India Quotient: The contrarian investors

“It’s fair for entrepreneurs to follow the money, right?” Anand Lunia asks, leaning back on his swivel chair, hands behind his head. It’s a sunny March morning and we’re seated in the conference room of his Mumbai office. “It’s very fair,” he answers his own question, without pausing. “It’s also very fair for the media to follow the money. But, at the same time, there is far more money in not following the money,” he says, leaning forward to stress on the “not”. “To be contrarian, that is what we’re trying to do.”

As founding partner of India Quotient, an early-stage fund established in 2012, the lanky, bespectacled Lunia has created a niche out of being different. To begin with, the 43-year-old points out that India Quotient has the smallest cheques to offer and so has to choose its investments well. It’s not a “spray and pray” approach, he says.

Yet, often, entrepreneurs prefer to go with them. ShareChat’s Farid Ahsan is one of them. When his co-founders and he were ready to raise seed funding in early 2015 for their vernacular language-focussed social networking app, they had two offers: One from India Quotient and another from SAIF Partners. The former offered them Rs 50 lakh whereas SAIF, a leading venture capital firm, was willing to pump in about Rs 3.25 crore. “We went with India Quotient,” smiles Ahsan. The “emotional connect” clinched the deal, he says.

Lunia allowed ShareChat’s three-person team to camp in India Quotient’s office (at that time Lunia’s team worked out of Paytm’s office in the western suburb of Santa Cruz, before moving to their current office in the startup hub of Powai) for six months, rent-free, until they got their product right. When the IIT-Kanpur students were left with no money to buy food, Lunia and his team would bring extra lunch from home for them. “They told us that they won’t fund us till we are fundable. ‘Focus on the product, first’,” Ahsan recalls Lunia telling them. Today, SAIF Partners is a co-investor in ShareChat, having led the Bengaluru-based company’s $1.25 million Series A round in July 2016. India Quotient further invested in that round. “Anand and Madhukar [Sinha, founding partner, India Quotient] bring a lot of operating experience to the table, having been a part of startups themselves,” says Mayank Khanduja, principal at SAIF Partners.

Prior to launching India Quotient, Lunia co-founded edu-tech startup Brainvisa, which he sold in 2005. He was also a partner at Seedfund, another early-stage fund. “Anand’s entrepreneurial background attracted us to his fund,” says UTV group founder Ronnie Screwvala, who invested Rs 5 crore in India Quotient’s first fund that had a Rs 30 crore corpus. “We, in fact, do not invest in a fund. This was our first.”  

But what is it that makes India Quotient contrarian? Not the size of its cheques for sure, for that’s no different from other early-stage funds. Neither is its focus on consumer internet companies, instead of B2B enterprises (its website explains: “Because we suck at investing in them”). What sets India Quotient apart is its focus on “India-unique stories”, as Sinha, 40, puts it. What he means is that the fund looks to invest in companies that are solving India-specific problems, like ShareChat does by giving regional and vernacular language speakers the ability to exchange messages, images and videos in their mother tongue. The proposition is simple: While the initial adopters of the internet in India understand English and have been using the web for a while, the next 100 million lack that understanding, says Sinha. That’s the audience India Quotient is targeting.  

Lendingkart is another company in its portfolio that is addressing an India-specific concern. Founded by Lunia’s younger brother Harshvardhan, the online platform offers business loans in the range of Rs 50,000 to Rs 10 lakh to entrepreneurs and small businesses without collateral. The company received seed funding of about Rs 4 crore from India Quotient and others in January 2015, and now counts larger players like Bertelsmann India Investments and Darrin Capital Management as investors. “Eighty percent of India’s population is unbanked. Their creditworthiness cannot be determined in conventional ways. We serve this segment,” says Harshvardhan.

“We prefer companies that don’t need too much of manpower and capital. They both become a drag and you can’t scale quickly,” says Lunia. Instead, the fund prefers companies that have “high network effects” or those that leverage the power of the internet and smartphone penetration to achieve scale.

Online networking platform Curofy, that claims to bring together 190,000 doctors across 1,500 cities to discuss difficult cases, the latest medical developments as well as search for jobs, is a case in point. Job portal for mid-to-senior level management employees iimjobs.com is another.

India Quotient was among the first institutional investors in iimjobs.com, when it led the startup’s Rs 13 crore Series A round in November 2016, with money from its second fund. Launched in January 2015, India Quotient’s second fund has a Rs 100-crore corpus. So far, it has deployed 60 percent of those funds, marking 20 percent aside as “dry powder”. “After the first fund, we didn’t have any capital to protect our ownership in the portfolio companies,” explains Sinha. While India Quotient’s ticket size has gone up from about Rs 1 crore in the first fund to about Rs 2 crore in the second, the team is now able to reinvest up to Rs 6-7 crore in investee companies that need additional capital, keeping its ownership intact.

Lunia and team also offer the heft of their previous entrepreneurial experience. Founders of their investee companies swear by it: Saurabh Saxena of Holachef, a food delivery service that raised Rs 2 crore in seed funding from India Quotient in February 2015, believes that because the partners at India Quotient “have been there and done that”, their advice is extremely grounded and practical. About five months ago, on India Quotient’s advice, Holachef bucked the free-delivery trend prevalent among food-tech companies and instead decided to charge a fee. “India Quotient made us realise that while it will impact us negatively in the short term, it is important, eventually, at a unit economics level,” Saxena tells Forbes India.   

This aside, India Quotient prides itself on bucking “hot sectors” like cab aggregation or online grocery services. “At Seedfund, we never did momentum investing. Not doing so is contrarian. Anand continues to do that,” says Pravin Gandhi, managing partner at Seedfund.

Take the case of on-demand home services, which was abuzz with investor attention in the recent past. India Quotient invested in Belita, an on-demand beauty services provider which Enrich eventually bought, back in 2011 when it wasn’t “the flavour of the month”, says Prerna Bhutani, a partner at India Quotient, who was also an entrepreneur in a previous avatar. In fact, it [the investment] was way ahead of its time. Today, the only segment that is working for large home services players like UrbanClap is beauty, which constitutes 50-60 percent of their business.  

 So how well has this contrarian approach worked for India Quotient? “They have been able to raise money for their first, second and now third fund, so they’ve done well,” says Gandhi, referring to another Rs 350-400 crore fund that India Quotient is in the process of floating.

While a handful of companies in their kitty have shut shop, India Quotient has successfully exited four investments with another 26 still active. Many of these have received follow-on funding from larger venture capital funds. Broadly, India Quotient’s internal rate of return (IRR) is in the range of 30-35 percent, says Sinha. With a target IRR of 50 percent for the fund, Lunia and his team are hoping that fortune will favour the contrarians.