Quite a few major venture capital funds are back into the market to raise fresh funds. Accel Partners India recently announced their new India fund, Accel India IV, a $305-million fund focussed on early-stage startups. On similar lines, Kalaari Capital, an early investor in online marketplaces like Myntra and Snapdeal, is planning to raise $275 million for two new funds. Sequoia Capital raised $530 million for its fourth fund last year in May and roughly a year later, the company has raised another $210 million to add to the existing fund. The additional funds have been raised by the same Limited Partners (LPs). As per reports, Nexus Venture Partners too is in talks with LPs to raise $400 million for its next fund, which will be called the Nexus Opportunity Fund. The fund sizes of each firm have been on the rise consistently. For instance, Nexus Venture Partners, which was one of the early investors in companies like Snapdeal and MakeMyTrip, was launched in India in early 2007 with a $100 million fund. It raised a second round funding of $220 million in 2008. In 2012, it closed its third fund worth $270 million taking the total assets under management to around $600 million. Business Today's Taslima Khan caught up with Sandeep Singhal, Co-Founder, Nexus Venture Partners to help explain the uptrend.
Q. It has been reported that Nexus is planning to raise $400 million for a Nexus Opportunity Fund. Your comments?
A. I can't confirm any fund-raising because we are restricted as per guidelines to talk about fund-raising until we close the process.
Q. Do you agree that most funds are now aiming at much bigger fund sizes? What explains this trend?
A. You are right that fund sizes have increased across the board if you look at where people started 10 years ago. I think it the increase is about two to two-and-a-half times. I think what's driving the trend is the overall entrepreneurial ecosystem. One, there are more companies or opportunities out there to invest. Second, companies are scaling up much faster. Earlier, you would deploy three to five million dollars in a company and see it scale. Today, that number has increased as companies have scaled faster and have required capital faster. And so there is lot more money going into brand building and growth. The whole domestic consumption ecosystem is becoming a lot more growth-focussed. And growth orientation by default means spending money on marketing, building the team…and so that increases the burn.
Q. Is it to back your existing portfolio and get the mettle to participate in further fund-raise, or to back more new companies?
A. The way funds work is to construct a portfolio over a three- to four- year period. A normal fund will have a five-year investment cycle. Typical funds won't invest in the fifth year, but the first four years will only see new investments. In those four years, the expectation will be to do 25-30 investments. You will do six to eight investments a year, roughly. The number of investments won't really change much even in the new model. It is not like you are going to invest in 40-50 companies from a given fund, but the allocation against any one investment has increased. In fact, if you double the size of the fund and you keep the number of companies somewhat similar, you would be deploying twice the amount of money on an average per company. Earlier, assumptions were that companies would grow slower, they would require less capital and the market was supportive of that. Deep Kalra was able to build MakeMyTrip at a time when there wasn't much capital available so he had to spend less money to build that out. If today someone had to go and build a travel play of what Snapdeal did in the e-commerce space, you will have to move much faster. Global companies are coming to India sooner and competition is growing fast. So that's the big change.
Q. What is the sentiment on the LP side? What is giving them the confidence to invest back in the funds? Have they seen enough successes?
A. You have started to see the IPOs of companies but those have been few. Actually, the most important thing is that they too are seeing growth, not just from the valuation perspective, but the underlying business itself.
Q. Not much in terms of exits?
A. Obviously the exits will come over time. More importantly, LPs are seeing growth in the businesses and the economics getting better in underlying businesses. As the economy stabilises, they want to be in the right investments early on.
Q. Is the e-commerce run over for venture funds in India because most big-ticket deals are dominated by global funds like Tiger Global or DST?
A. No, I think one of the reasons why funds like Sequoia and others are raising funds is that we want to stay in our companies longer. But some of the companies have reached the kind of scale wherein the nature of investments required is quite different. Each of these companies are raising capital that would mean half of our fund. You can't bet your fund on one such company.
Q. Which are the sort of startups or sectors that you are excited now?
A. We are spending a little more time in the vertical e-commerce companies. Investment in TinyOwl (a Mumbai-based online food delivery service provider) was in that context. E-commerce enablement is also interesting. So we have Delhivery in e-commerce logistics and also companies in payments that make sense. Clearly this segment still has a lot of areas of improvement. Mobility is also an interesting bet.