Inflexor Ventures co-founder Jatin Desai on Fund II and investment priorities post Covid-19

In August this year, Inflexor Ventures, a Hyderabad-based venture capital firm founded by Parampara Capital co-founders Jatin Desai and Venkat Vallabhaneni, raised commitments for the first tranche of its targeted Rs 500 crore fund, dubbed Inflexor Technology Fund. The firm expects to raise the remainder of the fund commitments by March next year.

With a focus on early stage enterprise technology startups, the fund made its first bet this month with an undisclosed investment in deep-tech startup Steradian Semiconductors.

In an interview with TechCircle, managing partner Jatin Desai spoke about the challenges the firm faced during the Covid-19 induced lockdown, targets for the new fund, overall investor sentiment and portfolio strategy. 

Edited excerpts:

How did the pandemic impact fundraising?

We got the SEBI approval in January and then just as we were starting the fundraise, Covid-19 hit… Considering all that and after an initial one or two months of a slowdown, I think things have gone pretty well in terms of fundraising. We did the first close for Rs 230 crore on August 28 and since then we are approaching Rs 350 crore of commitment now. So, even post (first) close, things are moving in the right direction. Our domestic target is Rs 500 crore and we are looking to close it by March 2021.

What is your broad investment strategy?

Our first fund, Parampara, was early stage, ‘pre Series A’ focused. So, that is what we intend to do for a bulk of our funding from Fund II. Our plan is to invest 70% of the corpus in the ‘pre Series A’ to Series A stages and the balance 30%, we intend to do Series A-plus. That's the slight change. The (investment) theme will remain the same. 

What will be the fund’s typical cheque size per investment?

In ‘pre Series A’ we start with about a million dollar cheque (Rs 5-7 crore). Then we will take it up to Rs 25-30 crore as the company does well, and we continue investing. So that will be for the ‘pre Series A’ portfolio. The balance 30%, we may enter right away with $2-3 million cheques because those are more mature companies.

How many investments will you make this year?

We intend to back 20-22 startups from Fund II and we're targeting five-six investments a year.

Co-investments?

We are open to co-investments. In fact, we have made a few co-investments from Fund I as well. So, there are a couple of scenarios where we would like to co-invest. One, when we are investing in a new sector like we did in space tech. It's always better to have another pair of eyes also doing diligence and sharing risk. Another scenario would be when the ticket sizes are larger and we really like the company. We generally prefer to be the first institutional cheque.

What specifically do you look for in a startup?

We primarily look at four-five important things. Founder is one of the most important factors -- the quality, profile of the founder. We spend enough time with them both in formal and informal settings to gauge how they behave with each other and how they handle tough questions from investors. 

Second, as we are a deep-tech or a tech IP focused fund, obviously a startup has to qualify on that front. My partner Venkat (Vallabhaneni) and I have been serial entrepreneurs and been on that side of the table as well. Since we are hands on with respect to technologies, we can also validate technology quite well. So, somebody just cannot get away by telling us that they are an AI/ML company. These things have become fashionable and people keep attaching those tags -- big data, AI/ML/analytics, etc. We are able to deep dive and figure out whether there is a real tech IP or not. We also look for at least a two-three year head start in terms of the tech IP and continued R&D because if someone throws money, it's very easy to copy technology. 

Third, of course, is the standard, market size competition, whether there is a large enough market size. We generally invest only in companies that have global scope. When we invest, they may only be doing revenues in India, which is fine. But we look for scope that is global in terms of the market. 

And the last one is the entry valuation and the exit potential. It has to be at the right entry valuation to make enough returns and there should be exit opportunities. Whether it's a strategic exit or next round exit. 

What are your sector preferences?

We have a horizontal theme of deep tech, technology, IP innovation. Of course, our preference is software and SaaS models. Cloud based software is a preference. But sometimes we do a combination of software and hardware. In deep tech, sometimes there may be a layer of hardware. But the IP generally will be in the software. 

As long as all the parameters like the founders, market size, exit potential, valuation are all checked, we are generally sector agnostic. But, of course, our favourites remain consumer tech, health tech, fintech, edtech, and we also opportunistically take space tech kind of bets. We had a space tech company in our portfolio before space tech became hot in India. We had invested in Bellatrix Aerospace.

How has the pandemic impacted early stage dealmaking in general? As a firm, what was your experience working through the lockdown?

I think the first couple of months were definitely tough. Particularly April to June were tough, both in terms of fundraising, as well as meeting with startups and engaging with them. I think slowly the confidence came back and funds also started committing. 

I think there was a little bit less impact, anecdotally on the ‘pre Series A’ side of things. I think Series B and Series C slowed down and that has still not picked up. But I think on the ‘pre Series A’ side, I would say things are almost 70-75% back to normal. 

Of course, the challenge still remains, as in normal situations, we would meet the founders face-to-face multiple times. So that has been a little bit challenging as a lot of things are happening on video calls. But ultimately, we do meet the founders at least once or twice. Otherwise, you would have met them five-six times minimum in person.

How has Covid-19 altered investing priorities for venture capitalists?

I think… some sectors are being avoided right now. Till we see visibility, you would not see too much action in hospitality, travel related services, or where the client base is from these heavily damaged sectors. So that is one of the common negatives in a way. 

Second, I think cloud fascination has increased a little bit more, because cloud companies offer a little bit more predictable revenue stream, because these are recurring revenues. We also avoid pre-revenue companies during this time. So we are seeing the company's performance in the first two months of Covid-19 and then the next three-four months. Most of the good companies or companies with their software or their products that are relevant, we have seen a bump in the last two-three months. There was a dip in March, April and May, but people have started recovering in the last few months. 

In fact, we have seen in our Fund I portfolio, two or three companies were impacted by the lockdown and they really came back with a huge pent up demand. So I think that pattern is also helpful. 

How is the Parampara Capital portfolio doing? 

We were lucky. In Fund I, pre-Covid or during Covid, we have seen zero shut downs. Hopefully we keep it that way. While two-three companies got impacted when there was a complete lockdown, they came back very strong. And, thankfully, most of them had enough funding to tide over the crisis. That became the most important thing for startups. The startups that ran out of money just before Covid-19 hit, they were in real bad shape unless the existing investors decided to support them. They were left high and dry. So we were lucky as most of the companies had money in the bank to tide over the crisis. And then of course, we had to do a bit of hand holding, because for many of the young co-founders, this is their first crisis. 

How does the exit scenario look for Fund I?

So, now we are mentoring the companies to their growth phases. And slowly exit one by one. I think we are fairly positive and there is some development happening as we speak. We have three-four more years left of the fund life and we are quite optimistic on the exit. I think the exit situation in India is also improving a little bit. When we started Parampara, the exit scenario was a bit dicey but things have now definitely become better.

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