Endiya Partners’ Sateesh Andra on the challenges of investing a B2B focused seed fund

Endiya Partners marked a fundraising milestone last week when it hit the first close of its second investment vehicle at $40 million (Rs 280 crore). With a total corpus of Rs 500 crore, it has been touted as the largest seed fund focused on the business-to-business (B2B) segment. 

Hyderabad-headquartered Endiya typically focuses on startups that are leveraging emerging technologies to build products that can be rolled out in global markets. These include software-as-a-service (SaaS) startups Darwinbox and Hansel.io, artificial intelligence-based diagnostics startup SigTuple Technologies, online lending platform Kissht, and omni-channel health and fitness startup CureFit. 

Its $26-million debut fund struck an exit earlier this year when ShieldSquare, a bot management solutions provider, was acquired by Israeli cybersecurity company Radware.

In an interview with TechCircle, Endiya managing director Sateesh Andra offered a glimpse into the firm’s strategy for its second fund, why it’s important to focus on a particular investment stage and why follow-on capital is a challenge for deep-tech startups.

Edited excerpts:

You are targeting Rs 500 crore (about $70 million) for your second fund. Is that the hard cap or are you open to increasing the corpus if there is more incoming interest from Limited Partners?

We had envisioned this as a Rs 500-crore fund right from the very beginning. This is a corpus we are comfortable with and an amount which we think is necessary to invest in the right companies and grow them into large businesses. At this time, we do not have any intention of increasing the corpus even if there is any interest from LPs.

The second fund's target corpus is significantly larger than the first fund. Given that you now have more capital at your disposal, how will your investment strategy play out for this fund in terms of stages, sectors and business models?

The investment strategy will largely remain the same. We will still focus on the pre-Series A stage. And then we would want to be able to participate in the follow-on Series A or B rounds of our portfolio firms.

In the first fund, we were only able to participate in a few Series B rounds. We want to make as many Series B investments in portfolio firms as possible with the new fund.

We are also going to look at some early-stage life-sciences deals as the sector requires a little more capital than a digital health, medical devices or healthcare IT venture.  For that reason, obviously, we require a little more money. 

In addition, we expect to do three or four more deals from the second fund as compared to the first one, where we closed 12 investments.

For the second fund, how much capital has been raised from overseas LPs so far? Is there a shift in strategy in this fund in terms of the kind of capital and mix of LPs you are bringing on board? 

For the overall corpus, we anticipate almost 40-50% coming from overseas LPs. There are two kinds of strategies that funds usually follow. Some of them go to retail investors and then while deploying capital, they put money in several companies and then double down on the ones that perform well. 

Our strategy for both funds is to have a very limited number of LPs and very focussed number of portfolio companies. So the mix is similar -- family offices, a couple of fund of funds, and corporates. We have chosen a very select number of entrepreneurs who have been very successful in building large companies with domain expertise. 

Have you started deploying the corpus from the second fund? 

No, we will actively start making investments from July.

With a larger corpus, do you also plan to expand the existing investment team? Could you share some targets?

We are already six people and we are going to announce a few more additions to the team soon.

Fund I has already delivered an early exit (Shield Square). Are you expecting any more early exits from the fund?

We are three-years-old in terms of Fund I. Between now and the end of next year, we expect at least three or four exits. 

How is the Fund I portfolio faring so far in terms of follow-on funding from external investors and revenue traction? 

Exceptionally well. For every dollar we have invested, our portfolio companies have raised $15 of external capital. Kissht, SigTuple, hansel.io, Darwinbox, Cygni, and CureFit have had multiple rounds of financing. Steradian Semiconductors and AlphaIC are going to raise Series B rounds very soon. Almost all of them are performing well.

In terms of earnings, revenue cycles of deep-tech firms are very different from SaaS companies or consumer-focused companies.  Each company has a very different method of monetisation. 

As the largest B2B-focused seed fund in the market, do you anticipate coming up against any challenges, internally and externally, as you go out and deploy this capital? 

While the picture is changing a bit, there isn't much follow-on capital in India for deep-tech. For instance, not many investors would bet on Steradian, which develops high-performance sensors for autonomous vehicles.

Such deep-tech companies sometimes have to go overseas to raise capital. Also, market and revenue for these companies come from abroad. So we help out by going to Japan or the US to acquire customers. 

Are you concerned by the entry of large investors such as Tiger Global and Sequoia into the B2B segment?

In fact, I am very happy that we are the ones who find the jewels and we engage very early while these companies (large investors) come in at the Series B or A stages. 

We are essentially a pre-Series A fund. For that reason, the bigger investors look at us as a funnel rather than seeing us as competition. The big funds do seed deals occasionally, but that is not their core focus. So I am more happy than worried. 

What have been the three most important learnings from your first fund that you will reflect on going forward?

Stage and sector focus. We can’t be all things to all people. We are very much stage-focussed. As for sectors, there is SaaS, mobile, information security, semiconductors, digital health, medical devices, and now a little bit of life sciences. 

Another learning is about investing in businesses where we are able to add value. We label ourselves as co-founder/VC, but that doesn't mean we run the company -- it is entrepreneurs who drive these companies. However, we have the ability to add tangible value in terms of product launch, hiring for the core team and refining the business model.