
Fund focus: Faith in Indian modernization
Accel Partners plans to take advantage of India's increasingly affluent and sophisticated population
As the Indian government's decision to remove INR500 and INR1,000 notes from circulation creates short-term chaos at banks and brick-and-mortar shops across the country, long-term investors are contemplating the upside of a more paperless economy.
This optimism is being reflected by Accel Partners following the close of its fifth India-focused venture capital vehicle at $450 million. Fund V will target seed and early-stage companies in consumer, enterprise and software-as-a-service (SaaS), financial technology, business-to-business (B2B) services and healthcare sectors.
"Demonetization has given an additional boost to the fund if you take a long-term view," says Shekhar Kirani, a partner with Accel in Bengaluru. "Digitization will be accelerated and create opportunities for Indian B2B enterprises and fintech companies. As people get used to online transactions, a lot of consumer start-ups will benefit as well, so even though we raised the fund before demonetization, it fits well into our investment thesis."
The plan also includes leveraging macro trends around the rise of India's upper income groups, which are expected to grow from 150 million to 250 million people over the next 10 years. During this time, these groups are set to experience an average annual income increase from $4,000 to $8,500, adding some $2 trillion a year to the modern household budgets start-ups are targeting.
Accel is reacting to these conditions with a more nuanced approach in Fund V. This will include a closer look at artificial intelligence, machine learning and niche SaaS plays as opposed to the more broadly marketed products that are becoming competitively commonplace.
LP participation in the fund is dominated by Accel's usual pool of pre-selected backers, including a number of long-term endowments and fund-of-funds, about 80% of which are headquartered in the US. Although few new investors have come on board, this base is underpinning the firm's largest India-focused fundraising to date, following a $305 million close for Fund IV less than two years ago and a $157 million raise for Fund III in 2011.
The larger corpus is expected in part to allow Accel to make some opportunistic Series A investments in a fast-growing talent pool. Kirani sees a substantial increase in the quality of entrepreneurs since 2010-2012, predominantly because there have been enough successful companies to show the way.
"People now have role models and a template for scaling, and the younger entrepreneurs have a better understanding of how to build viable businesses by building great products not only in India but globally," he says. "So there is a good supply of talented entrepreneurs overall, but recruiting a talented employee base to take these companies to scale is an area where India may need some help in the coming years."
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