 years. So that’s so for me that’s a unique way of looking at it. Everybody has a unique way. But don’t expect instant returns. It’s just not possible. It took me eight years as I said, to get most of what I put in out.
Fantastic. I think you have been a very patient man with your investments. One more last thing you know before we conclude the podcast, you identified that fintech is your key core area but you’d still like to do a consumer through Manu, or SAAS through you know the reference you get from either Ankit or Ashish? So? Why did you choose to be only a FinTech investor? Rather than spread yourself out in multiple directions?
So, so I think the point is, FinTech is a word, but it’s probably amongst the deepest spaces you can be. Right? So that’s why I decided that it’s okay. It’s okay to just say FinTech, B2B marketplace, right? Because I can do deep work in it. And I know genuinely how deep these industries actually are. Right? So I have actually no qualms and saying I only do this. And also in FinTech. I, I actually think that I have some edge, you know, in the market, and I’ll tell you like this, right. Because, you know, for whatever reason, you know, because of the family business, I know very clearly how the lending business works. So Chola finance, so today, it has a 75,000, crores 80,000 crores something like that, you know, book, okay. Now, if I want to know how regulations work, if I want to know how certain you know, policy matters of RBI work, I can always go and ask for a resource in Chola, and I can understand how it works. If I want to know how stuff works on, you know, the relationship between people who own the, you know, the book, and somebody who’s doing FinTech, who’s trying to partner up, there’s always people like Lizzie and Priya are zestmoney, there’s Akash of Cashfree. There’s also you know, Ziploan is another company, which I did, which is doing work. So what I’m trying to say is we want, you know, I have that depth to go in. And I know even within this space, what I will do and what I won’t do, right? So I’ll just give you one kind of nuanced way. So today, everybody, you know, wants to do you know, investments of NBFC large companies, even startup companies want to build an NBFC. See, what people don’t really understand is, even today, the promoter holding up Cholamandalam finance about 47-48%. The main reason is for for 30, something years, we didn’t diluted penny. So we kept growing out, you know, the book value just on our own profit. And eventually, when the multiples came, we raise more money on book value as a multiple of book value, so when you still own a good chunk of it, however, today, if you want to lend a billion dollars, right, you’re still constrained by what the RBI says, right? And what happens is, they will not let somebody new, basically come and build a billion dollar book with seven x leverage overnight, it just doesn’t work. Right. So what ends up happening, you know, Siddhartha is people want to invest in NBFCs, but you don’t realize that you will be like 90%, diluted, by the time we build a billion dollar book, because you will just be pretty much operating at two to three x leverage. However, it’s not that there’s no opportunity there. So if you look at Ziploan, they do small ticket, unsecured and sometimes unsecured working capital loans for small MSMEs. Small traders, right? Now, why would I do that if Chola is also a big NBFC. That is because when Chola becomes such a big company, the cost base is so high to give a small ticket loan. And in a small ticket loan, the yields are so high enough to give a really good return on asset. So even if you even if your leverage is three, return on asset of 6% pre provision levered up three times is still a return on equity of 18%. Right, which is actually damn good as an NBFC business. The problem that happens is when you raise crazy money doing NBFC and you don’t have some alpha, right to do that, like in terms of cost or so many other things, you’re, to me or an NBFC. So the nuanced view is I’ll do something that obviously Chola can’t get into. Right and Ziploan wonderfully kind of came into that space. Right? Kshitij done a fantastic job. Elevation and Matrix are both investors there. So what I would say is that I found a gap even in lending, because I thought I wouldn’t do but there is opportunity. At the same time, I realized that, you know, the real value for me is in non diluted FinTech businesses. I actually want to look at most of the stuff I do is actually a huge fee incomes
FinTech exposure, right. And the return on equity on a fee income business is more aligned to a technology business. Right. So if you are a tech NBFC, What does it mean, right in India because the regulations, you are more financial than tech. So to me regulation first, but if you’re a fee income business, you’re not regulated on leverage. It’s really about how much volume you do. So that’s why you know, a business like Cashfree is just truly unbelievable, because nothing can stop it. Right? There is no policy matter on how much it can grow and equity and stuff like that. So, as a result, I even in FinTech, there will be opportunities in spread income businesses, where I think there’s alpha, but the focus is very clearly fee income. But it’s so broad, right? I’m willing to be patient to wait for the right thing. If somebody else wants to, you know, it’s as simple as this. If you want to come and invest in, you know, lending business as a technology business, your valuation is just some random technology valuation, which is fine, right? But if you build that business consistently, the penultimate investor before an IPO, will value it like an NBFC only. Right? They may give you five times book value six times, it’s all fine. But there is a cliff, you start with tech, and slowly, you know, your value starts looking like NBFC. Right. So there’s a way to play it. And I think, the way I’ve kind of approach it is just that, look, I have access, and I have a nuanced view. So even in FinTech, everybody wants to everyone wants really focus a lot on the lending side. But I’m very clear that you know, I just love the fee income side of the business, because it you know, I think it’s very underrated on how much you can actually build scale. People think you can scale on lending and NBFC. See, I know how difficult that businesses just because of Chola, right? So it’s going to take a lot to convince me that you’re going to be the king of a steady income business. Right. But I know people are likely to convince me that you’d be the king of a fee income sideway business. So that’s a nuanced view, even in FinTech, but it’s a patient view.
You know, just a parting question, what does your daily schedule look like?
So, that’s actually quite interesting. So I was actually spending the last year just being an independent consultant, you know, to FinTech companies. And, you know, just investing, you know, personal capital in the public market, which now looks great, but actually, it’s just a function of low interest rates in America, you know, pumping money into India. Now, what happened was, you know, there was an opportunity. Recently, one of my sort of family companies acquired a business called CG power, which is basically the industrial business of the erstwhile Crompton Greaves limited. So, this business makes switch gear, transformers and electric motors, right. So, you know, old B2B manufacturing business. But you know, there’s a lot to do, right. So in electric vehicles, one is a requirement for electric motors, electrification of everything is going to be somewhat interesting micro grids, data centers, and so many things. So like, you know, it’s an open Canvas, but it’s just a, but we bought that business in distress. Right. So I felt that look, I’m not probably going to build a technology business on my own. Right, but I have, I seem to have enough exposure, working with great founders on technology businesses. So I don’t actually have to build it myself. But there was an opportunity to say that, hey, look, we run pretty reasonable publicly listed companies with a very clean balance sheet. Right. And in India, you know, everyone gets excited, some people borrow a lot of money, and then they don’t repay it to the banks. And now through the IBC and NCLP, a lot of businesses are just going to be put up for sale. Right? So so there’s an opportunity, at least within the family business to look at a lot of incredible assets, old world, manufacturing. And you don’t just because tech is showing growth doesn’t mean it’s the only place there’s growth, you know, we can create a lot of growth value and profits just by buying, as my uncle, Mr. Vellayan Subbiah says, who basically used to run Chola, and now runs Tube investments and CG power, there’s a great opportunity, taking a third quartile asset to a first quartile asset. In the old world, and generally, the Murugappa Group is a very professional business, right? So my, you know, my whole effort to go and be a part of CG is not really to go and tell a product expert in motors or switch gear, what to do, they are the experts. But sometimes, you know, whether that’s customers, making some investments into future technology, you know, making sure capital allocation is not going into stuff that doesn’t return anything. These are kind of, you know, core building blocks that I just wanted to learn. So it was a unique opportunity to help turn around an asset, which I think we’ve publicly stated that in five years, we want to take CG power to about, you know, 5000 crores of revenue and 500 crores of PBT right it’s a great business, incredible professionals and I just thought it was unique to be a part of that. So it’s a little It’s a it’s further away from technology. But you know, there’s some convergence there somewhere. And, you know, I’ve taken so much from the family business, I’ve been the beneficiary. My uncles, and you know, my father, grandfather, everybody put their entire life into building this or, you know, great organization, I’ve actually not given anything back. Right. So in the family, a lot of people can retire, you know, in the mid 60s, and they try to give an opportunity to the next generation to build some of these businesses. So I look at it as sort of my calling to give something back to, you know, a business where I’ve only received, I’ve actually not given anything to, so it was more like a calling, and a great, you know, piece of timing, I would say,
you know, spend most of your working days in that business.
Yeah. But you know, if any of the founders that I’ve kind of invested in message at, like, 11 o’clock in the night, or I have an idea, two o’clock in the morning, this man, I’m just wired the way I am. So I’ll always be on top of it. So yeah, I get, I get a really good kick out of, you know, giving my contribution back to, you know, my family organization. But I’m like, Look, I don’t have to start next, I’d have to actually have to start a business. As long as I partner with best in class founders, I get equal amount of joy just through their success.
Fantastic. Thank you so much Arun. It’s been wonderful to have this conversation on the 100x Entrepreneur podcast. Grateful to you for sharing your experiences, insights. Kudos to you for building such a great name in the Indian startup ecosystem.
Cheers Siddhartha. Ironically, this is actually the first time I’ve actually spoken about any of this stuff. As I said, you know, like, like many people from Chennai, were very quiet under the radar. But, you know, it’s always every now and then nice to go, you know, share a story. So I’m glad you did call. And I hope to even one person who listen to this is somewhat useful. So yeah, thank you.