Unlike the swank offices of many private equity (PE) and venture capital (VC) firms, Ventureast's office is a quaint house in Chennai, complete with a sun deck in the garden. Its previous occupant was film director Mani Ratnam. In 1997, Sarath Naru and his founding team acquired APIDC Venture Capital Fund - the erstwhile venture fund of Andhra Pradesh Industrial Development Corporation - in a privatisation exercise. Ventureast, which currently manages nearly $300 million, plans to raise $150-200 million for its technology-focused fund Ventureast Proactive, which invests in technology start-ups. It also plans to raise around $100 million next year to invest in the life sciences sector. Managing partner and founder Naru and general partner Siddhartha Das speak to T E Narasimhan and Gireesh Babu. Edited excerpts:
How do you see the investment climate and the overall market at present?
Naru: I'm bullish on the market. Foreign investors coming into funds and hedge funds are also bullish. So are entrepreneurs. Despite a lack of notable progress in the past 12 months, the Narendra Modi government is likely to achieve a lot during its tenure; it is more stable than the previous government. The Modi government has the right ideas, which could result in great progress at a macro economic level. Today, many things are possible thanks to the right kind of system and the infrastructure needed to build technology businesses, such as e-commerce, using the mobile phone to check what is happening in your farm, etc. India now has the capability to build businesses which the US did first, followed by China. The macro situation is right. From a technology perspective, this is the right time for India to build its own technology behemoths.
The quality of entrepreneurs has also improved. Increasingly, seasoned professionals are leaving their jobs to start their own business.
What are the changes you see in the investor community in the changing times, where technology and tech start-ups are growing fast?
Naru: Earlier, there was a big outcry about big idea. There were no big ideas with the right entrepreneur. VCs' preference - a combination of the right entrepreneur with big idea - never clicked. But that's changing now. We're also begun to invest in groups. In fact, about 50 per cent of our investment has been as co-investors. It minimises the risks involved while investing in early-state companies. Most PEs now prefer to do smaller rounds of investing. The VCs, too, are investing in smaller deals. The hedge funds have also started coming down to invest in Series-A.
How is the environment of fund-raising for the venture capital firms, especially Ventureast?
Naru: It is a lot better than before. Earlier, it used to be quite challenging. Typically, we have three different types of investors - Indian institutions; overseas firms such as International Fiancee Corporation; and pension funds and overseas family opportunities. When things were tough, none of the overseas institutions was willing to invest; we had to go to Indian institutions first, get their money and then raise funds from overseas investors. But things have changed now; overseas investors are more open and they are willing to come in.
Our existing investors would be coming in first in the line-up because they know the kind of value and return we give. Now, the priority has shifted to overseas investors again. The first fund was the largest; the second fund had 60 Indian investors; and third fund was a proactive fund with 93 per cent overseas investment and seven per cent domestic investors. In life sciences, 60 per cent are domestic investors. I want to first invest in those companies which will have the biggest impact and then look at the others.
What would be the focus in the upcoming tech fund?
Das: In the previous fund, we had consumer and semi-urban markets such as vocational training, telecom solutions etc. The attractive themes are mobility including enterprise solution, financial technology, payment solutions and digital transaction as the government itself is mandating more transaction through the digital mode. A lot of products and innovation are happening in tech enterprises, with cloud as enabler. We're also looking at a few opportunities in the Internet of Things (IOT) space. Our sweet spot would be $5 million in Series A; we could invest up to $10-15 million in a company. Syndication has become the rule, which we follow along with the industry.
How is the exit market now?
Das: According to a study on the past eight years of investing in the US, Israel and India, Israel has returned five times the invested capital, the US has returned 2.5 times and India has returned 0.2 times. We have a long way to go.
Exits are not happening as much as they should. But you can't make unicorn out of every company and we have to exit at the right time. Exits are happening, but not as prolific as they need to be. The reason is that we don't have a mature system of recycling investments and exits because we're still in the early process of developing that ecosystem of buyers and acquirers. However, it is a lot better than, say, 10 years ago. If you look at many of the companies that VCs invested in the late 1990s, many of them took 10-12 years from their inception to exit. The only avenue was the listed market. Today, there are more avenues. We still need more buyers from the US, Europe, Japan and from India.
How were exits for Ventureast? What was the return from Little Eye Labs, which was acquired by Facebook last year?
Naru: We had two exits - one for cash and the other one was a share swap. We are expecting a third exit soon. For the exit for cash, the internal rate of return (IRR) in dollar terms was close to 40 per cent. The next exit will also have similar IRR. A 40 per cent IRR is a quite number, given the PE benchmark is 20 per cent.
For Little Eye Labs, the IRR was as high as 1,000 per cent. In less than a year, we made 10 times the capital. However, it was a seed investment and the amount was comparatively small.