India's venture capital industry has progressed by bounds in the past two decades, with firms such as IDG Ventures India leading from the front.
Especially since 2014 when global capital began rushing into Indian technology startups, resulting in the emergence of nearly a dozen companies that are estimated to be worth at least $1 billion (about Rs 6,700 crore).
IDG Ventures, which began operations 10 years ago, is raising $200 million for its third fund, which will double its total assets under management to $400 million.
The company has invested in large digital marketplaces Flipkart, Quikr and Shopclues as well as in online sectoral retailers such as Firstcry, Lenskart and Zivame.
Founders Sudhir Sethi (Chairman) and TC Meenakshisundaram (or TCM, who is the Managing Director) discuss in an interview with ET how India's venture capital industry has evolved since they began investing nearly two decades ago, what challenges VC firms face in selling their investments, and IDG's plans for expansion. Edited excerpts:
Q: How has India's venture capital market evolved in the past 20 years, since you began investing?
Sethi: The market definitely has become much more scaled, hyperactive, and the quality of entrepreneurs, investors, lawyers, angels and due diligence has improved dramatically. It is a much more mature ecosystem since I started investing in 1998, when I had to interview four law firms for a deal and none of them had experience.
When we started IDG Ventures in 2006 we used to get 60 deals a quarter; now we get 600. Every time we add a professional to the team our deal flow goes up significantly. The number of venture professionals is over 2,000 in the country, while there were only 100 earlier. (The industry has seen) a tectonic shift in the last 10 years.
Q: What else has changed?
Sethi: Another aspect which will accelerate (the industry) is the government's policy initiatives, which were non-existent till three years ago. For value, job creation and productivity to go up, the government has realised that new companies need to come up. Our portfolio of 60 companies employs about 40,000 people.
Rupee capital is very strong in India now and we ourselves have $100 million from them. In the next 10 years, rupee capital could be as high as 30-40% of the total private equity and venture capital funding in the country. It also gives confidence to international investors as they see Indians back a high-risk capital asset class.
Q: Exits remain a challenge in the Indian venture capital market.
Sethi: What is changing is the timeframe to scale... and companies are taking shorter time to exit. Markets are bigger and more capital is available.
We invested in Manthan in 2007 and exited in 2014, Myntra from 2008 to 2014. But companies like Hiree and Momoe got sold in 2-3 years to Quikr and Shopclues, respectively, so we are now seeing quick flips, which never used to happen. And as against reliance on foreign buyers, we now have domestic companies like Flipkart and Freshdesk that are making acquisitions.
A secondary market for share sales also exists now, where larger player can come and buy shares. In our portfolio, 3-4 companies will go public in the next 4 years as they hit scale.
TCM: In any VC portfolio, 20-50% of the companies will have easy exit capabilities. With the others, it will be challenging as these companies remain either behind plans or are not the top two-three players in their markets.
It is important for investors and entrepreneurs to recognize the challenges, think ahead and initiate a process well in time. We have two persons in our team looking at exits.
Q: You previously worked in technology services companies. Why haven't they become more active buyers of Indian companies?
Sethi: The top software services companies including Infosys, Wipro and TCS need to acquire companies to plug holes from a service point of view or a geography point of view.
India started throwing up software product companies from 2007 in a very small way, when we backed Manthan. One of the top players met Manthan in 2012 or 2013 and offered to buy it at 1x revenues. We sold our stake in Manthan to Temasek at 5x revenues. A product company with $50 million revenue could be valued at $250 million. Is that understood by Indian IT services companies? The answer is no.
Unless IT services companies decide that a product or (software-as-a-service, or SaaS) play has to become a part of their offering, it will not happen. All companies have also built service offerings internally, and a change in that mindset will take time.