Insights on the Indian Startup Ecosystem by Ankit Kedia, angel investor turned VC

Ankit Kedia is the Founder of Capital A, a new-age venture capital firm for early-stage startups in India. He launched the fund formally in 2021 after having spent the last 14 years as a second-generation entrepreneur in his family business – Manjushree Technopack Limited. Ankit has been angel investing since 2017 and Capital A is the formalization of this passion and his USP as an angel investor turned VC. He comes with a rich operating experience across the B2B space including in verticals like manufacturing, supply chain, healthcare, MedTech, fintech, and others.

At Capital A, the team is on a mission to back meaningful startups and founders looking for smart capital instead of just going after the valuation frenzy. They have also backed consumer startups with a solid product-market fit and impact. Their focus is on highly promising Indian startups across different industries and it has made 20+ investments over the last six months of its existence.

The following is an excerpt of the interview with Mr. Ankit Kedia, Founder & Lead Investor, Capital-A.

1. How was the year 2021 for you as an investor/VC?

The year 2021 was a solid one for investors. We saw an incredible amount of VC Capital being deployed across a highly diversified group of sectors. As far as Capital A is concerned, this was our maiden year and we have invested in over 20 early-stage startups across different sectors and have more in the pipeline for 2022.

2. How often do you bet on the entrepreneurs and not on the ideas? And when/if you do that, what quality of the entrepreneur usually makes you do that?

Given that we are an early-stage focused VC fund, we always end up in a dichotomy of choice between the founder and their idea. There is no binary answer for this. We have made bets on founders who are fresh out of college but come with great execution capability and zero experience. We have also backed seasoned professionals beginning their start-up journey after 10+ years of industrial experience.

Typically, we look for founders who have absolute clarity in their ideas and basic commercial acumen. If both these qualities exist in them, it is easier to assess the business. This is because we are assured that the founder knows their territory well. While an educational qualification from top business schools and engineering institutes is good, we have never used this as a prerequisite for evaluating investment opportunities.

3. What is a warning sign for you when investing in a startup?

If the founder keeps wavering on his/her product idea and wants to pivot even before having secured seed funding, it usually is a red flag. Another aspect that we carefully evaluate is the future-proofing of the business model in terms of technology and scalability. If either of these isn't likely to exist in the next 5 years, we tend to hold off any further discussions.

4. What are some common biases you find in the Indian Startup ecosystem?

While investing, many VC founders are most likely to pursue the crème de la crème from IITs and IIMs who they feel are capable of executing and scaling up to large businesses. In my view, we need to look beyond this bias and consider those from the non-premier institutes as well to democratize the startup ecosystem. Another bias which many early-stage investors have is that they tend to back founders and startups with other bluechip angels or VCs as their investors. While this is a good background, it displays the lack of understanding and belief of the incoming investors. It also displays a piggyback approach towards investing. Although we also consider such startups, only a small percentage of our fund is reserved for Series-B investment.

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5. What are your views on the Shark Tank India Episodes until now?

The Shark Tank show on Sony TV is an incredible start and will be a great way to get more and more entrepreneurs into the startup ecosystem. I love the section in which the sharks explain various VC jargon to viewers. From an investor's point of view, I would like the producers to tighten the quality of startups pitching to the sharks and not just select those who are vying for publicity on national TV.

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6. We are seeing many startups exiting with IPO, what’s your opinion on that? How is it going to change the ecosystem?

India’s startup sector has seen a record number of IPOs in 2021. The reason is quite simple. There is a lot of pent-up appetite for investment amongst global investors. Many companies are also looking at leveraging the stock markets that are bullish about a strong recovery from the pandemic to fund their expansion plans and achieve financial security. The ecosystem will see an enormous amount of global capital being poured into the startup space in India. The pandemic-induced lockdown led to a record high adoption of digital technology, thereby helping startups fuel their growth. There is a renewed confidence amongst the investors and IPOs will become a realistic exit option for investors.

7. More than 42 unicorns in 2021. What do you think caused this wave? Is the valuation justified according to you?

India stands among the top 3 countries (behind US and China) witnessing a surge of unicorns. This surge can be explained by the massive interest from global investors aspiring to secure their territories within the Indian startup ecosystem. Some innovative startups amongst the unicorns including Zetwerk and Apna which made it to the list due to their offerings. There are a few unicorns that commanded ridiculous valuations. In my opinion, they were just fortunate to be in the right place at the right time.

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8. How can we support/ enable entrepreneurs in tier2 and tier 3 cities?

Tier-2 and Tier-3 cities have very innovative founders and business ideas. However, they sometimes lack the right connect, platforms, incubators, or accelerator programs to bring them to the forefront. In fact, many founders focus on solving problems specific to Tier 2 and 3 towns which could be a very big gap in the market. In my opinion, VCs should identify the right venture partners to find out these hidden gems and also actively partner with academic institutions to develop student interest in the startup ecosystem.

9. What do you look forward to as an investor in the year 2022?

The year 2022 will be similar to 2021 or even better as startups continue to attract capital from both private and public markets. The year 2021 saw one of the highest investments both from PE as well as VCs with many startups also going to the capital markets. The IPO frenzy has injected a lot of confidence among investors and startups will continue to benefit from the pent-up demand from 2020.

10. What are a few sectors you think would be hot in the upcoming year?

Sectors like EV, e-Commerce, logistics, and even fintech will continue to be the flavor of the seasons amongst the VCs.

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11. One learning that you would like to share with founders who are looking to raise funds?

One of the most common challenges that we face with founders looking for capital today is that they underplay their equity without understanding how valuations and captable work.  The founders end up giving a lot of equity to investors who barely bring value to the table other than wanting to spray and pray. Any founder looking for early-stage smart capital must be equally selective about their investors as much as the latter cherry-picks investment opportunities.

Another challenge many founders are facing today is around individual investors on the captable who become extremely specific about their exits. In some cases, we have also seen their rigidity to sign on SHAs as they are entitled to the same rights as major investors. My advice to founders is that while your friends and family are one of the earliest believers in your ideas, it is very important to anticipate future rounds and draft agreements in the interest of your organization, and not the investors. Sometimes, the fundraising process can become very overwhelming, and hence, it is important to create a healthy mix of advisors, investment bankers and leverage early investors as your mascots for the same.