When Helion Venture Partners entered India, the country was perceived as a high growth economy. By now, growth has tapered and venture capitalists are running out of time to find great exits. The $605 mn India focused fund has made nearly 50 investments in the country so far and has had two exits (redBus & MakeMyTrip). Other funds that came in at the same time, are also starting to worry about exits.
To top it all, there is talk of venture capitalists having trouble deploying capital. But is there a way out? “There are at least VC funded 20 IPO ready businesses in India,” says Kanwaljit Singh, Senior Managing Director at Helion Advisors. “In the next two years, as the environment improves, you will see exits,” he said in an interview with NextBigWhat. Singh, a strong believer in the India story says that while there is work to be done on the exit front, the consumption story in India is still very strong. Edited Excerpts.
What was Helion’s investment thesis when you & other funds started off?
Helion came into the picture around 2005-06 where there were more Indian funds being born for India. We also saw a lot of global funds come to India at the time. When the 2008 downturn came, domestic funds continued to stay and some global firms pulled out or reduced their focus.
When we started, our thesis was that there is a resurgence of entrepreneurship in the Indian market. We also realised that while there was entrepreneurial activity, the support system was very fragile, unlike in the developed markets.
We said we will focus on technology in a broad sense. India was still not an innovation hub at the time. We wanted to do classic silicon valley style investing. Help businesses over years in the technology space. In 2008, we added another sector focus. We said we will invest in the Indian consumption story which may or may not leverage technology.
Does valley style investment work in India?
What I meant was that we would come in at the early stage and take the execution risk. That was the reference to the valley style. Typically Silicon Valley invests far more on innovation and new product ideas that are solving new problems. There, If you can get 3-4 successful hits that give you 50x or 100x, it works. In India, we invest more into services and applications. So it is rare to see that kind of an exit. But here you can have more successful outcomes out of every 10 deals you invest in. The way we see it, 30-35 % of companies will be very successful in India. Another 40% will be moderately successful with some returns. The number of failures should not be more than 20-25%.
Do Indian startups scale much slower?
Fundamentally, the answer is yes. Indian market is still in a developing mode with more environmental complexities. For instance, logistics is still developing while it is taken for granted in the US. Secondly, there are lesser product/ innovation businesses where you spend some time developing the product and then go to the market to suddenly become a more successful outcome. In India, we have more services and applications businesses. Typically here, 5-7 years is a fairly reasonable time to reach a certain level of maturity.
What are the risks for VCs in India?
Risks are around scalability and finding exits. While a 10 year investment horizon sounds long enough, you are not investing on day one. Say in a fund, you do 20-25 investments and you do 6-7 a year, you are still talking about 3-4 years to complete the investment cycle. In the year 3 & year 4 investment we have done, we have only 6 more years left to exit. That puts pressure in an environment which is still evolving. Then you start optimizing on the point of entry. This is why we can’t take very early risks and we often get blamed for being risk averse. Also, the phenomena of one investor buying out another investor is still very new in India. That has started happening but it is still early.
What are the challenges on the exit front?
Clearly, the size and scale you need to reach in a startup to exit. Say you are talking about $5- $10 mn investment. To give you a 4x- 5x return, you are talking about Rs 100 cr only for the investor. Typically, investors are minority investors. So the exit is about Rs 250- Rs 500 cr to even justify returns for the investor. For that, you need the company to be at a certain size of performance. That becomes a matter of time and execution. Time is probably the most critical aspect. That is the broader exit related aspect that one is trying to understand and address.
There are environmental factors– like the IPO markets, uncertainty, elections, corruption etc. There are at least 20 VC funded companies that are potential IPO candidates in the near future. The ground swell is building up but the environment has to be conducive. In the next two years, you will see exits. The roadblock in the last year has been the stock markets. Now with the rupee being where it is, it adds to the whole situation. Fundamentally, nothing is wrong. Over the last decade, there have been dozens of companies that have been created and have become of meaningful sizes. The proof for the investor model is lagging behind the business building effort because of the timing and environment.
How long before the IPO-ready companies go for an IPO?
If the market is so uncertain, it is very difficult to predict when the switch is going to happen. Everyone is saying “let the elections happen.” So I can give you the party line (laughs). I’m hoping that we have some form of stability of the government and it could stabilize the stock market. The response has been very positive for JustDial and others. There is demand in the market for high quality assets. The consumption story has not gone even if the overall economy has come down to 5%. It is just that it is all getting choked up at the exit.
There is talk that Helion wants to return money to LPs. Are you having difficulty deploying capital?
Not at all. It is absolutely untrue. We have already done 5 investments this year. We are actively looking at another 6 serious evaluations. So there is no logic to even suggest that we need to return money. The investing activity is robust.
Certainly, one of the things we are working towards is to generate more exits. But the two are not related. There is no concern in our mind that the capital can’t be productive.
What was the thought process behind merging Hoopos & Babyoye?
This is not a first time phenomena in e-commerce. Every industry has seen this. E-commerce has seen it in a very tight time frame. It has happened in other categories like BPO, Mobile VAS etc. The discussion began because of the synergies in businesses and the thesis around how much money do you need to take a business to completion.
It also protects your investment?
Protecting investment from a strategic sense than from a distress sense. In this case, by combining the two, we could create a better outcome. It can happen for both reasons.