A handful of awesome startups in the UK, France, Germany, Switzerland, Canada, and India have raised capital on AngelList, including ClearTax, a digital tax filing startup that is building financial products for the Indian market.
In this interview with angel investor and entrepreneur Sumon Sadhu, we go inside his investment in ClearTax to learn:
- How he took the lead in one of the most competitive deals out of Y Combinator with a strategy of benevolence
- How AngelList put him on the map with Silicon Valley super-angels
- Why he thinks the future of tech is outside the US
Regarding investment theses, I’m investing in the amplification of human intelligence and the expansion of the human lifespan; in companies which make economies more efficient; and in national empires, like finding the next Alibaba.
I'm not doing a lot of deals, but when I do, I like to take between $250-$500K in allocation. So I’m very focused on ownership and core concentration in a few deals, and mostly taking the super angel slot. AngelList has helped me create that platform for myself.
As for my approach, I am a Y Combinator alumni [fifth batch, with a company called Snaptalent] and I’ve been advising YC companies since then. The core fabric of YC is to help other founders, and the reason for Y Combinator’s ascendance as a prominent seed investor is because of this concept of benevolence towards other YC founders.
That's the reason I was in YC in the first place, because Paul Graham sent me an email when I was in England in the summer of 2007. He said, “You should come pitch me, because I hear that you've been building impressive things.” That email changed my life.
Tell me about ClearTax.
ClearTax’s goal is to build simple products to simplify the financial lives of businesses and consumers in India. They started with a self-serve personal tax product, and have recently launched business-facing tax products used by more than 10,000 accountancy firms. The business-to-business segment brings in 60% of the revenue. There are more financial products to be revealed.
ClearTax raised $3.5M in seed financing in 2014 in one of the most competitive deals to come out of Y Combinator. How did you get into the seed round?
I met Archit from ClearTax at the Y Combinator Alumni Demo Day in 2014. It’s where YC founders practice their pitches in front of their peers, two days before the official demo day for all investors. When I met Archit after his pitch, I said to him, "You realize how important your company is going to be to the future of India's economy."
I looked at it quite simply: Tax transactions are part of the system of record of an economy's transactions. It starts with individual tax transactions, and then it goes to commercial tax transactions. Once you start generating that system of record, you have digitization of transactions in an economy.
What happens in twenty years time if you succeed, and what happens when you digitize and organize all of the transactions in the Indian economy? What you can do with that data and network of users?
Archit got it on an intuitive level, but no one had articulated it to him. He said, "Look, I'm busy pitching some other investors. Do you mind if we just keep talking? Maybe we can work together on this.”
ClearTax is the first startup focused on the Indian market that raised money from YC (or that raised money on AngelList). Archit said it was almost inconceivable that a Silicon Valley accelerator would want to fund a company focused on an Indian problem a couple of years ago.
The investors Archit was speaking with at the time had never been to India, much less understood that most tax related transactions before ClearTax were done in a sort of underhanded fashion, as most people in India don't pay taxes. The recent focus on demonetization is going to change this as more money goes from being “black money” to being on the record.
There wasn't this type of digitization when I invested. But we recognized it as being an important force going forward as the economy matures. Most US investors probably looked at it and said, “We have Intuit. Why is this even special?”
Today in the US, we still do taxes in a terminal fashion [retroactively, every April]. They don’t update as we transact. And the systems ClearTax is bringing into place will allow for real-time taxation to exist as a product. It can work in a way that better reflects actual human behavior.
Not only can you integrate paying taxes, but what do you do with the savings that you generate from those taxes? Taxes are the bridge to organize all sorts of other digital transactions, whether it's for individuals or businesses. For example, the ClearTax Startup Program will help startups become operational in three weeks by providing advisory services, including incorporation, legal agreements and tax registration.
So I didn't see it as just a tax product; I saw it as something fundamental to all transactions by all participants in the economy as it digitizes. That’s the thing that people most misunderstand about leapfrog innovation: You can start with something that looks comparable, but you can reinvent the system.
So that was your first conversation with Archit. How did the seed round come together?
Sequoia India had approached him, and they were meeting in two days. A meeting like that is quite important, and you can’t just waltz in there. I asked if he had a deck that reflected the level of opportunity we were talking about. So the first order of business was to sort out his deck and help him articulate a big story.
The second thing was giving him some perspective as to how to sequence the investor interest. Rather than take those checks, I told him to hold off a few days and build a bit of intrigue. So he postponed his meetings, and we took four days to work on the deck and sequence the participants he needed to meet in a very tactical sort of fashion.
There's an order of operations to generate heat for a round, which I've done previously for a number of companies. I was directing traffic: “Talk to these guys, you should not talk to these guys, you should talk to these guys later, save them for later, play these guys off against these guys.” Ultimately, it got the right result.
At the same time, I had to convince Archit to let me into the deal. The way—again, if you operate through benevolence—you just do a lot of work for an entrepreneur, and naturally, they'll be grateful.
How did your allocation come into the conversation?
I originally had a $1M allocation. I wanted to go as aggressively as possible. I was trying to do it as a syndicate on AngelList, on top of my personal angel investment in the company.
We ended up doing $250K, which was the third largest ticket in the seed round, after investors Sequoia India and Founders Fund. Archit was trying to keep the round as secret as possible, and that was a problem with AngelList syndicates at the time.
Whereas now all of the deals on AngelList are private by default; Syndicate leads choose which backers to invite into deals, and most deals have less than 20 backers.
Even trying to be discreet, as soon as it went online on AngelList, within 35 minutes, $750K of the $250K allocation was accounted for. If I’d held a million dollar position in the company, I could have filled it with the demand. I had messages on Facebook and email from people trying to get into the deal, like, “Can you let me into the syndicate?”
Did you stop at $250K, or did you end up upping your allocation?
I would have loved to, but we stopped at $250K. It was a very curated sort of round. We only let eight backers in, including Elad Gil, Kamal Ravikant, Bill Lee, who invested in SpaceX and Tesla, and Othman Laraki. Maiden Lane was also part of the syndicate.
What were the considerations to decide who you let in, for what was going to be a small amount of money at the end of the day?
They were all chosen for their strategic value to the deal, whether it was for future fundraising or brand value. I think the consideration is always, How do you maximize the value per dollar, and how do you treat the syndicate as a recruiting exercise? Who would you recruit to maximize future value?
We also let some angels into the deal alongside the AngelList syndicate to help tell the story: Max Levchin, Cyan and Scott Bannister, Neeraj Arora at WhatsApp, Ryan Petersen at Flexport…. Then the rest of the round was for institutional investors.
That deal put me on the map. For existing super angels, they were like, “Who the hell is this guy? Why has he been able to do this deal?” And it’s all because of the syndicate platform.
Beating the known super angel funds and other VCs in that deal was something that I'm proud of. It was difficult because I didn't have committed capital; I was an individual angel. I leveraged the AngelList syndicate for that purpose: If you're an angel who adds a lot of value to a deal, then you should have an equivalent allocation to that level of value.
All in, ClearTax raised $3.5M in the seed round, from Sequoia India, Founders Fund, your AngelList syndicate, and the other angels you and Archit let into the deal. Then, in 2015, Ravi Adusumalli at SAIF Partners led a $12M Series A, which is one of the largest Series A rounds an Indian company has raised. What happened to your pro-rata?
No one was allowed to do pro-rata. We tried, but it was all taken by the Series A investor. I tried to invest again in subsequent rounds, but ClearTax stock is in high demand.
What’s been your relationship with Archit since then?
I am a strategic advisor. We did the same sort of process leading into the Series A: We re-did the deck, organized the participants, helped him architect and close the transaction. I'm involved in inflection points with ClearTax, and the goal is to support him in building an Alibaba-sized incumbent out of India.
Archit’s on his way, with 1.5 million Indians using ClearTax to file their taxes electronically last year. Worth noting as well that about a third of ClearTax users are mobile. Which is perhaps not so surprising given that 60% of ClearTax users are millennials.
India has a younger population. If you capture the millennials, then they eventually become the most important financial demographic, and you have an opportunity beyond tax to build financial products for them.
A lot of us have a relationship with TurboTax, for example, that spans ten years or longer. These are the kinds of products where the lifetime value of a customer is not a few months, but more like the order of magnitude of decades, if you get it right.
Archit said there is no iOS app yet, because India is on Android. In that sense, India has something in common with emerging markets like Latin America: About half the population is still offline, and everyone is coming online into an Android world. Any thoughts more broadly on emerging markets and where this is all headed?
First of all, only 50% of unicorns in the world are in Silicon Valley, and the biggest opportunity for investors is to find them outside. Outside companies will have a disproportionate likelihood of creating that type of value because operational costs are much lower outside the US. You can have more leverage with your headcount, and those companies are going to be more competitive per dollar.
The second thing is the global market opportunity: The US is only 8.4% of the global Internet market in terms of audience, while the non-US opportunity is much, much bigger.
And the level of ambition and originality that non-US founders have at scale is much larger than US founders because they're not operating in environments where everyone is doing a startup. The Xiaomi’s or Alibaba’s or ClearTaxes or Paytm’s of the world think on a much grander scale than US-focus entrepreneurs. I believe that the future is firmly investing in non-US companies.
This post is part of an ongoing series of interviews with investors and entrepreneurs behind some of the most high-profile, invite-only deals on AngelList. Get more of Sumon Sadhu’s thoughts on investing in startups in his podcast on AngelList Radio.