Fundamentum’s investors thus far include five-six Indian entrepreneurs and one non-resident, who have together committed close to $50 million. Nilekani and Aggarwal are committing to invest one-third of the overall fund from their personal wealth. This means roughly $33 million if the fund is $100 million, but going up to $66 million if the fund raises $200 million.
But neither Nilekani or Aggarwal will charge either 2% or 20% from the fund’s other investors. Which effectively means they are running the fund free of cost—of their own cost.
“We will charge a fee, but much lesser than what normal funds charge. And only to cover our expenses. There will be a carrier for the management, but we [Sanjeev and Nilekani] won’t touch it,” says Nilekani.
Losing the funds
This is an unprecedented step in venture capital, which exists unabashedly to make money—both from and for investors. Back-of-the-envelope calculations suggest staff salaries and expenses for Fundamentum, once Nilekani and Aggarwal’s salaries are ruled out, could be as low as 0.3-0.5% per year. That could be a plus for investors who normally lose four-seven times that every year with typical VC funds.
The decision to not take a share of profits is even more radical. Instead of the 80% of earned profits that VC fund investors are normally given, Fundamentum’s investors are likely to see around 95-97% (assuming a maximum of 3-5% carry is retained for the relatively junior management team) returned to them.
“We’re not trying to make money by being fund managers, but instead only as of the upside on our own investments,” says Nilekani.
When typical VC funds are being put together, the founders usually pony up around 2% of the overall fund size from their own wealth. Largely as a sign to investors that they have “skin in the game” too.
But with 33% of the fund comprised of their own wealth, Nilekani and Aggarwal are hoping to use the additional heft provided by other investors to multiply their own investments, instead of earning a fee or profit from them.
Identifying the areas in which Fundamentum will invest is an interesting game of set theory.
Take the universe of Indian startups. Remove all the ones that are at an angel, seed or Series A stage. Then remove the ones in fintech or edu-tech. Then remove the ones that use Aadhaar extensively in their operations. Now remove the 14 companies Nandan Nilekani has invested in. And competitors to those 14 companies (which will be wary of Nilekani being an investor in their competitor too). Then remove the five dozen-odd companies Helion has invested in (Aggarwal still continues to be a partner bearing fiduciary responsibilities for Helion).
About 100 deals are done every year in the Series B and C stages. Of those 100, Fundamentum was to get a few of the best.
“We’re going to select only two-three companies in a year to invest in,” says Nilekani.
“Given the profiles of both Nandan and Sanjeev, they will easily have “top 10 visibility”,” says an entrepreneur who’s known both Nilekani and Aggarwal. By “top 10 visibility” he means having visibility and access to the same deals as by the top 10 VC firms in India.
Who wins the competition?
In a head-to-head competition on a promising company, while a Sequoia or Saif Partners may be able to overbid Fundamentum (both have significantly larger corpuses), other VC funds in the $200-300 million fund size may see a strong new competitor in Fundamentum.
Another advantage for Fundamentum could be the fact that its investors are themselves operational founders and CEOs of large companies, which gives an additional exit path for investee companies. Given that the pool of potential acquirers in the Series C stage in India is still small, around 10-15 (ranging from Alibaba and Softbank to Flipkart and Quikr), having some of them as investors might be a good plus point for Fundamentum.
But venture investing doesn’t have to be a zero-sum game either. One of Nilekani’s biggest strengths is his ability to co-opt his opponents into his plans (Aadhaar is the best example), so it wouldn’t be unusual to see that with Fundamentum too.