'Our fund plan conforms to growth expectations'

Q&A: Promod Haque, Managing Partner, NVP

US-based venture capital (VC) firm Norwest Venture Partners (NVP) recently raised a $1.2-billion fund. It is one of the few large funds to be raised in recent times. Managing Partner Promod Haque says NVP took less than a month to raise the fund. The fund is almost double the size of its last fund of $650 million raised in 2006. Since then, the VC player has invested in nine companies in India. In the first half of 2009, it invested in three late-stage and secondary market deals such as the National Stock Exchange, Shriram City and OnMobile. In an interview with Shivani Shinde, Haque speaks about the focus of the fund. Excerpts:

Was it difficult to raise a $1.2-billion fund, especially when fund raising has become difficult due to the recession?
Actually, we took less than a month to raise the fund. I think, it’s all about our track record built over the years. NVP has been in existence for over 40 years. Besides, limited partners (LPs) are narrowing down the number of firms they work with and, hence, chose to invest in those who have done well. We are not the only one, NEA has raised a fund bigger than us, Khosla Ventures too closed a similar-sized fund.

What was the need to double the size of the fund?
This fund is more about scaling up as the initial foundation has already been laid. When we raised our last fund in 2006, we did not have any offices in India. I was the only one who was travelling here. We had not started doing deals in China. But in the last two years, we have expanded well. We hired people in India, we have two offices here — one each in Mumbai and Bangalore. We have done three-four deals in China. We started to expand internationally, including entering countries such as Israel.

In addition, we are also doing late-stage investment along with early-stage ones. So we need more funds.

Does this mean you will focus on new verticals?
Yes, we have added a new vertical — healthcare. We did not focus on healthcare over the last 10 years. But there are two important developments taking place. One, the health reform initiative taken up by the US and two, in countries such as India and China, the middle class is growing and getting prosperous. This is going to result in an increased focus on healthcare. So that makes it an opportunity. We will also add new team members, but it will be done initially in the US.

So will regions like India get a bigger chunk of investments?
Yes, that’s why we are scaling up. Now we have better geographical spread and a larger segment. But giving a break-up of how much will be invested in India is difficult for now.

Post the slowdown, is there any significant change in the PE/VC standpoint?
There are obviously some changes. Going forward, the industry will become smaller as LPs have become more cautious. Since their asset base has shrunk, therefore the allocation on percentage basis has also gone down. It stands to reason that going forward there will be fewer funds, and funds lacking a good track record will find it difficult to raise money.

In our case, what appeals to our investors is that we have three axis of diversification. We are in four geographies (the US, India, China and Israel). We invest across stages (early, mid and growth) and across sectors. But again, the sector focus is different in different countries. In India, there are sectors such as infrastructure, which is not available in the US or for that matter in China. I think there is still enough opportunity for investment in the information technology/ information technology-enabled service (IT/ITeS) sector. So such technology as cloud computing and software-as-a-service bring in a huge discontinuity and change in the sector and that is an opportunity.

What about the secondary market? NVP has recently started investing in this segment as well? What about valuations?
Well, this is more of an opportunistic game. We timed our investments well, and the pricing was good. Will we do these deals now? Probably not. The bulk of our strategy will be growth-stage funding and focus on growth equity. Valuations are always a challenge, especially in private firms. The problem is that in a listed firm, there is a prevailing price and you also pay that. But in unlisted firms, especially in the mid-stage, it is hard. As expectations of the promoter is high. That’s where you see a lot of disconnect. In late stage, it is not much of an issue as earnings before interest, taxes, depreciation and amortisation margins and price-earning multiples are already in place.