Vertex Venture Capital, Temasek's venture capital (VC) arm, says Software as a Service (SaaS) would be the next winner in India.
"We are excited about SaaS. Just as the Indian consumer is getting on the mobile internet, so is Indian SME (small and medium enterprises). There will be several successful SaaS companies in the next few years. These will use India as the initial market but quickly globalise," said Ben Mathias, managing director, Vertex India.
The VC firm had recently said it was changing focus from growth-stage companies to early funding. Formerly of New Enterprise Associates, 46-year-old Mathias has set sights on tech-led companies. "Typically, companies with a strong technology differentiation have the biggest advantage over competitors. We'll try and identify those opportunities and back them early," he said.
The company, currently operating out of a south-east Asia fund valued at $150 million, has said it will fund more early-stage firms. It has also realigned focus on Indian companies. The fund is two years old and has the legs to last another two, the company said.
Vertex's portfolio has only three Indian companies - GreenDust, FirstCry and Yatra. The VC fund made late-stage and big-ticket investments in these. While Yatra was a $23-million, Series-E investment in 2014, GreenDust got fresh capital worth $40 million from Vertex in 2012 and FirstCry raised $15 million in 2014. All were investment rounds shared with other funds.
"Earlier, our focus was not on India. Investments were strategic and often in the growth stage. Our focus has changed," said Mathias.
GreenDust has been one of its big winners in not only India but across south-east Asia. Now, the fund wants to get in on the ground floor, in several rising stars. "Early-stage investing is all about betting on an entrepreneur, their vision and a macrotrend," said Mathias. But, if the offer is right, "We will not shy away from later stage either," he added.
However, this change is not specific to Vertex. Several other international and domestic funds are looking at early-stage investments.
"This change is a good trend. It was triggered primarily because of the global acceptance of India's potential in the technology space, especially as internet penetration numbers rise. Risk mitigation is another factor at work. VCs want to spread their money out, so to increase their chances of success and minimise failures. Inflated valuations do not help them, either," said Prashant Mehra, partner, Grant Thornton, India.
Mathias said the company would start slowly and invest in two or three companies by end-FY16, to be raised to six or eight by the end of FY17. The average deal size would be $5-10 million, he added.