India exits: Milking unicorns

Once SoftBank Vision Fund appears on a start-up’s cap table, should early-stage backers be thinking about taking some money off the table and de-risking their investments? If so, Sequoia Capital India and Lightspeed India Partners might have got the timing just right with Oyo – perhaps mindful of how other investors got burned on Snapdeal and ongoing LP concerns about unrealized exposure to Paytm.

The two venture capital firms confirmed last week that they had made partial exits from the India-based online hospitality platform, selling shares back to founder and CEO Ritesh Agarwal. He reportedly spent about $1.5 billion to increase his holding from 10% to 30% as part of a $2 billion round – comprising primary and secondary shares – that takes Oyo’s valuation to around $10 billion.

Agarwal’s motivations for pursuing the deal are of secondary importance to LPs conscious of the fact that, while India’s unicorn population has doubled in the last 18 months to about two dozen, a handful are more than a decade old and have yet to deliver exits. On top of that, new inductees to the $1 billion club have seen their valuations rise so far and so fast that it inevitably begs questions as to how long the late-stage party can last, almost regardless of impressive underlying fundamentals.

Over the 12 months ended September 2018, when Vision Fund entered through a $1 billion Series E round, Oyo’s valuation soared from $900 million to around $5 billion. The company was said to be on course to break even by the end of the year, having successfully launched in China. As of the most recent round, Oyo was present in 800 cities across 80 countries, with more than one million rooms under management. Of these, 200,000 were in India and 500,000 in China. 

It is an encouraging story for Indian start-ups. Rather than assimilating models that have worked in the US and China, in Oyo the country has exported an innovation of its own: a branded platform that combines the resources of small-scale hotel operators and leverages scale, technology, marketing and hospitality best practice to generate more business.

Lightspeed led Oyo’s first institutional round in 2014 alongside DSG Consumer Partners and then re-upped a further four times, while Sequoia has been involved since the Series A. SoftBank participated in the Series B and C rounds before Vision Fund led a $250 million Series D in September 2017. With deep-pocketed strategics arriving on the scene – Didi, Grab and Airbnb participated in the Series E – there was likely no shortage of buyers for the Sequoia and Lightspeed shares or groups willing to back Agarwal.

The situation is not unlike that facing Nexus Venture Partners in 2016. Snapdeal’s valuation was up to $6.5 billion, Ontario Teachers’ Pension Plan was circling, and yet the GP is said to have resisted calls from several LPs to make a partial exit. Twelve months later, after a proposed merger with Flipkart failed to cross the line, Snapdeal’s value cratered and the company embarked on a rebuilding program without its VC investors. Nexus once marked the position at 13.9x; its return was a fraction of that.

Two other investors, Kalaari Capital and Saama Capital, made whole or partial realizations from Snapdeal. Saama also exited One97 Communications, the parent company of Paytm, at a reported valuation of $6 billion when Alibaba Group upped its stake. While One97 is now said to be worth even more, Saama secured a 50x return. SAIF India had locked in realizations of $360 million, or 5x its invested cost, from One97 as of 12 months ago. Nevertheless, there was still some disquiet at the remaining $1.3 billion in unrealized positions across three funds.

It is very difficult to satisfy every party with an interest in the timing of an exit: fund-of-funds that want to show returns to their own investors, endowments that focus on long-term accretion, or company founders who may prioritize raising more primary capital over allowing existing backers to sell shares. But if demand from new investors is strong, VCs are unlikely to be pilloried for locking in big gains.

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• Topics
• South Asia
• Buyback
• Technology
• Consumer
• India
• Lightspeed Venture Partners
• Sequoia Capital
• Exit