Arkam Ventures targets middle India: GenAI, space tech, EVs among key areas

Arkam believe that the biggest venture outcomes over the next 15 years are going to come from founders who are reimagining and rewriting many traditional industries

Started in 2020 by two seasoned venture capitalists, Rahul Chandra (formerly - co-founder and MD, Helion Venture Partners) and Bala Srinivasa (formerly partner at Kalaari Capital), Arkam Ventures is a pioneer in investing in the massive middle India opportunity. Unlike its predecessors and peers who have largely backed start-ups serving the top of the pyramid, Arkam backs a new generation of founders focused on building tech-led solutions for the next 400 million Indians. In an interview with Peerzada Abrar, Arkam managing director Bala Srinivasa talked about the opportunities that the venture capital firm is looking at to tap middle India and how the fund is now bullish on promising areas like GenAI, space tech and EVs.

What was the vision behind launching Arkam Fund?

Our first fund close was in March 2020, Arkam Fund  1 – $106 million fund.  We started with a thesis of looking for middle India disruptors. It is about founders building for middle India. We defined it at that point as 500 million Indians within a certain family income bracket. Since then we have built a portfolio of 18 companies that have cut across many sectors. This portfolio has proven the thesis that you can build large, scalable and actually profitable companies with a new generation of founders who are leveraging India's digital rails to actually build amazing solutions that cater to the next 500 million Indians. These historically have been underserved. They haven't had access to the broad range of products in areas such as financial services, healthcare, food and agri, skilling or logistics.

What kind of companies have you backed?

The next 500 million Indians didn’t have the same access that you would have in the top eight, ten cities of India. So that led us to companies like KreditBee, Jar, Smallcase, Smartstaff and Karkhana. There are also some of our SaaS companies like Signzy which is helping banks on board Indian small businesses and SpotDraft which is helping small businesses with contract management. Four years later, many of these companies have really done very well. There have been almost 18 new follow on investors after our first cheque in many of our companies. Our companies have raised over $2 billion collectively. 

What are these new middle India opportunities?

We believe that the biggest venture outcomes over the next 15 years are going to come from founders who are reimagining and rewriting many traditional industries. They have middle India consumers and small businesses. They are finding new solutions that have historically not been available to them. What is middle India? We have defined it as 500 million consumers who make between Rs 3 lakhs- Rs 20 lakh a year in family income. But the difference between a country like India and China, for example, is, the top eight metros in India have about 80 to 100 million people. You throw in the next 10-15 large cities in India, and you're going to hit about 200 million.

The vast majority of India's population in that middle income bracket is spread out in a lot of Tier 2 cities and towns as well as within large cities. Historically, it's been very hard to succeed in servicing middle India consumers. The cost of acquiring a customer in these cities and service them with bank branches for the amount of revenue you will get from them was never a match.  Which is why all of these companies, whether it's in financial services, even in consumer goods, healthcare, you'll notice the concentration are within the top cities. This has prevented companies from really accessing the vast majority of Indian consumers which is the middle India category. They have the ability to pay if you can produce a product or service at a price bracket that makes sense to them. The only people who really cracked it have been the Unilevers and the Daburs of the world with the sachet model.

What is the model adopted by these firms to tap this market?

Tech founders on the back of UPI, Aadhaar and DigiLocker have figured out ways to rethink the traditional model. Our first investment was KreditBee. In six years, KreditBee has grown in revenue and is profitable. They service customers in 19,000 pin codes of India. Unlike a (large) bank that was limited to 40-50 million customers, a company like KreditBee started from scratch with a digital solution for middle India that was able to scale to several crore in revenue, over 12 million customers, and they're profitable.There is a certain product model and a business model by which you succeed in middle India. The smallest loan you can get from a meaningful bank is about one lakh. But you can get a Rs 10,000  loan from KreditBee. They have mastered the art of acquiring customers and servicing them digitally, and making sure that their risk models work.

We've got another company called Jar that does small ticket savings with gold, where you're buying gold. You can put in Rs 500 and buy a small piece of gold which is held for you. Given the importance Indian consumers give to gold, people  have a digital app, which gives them the ability to save at a small level. They can put it into an asset class like gold. Otherwise, you have to go to a bank and produce documents to open an FD.

Most of middle India is also built of small businesses. About 50 percent of India's manufacturing GDP comes from them. The challenge for these companies is they are never able to scale due to lack of resources. We have invested in companies like Karkhana or  SmartStaff that are changing the way small businesses can become more efficient and scale. For example, textile factories in South and West India, get migrant labour from UP and Chhattisgarh. They are hired through contractors. But there is the problem of  huge attrition in the factories and low productivity. Our company SmartStaff, uses a digital platform to source workers. It helps them find jobs in factories in Thrissur, Gujarat and Maharashtra. This is done without contractors who have been ripping off these labourers.

What are the new investments that you are looking at?

We are currently raising Fund II. It will be an extension of Fund 1 in terms of existing sectors of focus (financial services, skilling, food and agriculture, mobility, healthcare and SaaS) but we're pretty excited about some new areas. We've been doing a lot of work in space-tech and manufacturing. We've also done a fair amount of work in electric vehicle space as well. In addition to what we did in Fund 1, these are some of the areas where we are excited about in Fund II. Its target size is approximately $180 million. 

A lot of technology around AI is increasingly being leveraged in a country like India to transform the efficiency of both small businesses and enterprises. One of our companies is Signzy, which uses a lot of AI. It helps banks, NBFCs and financial services companies do KYC and compliance on small businesses.  One of the reasons banks don't onboard small businesses in India is that they're not really sure if the business is legitimate? Signzy’s AI is used to actually run compliance and risk and monitoring of these small businesses in a few days compared to weeks. 

How do you view the declining valuations of unicorns and businesses and what kind of exits are you looking at?

At macro level we are seeing that investors are taking longer to invest and especially in late or growth stage companies. There is clearly a tightening of valuations. But I also see in markets like this there is clearly a push towards scale and profitability.  Investors are showing a lot of interest in companies that are demonstrating the ability to go on and tackle larger markets without traditional levels of cash burn and no sign of bottom line outcomes. At early stage (valuations) are a mixed bag depending on the sector. But across the board at later stage deals, which is series B onwards, there's certainly a lot more prudent decision making. Choices are being made on behalf of both investors and founders in terms of finding the right risk reward equation.

As far as the Arkam portfolio is concerned, we are looking more at IPO exits than M&A. We feel it would be the path for the vast majority of our companies given the markets they are in and their approach of rethinking new solutions for very large markets.We believe the Indian IPO markets today represent very real exit paths that didn't exist a decade ago in India. This was in terms of both investor interest and market’s readiness to adopt new listings by young companies. Today's startups are also able to scale in some of these large markets.