Early-stage venture capital (VC) firm Incubate Fund Asia aims to close its third fund by June 2024. In an interview with BW Businessworld and VCWorld, Incubate Founder and General Partner Nao Murakami and Partner Rajeev Ranka said the third fund will bag close to USD 50 million, which is its target corpus. It marked the first close in November 2023.
For Murakami, the most important factor when investing in a company is the founders’ mindset. “We invest in companies with the potential to become unicorns,” he added.
Incubate has been an early investor in startups such as Yulu, Captain Fresh, Shopkirana, Nimble, Plum, Gourmet Garden and BuyEazzy. “We have been backing outstanding founders. The founders’ credentials, including education and experience, are important. We look at how committed they are to the business,” Murakami shared about Incubate’s thesis for backing companies from the seed stage.
One reason investors assess the founding team’s mindset is that startups often need to make crucial decisions, such as pivoting or changing their model, to stay in business. Therefore, it is a critical parameter when investing in a seed-stage startup. Sharing insights along these lines, Murakami discussed Captain Fresh and Shopkirana’s growth journeys, “When we invested in Captain Fresh, it was operating only in India. Now, 80% of its revenue comes from outside India. When we invested, Yulu was just a bicycle company. Now, they’re into EVs. Even ShopKirana has changed its business model.”
Exit Avenues
From fund 1 and 2, Incubate has exited from seven startups. Typically, VC firms like Incubate invest in startups at the seed stage and exit via secondary sale deals. However, Incubate prefers the initial public offering (IPO) route for startups with the potential to grow into unicorns. The fresh fund, it aims an internal rate of return (IRR) of three-to-fivefold.
Sharing Incubate’s exit strategy, Murakami said, “Captain Fresh, ShopKirana, Yulu, and Shopkirana could reach the IPO stage in the next couple of years, which could be an exit avenue. We have already made around seven exits from our seed fundings. Around five were acquired. When a company is not performing well and cannot raise further funding rounds, we look for acquisition opportunities. For companies with IPO potential, we take partial exits through a mix of IPO and secondary sales.”
Focus Sectors
The firm might exit from a few startups from Funds 1 and 2. It primarily participates as a lead investor in seed rounds. Formerly known as Incubate Fund India, it rebranded as Incubate Fund Asia last year. Both partners mentioned the third fund is targeting investments in other major South Asian countries. Around 10-15 per cent of the total corpus would be deployed there.
“We keep changing our focus sectors. As an early-stage fund, we see innovations happening in multiple areas. In the last two quarters, we have seen deal activity picking up in the Seed to Series A stage. Even some growth-stage investments are happening. But I think the fundamental shift we are seeing is that investors are leaning more towards fintech and consumer lending sectors. Unit economics and strong signs of path to profitability have become more important for us. These are the general market shifts, and we are also focusing more on them,” Ranka shared.
The fund will invest in 20-25 startups with an average deal size of USD 500,000 to USD 2 million. For Incubate, the focus sectors for this fund remain EV, supply chain, consumer related segment such Direct-to-consumer (D2C) and fintech. Despite the buzz around AI and Generative AI space, it is not focusing on deeptech startups. Most returning limited partners (LPs), predominantly from Japan, are from previous funds and have shown confidence in maintaining a continuing relationship with the third fund.
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