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VC's Next Phase
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The hard work seems to be paying off. During 2004-10, venture capitalists invested $3.96 billion in Indian startups. Another $621 million has been invested this year, according to Chennai-based research firm Venture Intelligence. There is an established line of VC firms who have consistently invested through this period. Some are local arms of Silicon Valley firms such as Norwest Venture Partners and Draper Fisher Jurvetson. Others, such as Helion Venture Partners and Inventus Capital Partners, are independent startups themselves. By 2015, total investments will touch $10 billion, projects Bangalore-based VC firm IDG Ventures India.
The numbers underline a few important facts about the Indian startup economy. First, there is enough innovation at the startup level to encourage risk capital to make bets over a sustained period. Second, if VC investments are advancing towards the $10-billion mark, investors clearly see many more latent pockets of innovation. So far, the money has gone into myriad sectors including e-commerce, consumer services and clean tech. The net will be cast wider into areas such as cloud computing, mobile infrastructure services, healthcare, education and rural businesses.
The mood in the VC industry, as BW found speaking to 15-odd investors, is unmistakably upbeat. Confidence levels are up as several move close to completing a full investing cycle with their debut funds, an event that is itself a milestone. The last major VC outing in India ended in the dotcom bust of 2000-01 and investors retreated from the market nursing huge losses. Much of the renewed confidence has to do with the kind of entrepreneurs leading the current charge of startup activity. "The need to address the customer and the market, and not just focus on the technology or product has become internalised with entrepreneurs," says Samir Kumar, co-founder and managing director of Bangalore-based Inventus. Another big factor is that most VC firms that sprung up after 2004 have successfully raised second funds or are well on their way. This means the startups that have been funded so far have access to follow-on funding. The dotcom bust saw several startups die because their investors had run out of cash.
Also, several investors have shown a number of profitable exits. The first notable one came last August when Delhi-based travel portal Makemytrip listed on Nasdaq to raise $70 million. SAIF Partners, Sierra Ventures, Helion and Tiger Global had invested $39 million in Makemytrip during 2005-07 for an 83.41 per cent stake. In November, when German media company Axel Springer bought online auto classifieds startup CarWale, Seedfund exited its 25 per cent stake. It had invested $690,000 in 2006. This year, Nexus Venture Partners, Index Ventures and Draper Richards exited Dimdim, a Web conferencing startup in Hyderabad, on its $31-million acquisition by Salesforce. Dimdim had raised $8.4 million from the three investors.
The investment and exits have laid the foundation for the industry's next phase of growth. "This was a phase of discovery. Now investing strategies will become more specialised," says Kanwaljit Singh, co-founder and managing partner of Helion. The firm is part of a select group of seven investors who stand out from peers for their exclusive focus on early stage deals. Such deals form the bedrock of a stable VC industry. These seven funds will be the first generation of VC firms in India to raise successive funds and show exits as an industry. Their success or failure will define the future of VC in India.
While most of these companies started with the intent to focus on early stage technology businesses, several have diversified into non-technology sectors. Nexus has an organic commodities producer, Suminter Organics, in its portfolio, while IndoUS Venture Partners has invested in e-waste recycling firm Attero Recycling. Helion has bet on serviced apartments with HummingBird, while Accel Partners India has invested in quick service restaurant chain Kaati Zone. Through such deals, Indian investors have carved a distinct identity for themselves. Technology, though, remains the highest funded sector, cornering 2.5 billion in VC dollars during 2004-09, according to IDG.
As more money flows in, valuations will get dearer. The e-commerce sector, which has attracted over $200 million since January this year, is an example. Online books retailer Flipkart is reportedly in line for a $150 million funding round at a valuation of $1 billion. To sustain the current momentum, India's second generation of VC adventurers will need to find new white spaces. This means investing in younger firms and taking bigger risks. It also implies bigger returns in the long term. VC returns here have averaged between three to 10 times the original investment. The ideal is at least 50 times. If investors are able to move closer to those kinds of returns in the next five years, the VC industry can claim that this time it is here to stay.
Changes are afoot again at Helion Venture Partners. Ashish Gupta, one of the Bangalore-based VC firm's four founding partners, is relocating back to the US. The move may see Helion tweak its investment strategy to focus more sharply on technology startups that straddle the US and India. It will be the latest in a series of changes the firm has adopted over the past five years as it finds its feet as a first-generation VC investor.
Gupta moved to Bangalore in 2006 to launch the $140-million Helion Venture Partners Fund I with colleagues Kanwaljit Singh, Sanjeev Aggarwal and Rahul Chandra. The plan was to invest in early stage, technology-oriented Indian startups. The strategy drew from the team's professional backgrounds. Gupta had co-founded comparison-shopping site Junglee. Aggarwal, who is Gupta's brother-in-law, had just successfully sold BPO startup Daksh eServices to IBM. Chandra was a venture capitalist at Walden International and Singh led Carlyle Group's India VC investments.
|1 Helion Venture Partners |
Founders: Kanwaljit Singh (above), Ashish Gupta, Rahul Chandra and Sanjeev Aggarwal
Funds raised: $350 million
Invested: $266 million
Top 3 funded sectors: Internet, consumer services and KPO
Exit route: Initial public offering
By early 2008, half of Fund I was already invested in 11 firms and Helion raised its $210 million second fund. But the global financial crisis served a setback. Cracks began to appear in one of its earliest investments, Gridstone Research, a financial research startup co-founded by former Infosys global sales head Basab Pradhan. The firm used to churn out research from Mumbai and sell it to financial services companies in the US. Soon, Gridstone's customer base dried up. In a further setback, Pradhan stepped down in early 2009. The firm downed shutters last May.
Gridstone's collapse hit Helion hard. Gridstone's five-member founder team was pedigreed beyond a fault. All had been senior executives at Infosys and hailed from top-notch academic institutions such as the Indian Institute of Management and Syracuse University. Helion was so convinced of the team's ability that it committed funds even before Fund I was officially raised. It followed with a $10 million Series B round in 2008, along with Charles River Ventures and Maverick Capital. "It is not a given that career executives will make good entrepreneurs," says Singh, though he does not specifically attribute the reflection to the Gridstone experience.
The firm has since evolved a more rigorous evaluation. The pre-due diligence process now involves looking beyond the resume and spending informal time with entrepreneurs to better understand their skills. "Seasoned teams typically try to raise larger sums. But they will grow at the same pace as any other startup. So it is prudent to write smaller cheques," says Singh. The Gridstone experience did not scare the firm off from other career executives. Out of its 35 deals, a sizeable number still sport such foun-ders. These include online bus ticketing startup RedBus founded by former Texas Instruments executive Phanindra Sama, and service apartments chain HummingBird, whose founders Vivek Madappa and Vinod Thimayya earlier worked at Tata Tetley and Countrywide.
The global crisis prompted two other changes in Helion's strategy. It does more co-investment deals to spread risks and conserve cash. It has also moved into non-technology deals in education, financial services, health and consumer services. This is reflected in deals such as R&R Salons, Agni Property and branded quick service restaurants chain Brand Calculus. Within technology, the firm has been making aggressive plays in e-commerce. Last November, it invested $2.8 million in online luxury apparel retailer Exclusively.in, with Accel Partners India. In January, it invested $6 million in e-commerce site Letsbuy, with Accel and Tiger Global.
As Fund I enters the sixth year of its 10-year investment term, those strategy tweaks will begin to bear fruit. Early dividends have come from the listing of travel portal MakeMyTrip, which raised $70 million on Nasdaq last August. The next 24 months, says Singh, will be critical for exits from Fund I.
This January, Mumbai-based Nexus Venture Partners launched Nexus Seed, a platform to invest in seed stage technology and Web startups. Over the next five years, it plans to invest in 50 such startups, deploying anywhere between $50,000 and $500,000 in each. The initiative is unique as it comes from a VC firm that is identified with more mature investments. "We have always done seed deals and have launched a formal programme to expand on such investments," says Suvir Sujan, co-founder and managing partner of Nexus. Out of its 35 portfolio firms, eight were entered at the seed. In 2007, Nexus joined Acumen Fund and Draper Fisher Jurvetson to seed affordable solar lamps maker d.light Design. In 2008, it invested in video ad network Vdopia. This year, it joined Google Ventures and others to back apps developer Astrid.
Founded in 2006 by Sujan, Sandeep Singhal and Naren Gupta, Nexus seeks to invest in firms at their formative stages. "The first 2-3 years is when a VC investor can create the most impact," says Sujan, who earlier co-founded Baazee.com. The strategy is not unique. It helps investors ensure the best possible returns. At the seed stage, valuations are next to zero and businesses can be shaped in tune with investors' long-term profit goals. In India, however, VC investors prefer entering at later stages, choosing safety over risk. This has helped investors to reap steady returns, between three to 10 times the investment. But there is a problem. "Limited partners (institutions that invest in VC funds) expect supernormal returns. High rewards imply higher risk," says Sujan. As the market and valuations get more competitive, investors need to find younger deals to meet those expectations.
|2 Nexus Venture Partners|
Founders: Suvir Sujan (above), Naren Gupta and
Funds raised: $320 million
Invested: $200 million
Top 3 funded sectors: Internet, software solutions, business services
Exit route: M&A
So far, Nexus' limited partners seem content. The firm is reportedly raising a $250-million third fund, adding to its existing $320 million. It raised its first two funds within 19 months of each other. It has also booked a clutch of early exits. The first one was last August when South Africa's Naspers bought online startup OLX for an undisclosed sum. Nexus had invested $5 million in 2009. This January, Web-conferencing startup Dimdim was bought by Salesforce for $31 million. Nexus and others had invested $8.4 million over two years. In July, Citrix bought cloud software startup Cloud.com for a reported $200 million. Finally, in August, Yatra Online bought hotel rooms aggregator MagicRooms. Nexus had invested $1.5 million a year ago.
In the next five years, Nexus will stick to its original investment mandate. It targets firms focused on India, and others building products or services that can go global. Roles of the three founding partners are aligned along sectors. Sujan leans towards Internet, media and technology firms. Gupta, in Silicon Valley, brings his experience as a serial technology entrepreneur. Singhal focuses on agriculture, rural and consumer businesses.
As it readies for the next phase, Nexus faces some challenges. It has to find enough promising young startups in its sectors of choice. Its portfolio is an even mix of early and mid-stage deals. Recently, it was part of a $12 million Series B round, with IndoUS Venture Partners, in SnapDeal and led a $12 million Series B investment in enterprise software startup Druva this week. The launch of Nexus Seed shows the firm is keen to balance that situation.
In early 2007, when venture capital in India was entering its second phase, the entrepreneurial bug bit Kumar Shiralagi again. He quit his job as chief of Intel Capital India, chip maker Intel's corporate VC arm, and teamed up with Silicon Valley serial entrepreneurs Vani Kola and Vinod Dham to start IndoUS Venture Partners.
IndoUS is the Bangalore-based firm's rebranded identity. At the time of founding, it was known NEA IndoUS Venture Partners, taking its name from the $11-billion Silicon Valley VC veteran, New Enterprise Associates, which came on board as an anchor investor. The firm started with a $189.4 million fund and has invested in 24 companies so far. Like most investors that entered the market at the time, IndoUS's objective was to pick up stakes in companies across stages — from seed stage startups to more mature companies. It also had a narrow sector focus on technology-oriented businesses. Further, staying true to its name, it planned to focus on firms that straddled the US-India corridor. But since then, several things have changed at the firm.
|3 IndoUS Venture Partners|
Founders: Kumar Shiralagi (above), Vani Kola and Vinod Dham
Funds raised: $189 million
Top 3 funded sectors: Software, telecom, Internet
Exit route: M&A
To begin with, last year, the firm decided to drop NEA from its name. The reason was that NEA itself had entered the Indian market and compared to IndoUS, it had a focus on later stage firms. "NEA remains an anchor investor in our funds," clarifies Shiralagi. The firm is said to be raising a second fund, but Shiralagi declined to comment on the new round.
The big change for IndoUS, though, has been in the area of the kind of companies it backs now. It started with a series of seed deals, but has come around to the view that it should vacate the seed stage. "For a fund such as ours, you need to do a certain number of seed deals — at least 20 — for it to make economic sense," says Shiralagi. From the returns point of view, the firm sees $3-5 million deal ticket sizes as its sweet spot. In August, it led a $30-million investment round in mortgage solutions company ISGN Corporation. Earlier, it participated in a $40-million Series B round of funding in e-commerce startup SnapDeal.
Alongside the shift in the stage of investment, the company has also broadened its sector focus and moved towards deals that are more focused on the domestic market. Though it tries to retain a technology flavour in most deals, it has invested in companies such as Carz, a multi-brand car service chain, Attero Recycling, an e-waste management startup in Delhi, and MedPlus, a Hyderabad-based wholesale pharmaceuticals cash-and-carry business.
Over the next few years, its primary areas of focus will be telecom and mobile, consumer Internet, businesses in outsourcing and KPO, education, healthcare and clean technology. "The Indian VC market is not yet deep enough for firms to focus on any one particular sector," says Shiralagi. As the firm moves into the next phase of investing, specifically from its new fund, it will have to factor in one other big change. Dham, one of the three founders, will not be part of the new fund. Dham is moving out to pursue other opportunities at his home base in the US.
Sudhir Sethi has two passions: technology and startups. Five years ago, he decided to combine the two and raise a specialist technology VC fund. Since then, IDG Ventures India, the $150-million fund Sethi helms, has invested in 16 technology startups. The portfolio has combined revenues of $100 million, which is projected to grow to $500 million by 2015. "We believe that new disruptive technology and products are going to come out of India," says Sethi, who earlier led Walden International's India investments. He has put his money where his mouth is. Five out of IDG's 16 firms are in software products. These include iCreate Software in Bangalore, which hawks business intelligence software to the financial services sector, and security software maker iViz Techno Solutions in Kolkata.
The key to staying focused lies in what it dubs the ‘ventureprenuer' approach to making deals. Aujas Networks, a Bangalore-based digital security firm, is an example. After studying 62 security startups, IDG realised that it could not invest in a single one. So it decided to create one. In May 2007, the firm signed on former Lucent Technologies technologist Manjula Sri-dhar as an entrepreneur-in-residence to start work on Aujas. They spent several months sha-ping the business model and the top management. IDG invested $3 million in early 2008.
|4 IDG Ventures India|
Founders: Sudhir Sethi (right), Hemir Doshi, Manik Arora and T.C. Meenaskhisundaram
Funds raised: $150 million
Invested: $115 million
Top 3 funded sectors: Software products, Internet, mobile
Exit route: None
While Aujas was being incubated, the IDG team was also seeding ConnectM Technology Solutions in collaboration with telecom software firm Sasken Communications Technologies. Sethi had known Sasken co-founder Rajiv Mody from the Walden days. ConnectM was spun out of Sasken in June 2007 with $6 million funding from IDG and Sasken. The company uses machine-to-machine technology to help industries such as transport and utilities to remotely monitor facilities. The same year, it pulled out 3D Solid Compression, a company in 3D content creation and virtualisation, from the Indian Institute of Science in Bangalore and invested an undisclosed amount. Later, when it decided to enter the medical devices sector, it researched 74 companies and invested $3 million in Chennai-based Perfint Healthcare.
"There is no one way of doing venture investing. We have tried various models to reach that targeted disruptive technology," says Sethi. That insight probably comes from the IDG founding team's experience with technology investing in India. T.C. Meenakshisundaram and Sethi, both alumni of Wipro, had invested in firms such as MindTree and Techspan (Headstrong) as part of Walden. Manik Arora, the firm's Mumbai-based partner, had invested in Travelguru and Patni Computer, while with Battery Ventures and General Atlantic Partners.
The firm's focus on technology also has much to do with its anchor investor, the $6.8-billion IDG Ventures, arm of US-based technology research giant IDG. The firm has sunk $2.5 billion into Chinese tech startups and is keen to balance that with a strong presence in India. It took Sethi just 31 days to convince IDG founder Patrick McGovern that India was ripe for a specialist technology fund and raise $150 million.
So far, the pure technology thesis has played out reasonably well. In 2008, Norwest Ventures Partners led a $7.2-million round in Pefint. Hyderabad-based mobile content startup Apalya Technologies raised $7.5 million in a round led by IndoUS Venture this January. IDG and Qualcomm had invested $3 million in the firm three years ago. Bangalore-based e-commerce site Myntra raised $14 million in a Series B round led by Tiger Global this March. IDG had invested $5 million in the Series A round in late 2008, alongside IndoUS Venture Partners and Accel Partners India.
When Prashanth Prakash and Subrata Mitra founded Erasmic Venture Fund in 2006, they knew they were going against the tide. Erasmic was conceived as a seed fund that would invest in startups still firming up their business models. They raised $10 million that eventually went on to invest in 14 companies, including Perfint Healthcare, Myntra and Kirusa. These companies are now among the most promising technology startups in India.
"We knew how to build companies. That is why we felt most at home at the seed stage," says Prakash, who founded e-business consulting firm Netkraft before Erasmic. Co-founder Mitra had worked at IBM, founded wireless infrastructure management startup Firewhite and led Tavant Technologies' India operations. In 2004, the two teamed up to start Erasmic Consulting to mentor and angel fund technology startups that straddled the US and India. This later morphed into Erasmic Venture Fund.
5 Accel Partners India
Founders: Prashanth Prakash (left) and
Subrata Mitra (extreme right) with partner Mahendran Balachandran
Funds raised: $70 million
Invested: NA Companies: 25
Top 3 funded sectors: Internet, software, consumer services
Exit route: NA
The thesis at the time was to invest between $100,000 and $500,000 in young firms that needed capital and a lot of handholding to reach the next level of growth. Illinois-based business analytics startup Mu Sigma, one of their earliest deals, incubated its Indian operations at Erasmic's office in Bangalore. The strategy held after Erasmic merged with Palo Alto-based Accel Partners in 2008.
The merger was followed quickly with a $60- million India dedicated fund. In the five years that the India team has been investing, it has built a portfolio of 25 firms. It has invested in quick service restaurants (KaatiZone), online communities (Commonfloor), e-commerce (Exclusively), healthcare (Healthcare Magic) and mobile VAS (Kirusa). That said, Accel India's big bet has been the Internet sector. It has about 10 Internet portfolio firms at present.
Flipkart is an example of how the early call on the Internet has played out. Though Prakash does not specifically say so, Flipkart could be the first company to return more than 50 times the investment. The online retailer is reportedly in line to receive a $150-million fund infusion from private equity investor General Atlantic Partners. Accel had invested $1 million in 2009. "This focus was a conscious strategy. But even back then, we did not believe in media-led businesses," says Prakash. By media-led businesses he refers to advertising revenue-led businesses such as MakeMyTrip and CarWale.
Accel believes that supernormal returns from Internet businesses will come from commerce-oriented businesses. It feels that only businesses that shift large and existing consumer spends from an offline market online will make money. It cites job portal Naukri, a listed firm now, as an example. Within e-commerce, though, it prefers betting on vertical-focused firms and looks at deals in healthcare, education and luxury. The next five years will see the firm invest in Cloud services, education and healthcare, along with Web. A new fund is also on the cards.
Bangalore-based Inventus Capital Partners' three-member founding team is streets ahead of most peers in terms of VC investing experience. Ace Silicon Valley serial entrepreneur and angel investor Kanwal Rekhi headlines the team. John Dougery has been investing in US-based technology firms for over a decade and Samir Kumar, who helms investments in India, had led Acer Technology Ventures' investments here. Yet, the team decided to enter India just three and a half years ago, well after most others had dug their heels in.
The late start, though, has not been a disadvantage. "We had already invested in over 70 firms before starting Inventus. Few teams have this depth," says Kumar, who earlier invested in companies such as HelloSoft and Kaboodle as part of Acer. His co-founders share a similar legacy. After selling his firm Excelan, a manufacturer of smart ethernet cards, to Novell in 1989, Rekhi went on to invest in over 50 startups. Dougery started his investing career with Scale Venture Partners in 1997 where he helped raise two funds worth $600 million.
Inventus' founders marked their entry in India with a modest $52 million fund. "We are a seed-to-early stage investor. It is hard to be an effective investor in that space with a large fund," explains Kumar. Fund I has invested in 13 firms. It invests $3-4 million per company over multiple stages. Investments may sometimes go up to $5 million, but it tries not to invest more than 10 per cent of its overall corpus in one company. About 80 per cent of Fund I is now invested and the firm plans to raise a new fund soon, which is likely to have a $100-million corpus.
|6 Inventus Capital Partners|
Founders: Samir Kumar (left), Kanwal Rekhi and John Dougery
Funds raised: $52 million
Invested: $42 million
Top 3 funded sectors: Internet, mobile, software solutions
Exit route: M&A
The firm's strategy will not change with the new fund, though it will have the ability to bring in more money at the initial stages and pick up higher stakes. This will be an important factor in the next five years as more of its peers begin to move into its sweet spot — US-India cross-border technology startups. Nexus Venture is already active in this area and Helion Venture co-founder Ashish Gupta is relocating to the US to strengthen the firm's focus on such investments. Kumar sees the trend as inevitable. "The entrepreneurial and VC communities in the US and India are interlocked at the hip. Deals can be sourced from either side," he says.
For instance, California-based Salorix, in which Inventus invested in 2009 along with Nexus, was sourced from Bangalore where founder and CEO Santanu Bhattacharya is based. The firm provides analytics solutions to US companies. Among the two stealth mode startups in its portfolio, one has founders headquartered in the US, but are building an online music business for Asian audiences. Kumar declined details on the company. While US-India cross border firms run as a strong theme, the firm's investing strategy is underlined by a focus on Indian startups that have the potential to go global. Investments such as Web marketing firm Vizury and mobile marketing solutions startup Telibrahma fall in this category. Both firms are scaling up their customer base overseas.
While it prepares to raise its next fund, Inventus has already received early validation for its investing strategy so far. In January, portfolio company Sierra Atlantic, an offshore enterprise applications and product developer, was acquired by Hitachi Consulting for an undisclosed sum. Inventus realised a return of almost five times its investment, says Kumar. That is a moderate rate of return, but Inventus' founders expect to up their game to targeted returns at 30-50 times in subsequent exits.
Delhi-based Canaan Partners has a smaller portfolio than most VC firms of its vintage in India. In the five years since it started investing, it has done 11 deals, averaging at 2-3 deals per year. The firm follows this pace of deal making as a deliberate strategy, which it claims gives it the advantage of making fewer mistakes.
For Alok Mittal, who fronts Canaan's investments in India, the past five years have been a period of realigning strategies constantly to find the best one for India. "Our global model is conditioned to let deal making be driven by innovation. But that does not work here," says Mittal, who founded jobs portal Jobsahead, which was acquired by Monster.com. Mittal is one of the few in the industry who admits venture investing in India is tough. "Aside of market challenges, the peer pressure to show deals is hard," he says. So far, the firm, which operates as the Indian arm of US-based Canaan, has committed $150 million across its 11 firms. This year, it will invest $40 million in follow-on deals and close 2-3 new ones.
|7 Canaan Partners|
Founder: Alok Mittal
Funds raised: NA (invests from a $650- million global fund)
Invested: $150 million Companies: 11
Top 3 funded sectors: Technology, telecom, healthcare
Exit route: M&A
Canaan's focus on innovation in its global markets, notably the US and Israel, has seen a shift in India. While innovation is still a key factor, it now lays more emphasis on founders' abilities to execute and scale businesses. Investments in the past three years have gone to firms whose founders have significant experience. In 2009, it made an undisclosed investment in online automobiles marketplace MotorExchange, founded by Vinay Sanghi, former CEO of Mahindra First Choice. Last August, it invested $7 million in e-commerce site Naaptol.
Canaan's other big challenge has been to stay focused on its areas of strength — technology, telecom and healthcare. Here, it has had an easier run than most other funds as it is investing in India from a global $650-million corpus. If it does not find enough of the right kind of deals to do in India, it has the flexibility to deploy that capital in other markets and protect returns. This also allows it to resist the pressure of jumping on to the bandwagon of popular investment themes. For instance, in 2006, the India team lobbied hard with headquarters to enter the specialised retail sector. At the time, peers such as Helion and Matrix were busy tying up such deals. "Trends change every year. You have to remain focused and invest in what you understand the best," says Mittal.
Over the next five years, the firm's focus will be consumer Internet, mobile payments and clean technology. The recent induction of Rahul Khanna, from rival Clearstone Venture Partners, will help the firm make inroads into mobile payments, which it sees as the next growth driver in the mobile segment.
(This story was published in Businessworld Issue Dated 12-09-2011)