We bet on startups catering to the middle of the pyramid: Arkam co-founders

In a Q&A, Bala Srinivasa and Rahul Chandra, explain why it is essential for any company today to service the Middle India market in the country's smaller towns in order to thrive

Both are BITS Pilani graduates with additional qualifications from top-notch foreign universities. Both worked with two of the better-known companies in the venture capital ecosystem -- Rahul Chandra was with Helion ventures he co-founded, and Bala Srinivasa was with Kalaari Capital -- before starting Arkam Ventures in 2020. Their aim: to tap startups operating in tier-2 and smaller markets, catering to the consumers in the middle of the population pyramid. In an email interview with Namit Gupta, the co-founders and Jt MDs of the new VC company explain why they're betting on a segment many other venture firms see as a difficult, albeit lucrative market. Edited excerpts:

What is the size of the fund, and what is your investment strategy?

Bala Srinivasa: Our Fund 1 was $106 million. We invest in early-stage startups -- generally pre-series A to Series B with check sizes in the $1-3 million range. Arkam focuses on two themes - Middle India digitisation and SaaS. In the Middle India digitisation space, we are specifically looking for startups that address the needs of the 400-500M consumers at the middle of the pyramid in sectors like financial services, agri, skilling, healthcare and logistics. We also invest in SaaS companies targeting markets in India as well as globally. This is also a very exciting space as we see Indian SaaS now with the maturity, talent, take off velocity to scale to global markets.

You closed the maiden fund at $106 million, but the first close was raised at $30 million almost two years back. Why the delay?

Rahul Chandra: We closed the fund in late 2021 but announced it in 2022. Covid did delay our final close.

What makes 400M tick? How big is this market, and what makes it different from mainstream in terms of consumer mindset? And why are enterprises in this domain likely to succeed and possibly surpass their 'better-heeled' counterparts, for want of a better term?

Rahul Chandra: The Middle India market comprising 400-500 million consumers making between Rs 3-20 lakh a year in family income is massive by any global standard. For any company that wants to scale in India you have to win in this market. This market has gone through a generational shift over the past five years in terms of digitisation.

In 2022, Tier-2 smartphone users crossed 600 million from 170 million in 2017. Vernacular digital content users topped 400 million in 2022, up from 100 million in 2017. UPI payments now exceed 6 billion a month, up from 7 million a month in 2017. These massive shifts are opening the door for new technology led solutions that incumbents are not as equipped to provide.  

The Middle India customer behaves completely differently from the customer at the top of the pyramid. These customers have specific attributes - for example, many of them earn on a daily/weekly basis and not monthly/annually like the salaried class; most transactions in Middle India are small ticket size (smaller order value) but high frequency. These requirements need to find their way into product design. Category-creating founders understand these requirements and build winning solutions with deep knowledge of Middle India user behaviour.

What are the three barriers in the Middle India market you spoke about, that now seem to be crumbling? What is leading to their disintegration?

Bala Srinivasa: The three main barriers to cracking the Middle India market historically were cost of customer acquisition, cost of servicing and risk of the transaction. In a dispersed country like India with limited critical mass outside the main cities, smaller entrants found it too expensive to build physical distribution given lower price points that the masses could afford. This has changed dramatically due to massive digitisation that we discussed earlier. Today very young companies like a Jar and Kreditbee have millions of customers in thousands of pin codes across the country via low-cost and all digital acquisition and servicing.

How exactly do you evaluate a proposal? Why a KrazyBee, Jai Kisan, Smallcase or Signzy, and not any other competing enterprise working in the domains of these companies?

Bala Srinivasa: We index heavily on founders and their ability to build defensible and scalable businesses in large markets. All our companies have outstanding founders with a deep understanding of their markets, great product thinking, and a clear sense for what it takes to win. We also look for founders with the ability to attract strong talent and build a culture that can withstand the inevitable ups and downs of a startup's journey.

How many companies have you invested in, and how much have you invested in each so far? What exit options are you looking at, and what is the time horizon?

Rahul Chandra: We have invested in 14 companies so far. We are in the third year of a 10-year fund and believe in backing  companies across multiple rounds to achieve their target goals and scale outcomes. Like any VC fund, we look for exits towards the second half of our fund life.  

At first glance, it appears you have a strong affinity for fintech and investments. Which other sectors serving Middle India would you be looking at?

Rahul Chandra: We are also looking at agri, skilling, healthcare and logistics. Besides, we invest in SaaS companies targeting markets in India and globally. This is also a very exciting space as we see Indian SaaS now with the maturity, talent, take off velocity to scale to global markets.