Fund focus: Matrix doubles down on India

When Walmart agreed to pay $16 billion for a 77% stake in Indian e-commerce leader Flipkart in May 2018, it set the tone for the country's best year of PE and VC exits to date, with AVCJ Research tallying some $28.4 billion in deals, almost doubling the figure for 2017. But when Matrix Partners confirmed the close of its third India fund this week, this long-awaited momentum had no impact on the sentiment behind the LP contributions.

The reason for this is that Matrix actually wrapped up its targeted $300 million fundraise in the first quarter of 2018, before the Flipkart news had put any wind in the sails of Indian VC. In keeping with the firm's previous two funds in the country, a 10% sidecar vehicle was established in the months following the closure of the main fund. This brought the total investable capital to $330 million, compared to a $275 million raise for Fund II in 2011, which was extended by a further $110 million in 2016.

"The liquidity from multiple exits in 2018 is a big deal for the venture environment, relative to when we were meeting with our LPs in the first quarter of the year, and and there were questions about the performance of the asset class in India," says Avnish Bajaj, founder and managing director at Matrix India. "The biggest question was whether India is really going to be the next China – especially since that comparison has been overplayed by everybody in the industry and there is a level of fatigue about it."

Bajaj reckons India is now about even with China in terms of mobile data usage and metrics that illustrate developing markets' leapfrogging technology uptake such as the percentage of mobile payments in the overall economy. However, he sees India as about five years behind in mobile penetration rates and 10 years behind in consumption and GDP per capita. This view has imbued the Fund III thesis with a sense of patience about the incremental nature of disruption.

Focus verticals will include consumer themes such as retail, marketplaces, and brands, as well as technologies in the financial and healthcare industries. Enterprise support technology, including software-as-a-service businesses, is seen as a particularly strong growth area for the coming year. Deployments will range from $1-10 million and are expected to be realized at a pace of about 12 deals a year, resulting in a total portfolio of some 40 companies.

"Given how exits have trended, I think people are going to be a little more bullish on venture in India, but it will still be a cautiously optimistic environment overall because there have been so many false starts in the past," says Bajaj. "It seems like the pool of managers has been shrinking in the past few years as investment concentrates with existing GPs, and I think that is going to continue this year because the track record of new mangers hasn't been great. People have just gotten too excited too quickly. At this point, India is a 10 to 15-year story and one has to participate in a calibrated fashion."

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