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The Great Capital Splurge
Sudhir Sethi, Founder & Chairman, Chiratae Ventures, in an exclusive interaction with BW Businessworld sheds light on the current Indian investment environment, the workable strategies during ‘funding winter’, the impact of rupee capital as a game-changer for homegrown startups, and the growth plans for Chirate Ventures
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Founded in 2006 by Sudhir Sethi and TCM Sundaram as the Indian arm of global VC firm IDG Ventures, Chiratae Ventures largely invests in growth-stage companies in the Indian market. The funds advised by Chiratae Ventures India Advisors collectively have close to $1 billion under management and over 110 investee companies across SaaS, consumer media tech, healthtech and fintech.
Some of the notable companies in Chiratae’s portfolio are Policybazaar, Early Salary, Bizongo, Zivame, Curefit and HealthPlix. Chiratae closed its fourth fund, oversubscribed at $337 million in 2021. The team has delivered value for its investors through the years with more than 40 exits, three IPOs and eight unicorns, with more around the corner.
You started with IDG Ventures long ago. What is the background story behind Patrick McGovern writing a big cheque to you?
It's an interesting story. I wanted to start my own firm and find someone to anchor us. By pure luck, I met Patrick McGovern, who was the founder of IDG (International Data Group) Worldwide. We met on May 21, 2006 at 09:30 AM (IST), at Oberoi Hotel, Bangalore. He was looking to beg somebody to start a VC firm and we were looking for somebody to look at starting us up as an investor.
And after that meeting, I had a good feeling, so he asked me for a formal proposal. I gave a four-page proposal. The wheels were churning about. After about a month on June 21, 2006 at 09:00 PM (IST) he and I were talking. Patrick McGovern said you're raising $100 million, why don't you look at $150 million to which I said okay, that's a good idea. But the question is, who will anchor me? He said, ‘I will anchor you.’ At that point in time, I said how much? And he said full $150 million.
That's how we started. We were very fortunate as that was a very tough time for the VC industry. Fast forward, we turned to Gerardo because he (McGovern) passed away; he anchored us for three funds.
You have been actively involved since the last 18 years. What has changed since then for the better, and what are some things which haven't changed?
I think everything has changed. I think the startup ecosystem is massively scaled right now. Our recent Chiratae and Zinnov research shows that Indian SaaS is expected to reach $100 billion in revenues by 2026. That's humongous. I think that investments in the country, which were approximately $200 billion during the last six years, is likely to scale up to anywhere from $350 to $400 billion. It indicates that the supply chain of entrepreneurs is increasing.
Today, our company's revenue in March was $2 billion and 10 per cent of that was international revenue. I believe in the next five years, 25 per cent to 30 per cent of this from India will become international revenue.
The last thing is very important. When I started there was no participation from Indian investors. The rupee capital participation was zero, or maybe very minimal. However, today, out of our $1 billion AUM, we have raised more than $400 million from India. There is a clear trend that Indian investors are putting more money into riskier asset classes like private equity and venture.
As startup ecosystem is constantly evolving, but we are not talking enough about the culture. What is your comment on the culture in startups?
I think there is nothing wrong with the culture in startups. I don't think one can paint the industry black and say there's a culture issue. What's the culture in a startup? It is primarily about speed, agility, innovation, innovation, innovation and in many cases, invention.
The role of venture investor and governance is quite important. Overall, the industry has no legacy. Entrepreneurs of today don't have parents who have been industrialist.
We funded Myntra, Lenskart, Firstcry, Policybazaar, Curefit, Bizongo and more, in the very first meeting you get to know the vision of changing the world. As VCs, we have to buy this vision and if we believe in it we put in risk capital.
In the last few years, we saw India creating over 100 unicorns but at the same time, the valuations of startups in the stock market have evaporated. So, while nobody can argue that there is value being created, what is your viewpoint on the valuations of startups?
Today, they're too high. The stock market does not go through corrections because of startups. The stock market is going through a correction because of stock market issues. Will that affect private equity? The answer is yes. When valuations are very high, there's a correction. Because it is important to understand that families worldwide are getting wealthier PEVCs (Private Equity Venture Capitalists), the incoming cash is more as compared to the number of entrepreneurs to be funded, which is less.
During the covid times, 70 per cent of our companies grew faster than record levels and 40 per cent of our companies took international footprint steps because the technology was able to solve challenges which were never solved before. The market after covid has shot up in size, not by 1x but by 4-5 times. We are looking today at entrepreneurs solving humongous scale problems, not just challenges.
Is it winter? No. Is it autumn? Yes. An investor like us has always put their head down, pauses a bit and aims to execute better. Overall, it's a correction which we have to address.
Tata has jumped onto the digital bandwagon in the last two years in a big way. Similarly, TCS has announced to launch products. Is it a combination of FOMO and opportunity, what is happening in this space?
Over the last decade, at the narrative level, the government has realised that this is a big growth engine. Effectively, it's a combination of factors affecting the current environment. The top six companies in the IT services industry, in the last six years, have distributed dividends and share buybacks of $27 billion, which means more cash is in the hands of the investors, where does that cash go? But more knowledge comes into PEVCs, I wish out of that 37 per cent at least maybe 25 per cent had come into the risk VC but nothing has come.
Corporate VC has not started in India, overall. The family offices are taking measured approaches to come with a very calculated diversification away from the volatile public markets.
Today, there are many of us who are giving either 10-25 percentile returns, India has now become a place where we are giving better returns than public markets on a consistent basis, which is not to be scoffed at.
From here, where does Chiratae go? What should we expect from Chiratae Ventures in the next 12-24 months?
We believe there is a strong place for a scaled Indian VC and we are here for the long term. We have a billion under management, we have done 125-130 companies invested, exited 43 ventures, we've delivered returns year after year, delivered unicorns and delivered IPOs. We have five funds under our management. We aim to raise more funds. We are hiring right now. We've launched some new funds in the market space so that we can invest more. So it's a cycle.
India will see more first-time funds, which are very important for the industry to grow. I always keep saying that it is important for international funds to raise Indian capital and the reason is that the market will expand.
Chiratae has already extensively invested in consumer tech, health tech, deep-tech, fintech, SaaS and many more. What are some of the other sectors on your radar? Given the special attention towards renewable energy, what potential do you foresee?
About 70 per cent of global venture money goes into technology. Given a competitive differentiator, technology helps you cross boundaries. The pace of innovation is rapid in the tech space as well as the pace of death is rapid too.
It is critical to build companies global and startups being made in India are competitive globally which is a massive potential indicator. I never thought that consumer companies would go global but today a number of companies such as FirstCry, Lenskart are going global.
India is about ‘every-tech’. Technology does two things, creates a new market and improves the efficiency of existing businesses. UPI has effectively broken the proprietary nature of the legacy businesses.
When we invest, there are four basic elements to look at which are revenue model, business model, technology and product apart from good governance and disruption being created by the entrepreneur. Today, we are finding companies where the technology and the product are actually new which are a game-changer for the country.