Seed to IPO: A Venture Investor’s Perfect Dream

Aavishkaar, a pioneering impact fund manager that does multi-stage investing, recently saw its fourth seed to IPO story play out with the listing of Utkarsh Small Finance Bank. Every success has a good story behind it, and here is an attempt to share our thinking behind the investment and what kept us going till the IPO and further.

All seed investments are made with the belief of great unrealized potential. The challenge with potential is that it does not get realized often, and hence, seed investors are unsure of how long to stick out with their early investments.

Aavishkaar’s journey started in early 2000, and given the very scarce follow-on markets, our focus used to be on sustainability and profitability at the start-up. All capital raises were directed toward securing the company and its growth, and secondaries for seed/angel investors or for promoters were not even on the discussion table.

In early 2000, our investment decisions were both similar and different to current VC decision-making in the broader investing market. The difference extended not just to how we operated but also to the manner we imagined the future of the company.

Like every generation of VCs, the management team and its founder leader were key diligence items for us and consumed most of our time, but when it came to the business model, our diligence used to focus on profitability (a term that lost its relevance for some time but has found its mojo back post-2021) and sustainability of scale.

In 2009, when I met the founder of Utkarsh Small Finance Bank, we were seeking out a trustworthy leader from banking or finance around whom we could build an incubated start-up in microfinance in Eastern UP to scale and build market credibility for low-income states as a destination for microfinance.

In Govind Singh, we thought we found a person who was credible and trustworthy and a worthy partner. Our diligence needed us to find verifiable evidence of his ability to be long term, be decisive, and act speedily. We put a few conditions in front of him, and I share those conditions and our thinking behind those questions:

• If you are convinced about the opportunity, would you be willing to quit your job without any commitment to our capital?

The purpose of the question was to test his conviction in the idea and if he was decisive enough. We wanted to be his support but not his crutch.

• Could you convince a couple of senior folks from your current employer to invest money in this adventure?

We wanted to see if his bosses trusted him with their personal money and gauge his credibility within the system he operated.

• Could you invest your personal savings in buying a non-banking finance company without our capital commitment behind you?

We were keen to see if the person was willing to take a very large risk to make their dream come true.

• Please keep the head office of the company in Varanasi and build a business there, as it has a high density of poverty.

We knew microfinance needs a hands-on business leader and not someone who wants to play golf every evening. For us, Varanasi was a location we felt would give him an edge. We wanted to see if he is rational when his professional and personal interests collide.

Govind nodded and left my office, only to come back after completing all the tasks in a period of four months. He never once sought further assurance, and thus, we built a relationship of mutual trust and have kept backing Govind and Utkarsh through thick and thin.

Once we made our decision, we defined our role as cheerleaders, supporters, and personal advisors to Govind. We decided to intervene only if the institution needed it. Govind made sure no investor was ever surprised by any development in the business, and when it happened, it was not under his control.

Immediately after our investment, Govind walked into the microfinance crisis of 2010, and we were forced to invest in Utkarsh again to keep our promise of trust going.

Utkarsh has seen many crises since its infancy and has slowly grown to become a strong microfinance institution. Finally, Utkarsh got an opportunity to become a banker in 2016. This was a major pivot, and we supported the transition with more capital and commitment.

As the institution prepared to become a bank, it kept getting hit with new risks such as demonetization, and just when it was ready to go for IPO, COVID struck and thwarted all plans for the IPO. As the COVID impact forced Govind to raise more capital, Aavishkaar this time decided to come in and participate in the bank as well.

While the narrative sounds like a bold decision to back the institution, in reality, we made our choices early about the sector, the entrepreneur, and the potential for scale. Post that, our decisions were driven by opportunity and ability, and our desire to support scale was backed by our trust in the leadership.

As I conclude, I would like entrepreneurs to keep in mind that the seed to IPO journey is a long one and has many ups and downs. You need a village to raise the venture baby, so surround yourself with people who can support you when the chips are down and cheer for you when you achieve success.

To investors, I would say that make your choices early and back the leadership to help build scalable companies that deliver success and IPO.

And in general, my closing statement is that an IPO is a minor pit stop in the journey of building an institution that lasts beyond the leader, the investors, and everyone involved. The ultimate goal for all of us is to build a lasting legacy of great institutions that can deliver impact, scale, and return.