Tilman Ehrbeck on why India is a key market for Omidyar Network-backed Flourish Ventures

Omidyar Network, the impact investment firm backed by eBay founder Pierre Omidyar, spun out its investments in the financial services sector into a separate venture capital arm, Flourish Ventures, last year. It got off the ground with an existing portfolio of 45 companies worth $200 million. With an additional $300 million in fresh commitments from its parent, Flourish has since started making investments on its own.

In India, an important focus market for the firm, Flourish currently co-invests with Omidyar Network India. It already has 13 startups in its India portfolio that includes Bon, which offers credit to workers in the gig economy, insurtech startup Toffee, neobank Kaleidofin, and digital lending platform Indifi. It has also made two new investments -- Yelo and Shubhloans, and done follow-on rounds worth $10 million in ZestMoney, Toffee, Indifi, and Kaleidofin since being spun out.

In an interview with TechCircle, managing partner Tilman Ehrbeck spoke about what India offers Flourish.

Edited excerpts:

What is Flourish Ventures’ broad investment thesis?

We are sector focused. Within that, we have a point of view of what a better financial system that reaches more people with more adequate and appropriate services at far lower costs would mean. We have a normative view on how financial services can benefit people and small businesses. We're trying to develop an investment thesis where we feel new approaches and models can be demonstrated.

We have identified certain themes across different markets, so that the folks in Brazil can learn from India and folks from India can learn from what might have happened in other markets like Indonesia and or the US. These are the themes that we feel could help reach more people at lower costs.

Similar to Omidyar Network India, we are not a traditional fund. Our source of capital is Pierre Omidyar, so we have permanent capital. That’s a great advantage because we do not have investment pressures. We are meant to take early risks because Pierre, who is an entrepreneur himself, wants us to support cutting-edge innovations that really have the possibility to prove out different approaches. In an ideal case, our investments are individually widely successful and collectively demonstrate that a whole theme is feasible, shapes the narrative, and creates copy cats in markets where we are not present.

We would love to change the world through the successful demonstration of our underlying investments.

India has made significant advances in fintech over the past few years. How has that helped further financial inclusion in the country?

There are many tools that help India lead the fintech revolution. The introduction of tools like UPI (unified payments interface), Aadhaar, and India Stack have lowered system costs and then Reliance Jio has brought data prices down sharply. There are incredible things happening where India is the role model for the rest of the world and then there are also some themes that work in reverse.

India really got an early start, coinciding with the rise of smartphone penetration. The coming together of UPI stack and emergence of cheap smartphones gave it the ability to offer services in an open architecture environment over-the-top. India had an incredibly exciting first phase in fintech. I would like to think that Omidyar Network at the time were early in recognising that and we had colleagues on the ground who were early in seizing the first set of opportunities.

I think we are entering a new era for different reasons. Fintech has been discovered by more generalist investors. The notion of financial inclusion has been discovered by the more fintech specialized investors, and there is a new set of successful entrepreneurs from the first wave of ecommerce and other companies – this is both a more active and hotter market and therefore, also a more exciting one.

Why is India a key market for Flourish Ventures?

It’s a large and exciting market with great entrepreneurial talent where a lot of innovation can either happen for the first time and be exported or we can bring in other innovations. Omidyar Group is very committed to India and it manifests itself by having the only geographically defined entity in India.

Economics is tougher in India because the payment infrastructure is now so efficient by regulations that there is little to no revenue. So you have to think about other models. As a result, there will always be tailoring and experimentation to find out what works from a product market fit perspective. In this context, I expect Indian companies to be a little different going forward.

Unlike many other markets, India achieved a level playing field because of UPI. Therefore, the innovation happening here has high relevance, they can quickly scale.

We have many innovators and a large market. Many fintech products offer opportunities for people to plug into them as innovators as opposed to the company controlling the whole value chain. The notion of embedded finance in India creates large opportunities. The way we create this is relevant for neighbouring markets to borrow on the models, but not necessarily people going from here and setting up businesses there.

We expect many of these models to emerge and become successful in the local market, which can find replication in other places.

Tell us about some of the emerging opportunities you see in the Indian market?

There are huge possibilities in this notion of embedded finance in which targeted, bite-sized insurance (insuretech) is one component. In addition, point-of-sale credit and target saving for future pleasure are emerging trends. The gig economy is becoming bigger and bigger. Social commerce is a big area. These are the examples of themes for the future.

We are looking at digital credit, both on the consumer side and micro and small business side. As more and more of our lives get digitised, more and more data is available, which has predictive power that can be used for credit underwriting. This empowers people who otherwise wouldn't have credit scores as individuals or whom a traditional commercial bank could never underwrite. We want to address those folks. This is a theme that’s coming more out of the emerging markets. We are doing it in other markets as well. This is an example where we have taken innovation and ideas that came out of India to other markets. We have made similar investments in Africa, in particular.

Challenger banks is a theme where other western markets could be a little ahead. We are evaluating if it makes sense for India. We have made about eight investments in this segment across the globe.

What is in the investment pipeline for Flourish in India for the year ahead?

We have an existing portfolio that is doing very well, and there will be follow on investments in those. We will make a couple of new investments, similar to last year’s order of magnitude. We might also co-invest where sometimes Omidyar India might lead or we would lead.

We don’t go by budgeting but typically we would definitely make two new investments and the follow-ons in about 5-6 will happen.

We are also very focused on unit economics. We look for businesses which are monetising. We are looking at some of the challenger banking ideas, but not from a global lens. More segmented plays in India is what we think will work out. Embedded finance opportunities and insuretech is something we continue to look at.

What is your average ticket size and at what stage would you like to back a startup?

We are an early investor. We are often the first institutional investor. Our first investment in any given company could be at seed stage or Series A, and in exceptional scenarios, Series B. In many cases, we are the only institutional investor in a seed round. We would like to participate early in a company’s journey and do follow-on investments.

The first cheque could be anything between $500,000 at the earliest up to $2.5-$3 million. We then follow through. When we invest, our thesis is that we will do at least one follow-on round in the company.

 We reserve that pool of capital. Follow-ons depend on how companies raise their next rounds. Our overall exposure in most companies has quickly gone up to $10-12 million.

We don’t do paper ideas. For seed investments, we look out for a team with an early version of what their product would be like. Here, nothing is tested yet and the product may not have gone to the market. For Series A, it’s about the product market fit. There is something out there in the market, you know who your customers are, and customers have, in some shape or form, adopted the product. We do not wait for large traction.

We want to be a meaningful partner with a meaningful stake because we are then very hands-on. We go on the boards, we help them with these services, and we want to learn because one of our key objectives is to take these learnings to other markets.

As an impact investor, how does Flourish select prospective investee companies?

The notion of impact and venture capital investors are not trade-offs. We are thinking through each investment - does it help their customers to improve their lives? Does it fit in one of these changed themes that can change the entire system for better? So our impact filter comes first and it’s qualitative. We are then taking a venture capital lens because our entrepreneurs and co-investors expect that from us.

It’s not a trade-off, it’s a sequencing, around a very strong thesis with an impact lens and then a venture capital investor. As a venture capital investor, we can be a bit more flexible and patient than others because of our own capital structure.

What is your investment holding period and exit strategy?

Empirical evidence suggests we have a holding period of about six years. We are at the phase where we are building momentum. The notion of patient capital has always come from the perspective of a very feet-on-street driven microfinance model. It requires a longer gestation period to start showing results. Some of our NBFC portfolio falls into this category where it requires patience. In the digital portfolio, the timing narrows, it’s closer to a venture capital kind of cycle. Beyond a level, they will raise good capital and therefore, as passive investors, we wouldn’t want to sit around but exit. In that context, we have seen that our exit cycles are around six years.

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