Exploring ideas #1 - Xborder: Simplifying cross-border FDI

Have you ever tried to raise capital from foreign investors? Then you'll like this one

Like many people I know, I keep a running journal of problems I come across both personally and while building a business, and ideas (frequently hare-brained) on how to solve them. Most get lost in the depths of the long, single Apple Note I keep, but every now and then one comes along that I spend time evaluating in more detail.

In my early days of searching for how to put together a startup pitch deck, I stumbled upon this note from Sequoia. It has since served as a useful framework for quickly evaluating an idea, drawing out the main questions to answer and assumptions to validate, and converting that idea into a lightweight business plan.

So over weekends or when I’m looking for some inspiration for my own business, Mintd, I pop open the “Problems and ideas” note and see if there’s anything worth exploring in detail. The result is a pile of semi-fleshed out ideas - some in fintech, others completely unrelated - just sitting in a database. I figured, why not throw them out into the world. I can’t promise a billion dollar business in there, but at the very least they’ll (hopefully) be entertaining.

Idea #1 - Xborder: Simplifying cross-border foreign direct investment (FDI) into India

Have you ever tried to raise money for an Indian Private Limited company from foreign investors? God bless you if you have, because it’s damn near impossible.

When I was first speaking to other founders to figure out how to structure my own round, I got a variety of advice. However, the one thing I was consistently told was “As a small early-stage startup, whatever you do, just don’t raise from the US.”

But how bad could it be?

Short answer - very. Mintd raised a small angel round from a handful of US-based angels in May of 2022 and we are (I kid you not) still dealing with the ramifications. I’ve corroborated this with several other founders - very much a real and painful problem that needs to be solved, at least for early-stage co’s who can’t afford a big 4 accounting and legal team combo.

So we came up with a solution and called it Xborder.

Company purpose:

To give early-stage Indian startups seamless access to global capital.

Problem:

Raising from outside investors is a pain because of India’s complex and stringent foreign direct investment rules. Practically, however, these rules create difficulties at two main points:

1. For the investor:

   1. The RBI requires that every FDI transfer have the investor’s 6-pt KYC attached to it. This KYC includes information like the investor’s tax identification number, address, and period of relationship with the remitting bank (?!). However, there is a UI incompatibility issue here. Investors use their regular banking transfer window (at Chase, BofA, WFC) to wire their funds to India. These transfer windows don’t have the necessary fields to even accommodate this KYC information. So you, the receiving company, end up with USD in a nostro bank account with no accompanying investor information. Your bank can’t settle the funds, you can’t use them, and therefore you can’t run your business.

2. For the receiving company:

   1. Once you receive this unidentifiable money, you have to embark on a six-months long journey with your banker - identifying the inbound investment, trying to attach it to specific investor, and then communicating via SWIFT (an archaic bank-to-bank messaging system) to try and tell the remitters banker to send this 6-pt KYC over for their customer. This process can take anywhere from 6 days to 6 months, with 0 exaggeration. Still the same UI incompatibility issue

   2. Then, you need your banker to file a form called an FC-GPR on your company’s behalf with the RBI, who you hope doesn’t find even a comma out of place. In my experience, FC-GPR forms are filed and refiled several times for a single investment before they are finally accepted. This is a legal/regulatory issue, and largely flows from issues with the 6-pt KYC.

Solution:

There are two problems to solve here:

1. A UI problem

2. A legal/regulatory problem

From our experience and the experiences of other founders we spoke to, it became clear that most problems in bucket 2 started off with a UI issue and an incorrect or absent KYC.

Our solution, would therefore be a simple web-based product that allows Indian businesses to:

1. Create a business profile and complete their KYB (Know Your Business - a business’ version of KYC) verification online

2. Upload their deal docs

3. Initiate an FDI fundraise

4. Send invites to invest along with the deal docs to their potential investors

These investors can then:

1. Create their profile and connect their existing US or foreign bank account

2. Review the deal online and decide whether to invest

3. Fill their KYC in a simple 6-pt format that exactly matches the requirements of the receiving bank and the RBI

4. Complete the transfer within the app

Xborder would then apply the KYC information to the transfer itself. Cross-border payments infrastructure companies (see: Tazapay) now allow for this mechanism.

We could also offer optional fixed-fee legal services to file the FC-GPR forms on a per-deal basis to solve for problem 2.

Why now?

1. The India story is louder than ever. Our economy is a bright spot in an otherwise bleak global picture

2. Private capital interest in Indian companies is at it’s highest ever

3. India is quickly turning into a global startup capital

We need to give Indian founders easy access to global capital, and foreign investors a seamless route to invest in Indian startups.

Market potential:

Target Users:

We spoke to founders/teams that have raised angel through growth rounds and found that the sweet spot for this product would be pre-series A startups looking to raise from foreign investors who are either individuals or small funds. A startup raising a series A or beyond usually has large legal, tax, and compliance teams already handling the FDI process for them.

TAM:

If we assume our total addressable market (TAM) today is the value of all pre-series A deals done in the country in 2021 (the year of highest venture capital investment in India ever), then TAM revenue on a 0.25% transaction fee model amounts to $1.49m. If we then further assume that 50% of the investment capital came from foreign sources (unverified), the SAM (serviceable available market) revenue is ~$750k. We haven’t even discounted for market share yet.

From where I’m sitting, it doesn’t look like you can build a standalone business on just a transaction fee model that serves only FDI into pre-series A startups. So what options do you have?

1. See if you can expand your market into larger deals (but how do you turn this from legal service to product?)

2. Use this as a hook for other cap-table/fundraising products for startups (how is AngelList India not doing this already?)

3. Use this as a hook to offer other financial products to startups (a la capital.xyz - looks like RazorpayX is now going down this route)

4. Replicate the model either in other EM geographies, or expand asset classes within India to private funds and public markets

Competition/alternatives:

When we first raised our round in ~July of last year, there was really no one solving this problem with a product. As of today, there seem to be three players in the market:

1. tykePe - an offshoot of startup investing platform, Tyke

2. Table Salt - an offering by global business banking startup, Salt (looks like it’s still in Beta)

3. RazorpayX - the startup banking division of Razorpay has launched this as a hook feature

The meat of the market still sits with traditional legal and financial firms, however.

Business model:

A standalone business model would probably involve a combination of a value-based transaction fee (akin to a forex markup from a bank) and an optional legal fee if you want the FC-GPR filed.

0.25% of transaction value + $1000 fixed legal fee per fundraise would capture a combination of value and volume.

Vision:

I see several ways this could play out:

I could easily have just typed out a list, but was looking for an excuse to use Whimsical

Thank you, but what do I do with this information?

Build a business, shoot me a reply, tell me why this is a great or terrible idea, poke holes, start a conversation.

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