3. January 2020

IEG to Focus on Mobility, Fintech and Larger Deals

German investment banking boutique IEG's joint venture in India is floating an early-stage alternatives fund in the country that aims to raise about $60 million. Going beyond the advisory business, the firm is engaging with European and South Korean family offices, besides two large Indian family offices, with an aim to invest their money in Mobility, Fintech, and Lending and Insurance sectors.

IEG India was set up as an equal joint venture between Mihir Kapoor and Stefan C Heilmann, the Berlin-based Chief Executive Officer of IEG. Kapoor had previously worked with Dutch investment banking giant Rabobank. In an interaction with VCCircle, Heilmann and IEG India Managing Director Kapoor discuss how the firm's global investing experience will play out in India as well as their strategy for larger deals in the advisory segment.

VCCircle: What are your plans for the advisory business?

Kapoor: Our deal sizes have become larger compared to last year. In 2019-20, we were looking for Series A deals of up to $25 million. In 2020-21, we will be looking at $50-75 million Series C deals. We would continue to work selectively in Series A deals, particularly where the deals can scale from Series A to C. In India, only two out of probably 25 deals go through the early-stage space. Mobility, Fintech, particularly Lending and Insurance, will be our focus area. Lending is a sector where we see a lot of Series C and D rounds. Apart from pure advisory business, we are also planning to launch our own investment vehicle. We will be speaking to structured credit funds from Europe that are looking to invest in India. A large European bank is looking to give out credit lines so we are launching an investment vehicle that will pool money from several investors. We have also engaged with European family offices -- South Korean family offices are also keen to partner with us in the investment vehicle. We are also in discussions with two large Indian family offices. Through the fund, we are looking at cheque sizes of $0.5-1 million.

VCCircle: Why did you move to larger deals in advisory business?

Kapoor: Raising Series B and C rounds are hard. Not all startups can scale. We don't want to work with many of the Series A-funded companies as they fail to scale. The focus area is who can add strategic value going forward. Strategic investors are selective. Mobility is a huge focus for us as we are seeing a lot of focus from strategists in this space. Larger insurance companies are looking at Fintech companies. A lot of South Korean funds are also looking at Series C deals, so we are also trying to get into the South Korean market.

VCCircle: On the investment side, which are the markets you invest in at present?

Heilmann: We don't invest in the US because it was an over-invested and overbanked market. In Europe, the current focus is anything to do with longevity like Healthcare, Sports, Nutrition and Data monitoring. We close 3-4 deals a year. It is a principal investment vehicle so it's on balance sheet. Our investments are directed through a special purpose vehicle, which is majority-owned by us. We have board members whom we call as 12 Apostles. The board has varied industry experience. They bring in opposing views and expertise on our potential investments. The model has worked well for us. In China, one of our managing directors has teamed up with a province. So, the fund business there is backed by either the government or individual investors.

VCCircle: How has your India experience been so far?

Heilmann: The year 2015 was a tipping point for the technology space in India. The same year saw massive investments by several global funds. But the valuations and the risk assessments were insane. They basically signed the term sheet and left the valuation open. In 2016-17, it was hangover time. Even the biggest names felt that they have overpaid. However, the reforms in the country have kicked off helping entrepreneurs. But reforms by nature are not fast enough. The mid- to long-term prospects are superb. Post-China and US trade war, China is looking for new friends, one of which is India in the Asian region. European investors are also looking at India as they are slow in picking up new trends. We have long-term trading and industrial partnership. But in technology, we are slow. Investors are now looking for more talent, quality and unit economics of the business in India. Investors across the stages are professionalizing. The market will be bright for the next 20-25 years. So having established a presence in the advisory business, we also want to participate in the investment side gradually.

VCCircle: What are your other investments in Europe?

Heilmann: In the Healthcare space, we have invested in a digital health company called DoctorBox where the patient can electronically store their data. In Europe, about 117 million have chronic diseases so that means they go 2-3 times every month to a general practitioner. The company has become more of a platform business where medical practitioners who need to interact with the patient end up on our platform. We also looked at every sport that has been boring or has a negative connotation like boxing, cycling and running. So, anything that is enduring or requires passion. We wanted to make it into a lifestyle, so we created a chain of cycling boutiques where you do full-body training on a bicycle. It is a highly profitable business model. It doesn't have a subscription model. It is designed for women with kids between 30 and 50 years of age who have no time to do sports and are unhappy with their body. We have seen such models like Peloton and SoulCycle in the US. In deep-tech data science, we have invested in a haptic technology company. The biggest trend in mobile in the last five years has been the camera. What is the next big tech development in mobile phones? We believe it's haptics. It means you look, read and hear something and when you touch your phone, you feel exactly what you are doing on the phone. If someone is watching a movie where the character is walking on the grass, you feel it on the phone. There is a software which live translates what you see into vibrating signals. This company is in open source and hopefully will become something like Dolby Surround Sound. Last month, Apple announced they will put haptic on their phones. So, we have a little more time. Nobody was looking at this space and we are absolutely the market leaders in this space.

VCCIrcle: How many total investments have you made?

Heilmann: We started three years ago. We have 6 active investments so we have made 2 to 4 investments a year on balance sheet. Only in China and India, we are looking for third-party investment opportunities. We will also co-invest in these opportunities. In India, our idea is to find family offices of China, India and Europe that have the entrepreneurial experience to invest with us. We don't require the fund to be big because we have a different approach to risk management. The venture funds in India put a lot of investment money into a lot of deals and they hope it works because the market tentatively goes up. It is a good approach but carries a high risk. Our LPs (limited partners or investors) put most prominent members on our investment committee. We basically make active co-investments in the deal. The investment committee is crucial to our risk management. We need to define a project on how we can tangibly improve the business.

VCCircle: At what stage do you plan to invest?

Heilmann: It doesn't matter. We are stage agnostic. If it's a larger deal, we will become a co-investor.

VCCircle: How big is your investment committee?

Heilmann: We limit our investment committee to 12 individuals. These can be LPs or outside individuals whom we believe are powerful to our businesses.

VCCircle: With your cheque size, how do you plan to make India investments?

Kapoor: We have the flexibility to write cheques across stages. Based on the size, we either invest directly or make co-investments or even come in at a time when the company requires bridge capital. Our investments sizes will be $0.5-1 million. Globally, we started investments 3 years ago. We have actively 6 of them. We also co-invest through the fund. We are not thinking of a large quantum for the fund because we have a different approach to risk management. We will be looking at 4 investments every year. We are open to coming during the early stage or even later stage during a bridge round. We are targeting to raise about $60 million. In the case of debt opportunities sought by global financial institutions, we would just become an adviser to those debt investments. These are USD 300m funds looking for an investment size of USD 30-35m.

VCCircle: How does your global investment help you in India?

Kapoor: We see a lot of well-funded technology companies from India making global acquisitions in Europe. For example, Oyo acquired a company called Leisure Group based in Amsterdam. Not too many players have expertise in the European startup ecosystem as IEG does. Getting a sell-side mandate (in India) is easier than in Europe. It is hard to find a good business up for sale, which is the value addition we are looking to make. It is a seller's market in India.

VCCircle: How is your business mix across the regions you are present in?

Heilmann: We have 50% of the revenue from Europe, 40% from Asia that includes India. India is growing stably unlike China that has a lot of spikes in growth. About 10% from the US where we do only in-bound or out-bound and do not work on local deals. Also, when it's in-bound, the deal is accounted as part of the Europe market. In Europe, our presence is in the core markets in Germany, Austria, Switzerland, Spain, France and Italy. In the UK, we have closed our office, which turned out to be a good decision. In eastern Europe, we look at Poland and do not look at the other geographies there because the deals are smaller. We still have an office in Turkey. The devaluing currency and political uncertainty don't make life easier there. We also have a presence in Abu Dhabi and Tunisia. Other efforts to capture the African market haven't materialized.

This interview was originally posted on VCCircle on December 31st 2019.




Header Pic © Sapsiwai via Adobe Stock (formerly Fotolia)