Niche early-stage investor pi Ventures is betting on the growth of the artificial intelligence and Internet of Things (IoT) in the country, and is looking to reach the first close of its $30 million fund. The artificial intelligence market is estimated to reach $5 billion by 2020 globally, and with Indian companies being one of the fastest adopters of AI, pi Ventures is trying to capture the market early. Founded last year by Manish Singhal and Umakant Soni, pi Ventures has already invested in three startups including Zenatix, ten3T Health (Cicer) and Sigtuple.
In an interview with DEALSTREETASIA Singhal talks about the challenges of raising an AI-focussed fund and the growth of the AI ecosystem in the country. Edited excerpts
How do you view the growth of AI in India?
For the last one year since we have been working on this – a few things have come out and supported our thesis from external sources. For example there’s a Zinnov Consulting paper which shows India is actually the third largest cluster of startups in the world, first being US followed by UK. Secondly, Infosys recently released a paper and they came out with the finding that Indian businesses are fastest to adopt AI. So, if you combine these two facts that you have quite a few startups here and that you have businesses that are willing to adopt AI, then you have something positive going on.
The other two components that are required to make this sector successful are talent and data. Data is the fuel for AI, and talent is required to make any business successful. The good thing about India is that data in India is cheaper than other places globally. For example healthcare data in India is probably 5-6 times cheaper than the US.
Another thing that has helped India in the last few years is all these MNCs opening their centres over here like Microsoft, Amex, Amazon, they all have their machine learning teams over here, those engineers have learnt what data science is, what machine learning is, what AI is. And now they’re actually either setting up startups or joining startups. So data, talent, startups, businesses willing to adopt AI, all of them are coming together to make a good environment for AI startups.
Is there a lot more acceptance towards niche investors than what there was a few years ago?
We in India are in the formative stages of the venture capital industry, which is about 15-odd years old. So far the kind of products and investor thesis has been around, is what I call as the market share-led thesis. Flipkart, Snapdeal, Ola, Practo – all these are the market share-led thesis, which is the thinking that I will go capture the market, I’ll be the biggest player in the market and from there I’ll build my business. Now I think over a period of time there is a transition happening investors are also opening their eyes to an IP-led product thesis. So, people are now looking at how can we back IP-led product companies, which may not be the largest shareholders in the ecosystem but they can be very disruptive.
So there is a change in the investment thesis mindset and is this backed by good evidence on the ground of some of these companies being available for investment as well. A combination is probably what is leading to this positive change. The drawback that has happened recently on the funding, is a very positive thing to happen to the Indian ecosystem because it has taken away capital from B2C and people are still trying to see where to deploy the capital and now that capital is coming to product companies. Therefore you will see a lot more IP-oriented products getting funded in India.
How do you view the current investment climate? There was a boom in investment in 2014-15, then last year, the pace tapered down a bit last year
It was painful for a lot of people but I feel it was a good pain to be in for long term gain. The model was not sustainable, where people did not have a sustainable business model and investor money was being pumped in to support the entire losses. Same model continues at a larger scale, you burn more cash you get more money. Where is the end of that? That’s what led to the retrenchment last year.
Now investors are still sitting on money, funds in India have closed big funds recently . That money is ready to be deployed, the market share-led thesis hasn’t given success to a lot of people, and IP in India has been growing, so the attention in India is diverted. Now, the IP led startups are able to raise more money, and they actually they don’t need as much money as B2C companies need. So this is a very positive change in the Indian ecosystem. You see a lot more real businesses out of it.
pi Ventures started out last year, how has your journey been so far? How many companies have you invested in so far?
Journey has been full of ups and downs just like a startup. It is not very easy to build a fund in India, and that too a first time fund with a specialised thesis like AI. So, we had all the things that can scare investors away from putting money in our fund, but good thing is that we are nearing our first close and we should be able to announce that soon. We have already invested in three companies and we are in final stages of talks in the fourth company. Demonetisation also hit us very badly, domestic investors were not willing to talk to anyone for any investment. Inspite of all the ups and downs, it has been a great journey for us, we have learnt a lot in this space. We have done three great deals and have also created a #chAI initiative, which is aimed at creating a whole ecosystem around AI.
The last one year has been tough, but we are getting over the curve now, nearing the first close and we should be able to do our final close also hopefully in 2017.
When do you think you will be able to announce the first close?
Within the next two-three weeks we should be able to announce it.
In terms of your deployment strategy, how many companies do you plan to invest in, through this fund?
We are looking to invest in 18-20 companies in a period of three to four years. We want to get in as early as possible so probably seed up to Series A level. We participate up till Series A pro rata.
What do you look for in a startup when you evaluate investment in it?
There are standard things that any investor would look at like good founding team, market size, defensibility etc. We look at few more additional things, one is that we spend a lot of time in gauging how good their IP is, what are the real differentiators in IP, what is the real AI algorithm that they have built. Secondly, we look closely at what data strategy they have, how will they acquire data, who will the data belong to, how will this data grow, what is the cost of the data etc. So we have a frame work within which we analyse the data strategy. Third thing which is very important for us is that we want to see a very specific business case in our startup, so we don’t want to fund any R&D company, we are an applied AI company. All the companies we have funded so far have a business case, which states that this is the problem that they are solving and AI is the means to solve it.
We are very hands on investors, we have been entrepreneurs ourselves, so sometimes we look at the code and all ourselves, just to get a feel of the algorithm and what they have built.
Any other sectors other than AI that you might be interested in investing in?
AI is not a sector but a technology, which cuts across every sector. So we are sector agnostic but sensitive to AI and IoT. IoT sometimes becomes an integral part of AI, because IoT is the means to collect data on which AI can work. We are looking at AI, IOT driven businesses, which cut across sectors. Having said that, we are finding a lot of startups in healthcare, of the three investments that we have done, two are in healthcare. We are also looking at energy, logistics, fintech, enterprise. There are many sectors in which this technology can be applied, so we are sector agnostic but technology sensitive.
What has been the response of LPs to funds like yours? What is the kind of LP backing that you have got?
We have a mix of both domestic and international investors. We have investors from US, Canada, Singapore and India. The initial part of our fund raise was obviously slow. When I used to go for fund raising, people used to say that everything is happening in the US so why should we invest in India. However, what happened slowly is that we were able to demonstrate to investors what kind of companies are in our portfolio and that changed the perception of people abroad as well as domestically.
Secondly, what helped us in fund raising was that we have been entrepreneurs so we understand the pain of entrepreneurs and we work with them along side. That went down well with a lot of Indian entrepreneurs like Mohandas Pai, Sanjeev Bhikchandani, Deep Kalra, all of whom have backed us. Third part is the institutional funding, whose names we will disclose at the time of our first close and beyond, but we have been able to get the backing of domestic as well as foreign institutional investors. In short it has been a trying journey, probably the hardest thing I’ve done in my life, but it has been very exciting to do it because there is so much learning involved.
How does 2017 look for pi Ventures and the ecosystem as a whole?
This year you will see a lot more product companies getting funded out of India based on real IP, that is a clear trend that you will see, for us also it will be a similar thing. This year will be a defining year for us because we have to do our initial investments as well as close the fund, so it’s a critical year for us as we are excited and all charged up for the year.
We are looking at another maybe three-four investments this year, we want to go a little slow, we want to learn a little bit more.
Would you also look at investing in overseas companies, since a lot is happening in AI in other regions as well?
We are primarily India focused and I think a lot of stuff is happening in India, with a global need in mind. All the companies that we have backed so far although they are starting in India, but they do have global play. We may back India companies more than other regions. Also, we want to work closely with the companies we are involved with, we are not passive investors. Sometimes working with companies abroad becomes challenging out here. All these factors gravitate us to backing Indian companies for majority of the fund.