Krishna Ramanathan, Managing Partner & Founder, Fulcrum Venture India (Fulcrum), realized very early on in his investing career that taking bets on sectors and businesses he understood well was crucial. Today, Fulcrum is primarily focused on investing in early-stage entrepreneurs in the healthcare, pharmaceutical and wellness sectors.
In 1999, when Krishna Ramanathan’s father, R. K. Ramanathan sold his pharmaceutical company, American Remedies, to Dr. Reddy’s Laboratories, the means to deploy the proceeds from this exit was one of the key triggers for him to enter the private equity business. After completing his MBA from XIM-Bhubaneswar, when Krishna was all set to start his career, the task of managing this fund fell on his lap. He weighed all the typical options for parking the funds like investing in mutual funds, index funds, commercial real estate, but was not convinced about its growth opportunities. With a firm nudge from his father, he eventually became an angel investor. “We didn’t have terms like angel investment then; however, I clearly remember that my father asked me to take stakes in multiple startup businesses and help them scale up,” recalls Krishna.
And that was the beginning of Krishna’s investment journey. However, his investment opportunities were a little restricted during the first three years of his journey, as the family had a non-compete agreement with Dr. Reddy’s Laboratories. Hence, in this time frame, Krishna invested in sectors other than pharmaceuticals. One of his early investments was in Casa Grande, a real estate startup at the time, which eventually gave Fulcrum its first big exit.
While Casa Grande gave Krishna an exit with over 9 times returns, his two other investments during this period made him realise the need to stay tightly focussed on sectors he and his family knew well. And hence, from 2003 onwards, Krishna and his team primarily invested in the pharmaceutical, healthcare and wellness sectors. It was also a booming sector in terms of market size and potential. “I believe, just the branded formulations sector is worth Rs. 1 lakh crore, with a growth rate of around 12 per cent annually,” says Krishna, while touching upon the overall macro market.
Fulcrum’s Fund-1 did not have any external investors and it was capital from the promoter’s family that was invested. He invested in several companies including Curatio Healthcare, Swaas Systems, Casa Grande and Four Fountains Spa and Nutri Synapzz. Today, Krishna is focused on managing Fulcrum’s Fund-2, a Rs. 100 crore fund in which the promoter family invested Rs. 30 crore and the remaining was raised from SIDBI and various domestic HNI investors. Most of Fund-2 has been deployed in 6 companies and it has another Rs. 10 crore to deploy. Over time, Krishna plans to raise a third fund, but wants to wait a little bit before announcing the timelines.
In this story, we take you through Fulcrum’s investments, exits and overall philosophy of managing the fund.
Once the Ramanathans completed their non-compete agreement, from 2003 onwards till 2012, Fulcrum made four investments in the pharmaceutical sector. One of its investments was in Curatio Healthcare, whose top line touched Rs. 100 crore in FY 2014-15. Fulcrum also invested in Four Fountains, a chain of branded wellness spas and SwaaS Systems, a company focused on offering SaaS software and IT services for the pharmaceutical industry and Nutri Synpazz, another branded formulations company focussed on gynaecology nutrition.
“We invested in these companies on day-one, based on their excel sheets and power point presentations.The entrepreneurs quit their professional careers only after they were sure that we will fund them,” recalls Krishna. He continues, “There are funds like Sequoia Capital, Tata Healthcare or Kotak and a few more, that have a healthcare bias, but they enter the entrepreneur’s life at a slightly later stage. We invest in a company in the very early stage, sometimes even before a company starts operations. In other cases, we invest ahead of time, probably at a stage where the promoter does not even have a CFO, the books are not in order, but the business is sound.”
Subsequently, Fulcrum plays the role of a CFO from inside. Citing an example of an investee company, Krishna says, “If we had done an audit by a Big 4 firm before investing in this company, which is a typical process in larger PE firms, we would have never made the investment. Fulcrum was willing to do a reference check on customer perception of its products, look into the bill of material and estimate the approximate gross margin and take a decision based on these data points,” says Krishna. However, post investment the company immediately appointed a CFO to set the books in order.
In several cases, Fulcrum invests multiple rounds in its portfolio companies. “If we believe in the company, we will do whatever it takes till the next round of funding happens,” states Krishna firmly. He believes that even if the 18-month projection is missed , the 5-year direction has to be right. This is also the reason why Fulcrum has a limited number of companies in its portfolio and is choosy about the companies it invests in.
Betting on round two
In 2012, Fulcrum got an exit from Casa Grande. One of the main reasons for the exit was the fact that the real estate market had a fair run and Casa Grande had reached Rs. 100 crore in topline. “The company gave me a fair return –almost 9 times the amount that we invested,” states Krishna. By then, he was also clear that he wanted to specialise only in the opportunities in the healthcare space and needed cash flow for it.
And hence, after 12 years of managing just his father’s money, Krishna raised external funds. “I reached a stage where I was comfortable and confident of managing other’s money,” says he. With funds from this exit and from family and friends who wanted to co-invest with him and bet on the larger opportunities that lay ahead, he raised Fulcrum’s Fund-2 to the tune of Rs. 100 crore – Rs. 30 crores from the Ramanathans and Rs. 70 crore from domestic investors like SIDBI, HNIs, family offices, corporate treasuries and so on.
Fulcrum also changed its investment mandate for its second fund. Instead of choosing companies at the power point stage, it started investing in early growth companies. It has made six investments so far – Rs. 20 crore or more each in three companies and Rs. 5 crore or a little more each in another three. It still has Rs. 10 crore to deploy and the fund is almost coming to a close from a deployment window perspective.
“I expect the next few years to be interesting as some of the angel investments will come up for exits or for next round of Fund raise. And I have to show traction in my Fund-2,” states Krishna.
A natural progress
“Having decided to start a fund, the logical progress is to keep raising funds,” opines Krishna. However, he reminds himself of two things: One, his responsibility is to his previous investor rather than the next round of investors. He doesn’t want to rush into Fund-3 until his earlier funds’ performance speaks for itself. “A year before Curatio got an exit I knew that it had done well. The actual exit was just the actualisation of my knowledge,” says he. He expects to invest only in the healthcare space for Fund-3 as well. “I will stick to same sweet spot of coming slightly below the larger players and become the first external investor in the company,” states he.
Fund raising experience – Fund-2
For Fund-2, Krishna raised funds from known HNIs, friends and family and initially expected the experience to be a cake walk, but admits that it wasn’t easy.
He had to make his presentations simple and realised that there were several investors who were not okay with a 9-year investment window (the healthcare sector demands a longer time period, before money can be returned). “So I had to choose my investors carefully and it was learning on the move. In fact, I would say that I feel a sense of achievement after having raised Rs. 100 crore; It was sort off a mini-milestone I had set for myself,” says a happy Krishna.
Krishna believes that the first external fund-raise is always the most difficult. “After that, fund-raising only depends on the performance of the earlier funds,” he explains.
Why Healthcare and Pharma
While the sector has a lot of large players, there are a number of opportunities for smaller players to grab with both hands. Krishna cites an example from his portfolio company, Curatio. One of the treatments by the company is for acne which was not a focus market, say, 20 years back. For a large player, this acne market is probably too small to focus on. “We identify and enter such markets which has a growth potential of 30 per cent but is too small for a big player to enter,” states Krishna. Fulcrum’s portfolio companies has presence in nutrition, infertility and gynaecology segments, as well.
While this is a small portion of the branded formulations market, Fulcrum is yet to make an investment in the diagnostics and hospital segments.
In the wellness segment, Fulcrum invested in the spa market in 2007, expecting the market to transform. However, Krishna believes, he was slightly early in the curve, yet the company had good promoters, so he is glad to have stuck with them. Today, Four Fountains has a network of 30 spas, several of them franchises, and also has a few allied products and services. It intends to create a chain of 150 spas and is hoping to raise further capital.
What next for Fulcrum?
“We aim to raise a Rs. 300 crore fund next,” declares Krishna, without mentioning the exact timelines. And with this fund, he expects to invest in 10 companies from the same sectors with Rs. 30 crore in each company. However, this will happen only after Fulcrum delivers reasonable value to its Fund-2investors.
And once this is done, Krishna expects to don two roles; One, as PE fund manager in the pharmaceutical and healthcare space and two, taking on the responsibility of managing the family’s money by investing with fund managers with specialised skills. “My father gave me Rs. 15 crore and in the last 15 years, we have collected a cash outflow of Rs. 75 crores,” says he. But whatever Fulcrum has collected, it has ploughed it back into the funds – Rs. 30 crore into Fund-2 and Rs. 30 crore will go into Fund-3. “Over time, I will diversify into public markets and, hopefully, setup an organized family office,” says he on a concluding note.
One: “Casa Grande, the first exit, helped us realize our lack of experience, ” states Krishna candidly. He and his team had not structured the Casa Grande investment for an exit and hence, they had to take corrective action at the time of exit.
Two: Even if its with friends and family, there is always a negotiation. So I don’t expect any less in the future be it with promoters or investors.
Three: When Curatio was gearing up to raise a round from Sequoia Capital, we realized that it was a unique case of investors (Fulcrum) and the other large investor in Curatio, G.K. Ramani wanting to stay put but the promoters wanted to exit. We realized that the promoters had delivered on all their promises, and we altered the fund raise to the new reality, and to let the promoters exit their stake in this round, and we brought in a new CEO to run the business. The key was to ensure the objectives are aligned and more importantly, ensure this is understood by both the promoter group and investors.
Manna Foods: Approx. Rs. 20 crore
Specsmakers: Approx. Rs. 7 Crore
Richfeel: Approx. Rs. 20 Crore
Shield: Approx. Rs. 25 Crore
Briobliss: Approx. Rs. 10 Crore
Congruent: Approx. Rs. 10 Crore