Sequoia in India: Early-stage icon

No one could accuse Sequoia Capital of holding back in India. Having closed its fourth fund at $530 million in April 2014, within 12 months the venture capital firm was adding a further $210 million to the corpus. Now, less than two years on, Fund VI spent almost no time at all in the market as it accumulated commitments of $920 million. It is the largest-ever vehicle raised by an India-focused VC firm.

To put the Sequoia fund in context, it accounts for almost all of the $1.03 billion raised by India-focused VC firms so far this year. It is also nearly half of the record $2.05 billion that went to 16 venture capital managers in 2015 as a whole. The previous year a total of $1.2 billion was committed to 10 funds.

And yet, since the fourth quarter last year, Asia's technology sector has cooled; investors have grown wary of pumping capital into established start-ups with high cash-burn and backing new entrants that seek unrealistic valuations. Sequoia's fundraising success for India suggests this market is able to resist torpor beginning to take hold elsewhere. Is it for real, or has Sequoia bitten off more than it can chew?

"Typical VC funds have an investment cycle of 3-4 years. If you break down a $300 million fund, you're talking about investing $75-100 million per year. For a $900 million fund, it goes up to $225-300 million. Are there sufficient opportunities in India to absorb that amount of capital? I absolutely think there are,"says Aashish Bhinde, executive director with transaction advisory firm Avendus Capital.

Building a business

Sequoia started its India operation in 2006, raising $400 million for Sequoia Capital India Growth Fund I. Two funds followed in 2007 - a second growth vehicle of $725 million and an early-stage vehicle of $300 million. There was an upheaval between Funds III and IV as a merger with WestBridge Capital didn't turn out as planned and the WestBridge founders restarted their own franchise in 2011.

Despite at one point splitting its venture and growth strategies across two funds, Sequoia has always been stage agnostic. For example, in 2006, the firm teamed up with KKR on the buyout of Flextronics International's India-based software development unit, while also participating in a seed round for news search engine platform Guruji.com.

This diversity extends to industries as well. Internet-enabled technology is Sequoia's sweet spot - particularly in the context of mobile, payments and software - but over the course of 100-plus investments across 10 years, it has also dipped into healthcare and various consumer-oriented opportunities. To some, it is evidence of a firm staying ahead of the curve.
"The combination of roots in Silicon Valley and successful past investments in India has enabled Sequoia's team to think a little ahead of the market. If you look at the whole e-commerce start-up space, many of the new local VC firms have been drawn towards the same sectors as Sequoia," one industry participant says.
Total VC investment in India reached a record $12 billion last year, up from $7.5 billion in 2014 and $5.2 billion in 2013. The principal actors, in dollar terms, were later-stage investors pouring capital into a relatively small number of businesses they see as long-term category leaders. The $500 million round e-commerce platform Snapdeal raised last year from the likes of SoftBank Corp, Foxconn Technology and Alibaba Group is a case in point.

The new high in venture capital fundraising came as Accel Partners, SAIF Partners, Kalaari Capital and Nexus Venture Partners all closed new funds, capitalizing on strong investor appetite for emerging markets internet exposure. However, so far only Nexus has raised a dedicated vehicle, or top-up fund, to support later-stage investments in existing portfolio companies.

Sequoia's preference appears to be making fresh and follow-on investments from a single vehicle, although it has created distinct teams for each strategy. The firm has 20 professionals looking at venture deals, and 15 focusing on the growth and expansion side.

Industry participants expect large follow-on rounds to remain a feature of the India venture capital space in 2016, not least due to the wave of consolidation that is enveloping the technology sector. Over the past two years, larger players such as Snapdeal, its e-commerce rival Flipkart, and ride-hailing app operator Ola have all become more acquisitive.

Sequoia benefited from this trend when one of its portfolio companies, online bill payment service Freecharge, was acquired by Snapdeal. The VC firm received a 3% stake in Snapdeal in return for its shares. More recently, Oyo Rooms - a budget hotel booking app backed by SoftBank and Sequoia, among others - acquired direct competitor Zo Rooms. The deal is said to have come about after Zo Rooms tried and failed to raise additional capital from its investors.

"There is a degree of nervousness about the market and that is likely to have a cascading effect on every company. It won't be easy for private companies to raise capital, and valuations are going to be suppressed. Mostly importantly, capital will become concentrated around few assets. All of this is likely to happen over the next 6-12 months," says Avendus's Bhinde.

Familiar signs

A similar phenomenon is expected in Southeast Asia. The current and previous Sequoia India funds have included a relatively small Southeast Asia allocation and the firm has completed nearly a dozen deals. These range from Indonesian e-commerce player Tokopedia to Malaysian online fitness platform Kfit.

"We have already seen a material change in valuations in the most recent funding rounds. There is a bifurcation between start-ups that have a clear path to a sustainable business model and start-ups that have solely focused on growth while neglecting fundamentals. As a result, there will be a flight to quality - and quality start-ups will benefit from the coming consolidation," says Stefan Jung, a managing partner at Venturra Capital, which co-invested with Sequoia in Kfit.

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• Topics
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