India Needs More Sector-focused Funds

Developer infrastructure as a sector doesn’t sound very inviting for VC investments. It’s too technical for most venture capital investors, which has resulted in very few institutional investments in this space. But for 36-year-old Nikhil Kapur , this is precisely why he and his co-founder Siddharth Verma started Grayscale Ventures, a dedicated fund for dev infra startups.

Since Nikhil and Sid have been software developers, they not only clearly understand the technical nitty-gritty of building such startups, but they also know what the developer community's pain points are.

Before starting Grayscale Ventures , Nikhil was leading investments at Japanese fund STRIVE for Indian and Southeast Asian startups. Ten out of 20 investments he led at STRIVE were in the dev infra, SaaS, and AI sectors.

Started in 2023, Grayscale Ventures invests USD 300,000 to 1 million in pre-seed startups for 10% ownership. Till now, it has backed three startups.

The Content House co-founder Avanish Tiwary spoke with Nikhil Kapur about dev infrastructure space, innovations in this space, and how AI is making waves of change.

This interview is edited for clarity and brevity.

The Content House: Tell us a bit about your work at STRIVE and how you launched Grayscale Ventures.

Nikhil: I joined STRIVE in 2016 after my last stint at the startup that was acquired by Google. Initially, my mandate was to look at India and Southeast Asia investments. We were a sector-agnostic fund, so I had complete flexibility to look at any sector. Since I have had a lot of experience in building SaaS products, I gravitated towards B2B SaaS when I started investing for STRIVE.?

In a way, we got the timing right because we started seeing a very interesting trend around 2018. Highly technical products started coming out of India. The first company that we ended up investing in the dev infra space was Hasura. And this was the biggest outcome that came out of STRIVE. We started seeing this as a trend over the years.

Technical founders spun out of large tech companies to start something a bit more relevant to what they've been doing in the past. So they would build other products which solve issues that software developers and engineers face. There were mainly two kinds of products: developer infrastructure and developer tools.

Hasura is more of a developer infrastructure. Postman is a developer tool. We led the first rounds in companies like Hasura, 100MS, Testsigma, ByteBeam, and so many other companies. From 2019 to 2022, this is what I mostly focused on.

Companies like Hasura grew quickly. Along with them, we learned how to build global products in this segment sitting out of India. Things like how to sell Dev products to Fortune 500 companies became clearer to us. We learned a lot along with these companies as they grew.

By the end of 2022, my partner Sid at STRIVE and I got the confidence to spin out and launch our own fund because we wanted to build a fund that was completely focused on this sector.

We feel like developer products and anything highly technical is not something that you can combine easily with a sector-agnostic fund. The timelines of product building are different, the kind of check sizes you need to write are larger, and the kind of quality of founders you are targeting is very high, because not only are you building a very technical product, but you're also trying to be the best in the world in that space. You can't just be the best in India because that's not good enough, you have to be the best in the world.

And there were so many other nuances of how to build and grow these products globally that we felt we needed to be a standalone fund to really do justice to it.

The Content House: What’s the reason for you to focus on the dev infrastructure space?

Nikhil: I have been a part of the developer community as a software engineer, as a startup founder, and as a VC who has backed multiple dev infra companies. So, my personal association is definitely one of the biggest reasons why we focus on this sector.

Apart from that, considering where this industry is at present in India, we felt this is the most opportune time to invest in this sector. India is soon to overtake the US and become the largest developer base in the world. India has now 13 million users on GitHub, and the US has around 16 million, and we are adding two to three million every year. By 2025, we will most likely overtake the US and be the largest developer base on GitHub at least.

Founders with a tech background are realising they can build products sitting out of India for the world. When technical founders build for the world, they typically end up building developer infrastructure or developer tools kind of products.

We are seeing a significant number of new development infrastructure companies being built in India for the world, which makes this space very interesting and niche. But to invest in this space, VC funds need to know the basics of those technologies.

India has a lot of sector-agnostic funds, which makes it really difficult for a founder building a dev infra company to explain what they do. These founders have to really dumb down the technology and explain the differentiation in layman's terms to investors who might not be very accustomed to understanding technology. It’s extremely difficult for a founder in this space to explain why this ephemeral developer infra tool needs to exist and how it is completely different from the top three to four global companies.

Seeing this huge gap in the market for sector-specific funds, especially targeting the seed and pre-seed stages, we thought this is the best time to launch Grayscale Ventures.

The Content House: How has the opportunity in the dev infrastructure space evolved in the last five years?

Nikhil: It started off with more developer tool companies. Some of the early waves of companies to come out of India in this space were Browser Stack and Postman. Both of them were dev tools, which a developer typically uses every day. A front-end developer will use Postman to test whether the API they have created is working or not. BrowserStack is used as a testing tool to run some of the test cases that they create.

As founders and the market matured, people got the confidence to build the infrastructure side. Infrastructure is typically of two kinds, its developer infrastructure or its data infrastructure. We started seeing companies on both sides. So if you look at data infrastructure, it's companies like AccelData, Atlan, and Hevo Data. Then developer infrastructure are companies like Hasura, 100ms, and AppSmith.

The core difference between a developer tool and a developer infrastructure is the fact that a developer tool is an ancillary productivity improvement with efficiency and enhancement on the side. Developer infrastructure is a fundamental building block of the application that you're serving to the end customer.

We have started seeing founders starting to attack the infrastructure space and that's been the major evolution in the last few years.

The Content House: Which is the primary market for startups in this space?

Nikhil: It is very clear to everyone building in this space that if you're not number one globally, you don't stand a chance.

Getting developer’s attention is very difficult because they are very brand-centric. They want to use something tried and tested that everyone else is using. This is why there's an immense winner-take-all kind of outcome in this sector.

The Content House: It must be really hard for a new startup to break into the market then.

Nikhil: It's very challenging, yes, and that's why the bar for founder quality is very high in this space. You need to crack everything, product, distribution, and business model, which makes the chances of success very low in this sector.

The Content House: That must make your job really difficult.

Nikhil: VC is a kind of business that thrives on a large risk-reward ratio. In fact, the VC business model should exist in a sector where the higher the risk, the more the reward.

For example, if almost every D2C brand can raise some capital and do well and then potentially finance it somehow, the need for risk capital is quite low in that sector. When it comes to a sector that has a very big risk-reward ratio, it's a winner-take-all market. In such a case, the need for risk capital is even higher, because most other financial options are unavailable to founders.

And that's why we feel there's going to be a demand in this sector.

The Content House: Could you shed some light on your learnings while working with Hasura?

Nikhil: One of the biggest learnings was that companies building in the infrastructure space need to be mission-critical to the infrastructure stack. Their products can't just be good-to-have, maybe I need it, maybe I don’t, kind of a thing. The more mission-critical you are, the more chances of you getting embedded in the core infrastructure stack, and the more chances of you being able to make money.

Not only are developers obnoxious enough to only choose the best in the world. They are also very price-sensitive. So, a developer will not pay for a tool that’s not integral to what they are building. They're most likely going to use freemium stuff because they always think build versus buy. Since they usually have the capability to build a lot of stuff themselves, they're not willing to buy it easily. You have to figure out a way to get into the core production infrastructure. So being mission-critical is number one.

The second learning is you have to jump on certain hype cycles to catch the tailwinds in that particular sector. For example, AI and LLMs are the biggest hype cycle right now. You need to align your product and solution into these so that any developer who's today experimenting, they can adopt your product. Developers are always trying to side hack a lot of stuff, and they're willing to try out any new technology or new solutions that can make the new technology accessible.

So you have to figure out what's the tailwind, what's the hype cycle that you're jumping on to be able to capture developers’ attention.

The last thing I'd say is that you have to crack distribution. And cracking distribution on a global scale is extremely challenging, especially when you're sitting in India.

The Content House: Since you invest in these startups so early, what are the deciding factors for you to go ahead with an investment?

Nikhil: All we need is a well-identified market gap with a unique insight and a founding team with the capability to build a world-class product. These are the two core factors on which we decide whether we want to invest or not.

At the time of seeking investments, it doesn’t matter what products they have built because that’s going to change as they go to the market and start selling. What matters is how quickly they iterate the product based on the market’s demand or requirements. The best teams iterate really fast and they come up with the right thing much faster than other teams. That's where most of our focus goes after our investment.

We work a lot with American investors because we invest in companies that are global companies from day zero. So the more help we can get globally, the better for us and for the teams. We have really good partners, both as angels as well as micro funds who are sitting in the US. Our job is to find raw talent in India and make sure that we can support those teams in building world-class companies.

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