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Half of our VC exits came via domestic M&As, 40% of LP money is local : IDG’s Sethi

VC Circle
April 4, 2018

Sudhir Sethi

Follow-on investments outpaced new deals for most venture capital firms in 2017. IDG Ventures India was no exception. And in 2018, its follow-on investments will keep pouring as many of the firms it invested in are now growing, said founder, chairman and managing director Sudhir Sethi, in an interview with VCCircle. However, he added, the follow-on focus will not come at the cost of striking new deals. Sethi also talked about expectations from the government, attractive sectors and valuations, among other things. Excerpts:

IDG Ventures India was among the top three investors last year in the venture capital space. In terms of new deals, it was the second-most active in the space. What drove investments last year for the venture capital firm and do you expect to maintain the pace this year as well?

The quality of the deal flow, entrepreneurs and sectors are crucial for IDG’s investment decisions, and we find them to be positively trending. We don’t see any shortage of deals at any stage for us now. New sectors keep coming up, so last year we added fin-tech, which was a major thrust and, to that extent, we saw many companies there. IDG has invested in many companies in the fin-tech space now.

IDG Ventures India made the final close for fund-raising for its third fund last year. Give us a sense of the fund-raising climate and the limited partners’ view on India?

I think in the last three years, the sentiment on India has shot up. All those sitting on the fence earlier are looking at India seriously or actually putting money into funds and investing directly in India. There is no question that the sentiment has become very positive and more investors are looking at it.

What could be done by the government to shore up more rupee capital?

I must say that the government’s Sidbi Fund of Funds, under Small Industries Development Bank of India (Sidbi), has kick-started a great flow of investments. Sidbi is one of our domestic limited partners and we are impressed by their professionalism. I would recommend this initiative of Sidbi be rebranded as the ‘Startup Fund of Funds’. This will gain significant recognition on a global level and benefit general partners (GPs)/fund managers here. Hence, GPs/fund managers should be enabled to say that we have a sovereign startup fund backing us. That would be like Singapore’s
sovereign fund, Temasek Holdings, or Abu Dhabi’s sovereign wealth fund, Abu Dhabi Investment Authority, coming in, and giving tremendous confidence to international investors as well.

IDG Ventures India is attracting more rupee capital than other venture capital firms operating within India. How is this turning out for your firm?

I think we are a very local firm. We have always tried to build expertise on India. If we are not an expert on India then why would people invest in us? Fundamentally, we are an India expert firm. How have we achieved this over the last many years? First and foremost, 75% of the companies we have invested in are solving problems in India using technology. Second, of all the 14 exits, half of them have been through selling to Indian buyers. This is very unique. Third is that 40% of the capital is from India, from industrial houses. Effectively, we are a very local team. That is our expertise. We have built it through exits, investments and fund-raising.

In 2017, follow-on investments outpaced new deals for most venture capital firms, including IDG Venture Partners. What are the factors behind this?

The engine of follow-on investments will always hum because many companies we have invested in are now growing. It could go up this year as well. Follow-ons will always be a focus but not at the cost of striking new deals. In 2017, follow-on rounds in 17 of our companies were completed. In 2018, 30 firms in IDG’s portfolio will raise follow-on capital.

We are seeing fewer Series A deals, while the number of mid-stage to end-stage deals seems to be stabilising. Is this the new normal for the Indian startup ecosystem?

These are nothing but cycles. I won’t read too much into it. It only indicates that the angel investment and startup activity had taken a hit one to two years ago, which has resulted in fewer Series A deals now. However, the startup activity has picked up and we will see more Series A deals in the coming year. One has to be on a constant lookout for promising teams working on big ideas. India is about innovation and we see that increasing every day.

The Budget speech highlighted venture capital and alternative investment funds, and the stakeholders were quite upbeat. The Budget promised some innovative measures for the industry. What actions should the government immediately take?

The Budget has made a promise of good things to come. But I think there are certain things the government needs to look at urgently. First, the government must help shore up rupee capital in venture funds. Currently, the total quantum of rupee money coming into venture-capital- funded and private-equity- funded companies in India, compared with the dollar money, is very small. It is certainly anywhere between 5% and 10%. The message that comes is if Indians are not willing to put money in India, why would international capital be willing to invest in the country?\

I also don’t see the logic of the government authorising what a startup should be, to be entitled to benefits. It goes against their philosophy of minimum government but maximum governance. I think it should be a free market.

There is also a host of niggling issues, such as the angel tax, which has taken more than a year to just address it. I think we need to speed up to resolve these niggling issues. 

Which sectors are the most attractive at the moment?

I think the areas where we are increasingly finding good opportunities are robotics and innovation in health-tech. Software is increasingly attracting more capital from IDG since there have been some good exits there. Besides, there is the whole area of technology use in agriculture and fin-tech spaces.

As a venture capital firm, we will be open to innovation in any sector but we are not going to touch anything that is heavily regulated at the broader level. 

Most venture capital firms this year seem bullish on health-tech, and IDG has been quite active in this segment. What is exciting about this space now?

I think we have gone through various phases. We started with medical devices, then we got into consumer health-tech and then we got into multi-channel health-tech, if I might say so. I don’t see med-tech (medical devices) as an area that will attract many investments in the country because of lack of knowledge about it. Wherever there is a consumer angle and where the cash flow is scalable, the investors in the health-tech space will succeed. The business-to-business market has limited scope in the short to medium term.
We have been hearing a lot of fin-tech in the past years. Has this space been exhausted by investors or are there still some segments yet to be tapped?
One major segment within fin-tech we have looked at is lending and I think there is more scope in it. IDG has invested in Vayana Networks and EarlySalary in that space. In the area of SME (small and medium enterprise) credit ratings, there is CreditMantri, and the entire segment of how to get insurance products online, where IDG has bet on PolicyBazaar. There are certainly more opportunities. Many of these segments will continue to attract investor interest. Our focus will be on those where there is little regulatory concern.

What is your view of the rising dry powder in the country? And what is your take on valuations?

I think the country can absorb more capital. I truly believe that mechanisms should be built to increase the number of domestic funds to address India problems. And we are fairly happy with the fact that valuations are where they are. Entry valuations are not shooting up.