Funding Human Capital

Funding-Human-Capital-Entrepreneur-IndiaENTREPRENEUR, FEB 2012

An Indian first—a fund that will exclusively finance and foster HR businesses.

Move over e-commerce. There is a new gold mine in town, and this one probably does have the glittering metal in its depths. After the venture capital overdose on online shopping for most of 2011, the new year has brought in some fresh air with India’s first fund for HR entrepreneurs.

The fund and the founders
Launched in November last year, and backed by senior executives from the larger HR sector, The HR Fund is a seed-stage fund that is looking to foster the growth of new and innovative HR organizations operating in what already happens to be a highly fragmented and competitive industry.
The fund is anchored by six big names in the world of HR including Varun Talwar, Founder, Withya Group; Pankaj Bansal, Co-Founder and CEO, PeopleStrong; Arvind Agrawal, President, Corporate Development and Human Resources, RPG Enterprises; and Santrupt Misra, CEO, Carbon Black Business and Director, Group HR, Aditya Birla Management Corporation.
The funding size of each investment, the fund’s major differentiator, will range between Rs.3 crore and Rs.6 crore.
Further, the team plans to allocate around Rs.30 crore-Rs.40 crore during FY2012-’13, which will translate to around 4-6 investments.
“Most venture capitals will not find value in it because they are large funds and cannot invest in more than 10-11 companies,” comments Talwar, CEO, The HR Fund, in context to setting up an HR-focused seed fund.
The fund will focus only on India for the first two years. “Our ticket size isn’t big enough to go outside, given we are a rupee and not dollar fund,” explains Bansal.
Subsequently, this fund will be looking at the Middle-East and the subcontinent. This is because the anchor investors of the fund understand these geographies better, a decision that was based purely on certain internal reasons.
A need that had to be met
The idea to set up the fund was initiated by Talwar two years ago, after the success of PeopleStrong, a human resource outsourcing (HRO) company incubated at Withya that grew to a 300-strong organization in five–six years.
“I spent two years studying the HR landscape in the U.S as they are 20-30 years ahead of us,” he says. The U.S., he noticed, boasted of several ideas that had become large, publicly traded firms, while India staked claim to only Naukri, an online staffing company.
Most HR companies in India, he observed, are actually mom-and-pop shops with an employee base of 10-30, usually family-owned, single person-led and of the trader mindset.
Plus, they have succeeded in acquiring clients and managing their employees but have failed to attract funding, as they don’t understand investor language that speaks of IP, scale and first-mover advantage. “They have not been able to think afresh or know how to scale up either,” highlights Talwar.
Alongside, Bansal had been periodically peppered by requests from investors looking to invest in more companies after receiving healthy returns at PeopleStrong, as well as queries from HR vendors on startup issues and raising capital. “There were several senior HR executives wanting to fund HR ideas but they didn’t know who to go to either,” says Bansal, anchor investor and Board Director, The HR Fund. Bansal has no executive role, but is accessible for advice or mentoring.

Focus on the services sector
Also, provoking the idea was the pertinent fact that India’s investment focus has never been on the services sector, barring IT. Usually, most VCs focused on some big U.S-based ideas, as India carried negative branding in the domestic market for services.
“The space was seen as low-margin business and not scalable for investors,” Bansal points out.
HR firms had emerged in India post-2000 only and, by the end of the decade, sectors like banking, insurance, telecom, FMCG and auto, in particular, grew exponentially.
This propelled a need for HR support and thus the market for HR in India expanded, as did the need for distribution models increase. These are the  reasons that reassured those involved that the timing for a HR-focused fund was just perfect.

A different approach to sourcing and funding
In all, the six have pooled in a sum of Rs.14 crore together, and aim to grow the fund to Rs.60 crore by June 2012 by raising the remaining money from CXOs, HR heads or CEOs excited and passionate about HR. Interestingly, they would not be going after generic high net-worth individuals (HNIs). “We won’t take more than Rs.1 crore from each investor as the fund’s real intellectual property will be the brain power of these 60 people who will find us high-quality entrepreneurs and potential investors too,” says Talwar, who is responsible for raising capital, building a structure and systems, and making the right investments.
The fund’s criterion is to fill market gaps coupled with providing entrepreneurs necessary know-how and support to scale. “Entrepreneurs will want to take money from someone they trust, and so people they have looked up to, who understand the nuances of setting up an HR company, are going to be part of this fund,” points out Talwar.
Its funding focus will be on professional employee organizations (PEOs) which are still not evolved in India, staffing, training and technology/software, both early and growth stages. “The PEO model works with SMEs as they don’t want to manage HR, and find it tough to recruit talent or offer significant career prospects,” says Talwar. This, the anchor investors feel, will give them the much-coveted first-mover advantage too.
“Any idea that expands a particular sector, profession or area, and has the potential to create better value for its stakeholders, bringing about exceptional standards and better services, is exciting,” says Misra, in context to his investment in the fund, given the lack of entrepreneurial investments in the HR space. “As the service providing industry grows, we, as consumers of services, will enjoy some benefits too,” he adds.
The five dozen investors deem to bring the fund’s investees added benefits like market access (unavailable through other funds), suggestions with business ideas, and critique existing ventures. “We will ultimately build a fantastic ecosystem, as investors are also users or belong to the client community,” highlights Bansal. Plus, portfolio companies will mentor new investees too, providing much-needed handholding at the early stages.
“As investors, we can create a pull in the market,” suggests Agrawal. “We won’t be reactive, but more proactive than other funds in a search mode looking for high calibre, energetic entrepreneurs running scalable businesses in specific spaces. We will urge them to grow 10 fold in five years,” he adds. India, he says, has only a handful of HR firms generating revenues of over Rs.100 crore.
The money bit is easy, it’s the scouting that is tough.

Challenges loom ahead
While Talwar does not carry any concerns on raising additional investor money, he anticipates finding right entrepreneurs hungry to grow and ready to build publicly listed organizations as a major challenge ahead. Nonetheless, the investors are in advanced talks with two of six potential investees, and the fund is slated to announce its first investment in February 2012.
Though most details of the maiden investee are undisclosed (as it is a well-known brand), all the investors are currently willing to disclose is that the India-based venture is a marriage between HR, media and technology, pioneered by an entrepreneur from the HR industry with an MBA degree, who is creating a platform for people in the HR space to share content and videos.
The opportunities are enormous. Though there is no recorded data on market value or number of organizations, sector experts peg the HR consulting market in India at Rs.250 crore-Rs.300 crore, while the recruiting industry is valued at about Rs.5,000 crore ($1 billion) with about 28,000 players and 100 payroll firms. The valuation for HR technology and process outsourcing market is still unclear.
Optimistic on the need for such a fund, Bansal anticipates four clear-cut trends in the industry this year, which in turn reflect the nature of some entrepreneurial ventures that may emerge.
“I foresee a lot of consolidation in the recruitment space through M&A which will fuel growth in recruitment process outsourcing [RPO] firms,” he highlights. Second, the HRO market, he says, will come up as a stable and wanted business in the Asia-Pacific (APAC) region with India emerging as region head.
“Many APAC deals will happen through India in HRO,” he says. Further, there will be an evolution of supply-chain concepts for HR departments at corporates with systems for every smallest business unit. Finally, a shift from competency-based systems to energy analysis of organizations, especially for those that keep reinventing themselves every year. “A firm’s energy can be creative, entrepreneurial, sales or operational,” he notes. Given the need for quality HR practices and the market requirements, the six investors of the fund will be hoping to prove that the fund is an idea whose time has come.

Comments are closed.

Post Navigation