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Startup funding worldwide has slowed down significantly after about three years. This could be a cyclical retreat post the funding boom that was not really dampened by the pandemic during its peak years of 2020 and 2021. On the other hand, as most investors and experts seem to think, this is a much-feared fallout of geopolitical tensions, rising inflation and an impending global recession. The Indian startup ecosystem is also facing a funding winter of sorts, validated by dwindling capital inflow and mass layoffs. According to Inc42’s Indian Tech Startup Funding Report, in Q2 2022, startup funding fell 37% quarter-on-quarter (QoQ).

An interesting pattern has emerged, though, from the current funding trends. To begin with, investors are cautious but bullish about the potential of India’s startup economy. According to Inc42 data, startups raised $19 Bn in funding across 900 deals during the first half of 2022 (January-June), setting a best-ever H1 record. Not just that. During H1 2022, a total of 78 funds exceeding $12.3 Bn in value were launched or announced with a focus on Indian startups. 

Going by the funding, fintech emerged as the most preferred sector in H1 2022. Fintech startups across India raised $3.4 Bn from 159 deals, a 35% rise in funding amount and a 39% increase in the number of funding deals compared to H1 2021, which saw $2.2 Bn in funding from 114 deals. 

The exponential growth of fintech startups despite the RBI’s recent crackdown on PPI credit lines, talks of a crypto ban and other regulatory uncertainties proves that investors’ faith in the sector is not unfounded. Of the 105 unicorns in India, 22 are from the fintech sector, with OneCard being the latest to join the coveted club. It is also the fourth fintech unicorn minted in 2022. 

What makes fintech companies an attractive investor choice? And how do investors view fintech funding in the current financial year? Inc42 caught up with Sagar Agarvwal, cofounder and managing partner of Beams Fintech Fund, for clarity on these questions. For the unversed, Beams fintech fund is a Mumbai-based fintech-focussed fund that backs growth stage startups. It was set up in January 2022 by fintech veteran Sagar Agarvwal and founders of Venture Catalysts – Apoorva Ranjan Sharma, Anuj Golecha, Anil Jain and Gaurav Jain. And in April, it completed the first close of its maiden fund at $36 Mn. 

The first close reportedly saw participation from domestic and global investors including banks, non-banking financial companies (NBFCs) , fintechs, family offices, financial service’s CXOs and fintech founders. Existing investors of Venture Catalysts and 9Unicorns also backed Beams fintech fund in its first close.

Here are the edited excerpts of the interview.

Inc42: Why did you launch Beams fintech fund in the first place? Do we require a sector-focussed VC to help growth stage fintech players? 

Sagar Agarvwal: In India, the penetration of financial services is still below 10% across all sub-segments, be it active bank accounts, payments, credit cards, insurance or mutual funds. I don’t think legacy FIs alone can solve the low penetration problem. This can only be resolved through an FI-fintech collaboration. 

Then again, the fintech sector is growing in valuation and investment; it is the largest sector within the tech landscape. So, there is a need to create a dedicated fintech fund that will invest in fast-growing fintech companies and also provide an ecosystem to foster their growth. That is why we have launched India’s first growth-stage, fintech-focussed fund. 

Beams fintech fund aims to invest in companies operating at the intersection of financial services and technology. We will not only provide growth capital but also create a network of banks, NBFCs, fintechs and fintech founders and financial services’ executives from India, the US, the EU, Asia and the MENA countries. They will be industry stakeholders with diverse expertise, willing to lift our portfolio companies.

Inc42: How many fintech startups are there in your portfolio?

Sagar Agarvwal: Well, we don’t like to call them startups. We have invested in growth stage companies. This positioning aligns with our thesis of backing category leaders and helping them take the business to the next level. We have invested in two leading companies, a neobanking platform and a supply chain finance firm. We plan to close at least two-three deals in FY23.

Inc42: What is your game plan for these companies? How would you support them?

Sagar Agarvwal: We create an alignment of interest between our investors in the fund and our portfolio companies. We connect the companies with FIs to enable partnerships, technology integration and co-creation of fintech products. We also help big companies in our portfolio grow by acquiring smaller and younger portfolio firms. Our sister concern, Venture Catalysts, handles these deals. 

Besides, our network of industry experts and mentors helps our founders navigate regulatory concerns, understand the product-market fit and solve challenges with scaling, breaking into new markets and preparing for their next round of funding.

Inc42: How would you describe your investment thesis? What sub-sectors (within fintech) do you focus on, and what’s your exit strategy?

Sagar Agarvwal: We primarily invest in growth stage rounds (Series B and C) and look at companies at the intersection of financial services and technology. But at Beams, there are certain eligibility criteria, and companies must qualify. The fund will create a concentrated portfolio of 10-12 companies from a corpus of $120 Mn and will invest a total of $150-180 Mn along with its co-investors. This enables the fund to underwrite $15 Mn for each company during the investment period.

As you rightly said, Beams fintech fund has zeroed in on a few major categories. These include commerce and finance (embedded finance), products and technologies, enterprise SaaS, neobanks and platforms catering to MSMEs.

Also, we believe in backing sustainable businesses rather than investing in companies thriving on current trends. We look for long-term opportunities and segments where founders are creating big outcomes.

Beams fintech fund manages to mitigate investment risks to a large extent as we come in at growth stages. By that time, companies establish their product-market fit, show enough resilience through the downturns and have strong founders who can steer their businesses in the right direction regardless of the circumstances. Of course, the dynamics are constantly changing in the investment world. But given these parameters, we can still protect our investors from the downside risks associated with this asset class.

Inc42: You also mentioned minimum eligibility criteria for funding. Please take us through the due diligence process.

Sagar Agarvwal: We have a rigorous and elaborate screening process for evaluating companies. It begins with creating a pipeline of businesses at the forefront of problem-solving in the financial services space. We also list category leaders under each segment mentioned earlier. 

Next, we use internal scorecards and filter the companies to zero in on those which best fit our investment strategy and thesis. We dive deep into the company and the segment syncing with our mandate and criteria. Companies that qualify are shortlisted and presented to the investment committee. This is a three-month-long process, but we can be nimble if it is required.

Inc42: Do you look at any other criterion before investing?

Sagar Agarvwal: We look at the problems that founders are trying to solve and their confidence in what they want to achieve. We look at the founding team, the management team, employees, customers and supplier/vendor ecosystem to understand the thought process and the business culture. Beyond the standard quantitative analysis, we focus a lot on the company’s business model, products/services and its potential in the long run.

Inc42: Regulatory uncertainties are wreaking havoc right now. Keeping that in mind, how will VCs operate in the current financial year?

Sagar Agarvwal: I think the RBI is one of the most progressive central bank that maintains a strong balance between regulation and innovation. It has come out with clear guidelines for most fintech categories and wants organisations to follow those instead of operating in grey areas. More measures in place are not necessarily bad for the ecosystem in the long term. On the other hand, VCs are maturing as India investors and focussing on companies that do things by the rule book and have robust compliance checks in place.

At Beams, we are very bullish on the overall fintech landscape. We also think that the pandemic trigger and the extensive regulatory framework will augur well for the ecosystem. We want to underwrite more than 100 fintech unicorns in India in the next decade. However, the outlook remains cautiously optimistic for FY23.