Episode 68 / June 7, 2020
Sushma Kaushik on the Exit thesis of Aavishkaar Capital & investing in socially responsible startups
With over 14+ years of experience in investing, Sushma has been acknowledged for “40 under 40 – Alternate Investment Professionals” in India.
Currently, at Aavishkaar, she majorly looks after Fintech & Microfinance. Aavishkaar is also well-known for being one of the few VC firms in India, well known for its Impact Investing Thesis. Some of its portfolio companies are – Chqbook, Agrostar, and Soulfull among others.
In this podcast, Sushma shares her experience of investing in high-growth socially responsible startups.
01:10 – Her Journey from real estate equity background to joining Aavishkaar
03:08 – How does Aavishkaar differentiate itself from other funds in terms of thesis – Impact Investing
06:36 – Is impact-investing successful in giving justified returns to LPs?
08:55 – Investing in socially responsible businesses – Micro-finance & Agritech
13:42 – Investing in Chqbook – Making credit cards & short-term loans accessible
19:23 – Diversification in investments between early-stage & growth-stage companies
22:25 – Significant evaluation around Exit-thesis at the time of new investments
28:33 – What does the Indian startup ecosystem requires to mature similarly to Silicon-valley?
30:48 – Gender Diversity in the VC & Startup Ecosystem in India
Read the full transcript here:
Today I have with me Sushma Kaushik. Sushma is the partner at Aavishkaar Capital and brings with her over 18 years of diverse experience in the field of early-stage investing, business incubation, and consulting across sectors. Sushma has worked to identify, manage, and exit a large number of companies and has worked closely with several influences, business entrepreneurs. She has been an active representative on the board of several early to growth-stage companies. She started off with an entrepreneurial venture in engineering design services and moved on to a role in investments. She was recognized by IAAIF as “40 UNDER 40” Alternate investment professional in India. Welcome, Sushma to the 100xEntrepreneur podcast.
Thanks, Siddhartha. It’s great to be here today.
Sushma, we would love to know about your journey with Aavishkaar Capital, how did you get started in investing?
Sure. So I’ve had a very interesting journey, not just at Aavishkaar but the way I entered into investing as well. I have over 15 years of investing experience and my Aavishkaar journey started way back in 2010. And it’s almost been a decade since I’ve joined and it’s been one of the most phenomenal journeys and very entrepreneurial in many respects, because when I started with Aavishkaar, it was close to a $30 million fund house, and we managed about two funds. And I was coming from a real estate private equity background where everyone used to talk of billion-dollar funds, right. And if a fund was not close to a billion dollars, then people would raise their eyebrows wondering, you know, what were you doing? So, it was a good transition. And I’m very proud to be part of this whole 10-year journey and to say that we started from 30 million, and today in 2020, we are close to a billion dollars in both debt and equity assets. And, it’s been an extremely entrepreneurial, inorganic kind of a growth journey for me, as well. Lots of learnings have constantly been pushed out of my comfort zone. I have not had a dull moment, the last 10 years. In fact, now when I look back, I am like, you know, where did those 10 years go and 10 years forward also seems equally exciting for us.
Aavishkaar is a very different kind of fund. Can you elaborate more on the thesis of the fund, you know, and some of the top five to top 10 companies of the fund?
Sure. So, yes, you’re right, Aavishkaar is different, we started also very different. And, you know, we are very unique in that respect. So when we started way back in 2001, we started off with the investment thesis, which identified rural Enterprises as an opportunity. And this is way back then when the VC industry itself was extremely nascent, and even the few who were there were only talking of a handful of tech investments, and that too in the large cities like say Mumbai or Bangalore that was where all the capital was concentrating. And so then to say, okay, we believe there are enterprises in rural India that have the ability to scale and have the ability to absorb capital to grow was a little unheard of. Around the same time, we also identified a microfinance sector sunrise sector back in 2006. And so with these two hypotheses, we started our fund investment journey. And over the decade, as I said, we have evolved during the decade, the term impact investing got coined, and, people started globally recognizing us as a pioneer in impact investing. So it was not a term we called ourselves. It was, the global world suddenly woke up and say, you know, what you guys are doing would classify as impact Investing. So we said great, so be it. And so today we continue to be recognized as impact investors. However, our thesis keeps evolving. You know, it started from rural enterprises to microfinance, to now, sustainable businesses. Mainly we focus on sectors like agriculture, Agri tech, financial inclusion, and essential services, which could include things like health care, education, logistics, all of those. So, yes, so, to that question, yes, we are different. But, you know, that’s only the difference in the evolving theses.
And what was the current fund size? As you mentioned, the last one was, you know, $30 million. And currently, you have 1 billion assets under management if I’m not wrong.
Yes. So yeah, we managed close to six funds now. This is across six funds. We have about 450 million dollars of assets under management in terms of equity across the six funds. And from the six funds we’ve made close to 69 investments and 32, full and partial exits, largely in the sectors that I mentioned, which are agribusinesses, financial inclusion, and essential services. So currently, we are investing out of the sixth Fund, India focus Fund, which is the Aavishkaar Bharat Fund. That’s about $125-$130 million Fund currently.
And in impact investing, how do you give returns to LPs? That’s like whenever anyone thinks of impact, they’re thinking of creating a good social cost, but it doesn’t get the same kind of returns that LPs expect from VCs in the range of 15 to 20% IRR.
Sure. So, I think that’s where the difference is. So, as I said, we invest in very strong theses. And you know, people have labeled us as impact investors and you know different people have different connotations to impact investing. But for us to continuously raise funds, we definitely have to give returns and people are not forgiving when it comes to financial returns. Yes, we do focus on a lot of the SDGs the Sustainable Development Goals, but we continue to be one of the better performing funds from India. So, as I mentioned, we made about 69 investments, and we probably one of the few funds in India who have made as many exits as we have, and we are also in terms of returns, we stand to close to 3x MOIC on the realized investor. And we clock approximately 25% in terms of IRR as well. So, you know, I don’t think returns can be compromised just because we are called impact investors. And I’m sure that’s true for any kind of thesis-based investing funds.
25% is a fantastic number like almost unheard of in terms of IRR.
Yeah, I know. So that’s why I’m saying that we need to pick the right sectors, the right companies, and with very strong financial and business logic to it. And that’s when one makes money. We’re very clear on that that we are in the business to make and return money to our investors while continuing to ensure that these are responsible businesses, which are environmentally and socially friendly businesses.
Can you throw more light upon the kind of businesses that you call a responsible business, what are kinds of responsible? What are the kinds of nonresponsible businesses?
So, I give you a couple of examples from our own portfolio. Like, as I mentioned, we’ve invested in microfinance as a sector, right. And without even taking a single name. When they started off, it was a huge need at that point in time. Because the largely underserved population at that point time had no access to formal credit. So this kind of formalized the whole credit system for the BOP segment. And then they started formalizing the whole sector. There were right credit practices that were insured, there was a social responsibility towards these women as well. And so, you know, we bought into good practices in terms of how to behave with these segments of the population, you know, and what kind of products and services to offer to them which are relevant and right, because otherwise, these women would tend to borrow from the moneylenders who had very dubious interest rates that they were charging them. And, you know, many of them were actually being pushed into poverty just because they were forced to take some kind of a hand loan from someone, but now, you know, things have improved significantly and in the last 10-15 years, the sector has really come out very strong, what started off as a few thousand or a few lakh in size is now of over two lakh crores in sector size Right. So that really speaks volumes of how this is a sustainable business in making. Similarly in Agri, for example, we have invested in a few companies. One such example is the Soulfull brand. Soulfull brand uses Ragi or millets as its main ingredient in breakfast, and snacks, particularly for children, and it targets working women who don’t have too much time. You know, unfortunately, because of the work-life pressures that are around and so Soulfull provides a very good healthy option for working mothers to provide breakfast options for their children. Now you can ask what is so impactful about this? It’s important for me to highlight that millets, especially like ragi, have been ancient grains of India, right, which have been very easily forgotten in the last 20-30 years with the onslaught of western brands coming in and telling us that corn is better than any of the other grains that we have historically been eating. And so we have moved our consumption patterns to more modern crop, which not necessarily are native to our country, and not necessarily native to the kind of agrarian practices that we follow here. And so they tend to be heavy in terms of the water requirement, in terms of their harvest yields are very different. However, when you look at most of the ancient grains that were being grown, they had a very low carbon footprint. They didn’t require as much water. They were far more hardy could manage the vagaries of weather, which we know, we face significantly because of climate change. And so the only problem they face was there was no access to markets. And so this now has given access to markets. And so farmers are now more than happy to go back to going to ancient grains because they know that there is a demand for it. And it’s far better for them in terms of the yields. And so even farm incomes have gone up significantly by focusing on these grains. So those are the kind of impact that we look for when we make our investments.
So you have recently invested in a FinTech startup called Chqbook.com
Can you share your thesis behind it?
Sure. Chqbook is one of the quintessential FinTech companies which is transforming itself into becoming a Neo bank. And what interested us specifically at Aavishkaar was the fact that they had a very clear focus on a segment that appealed to us, which is the small business segment or the small mom and shop Kirana shop segment. And that we know is one area where credit is not easily available, most of them continue to be underserved. They don’t fully come under the financial inclusion terms. They don’t have access to credit from formal financial institutions like banks. And there’s also a report by IFC, written by Intel cap, which talks of the missing middle and the dreaded gap in that missing middle is what they estimate close to about $500 billion. And this missing middle is largely comprised of these small businesses and Kirana shop, guys, and what Chqbook has coined the term called watering hole where they service customers and source customers from watering holes where they go and access these customers and provide them all financial products and services, which otherwise was not made available, which includes working capital loans, short term credit, business loans, personal consumption loans maybe a motor loan housing loan credit cards, so I was quite surprised to see that 70% of the customer segment did not have access to credit cards right. So that’s how under-penetrated credit cards are and insurance products because of low awareness of insurance. These people were not even provided the right products at the right price. And in the COVID environment, we’ve seen that there has been a sudden off-take in terms of the insurance especially in the health insurance products. So, those are the offerings. They partner with large banks and other financial institutions and provide intelligence on the kind of products that this segment requires. So a very unique platform transforming to become a Neo bank soon.
And what are the other companies where you have led the investment in recent times?
Yeah, so I largely look up the financial services portfolio within Aavishkaar. And again, as I was saying, our thesis has evolved over the years and our portfolio is a healthy mix. We have a small finance bank in our portfolio called Utkarsh. We have a large MFI in the eastern region called Aarohan microfinance. We have a small housing finance company called Altum Credo focusing on the EWS LIG segment. We have a very interesting payments company with started off as an ATM managed service provider for banks and has now evolved into a full-stack payment service company for large banks. So our portfolio is quite diverse. There is no concentration on any one particular type of business. But across all our companies, we focus on this segment, which is largely the underserved populations of women or rural women, small business owners, financial infrastructure, all of this. So yes, I’ve made about 11 odd investments from Aavishkaar all in financial service.
And among the Aavishkaar’s portfolio, 87% of the companies are in the seed and early stage. What about the rest 13% tell us about the exceptions.
So we have evolved our investment strategy over the years. Initially, in our first few years, we were only focusing on very early stage seed investments, because at that point in time, the ecosystem was not fully developed yet in the space that we were investing in, and hence it required that kind of investment support. Over the years now, that ecosystem is vibrant, thriving, there are a lot more investors who have come in. In fact, the whole VC ecosystem has become so much larger with all kinds of investors on the horizon. And so now slowly we are moving on to growth and early growth company investments as well. So the 30% of our investments are mostly in early growth businesses, as well to support companies from series A to series B stage of their journey.
And if you can share, what does a typical first cheque from Aavishkaar look like at the early stage and at the growth stage? And what kind of ownership is Aavishkaar looking in a company?
So the typical cheque sizes could be anywhere as low as about a million-dollar, depending on the size of the company and the stage of the company. We’ve also invested in companies with just a business plan stage where we really liked to the entrepreneur, we really believed in his idea and we said, you know, we want to back you. One such example was Equitas small finance bank when they first came to us. They were just a business plan stage. But they really had a very compelling story and a very strong track record. And so when we started off, they just about had the license to begin. And, and as they say, rest is history because it was one of the first companies in our portfolio to go public. And it’s now a listed company. So, so that we go in that early as well. So about a million-dollar is our cheque size, but now, we can also support a company till about 15 odd million dollars. So 1-15 million is the range in which we invested
and what are the other companies in your portfolio which have gone public?
So right now, Equitas is one, there are a couple of them that are waiting for markets to improve to list. So there are two maybe three of them who would list once the market conditions improve. And yes, we’ve been through their journey in the last 10 years to bring them to the scale to take them public.
Sushma, Aavishkaar has mostly been focusing on the first time founders whereas other farms would prefer to also invest in successful serial entrepreneurs, is it a coincidence? Or is there any particular thought process behind it?
Yeah, so when we say we back first time founders, what we mean is, we back professional entrepreneurs, you know, people who have probably been working as a professional in large institutions who aspire to become entrepreneurs in their own right. So those are the kinds of entrepreneurs we have been backing. Yes, I mean, if we do get serial entrepreneurs who have successfully churned out multiple companies, definitely, but one area where we have kind of not gone too much into family-run businesses. We would prefer backing professional entrepreneurs.
And you know, you mentioned about 32 exits in the Fund. How have you planned your exit like and if you can share the horizon of exits that have been?
Sure. So, what’s very interesting in Aavishkaar is our ideology. We are not in the business of investments, we are actually in the business of exits because only if we are able to generate exits and returns for our investors, will we be able to successfully continue raising our funds and then continue investing. So we have a very strong filter for exits, right at the time of evaluating deals. So and, there is significant time spent in just addressing the exit thesis for most of the companies that we get into. We don’t have a strategy which says, let’s pray to God, and let’s just go ahead and make this investment because that doesn’t cut it for us. Because we’ve known how difficult exits are in India and the kind of effort that goes into building exit-able companies. So exit is a very important result for us at the time of investment itself.
And who has been these companies because I believe you mentioned a few public companies or which are about to go public, or what have been other forms of exists, like majorly M&As by larger companies. If yes, who have been the larger companies?
That’s interesting. Yes. So, there have been M&As as well, but actually most of our successful exits have come from trade sales to other private equity or other larger funds who have bought out our stakes. So most of our successful exits have been those. So, not so much on M&A.
And Sushma, do you think that the M&A ecosystem of India is still very early stages not yet matured like a few years behind those of China and Silicon Valley? And that’s the reason for this?
Yeah, So you know, when you look at M&A, I think most of the large corporates have their own strategy teams. And the constant dilemma they face is Build versus Buy. And because I guess we have so much talent available, and large teams available. Most large, corporates feel that you know, they can very easily build on their own rather than buying so we had one very successful exit on M&A where we sold an online brand called Jaipur to Aditya Birla retail. So that was one of the better M&A exits that we had. But those, again are far and few because I know most of the discussions during that time were, you know, how difficult is it to build something like this from scratch, but they don’t realize that it takes a lot of time and effort and back end work that goes into building a sizable business. And yes, while people can build things, it takes a lot of time and effort and most likely than not, it could not even be a success. So, if there is a successful enterprise that has demonstrated scale profitability, then I don’t see reasons why M&A should not be the route most large corporates should take. But yes, it is not as vibrant as you see in other countries.
And you mentioned about mostly the exits have been to larger PE funds, if you can share who have been those PE funds who are the likes of IFC?
Not IFC at all. In fact, I think it’s not their policy to give exits to anyone. But that aside, it’s been large commercial private equity funds. So, you know, we’ve sold our stakes to the likes of Netherland based funds like Triodos, and TR capital. These are some of the names that come to mind right now.
And do you think exits are glorified in the VC ecosystem? And if yes, do they need to be?
Sorry, when you say glorified, what exactly do you mean?
It means entrepreneurs who have built successful businesses, let’s say for 10-15 years and still hold the reins of the business while building more than a thousand crore businesses, right? And those entrepreneurs who have exited, I believe the second category of entrepreneurs who are more glorified and put on the higher pedestal in the ecosystem?
Rightfully so why not if an entrepreneur has demonstrated that they have the ability to grow and create value for all stakeholders, they have every right to be put on a pedestal I feel as you rightly pointed out exists in India have been challenging. We don’t have a very deep ecosystem yet with the different pools of capital coming in. And it’s not yet mature. And so you know exists are challenging so that’s why especially in the Tech VC space we see a lot of M&A opportunities because billion-dollar companies from other ecosystems see India as very attractive geography. And that’s where M&A works well for them. But I strongly feel we should celebrate every exit every entrepreneur who has given exit and created value for all stakeholders.
And Sushma, on the terms of exists, what do you think is required to make India a mature M&A ecosystem? And how much time do you think it will take to be where, you know, Silicon Valley or China is today in terms of M&A?
Terms of making this a more vibrant ecosystem, I think India is still a little early in the cycle. We don’t have, as I said, different pools of capital flowing in very easily especially because, you know, I feel when the domestic investment ecosystem is not as vibrant as one probably feasible in China, where we get to hear that the Sovereign of China tends to back lots of high growth potential companies, and have taken them to a certain size, and are very supportive in their policies and in the regulatory guidelines as well, which sometimes, you know, maybe because of the nature of our country, things become very complicated. And so there’s not as much capital flow into this ecosystem. So we have to rely on external funds a lot. And external funds come at a price. And so and also then, you know, like the whole ecosystem of seed, Series B, Series C, the public markets and maybe even secondary funds, that’s the whole value chain of investors we need in this ecosystem to make this a thriving place. And even if you look at public markets, how many startups can really go to or even dream of going to public markets right? Now, we don’t have that kind of ecosystem because it’s not building yet. And so, unless there are some significant changes, it’s going to take some time for this to evolve.
Sushma, the venture capital space in India is a male-dominated space. If we see gender equation, especially in the partner level of VC firms in India, however, Aavishkaar has made a difference. If we see across the team, there’s a good mix of gender diversity. We also see 30% of your portfolio companies have women as founders or board members. Was all of this done with an intention to balance the gender equation?
I think I don’t know about intention but it just so happened that even when we hire, we hire on merit. And it just so happened that the women we hired were extremely competent, with very, very strong experience in this space for us to hire so it’s not like they got special brownie points just because they were women, we hired them out of merit. And so probably we are one of the few funds who don’t apply gender bias when we are hiring, that is one and the same thing applies when we are evaluating. So we evaluate deals only on the merit of the deal and not whether it is female or not and, teams which have a healthy mix tend to do better and now when you read a lot of global literature you see that it is true that well balanced, well diverse teams tend to do far better than very homogeneous teams. So yes, I don’t think we do that consciously. However, what we do consciously is we try to create corporate governance, even at the board levels, we try to ensure there is gender balance on the boards. We try to bring in senior women leaders who are able to add a lot of value. And then because we also believe that when women leaders are there, they tend to open up for other women to come at different levels of the company and grow as well. So that’s something we consciously do.
Coming towards the end of the podcast, Sushma you are in inspiration to many, do you want to share a piece of advice for our listeners, especially women who want to make careers in the VC industry.
Thanks so much. I mean, it’s quite a lofty thing to suggest, but I do try to make the difference. I tried to mentor quite a few upcoming women leaders, because I see that there is a little bit of fear in many of them because Financial Services has not been very kind for career growth, especially, mainly because of the kind of time and the kind of commitment one requires, especially in investing. You’re here for the long haul. It’s not a sprint, it is a marathon you need to stay here to actually reap the benefits of your investments. So, the commitment timelines are much longer. than probably any other space. So, my only suggestion to many youngsters who are coming up now is, I don’t think there is a lack of talent, nor is there a lack of intelligence. So I think many of them are equally or better than much brighter than their other counterparts. So if they’re beating themselves down on that, they are being unfair to themselves. I just say that you know, just find the right teams and persevere, things will work out well.
Thank you so much, Sushma for sharing your wisdom, your insights, and your experience on the podcast.
Thanks so much, Siddhartha. It was lovely talking to you.