Business Today

Long on India

Exits dent a valuable venture and private equity business Sequoia Capital built, but the firm is unperturbed.

Josey Puliyenthuruthel        Print Edition: March 20, 2011

Late on February 14, around 11 pm, a visitor to Sequoia Capital's website was in for a bit of a shock. The names of four partners of the firm, arguably the most successful in venture investing in India, were absent from the site. The visitor, Sahad P. V., a trade journalist of 13 years, had the story he had heard from a source, confirmed: Sumir Chadha, K.P. Balaraj, Sandeep Singhal and Surendra K. Jain had quit.

VCCircle.com, the site that Sahad, who goes only by his first name, edits, broke what was then the Indian venture community's biggest story. The exit of the four senior-most executives managing $1.7-billion - one of India's biggest venture capital and private equity or VC/PE - operations, "was definitely a shocker but was done with surgical precision," says Sahad. Sequoia India immediately appointed two insiders to the posts of managing directors and said the exiting four would continue as directors on the boards of the companies they were on.

Chadha and his three colleagues are moving out to start a new fund to invest in public markets. "We will keep it small... a couple of hundred million, perhaps, and hope to close it by the end of the year," he says. "Just like we spotted high-growth companies (at Sequoia), we will invest in great listed companies and help them grow." Their new venture will be modelled on Warren Buffett's Berkshire Hathaway or San Francisco's SPO Partners & Co. - both famous for their long-term purchase of publicly listed stocks.

In the gold rush-like scramble in India's venture investing world, the Sequoia quartet - especially, Chadha and Balaraj - are seen as pioneers. In March 2000, just when the Nasdaq had peaked in the dotcom boom, the duo - with a third colleague Raj Dugar - quit Goldman Sachs jobs to set up what was India's earliest US-India investing firm. By October that year, when the Nasdaq had shed about a third since its peak in a sign that the dotcom boom was over, their venture, WestBridge Capital, had raised $140 million from the likes of Goldman Sachs, Capital Z Investments, SUN Technology, and others.

Michael Moritz
Michael Moritz, Managing Director, Sequoia Capital
That was all the good news for some time. "India went through three years of death," said Chadha, who met Balaraj, a junior-level Davis Cup player from Chennai, at Harvard Business School (class of 1997). Before those three years ended, Dugar has left WestBridge. That was also when WestBridge made some of its worst calls - Workadia, offering customisable intranets, and Intercept Consulting, an online advertising solution. "With the tech and quasi tech recession in the US, it was a very difficult environment for small tech companies in India," says Balaraj.

But WestBridge stuck it out. By 2004, it was time for the next round of fund raising for the firm. Early in 2005, WestBridge Investments II closed $200 million in funding from limited partners - as investors in VC/PE funds are known - from the first round and new backers like US university endowment funds, including Harvard and Stanford universities. With that round, Westbridge, Chadha and Balaraj came to be respected in the Indian investing fraternity. "There were three waves in venture capital (fund raisings) in India," says Chadha. "First 1994-95, second the dotcom era and the third was after Westbridge II."

The 2005 capital raising also marked a change in investment strategy of the fund. Until then, Westbridge had backed companies primarily in the software or business process outsourcing, or BPO, businesses. Those funded included ICICI Onesource (now called FirstSource); healthcare BPO service provider Integreo Inc.; marketRx, a pharmaceutical support services firm; debt collections firm Astra Business Services and the like. That industry focus expanded later to other industries such as consumer finance, insurance and drugs, with some gems of investment such as Manapuram Finance that yielded five times returns.

A year later, Chadha and Balaraj - who by then had roped in Singhal, with a background in consulting and consumer goods, and Jain, an ex-Intel engineer - made a decision that saw them move up a few more rungs in the esteem of the fraternity. In May 2005, WestBridge merged with Sequoia Capital - a Silicon Valley VC firm that had one of the most feted investee lists in the US.

Sequoia had funded Google, Apple, YouTube, Yahoo, Cisco Systems and Oracle among dozens of its investments. There have been similar mergers in the Indian VC/PE industry but none with a firm like Sequoia's.

For Sequoia, which had expanded into Israel and China earlier, WestBridge offered the perfect vehicle to leapfrog into the fast-growing VC/PE business in India. "In China and Israel, they had built from the ground up," says Balaraj. "Besides, 80 per cent of our investor worlds overlapped with common limited partners," he added. Very quickly, Sequoia India, as WestBridge was renamed, raised a $400- million fund to invest in late stage companies and listed entities. Funds raised since have taken the total fund size at Sequoia India to $1.74 billion.

All of this cash is managed from India but the Sequoia association spanning Silicon Valley to Shanghai with Tel Aviv in between boosts local smarts So, Sequoia Israel helped Global Logic, an outsourced software product development firm with a large presence in India, to expand in that country. The reverse occurred, too: Sequoia India's partners introduced Snaptu, a mobile application company from Tel Aviv, to Bharti Airtel resulting in the Israeli firm's first Indian customer. "The opportunity to talk to the right people in Bharti... would not have come about without the partners in India," says Shmil Levy, Managing Director, Sequoia Israel.

So, what does the Sequoia model risk with the four senior departures? Michael Moritz, the soft-spoken man running the worldwide firm, is unruffled. "Highperforming teams rapidly fill a void like this," the managing director for Sequoia Capital said in a phone interview. "I am sleeping very well." As if to drive home the point, Sequoia India's investment committee approved $35 million worth of investments on February 14.

Still, Moritz will have to address a gaping hole in Sequoia India. Abhay Pandey, a managing director at the firm, said in an interview in September last year that the firm was perhaps too spread out funding deals from $1 million to $75 million. "(Such) diversity means a lot of resources. A structured manufacturing deal versus a dreamy venture deal requires very different approaches," he had said.

Industry experts think Sequoia India has a challenge on its hands all right, at least in the immediate term. Sahad, who has reported extensively on Sequoia India, says: "In early stage investments, they have a good team at work but will need to beef up their growth stage and PIPE teams for sure."

PIPE refers to private investments in public equity investments. Adds the senior manager of a rival PE firm, "I can't see the current team being able to strike the big deals with large corporates. They will need to hire." If that's the only fix needed, the exits may not be more than a hiccup for the storied Sequoia.

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