In 2018, Vikram Chachra and Vishwanath V. set up 8i Ventures, an early-stage venture capital (VC) firm that backs startups in the consumer and fintech space through seed, Series A, and B funding rounds. Last year, the VC firm launched its maiden fund with a corpus of ₹100 crore. So far, the fund has invested in five startups including coffee chain Blue Tokai, Monk Says, a beverage company, and API fintech platform YAP. The two-year-old firm is set to launch its second fund early next year with a target corpus of ₹400 crore, mostly backed by institutional limited partners (LPs).
In an email interview with Fortune India, 8i Ventures founding partner Chachra talks about the funding scene in a post-pandemic market, the fund’s investment approach and plans, and what the government should do in this time of crisis to spur growth in the startup space. Edited excerpts.
The outbreak of the Coronavirus pandemic has changed the economic landscape globally. For venture capital investors, how have things changed post Covid-19 in India?
The overarching trend in venture capital today is flight to quality, much like any other asset class. The bar for fundraising is higher now and VCs have been doubling down on obvious winners in a purely remote economy. In the early stage space, venture investors have shown a clear bias towards pedigreed founders or those with whom there were existing relationships in place, prior to Covid. However, that is beginning to change as VCs get comfortable building trust in a remote investing environment.
What is your fund’s investment approach in the current market? Are you looking at new sectors or using more stringent norms to evaluate a business?
We launched the fund last year with a clear focus on fintech and consumer opportunities, both of which now fall under the essentials category. Every consumer interaction today starts on a screen and ends with a digital payment. We are entering an era where your bank will be an app, your university a video URL and your favourite hot sauce a digitally native brand. However, the truth is that our pre-Covid digital infrastructure was never designed for such mass adoption and it is already starting to feel a bit dated and clunky. Zoom is great for moving classes online but falls apart when you have to conduct examinations online. Similarly, bank apps are good enough to check balances and make basic payments but come up short when we try to do more complex transactions such as bank guarantees and letters of credit online. At 8i Ventures, our mission is to back 100 challengers in consumer and fintech to create a new generation of market leaders.
In the current environment, how are you handling the fund’s existing portfolio and responding to the challenges faced by startup founders?
My partner Vishy (Vishwanath) and I are both former operators and we take a conservative approach to budgeting the runway for our companies. We typically seed our startups with a runway of at least 24 months, so our portfolio companies are well capitalised for such a contingency. Moreover, we reserve half of the fund capital towards follow-on investments in our portfolio so our founders can feel reassured that we are there to back their growth trajectories as required in the future.
Any plans of launching a new fund?
Yes. 8i Ventures launched Fund I with the goal of backing founders who are upgrading how India lives and works. We are launching Fund II early next year with a target corpus of ₹400 crore from a predominantly institutional LP base. With Fund II, we are adding the context of convenience to the same thesis. Till this pandemic came along, convenience was the most under-appreciated force in the consumer economy in India.
How do you balance your commitment towards your LPs and entrepreneurs in a tough market?
It’s an interesting question that Vishy and I discussed at the beginning of our partnership journey. At 8i Ventures, we take a service provider approach to both stakeholders. Our founders are our customers, while our LPs are our shareholders.
We depend on our founders for the success of our portfolios and we take a customer-centric approach towards being their most valued financial partners. Similarly, we see ourselves as the custodians of our LPs’ capital and long-term financial goals. Today, our role in our LPs’ portfolios is more critical than it was pre-Covid. Their lives have gone digital, but their investment portfolios are stuck in the offline world. Our fund aligns their portfolios with the direction their lives are taking today.
How do you see the VC investment scenario in the country over the next one-two years? Which sectors are likely to attract the major chunk of funding and why?
In the next couple of years, we will see a number of billion-dollar IPO aspirants that include digital consumer brands, SaaS, and fintech companies. These are companies that have net revenue of $50 million to $200 million today but will grow to $100 million to $500 million by 2022, with the potential for an IPO at billion-dollar valuations. This is going to spur a rush of private equity capital into late stage venture capital deals and the lines will start to blur between the two in the pre-IPO market. This will be an important milestone for the maturity of our venture market and will put Indian VCs on a path comparable to the Chinese VC market in a decade.
From a VC firm perspective, how do you see the valuation play and the exit scenario playing out over the next one year?
At seed, valuation is more an art than a science and our goal is to always strike a balance where there is enough skin in the game for both the investor and the founders, while ensuring the company is adequately funded for 24 months. In my venture investing career as an angel or as a fund manager, I never missed investing in great founders because of entry level valuations. If we ever had any doubts around the full potential size of our portfolio companies, that’s gone now with the kind of digital adoption we are seeing today.
The pandemic has accelerated the product road map for market leaders, and we are already seeing a slew of acqui-hires under way now. However, larger deals like the WhiteHat Jr. acquisition by BYJU’S may be more of the exception than the norm in the near-term.
In the likely absence of FII and FDI flows into the country, economists say that most developed economies are either entering a recession or already in one. In such a scenario how do you see startup investments in India and the role the government should play to boost the startup community?
Private equity and VC deals have dominated FDI flows into India over the past few years, with VCs taking the lion’s share. India is experiencing a K-shaped recovery where the digital economy is accelerating, while the offline economy is still in a recovery mode. We believe the bulk of capital formation in India will continue to occur in the startup sector and will only accelerate from here. Global portfolios that seek to participate in the massive digital shift happening in India have no choice but to participate in the venture economy, because there is a paucity of digital plays in the listed markets in India. Moreover, India looks well-placed geopolitically to receive FDI flows vis-a-vis China.
What we need from the government is a more consistent policy framework that makes India the easiest place to launch and build a startup in this part of the world. Besides, the government needs to encourage domestic and global investment into the startup economy with tax and other incentives. It makes no sense that venture investors pay higher capital gains tax vis-à-vis their public market peers.