Seedfund has created a unique model for early-stage investment that is different from that in the Silicon Valley.
Seedfund, a Mumbai-based early-stage fund which has successfully raised and deployed two funds in 35 companies, is set to raise its third fund - whose size is yet to be decided - towards the end of this year.
It has already deployed close to 80 per cent of the second fund of $54 million it raised in 2011. Its first fund of $14 million, raised in 2006, has already returned money to its investors. Seedfund, which has invested in start-ups such as Redbus, CarWale and MyDentist, follows a unique early-stage investment strategy.
Seedfund's founders Pravin Gandhi and Mahesh Murthy had been investing in Indian start-ups long before the dot-com bust. The years of experience led to found SeedFund in 2006. SeedFund has its own investment thesis: "At the time of setting up the fund, we realised the investment thesis in India has to be different. We wanted to create an original India-specific early-stage fund. We did not believe in the spray-and-pray investment model," says Murthy. The founders believe in the quintessential Indian concept of "jugaad" or frugality and call themselves the original desi fund.
During the dotcom days, there was too much of money chasing ideas, which led to a valuation bubble, says Gandhi. This impacted Gandhi, too, who along with some others had set up Infinity Ventures. "I was investing as early as 1992-94. By 1996-96, many of my contemporaries who were doing angel funding. So a couple of us came together and started Infinity Ventures." Bharati Jacob, Seedfund's third partner, was then working with Infinity Ventures.
For Gandhi, Murthy and Jacob, the first fund from Seedfund was an experiment. They were able to get investments from Google, Sierra Ventures, Motorola, Mayfield Fund and Reliance Venture Asset Management. Seedfund is one of the few funds which has equal participation of women partners. The fund's focus was based on the learning that the three garnered since their earlier days.
The first rule was to invest small. The fund's size was also small at $14 million. "We realised that you can build a start-up and break even with less than $1 million (then around Rs 4 crore). Rather, we insist every company in our portfolio should attempt to break even within 12-24 months," says Gandhi.
Gandhi and Murthy also believe that if investing early, they have to be near the company. "We wanted to invest in 10-12 companies. With each of us managing five to six companies. While both of us were based out of Mumbai, we also felt that Bangalore is another area that we cannot miss out. But we wanted to have a direct presence and Bharati pitched in," says Gandhi.
For exits, they realised one needs to be a strategic investor to get good value. So Seedfund focused on companies that would be leaders in their segment. "Whether it was Redbus, CarWale or some of our other investments, they have created a segment," notes Gandhi.
Murthy believes the need to spot pioneers in their field is crucial for the success and their eventual exit. "The emerging world is very different. A decade or two ago, the No. 1 company in its field would have a market share of 20-25 per cent. Today's new leaders such as Google, Facebook, Tesla have 85 per cent market share. The world is becoming unfair for No. 2 or No. 3 players. Hence, for us, it is always about creating the dominant player in a sector, like RedBus, CarWale or MyDentist."
Creating pioneers meant Seedfund had to keep away from companies that are look-alike of another bigger player in the market.
The strategy seems to have worked. The first fund made at least 3-4x for investors. CarWale and Redbus were two big exits, giving 9x and 20x returns, respectively.
The second fund raised in 2010 incorporated new focus based on learnings from the earlier fund. The first shift was the bigger size of the fund - $54 million. Both Gandhi and Murthy realised although investing small was safe, there were limitations to follow-on investing. Unlike the first fund, which had strategic investors, second fund went to financial investors such as endowment funds, pension funds.
"Since we had little money back then, we took positions in companies which got diluted as they went in for the second round of funding. We then didn't have the dry powder to back our winners. So we increased the fund size for the second around. This will allow us to stay invested in a firm for longer, and participate in the full upside," Murthy points out.
To spot talent and work through the business plan, seedfarm the incubator was launched. In this, they invest around Rs 1 crore to 1.5 crore and let the company try its idea. If this works, then Seedfund does a follow-on investment of $2 million. Some of the companies that have come out of this successfully include MyDentist.
Seedfund does not encourage its investee firms to have large marketing budgets. Plus, Seedfund members actually sit with start-ups and work on their plans and like to have them in the same city. Mahesh believes the biggest differentiating factor of Seedfund is being frugal and being outspoken.
Murthy adds, "CarWale founders came to us one day and said they wanted an X amount for marketing as they were not growing as fast as expected. Now we have a natural anathema for spending on advertising. So we sat down and started to work on how we can make this website useful for buyers so it grows naturally, not artificially."
They soon realised that although CarWale started as just a listing service, it had created data of used cars and pricing. The team worked to make this accessible with India's first used-car pricing guide - and within six months, the traffic jumped six times, without any expensive advertising. Murthy points out that none of the Seedfund firms has large advertising budgets.
Perhaps this is why Seedfund has stayed away from investing in e-commerce firms. Although Gandhi defends it, saying it has invested in DonebyNone. "The e-commerce game has become obvious to everybody that it needs large capital. It's unlike the US market where niche internet players can make money even with small capital. We also did e-commerce, but realised soon that it takes a lot more money," says Gandhi.
Murthy feels it's important how people perceive the company. "We have done about 35 investments so far, of which five or six have failed. When I look at what we have done, rather than successful companies, we have helped create successful entrepreneurs. Whether it is Mohit Dubey of Carwale, Phani (Phanindra Sama) of Redbus or Vikram (Vora) of MyDentist, these entrepreneurs will inspire others long after they may have exited their businesses."
For Gandhi, large exits in India are few and far between. "India is a long-term story. Many people have returned from the Valley. They have worked with tech firms like Google, Yahoo, Microsoft and have deeper insights into what can be the next idea."