India VC: Growing pains

Chinese internet company Tencent Holdings is on the brink of securing Supercell, a Finland-based mobile games developer, for an enterprise valuation of $10.2 billion. In a spree of strategic investments made by the $235 billion Hong Kong-listed behemoth, ranging from domestic online-to-offline services to small US mobile game studios, this would be by some distance the largest and most complex.

A few weeks before the Supercell transaction, Indian online marketplace Snapdeal bought e-commerce analytics service TargetingMantra. Snapdeal, which is said to be worth about $5 billion, has become more acquisitive in recent years - AVCJ Research has records of five purchases in 2015, more than for the previous five years combined - but it tends to focus on smaller businesses that plug technical gaps. At $450 million, last year's purchase of online bill payment service FreeCharge is very much the outlier.

The evolutionary chasm between Tencent and Snapdeal is why there is no Indian equivalent to Richard Peng. After spending seven years as head of Tencent's M&A activities, Peng left the company in 2015 and launched his own VC firm, Genesis Capital. No one at Snapdeal has anything like the longevity and track record to follow a similar course of action.

"India is around 10 years behind China in terms of per capita GDP and market development - you don't have large consumer internet companies that have gone public and you don't have executives from successful companies looking for a second career as a fund manager," says Anand Prasana, who left Morgan Creek last year to launch Iron Pillar Capital Management. "You can only spin-out once you have built up a track record and have a bunch of LPs who are ready to help you establish a firm. It hasn't really happened in India yet."

Limited churn

The relative youth of the country's consumer technology sector is therefore one of the reasons behind the relative stability of the VC industry. India has fewer active firms with US dollar-denominated funds than China, and there has not been a proliferation of new shops from the existing base the way there has in China because the incumbents have not proved themselves with distributions from multiple funds.

Executives have departed the likes of Sequoia Capital India, Nexus Venture Partners, Kalaari Capital, Accel Partners, Matrix Partners India and SAIF India, but this established order has yet to be threatened. In three situations, global firms - KPCB, Canaan Partners and Draper Fisher Jurvetson - have exited the market resulting in portfolio sales, with the teams either spinning out or moving on to new ventures.

More recently, Rishi Navani, a co-founder at Matrix, spun out to form Epiq Capital, while three executives from Helion Ventures Partners - Alok Goyal, Rahul Chowdhri and Ritesh Banglani - have set up Stellaris Venture Partners. "If you look at the VC firms started in 2005, it is still virtually the same ones, especially in the Series A space. In the seed space there is more activity, and then for Series B and C there isn't really anyone," says Chowdhri. "The industry is only 10 years old and few people were convinced in 2005. Local capital was always a scarce resource, but now there is capital available."

Nupur Garg, head of South Asia private equity funds at the International Finance Corporation (IFC), adds that there are new VC managers emerging in India, but they are not necessarily raising US dollars - or at least not yet. For example, angel investors who are in the process of institutionalizing their platforms and taking on third-party capital tend to tap the local high net worth individual market.

Exfinity Venture Partners has raised two local currency funds. The firm is also one of the first to emerge from India's IT services industry, which unlike the consumer internet segment has 20 years of history. It was founded in late 2013 by industry veterans from the likes of Infosys and Wipro who recognized a shift in the industry as customers eschewed traditional, capex-intensive solutions in favor of cloud computing and software-as-a-service (SaaS).

"Most venture capital funds in India are run by people with financial backgrounds, not practitioners. We wanted to provide not only capital but also inputs such as connections within the enterprise ecosystem, go-to-market strategies and access to top advisors," says Shailesh Ghorpade, managing partner at Exfinity.

Asked why there are not more spin-outs in the enterprise space, Iron Pillar's Prasana attributes it to a lack of understanding. "Fifteen years ago people would have laughed if you said the combined market capitalization of India's top five enterprise outsourcing companies would reach $175 billion in 2016, but this has happened," he says. "A similar story will happen with enterprise software and SaaS, but it will play out over the next 10 years. Investors are sometimes not visionary enough in terms of seeing what the entrepreneurs and GP teams are seeing to back fund managers in this space."

The dollar question

Exfinity is looking to launch a US dollar-denominated vehicle next year in order to capture cross-border opportunities, and it remains to be seen whether it and other new entrants can attract foreign institutional capital. Blume Ventures has made this transition, raising INR1 billion for its debut fund in 2012 and a further $60 million in a second vehicle this year.

Nevertheless, Karthik Reddy, managing partner at Blume, admits that the environment is challenging. He says the domestic LP market isn't deep enough to back a fund beyond $50 million, while foreign investors are often reluctant to invest in sub-$100 million vehicles. For all the expectations that India will to some degree emulate the development of China's consumer internet industry, LPs want to see paper gains turn into actual gains. In short, large VC-backed companies need to go public.

"LPs say to us: ‘Yes, some exits happened here and there, but we haven't seen scaled exits.' They haven't seen multi-billion-dollar IPOs and so investing is very difficult for them," Reddy explains. "But when the market matures, they will come and go deeper."

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• Topics
• South Asia
• Venture
• Fundraising
• India
• TMT
• Matrix Partners
• Sequoia Capital
• IFC
• Blume Ventures
• Helion Ventures