Nobody will disagree that the past 12 months have been among the most difficult that India’s start-ups, especially those vested with lofty billion-dollar valuations on paper, have experienced in a while. Capital has been elusive and valuations remain under pressure as concerns run high about whether the somewhat irrational deal-making of the past two years will yield profitable returns. Those concerns, however, haven’t discouraged global institutional investors from continuing to bankroll India’s venture capital firms.
As of early November, Mint reported, the dry powder, uninvested capital, available with India-focused venture capital funds stood at a record $3.1 billion, according to data compiled by London-based researcher Preqin. The bulk of that dry powder is concentrated in three unusually large funds raised over the past 12 months. In December last year, Mumbai-based Nexus Venture Partners raised $450 million for its fourth fund. Two months later, Sequoia Capital India, the country’s largest venture capital firm, raised a record $920 million for its fifth successive India-focused fund. And, this month, Bengaluru-based Accel Partners India joined the party with a $450 million fund, its fifth for this market.
With the exception of Sequoia, most venture capital firms in India, including Nexus and Accel, are new to large funds. Last year, a particularly busy one in terms of new funds that closed commitments from limited partners (investors in venture capital funds), the largest fund raised was SAIF Partners’ $350 million fourth India fund in May. Prior to that, in March, Accel raised a $325 million fourth fund. In August, Lightspeed Venture Partners followed with a $135 million debut India fund, and the following month, Kalaari Capital, the Bengaluru-based firm, garnered $290 million for its third fund.
The big funds raised by Sequoia, Accel and Nexus in the past 12 months may indicate that while limited partners are not pulling back from the market, they prefer to park more capital with established firms rather than place bets on untested ones. That doesn’t mean new firms will not raise funds. Upstart firms backed by seasoned fund managers such as Pravega Ventures, founded this year by former SAIF Partners executives Mukul Singhal and Rohit Jain; Stellaris Venture Partners, founded by the former Helion Venture Partners team of Ritesh Banglani, Alok Goyal, and Rahul Chowdhri; and Endiya Partners, started by former Ventureeast partners Sateesh Andra and Ramesh Byrapaneni, have already closed some commitments for their debut funds.
More important than the size of the mega funds raised this year is where all that money is headed. Sequoia, Nexus, and Accel count among the most prolific and influential venture capital investors in this market and their deal-making run over the past 12 months could be instructive on how the market will play out in future. Mint takes a look at how the three firms have been spending their money this year.
Nexus Venture Partners: Measured pace
When Nexus Venture Partners raised $450 million for its fourth fund in December last year, it wouldn’t have been unnatural to assume that the Mumbai and Menlo Park, California-based venture capital firm would burn up the deal market.
Nexus co-founder and managing director Naren Gupta. Photo: Hemant Mishra/Mint
After all, this was the biggest fund the firm had raised in its over 10-year history and nearly double the size of its previous fund. But it has stuck to its measured pace of deal-making and will close this year with dozen-odd deals, give and take some.
“The fund size has grown modestly in line with higher capital needs of rapidly growing companies… the need to continue to sponsor successful companies through their entire life cycle,” Nexus co-founder and managing director Naren Gupta said in an email response.
A larger fund gives Nexus the resources to scale up its investment in existing portfolio companies that have grown and could potentially deliver supernormal returns in a few years. Most of these companies are now heavily funded by later-stage investors who have deeper pockets than Nexus and a large fund allows the firm to continue to participate in later-stage funding rounds and retain a meaningful stake. For instance, this year, it participated in the $51 million growth round raised by cloud data security company Druva from an investor consortium led by Sequoia Capital. Nexus had entered Druva in 2011 as the lead investor in its Series B round. It also participated in e-commerce company ShopClues’s January growth round which was led by Tiger Global Management and GIC, the Singapore government-owned investment firm. The size of the round was not disclosed.
_web.jpg "Graphics by Ahmed Raza khan/Mint")
This isn’t the first time though that Nexus has felt the need to beef up its resources for later-stage investments. In March 2014, it raised a sidecar fund dubbed Nexus Opportunity Fund, according to a filing submitted to US Securities and Exchange Commission, with a reported corpus of $110 million for the purpose. That, along with the $450 million fund it raised last December has taken its overall funds under management to about $1.2 billion, the first home-grown venture capital firm to breach the $1 billion mark.
Despite its bumped-up size and the odd growth deal every now and then, the firm’s deal run this year demonstrates that it prefers to more or less stick to its founding mandate—8-10 deals a year, preferably at the Series A stage, selectively at the Series B stage and, only in the technology sector. Last year was an exception. Based on what has been disclosed through media reports and press releases, it closed more than 20 deals of which at least 10 were Series A deals. There seems to be a bit of shift in terms of the stages it has invested in this year—just four Series A deals and two seed-stage deals. There may be more deals at those stages which have not yet been disclosed.
The firm has also put more capital to work in existing portfolio companies and less in new deals. Out of the 12 deals that our research threw up, nine are follow-on investments. This means that like most peers, it is taking advantage of the correction in the funding market to consolidate and secure its interests in companies that it thinks have greater potential in terms of delivering returns.
However, again, what really differentiates Nexus from most of its peers are its frequent forays into the Silicon Valley start-up market. It is the only home-grown firm that has invested equally in both local and foreign technology start-ups since inception. This year, it seems to have upped the ante on that front—seven out of its 12 deals involve start-ups based in San Francisco (BlueShift, HelpShift, Mezi, Cricket Health), Sunnyvale (Druva), Toronto (Quandl) and Vancouver (Procurify). Last year, it had invested in five. Out of the 75-odd companies in its portfolio, nearly half are estimated to be based outside India.
Sequoia Capital: Sitting pretty
Restraint has been the guiding principle for Sequoia Capital’s deal-making in India this year. Since January, the storied venture capital firm has put money to work across 25-odd deals against the blistering 50-plus deals it closed last year. The sober pace of deal-making is obviously not for want of capital. In February, it started investing from a new $920 million fund, the largest it has ever raised for this market.
Sequoia Capital managing director Abhay Pandey. Photo: Abhijit Bhatlekar/Mint
“We are operating in a more sane environment. Yes, the pace (of dealmaking) has been slower this year but that’s good. This is the new normal,” says managing director Abhay Pandey in a conversation at the firm’s midtown Mumbai offices.
Incidentally, the old normal is what led Sequoia to raise the fund it is investing from now. Back in July last year, when the start-up funding market was still on steroids, Pandey, and the firm’s other partners came to the decision that it was time to raise a new fund, one that would have to be bigger than any they had ever raised here. The previous fund, by no measure small at a $740 million corpus, had been exhausted in less than two years. “The fourth fund, raised in early 2014, found investment opportunities faster than anticipated. The market for mobile Internet opportunities was being created in that period,” says Pandey.
Pandey and his colleagues knew the environment was far from rational. Hedge funds and an assortment of strategic investors were wreaking havoc at the deal table. Term sheets were being signed before one could blink and valuations were out of control. Capital had become the only differentiator in India’s start-up market. “We didn’t expect this (environment) to continue…” he says. But, in the event that it did, Sequoia had to be on top of its game. So, the partners pitched the new fund to nearly a hundred global limited partners. It wasn’t a hard sell. They closed commitments worth $920 million within two weeks.
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As it turned out, the irrational environment came to an abrupt halt soon after Sequoia decided to raise the mega Fund V. Following the devaluation of the Chinese yuan in August last year and the subsequent turmoil in global financial markets, hedge funds started to withdraw from the start-up market. Their presence has remained small through the current year. With the pressure off to close deals faster than they would have liked, Sequoia’s partners are savouring the slower pace of deal-making. “There’s more time to evaluate investment opportunities. Even at the slower pace, this is turning out to be Sequoia’s second busiest year in terms of investments,” Pandey says.
Unlike some of its peers, the firm’s deal run so far has been an almost even mix of new and follow-on investments. Out of the 25-odd deals that it is reported to have closed this year, 13 are follow-on investments in existing portfolio companies. Some of the larger ones it has participated in with other investors include a $51 million growth round in cloud data security firm Druva, a $50 million Series C round in mobile wallet services firm MobiKwik, a $25 million Series D investment in content aggregator Daily hunt and, another $25 million Series B round in online lending platform Capital Float.
Among its new deals, two interesting ones are in the education sector. In March, it teamed up with Belgian investment firm Sofina to lead a $75 million Series C funding round in Bengaluru-based Byju’s that offers online and mobile app-based learning content. Sequoia later also participated in Byju’s $50 million Series D round in September which was led by Facebook founder Mark Zuckerberg’s investment firm Chan-Zuckerberg Initiative. The other investment is in impact enterprise Cuelearn, a Bengaluru-based startup that offers after-school math tuitions at affordable rates under a program called Cuemath. Sequoia and existing investor Unitus Seed Fund invested $4 million in the company’s Series A round.
The firm also expanded its portfolio in the relatively new life-sciences sector with an investment in Bengaluru-based personalized cancer care and drug development company Mitra Biotech. It teamed up with Sands Capital, Accel, and others to invest $27.4 million in the company’s Series B round. Last year, it had invested in another life-sciences company, MedGenome, a genomics diagnostics and research firm based in San Francisco with operations in India.
In terms of stages of investment, the firm has shown a preference for Series A deals, a strategy that continues from last year when it decided to get into companies at the earliest stages of their development in the quest for better entry valuations. Our research, which is based on deals that have been reported in the media or through press releases, did not throw up any seed-stage deals. Sequoia and several other venture capital firms took to aggressively investing at the seed stage last year as entry valuations in later-stage rounds became more and more unrealistic. Pandey says the firm continues to make seed-stage investments and has closed a few this year but is yet to announce them.
As Fund V enters the second year of its investment term next month, Sequoia plans to make deeper inroads in its three broad sectors of choice: technology, consumer, and health. “The sectors of focus haven’t changed since 2011 though the niches within those sectors may change from time to time. We would like to do more Series A deals and some seed. Seed investments are done with the aspiration of converting them into Series A in a short time,” says Pandey. Another important part of the Fund V strategy will be to grow investments in South East Asia, an initiative the firm launched about two years ago with an office in Singapore.
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However, the biggest opportunity for the new fund lies in the space vacated by the hedge funds and notably Tiger Global Management, the New York-based firm that dominated start-up and consumer Internet investments in India till September last year. With its $920 million war chest, bigger than even some private equity funds in the market and valuations at many prime later stage start-ups becoming reasonable, Sequoia is uniquely positioned to pick up from where Tiger Global left off though most likely in a more measured fashion.
Accel Partners India: Ready for the next stage
Flipkart backer Accel Partners India surprised the market earlier this month when it announced it had raised a new fund, its fifth India-dedicated fund. The $450 million fund is nearly as much as it has raised for its previous four funds and catapults the venture capital firm’s total funds under management here to a shade over $1 billion.
Subrata Mitra, partner, Accel Partners India.
But rather than the size of the fund, the big departure for Accel is how quickly it has raised a new fund after its previous one. The fund comes barely 20 months after the firm raised its fourth fund, also a reasonably big one at $325 million. Venture capital firms don’t typically raise a new fund till they have run through the previous fund. The bulk of each fund goes into making new investments and the remainder is kept in reserve for follow-on investments. The rush to deploy capital in record time isn’t hard to comprehend, given the environment in which the fourth fund was raised. It hasn’t yet started deploying the new fund it has just raised and plans to do so from next year.
So, where’s the money headed? Accel declined to participate in this story. However, it did share some details on its investment strategy for Fund V earlier with Mint at the time of announcing the fund. The focus on seed and early stage investments continues and it is looking at sectors such as consumer, enterprise software, financial technology, and healthcare.
A large fund gives the firm the resources to participate selectively in the later stage funding rounds of existing portfolio companies that it sees as potentially big winners.
Out of the 26-odd deals, it has done this year, from the previous fund, nearly half are Series A stage deals. But, it has also participated in 12 later stage deals in the Series B, C, D and growth stages. The big ones on the deal chart include a $81.5 million Series C round in online ticketing service BookMyShow that was led by Stripes Group, a $35 million Series C round in food delivery service Swiggy led by Harmony Partners and, a $55 million growth round in cancer care and drug development company Mitra Biotech. The round was led by Sequoia Capital.
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For entrepreneurs, a new fund from Accel is always something to look forward to. Unlike some of its peers, it doesn’t carve out seed stage investments as a separate initiative in line with market demands but ingrained as part of its strategy: the firm claims that 80% of its investments over the years have been at the seed stage. That’s something that the firm draws from its roots. It started up with a $10 million fund that invested almost exclusively in seed stage firms. But staying true to its roots may prove a bit of a challenge with a big fund that needs to be deployed and returned to investors within a short lifespan.
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Source: Mint
