Fund focus: Fundamentum finds its niche

The Fundamentum Partnership’s debut fund in 2018 was a friends-and-family affair. The India-based investment firm, established by Infosys co-founder Nandan Nilekani and Helion Venture Partners co-founder Sanjeev Aggarwal, raised USD 100m from internal sources and the principals’ networks.

Fund II recently closed on USD 227m, comfortably exceeding the USD 150m target, yet the GP commitment is still probably among the largest in the Indian market. Management accounts for 25% of the corpus, a commitment that demonstrates the conviction that “no other asset class will create more money than ours,” according to Ashish Kumar (pictured), a co-founder and general partner.

Local investors make up 80% of the LP base, with a bias towards entrepreneurs and families, or “people who have built their own businesses and can bring value to the portfolio,” Kumar explained. He expected the process to take 12 months, but it was done within three. The fund is now closed to new subscriptions, but a couple of ongoing dialogues could see the total swell to USD 250m.

Fundamentum has been buoyed by a deliberately concentrated but high-performing debut fund. Of the six investments, two have already achieved unicorn status: drugstore portal PharmEasy and used car marketplace Spinny. A couple more – artificial intelligence-enabled logistics platform FarEye and opinion-tracking start-up Probo – are said to be on course to join them.

This restrained approach to deployment, ultimately driven by a desire to work closely with portfolio companies, played well with LPs when marketing Fund II. “A lot of people asked whether deployment was going to happen in three years or one year. They want managers who are disciplined,” said Kumar. “In 2020 and 2021, that didn’t really happen in India.”

Fundamentum exists in the space between venture and growth capital, entering once a start-up has established product-market fit, and writing cheques of USD 10m-USD 15m as the lead or co-lead investor in Series B and C rounds of USD 25m to USD 40m.

Investors poured USD 36.6bn into early and growth-stage deals in India’s technology sector in 2021, more than the previous three years combined, according to AVCJ Research. The early-stage versus growth-stage split was 32-68, compared to 47-53 in 2020 and 71-29 in 2019. The record for the fastest journey from launch to unicorn status was reduced by more than half in 2021 to six months.

Kumar blames investors pumping capital into start-ups faster than they should, which led to median revenue multiples rising from 10-12x to 30-40x, and start-ups looking to attract top engineering talent by compressing development timelines, with three-year targets squeezed into 15 months. He doesn’t expect this kind of behaviour to be repeated.

Indeed, as of late August, technology investment was well short of 2021 pace – early and growth-stage deployment was USD 6.8bn and USD 8.9bn, respectively. While the impact of the global technology sell-off in listed markets has been relatively muted in India, Kumar believes capital entering private markets has become far more concentrated in terms of target industry.

“In 2020 and 2021, multiple industries went through digitalisation and more than 15 received venture capital funding. Now and for the next two years, it’s down to seven or eight industries,” he said. “This will become visible in our deal pipeline over those two years, when companies that closed Series A rounds in the past 24 months come back for Series B.”

Fund II is expected to back about a dozen companies, reflecting that increased deal flow. Up to 40% will go into software-as-a-service (SaaS) and 20-25% to healthcare, with smaller allocations for digital content companies and businesses catering to India’s 400m-strong second-tier of consumers.

“India has 100m top-tier consumers, but we are now seeing more traction in the next 400m, which we call the bharat,” said Kumar. “A lot of founders grew up in tier-two, tier-three, and tier-four cities, they saw what happened with digital activity among the top 100m, and they are looking to do the same in their cities. There are agtech opportunities around that as well.”

Fundamentum believes it retains an attractive niche caught not only between venture and growth but also between domestic and foreign pools of capital. Local managers tend to start with small funds, which naturally draws them to early-stage deals, while their foreign counterparts – still the source of most of India’s growth capital – struggle to gravitate from late to mid-stage rounds.

“When late-stage investors come in, it’s with an understanding that the industry leaders are established, and they need only choose between two or three. At our stage, there are still 8-10 candidates, and it is difficult to think about the business model, team, and expansion prospects when you aren’t domiciled in India and operate in India,” Kumar said.

“When we started, there were only two other funds in our space, both global firms with offices in India. Now there are about six.”

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• Topics
• South Asia
• Fundraising
• Venture
• Technology
• GPs
• India
• The Fundamentum Partnership
• Helion Ventures
• TMT