We back companies where tech is an enabler, not the hero: C4D Partners CEO

Our crucial thesis is that the business model is woven around a societal problem, said CEO Agarwal

Arvind Agarwal, co-founder and CEO of C4D Partners, believes that impact funding needs to turn a profit to make a serious impact. Many impact funding players, he says, have moved to tech-focused investing owing to a lack of exits.

Agarwal points out that his fund does not engage with companies which already have numerous venture capitalists (VCs). Importantly, in firms where tech is the hero. In an interaction with Shivani Shinde, Agarwal talks about C4D’s investment thesis, the current fundraise and why he shies away from tech-focused investments. Edited excerpts.

So, will C4D not invest in tech-focused companies or sectors with tech as a suffix?

Yes, we back companies where technology is an enabler and not the hero of the story. The moment tech becomes the focus, it turns into a valuations game.

We invest in a lot of traditional businesses which are rural-oriented. As a strategy, we are usually the first investors in companies where traditional VCs are not invested.

Our bigger story is that we have demonstrated exits are possible from such businesses. You do not need a $100-200 million valuation IPO to exit and make money. We already have a few exits in the pipeline. The valuation from these would be in the range of $20-40 million, but the internal rate of return (IRR) in some cases ranges between 30-50 per cent. So, every company need not go through the typical cycle of a startup: a series of fundraises, followed by an IPO. That’s where I think an impact fund should differentiate itself; at least, that’s what we are trying to achieve.

What were the early years of C4D in India like?

We started creating portfolios actively in 2014. Our first investment was a year later. After that, we started investing through the group organisation -- C4D Netherlands. So far, we have invested in 11 companies.

Our existing investments are from a global fund raised in the Netherlands. We have assets in Indonesia and the Philippines, including India.

And, now you are launching an India-dedicated fund?

Our second fund is registered in India and is India-dedicated. We are planning to raise $50-75 million. The global fund had raised $30 million, and almost two-thirds of the portfolio assets were from India. We hope to get the first close for our second fund by December, so we can start investing from 2023.

Tell us more about the new fund, who will be the limited partners etc?

Our first fund had only global investors, mainly from Europe. The new fund will have a mix of Indian and foreign investors. Our existing investors will participate in this fund as well. We will also tap into other private finance initiatives (PFIs) and institutions in the US, Europe and Asia. We are also approaching funds of funds and some foundations in India. The idea would be to get a 50:50 split or a 40:60 split between Indian and foreign investors.

We have seen some prominent VCs raising funds successfully; the market is very cautious and uncertain. Do you think raising funds now will be a challenge?

For a fund like us, which is focused on impact funding, investors look for two things. One, how are we creating an impact and what is our vision? Two, whether we have exits?

Thankfully, we are in our fourth year of the first fund, we have already signed a term sheet for a partial exit, and the IRR is not muted.

One other differentiator, we are one of the only funds in the domain which has connected our impact matrix to the carried interest that the fund manager can make. If our impact achievement is lower, the carry percentage will be lower. Consequently, if our impact achievement exceeds a certain threshold, the carry percentage also goes up. We are at 25 per cent of carry interest right now.

Since C4D does not invest in any company with tech as a focus, what are the focus areas?

We are sector agnostic. Our fundamental thesis is weaving the business model around a societal problem. While addressing that problem, one or two sector pain points are also resolved. Our portfolio has solar and waste management. We have invested in companies that provide last mile connectivity in rural and urban areas, a skilling company, and an NBFC lending to SMEs. We also have low-cost housing finance, which is, again, rural-focused.

What is the investment size that C4D is comfortable with?

Our existing fund has a cheque size of $1 million that can go up to $3 million. For the new funds, the cheque size will start from $500,000. So, the first check will not be more than $2 million; we will reserve another $4-5 million, depending on the final size. We usually invest in pre-series A and then participate in further rounds. The ownership can range anywhere from 5-25 per cent.

What have been the learnings for an impact fund like yours during the pandemic?

So, a couple of things happened. Initially, there was a shock. When the first lockdown was announced in 2020, the revenues and operations fell. Most of our companies are rural-focused. The whole urban to rural shift gave an upside to our portfolio firms in the later part of the year. We witnessed most of our portfolio companies coming back to pre-Covid levels of operation. We didn’t lose any company owing to stress. We focused on sustainability rather than depending on the next round of funding. By 2021-22, most portfolio companies had doubled their revenues compared to the previous year.

India has its fair share of impact investors. Have you seen any significant shifts, either in terms of more entrepreneurs or investors coming to this sector?

Unfortunately, no. I was hoping things would change after Covid-19. For instance, a lot is being talked about climate issues, which need to be resolved from the ground up. But not much activity can be seen in such areas. In the name of climate tech, most investments are going into the electric vehicle segment.

To create an impact, one needs to build with patience. If you look around, all the investments are about the valuation game, exponential growth, and easy and faster exits. I think it also has more to do with investors’ expectations and what limited partners and general partners are saying.