Mumbai-based venture capital firm Lightbox Ventures is pacing out its investments with only two spots left in its $100 million-fund portfolio. With a comfortable over two years to deploy the fund, the tech-focussed fund, which takes around 4-5 months to decide on an investment, is focussing most of its energy into strengthening its existing portfolio.
In April 2014, the firm launched two funds to invest in start-ups in the consumer technology space in India. Lightbox Fund I acquired equity stakes in GreenDust, ZoomIn, MapmyIndia, Paymate, FutureBazaar and Kotak Solar. Lightbox Fund II was closed at $100 million in late 2014, as a fund for a concentrated investment portfolio of 7-8 companies with an investment horizon of 7–8 years.
Since the launch of Fund II, it has already invested in around five companies including Embibe, tech-enabled fast food chain Faasos, furniture subscription business Furlenco, automobile marketplace Droom, and online jeweller Melorra.
In a freewheeling chat with DEALSTREETASIA, Sid Talwar, Partner at Lightbox Venture, talks about the firm’s investment strategy and the overall funding environment.
How do you view the current funding environment?
There is more money in India today than there has ever been. Over the last one year, the valuations went very high and people are re-looking at how to value companies and that’s causing a little bit of pause when evaluating a company. The other thing that is happening is that although there are billions of dollars, most funds that are based in India are doing rounds that are up to Series B.
Our problem isn’t that there is not enough money for A and B rounds, our problem is that we don’t have a venture ecosystem that can lead a Series C or D round.
Is it a good time for investors like you, as you are now getting companies that are more reasonably valued?
When you’re determining value in an early stage company, it’s as much of an art as it is a science. You have to look at so many different elements, how much equity you want to own in a company, how much equity will the owners have how much money are you putting in.
Also, how have other companies that are comparable, being evaluated outside. I think to a large extent, it not about how these companies are going to get valued, it’s about what kind of companies are going to get funded.
How do you view 2016-17 for investments?
I think that it’s going to be tougher for startups to pitch their plans to venture capitals, which is good because it should be tough. We should have smart guys, with smart companies coming in the venture ecosystem. I don’t think it will be as frivolous as 2015. Having said that, I don’t think that you will see a massive drop in the quantum of funding.
Good companies are always going to be able to raise money. The environment in India hasn’t changed, the economy hasn’t changed, the consumer base hasn’t changed, the needs of the consumers hasn’t changed. It’s just that the funding environment has changed.
Has Lightbox’s approach towards investment changed?
Not at all. We are a very concentrated fund, we will only put money in seven companies of the $100 million that we have. We spend on an average 4-5 months on evaluating any company to make an investment. We are sticklers for execution and unit economics. The average company in our portfolio have 35 per cent gross margins.
We concentrate on building a portfolio where founders are very execution led. And, because we put money in only a few companies, we have financial leverage, we can support these companies over time as well. Also, we have bandwidth to give them operational support. When we put money in a company, our future is stuck to the future of that company.
Our philosophy hasn’t changed, we have dry powder, we will invest. We are not in any rush to invest but that’s not because of the environment, but only because we only have two investments left and we are just in the beginning of our funding cycle. There is no stopping us.
There are only two spots left of your $100 million, do you think those will be exhausted this year itself?
We take a very long time to take a decision. We are talking to companies all the time. New companies are always a very secondary part of our priority, our present companies are always a larger priority for us. Are they well funded? Are they growing? Are the founders well supported? Those are much more important for us. We are always continuously on the lookout for good companies, but 80 per cent of our life revolves around our portfolio.
You recently invested $5 million seed funding in Melorra, what do you look at while investing in a company?
Melorra was interesting. It was the first time that we invested in a business plan. We don’t see it as an initial funding. We see it as a fact, that if we’re in, we’re in all the way. We don’t see the point of giving someone $250,000. That might mean we might not give them money later. We would rather give them the money they need to prove their case, which means we need to find founders that can manage that.
So, what we look for is the founder or founding team which has sufficient amount of an understanding of the space that we are getting into.
Then there is the market itself, if it excites us. We look for large markets that have significant bearing in India. Also, an understanding from a model standpoint how we will make a difference in that space in India. And finally, we look at how they use technology, because we are a technology-driven fund. So, how is technology effectively going to be used to scale business. In some businesses they don’t need technology, they have their own distribution, we will probably not invest in that business.
Are there any other sectors that you think have not been tapped yet or you would be interested in?
What I liked about Droom was that they were moving heavily classified model in a sector to a more transactional model. I think most classifieds will have to get transactional for them evolve. That excites me.
Market places excite me. Droom is the second marketplace that we invested in after ShopClues. I would be interested to see how verticals would be able to create market places. Also, which sectors marketplaces would work and in which they would not.
We have made it very clear in our funding that in furniture and food and jewellery, we believe brands made more sense than market places did.
Would you be interested in investing non-tech companies?
We have a three-point investment focus. We will investment only in India and in companies that are trying to solve something specifically for India. We will invest in companies that are using technology to scale, and we will invest early. And early for us, is anywhere between a business plan to a Series B.
Would you look to make smaller investments in more companies to mitigate your risk?
We mitigate risk differently, not by decreasing the amount, or getting another investor in that round. We mitigate risk by thoroughly evaluating both the entrepreneur and the business before we get in, as well as figuring out if we can help support the company. We would much rather invest in a company that we can support that might not grow as large as a company that we cannot support.
The amount of money that we invest is based on how much money we believe they need to derisk their business.
Is there a minimum amount that you invest?
In the last five deals, our average investment has been $7 million. The lowest that we have done was the first from the fund, when we did it in collaboration with Kalari, when we invested in Embibe, they are in the test prep space. But, that’s an unusual case, our fund hadn’t closed at the time. Since our fund has closed, we have done Furlenco, where we invested $6 million, we put over $10 million in Fassos. We have done, Droom and Melorra.
We do like to do larger cheque sizes, but it’s based on the amount of money that we believe that will work for them.
Can we expect more investments from you this year?
We don’t look at it like that. If we find something we like, 100% we will invest in that, but right now there is nothing that is eminent. But, if we don’t then we might go through 2016 only investing in companies that we have invested in the past.
Is there any plan for a another fund?
Our priority right now is to make sure that the companies that we have grow. Although technically you can say we only have two companies left, but honestly we also have two years to put in money into those companies. It was purely co-incidental that we put n money in so many companies so quickly. It doesn’t necessarily mean that we will raise another fund immediately.
When you decide to do fund raising, as a fund it is a very distractive process, as it is for any entrepreneur. As much as we want, the environment right now directly effects everyone of our companies including Droom. We want to make sure, that all our companies are secure both from a financial standpoint as well as an execution standpoint. And if we spend our energy doing that, it will give us that much more of an advantage, when we decide finally to raise money. We have closed closed Fund II in the end of 2014, its barely been a year and a half, so we are in no rush to raise more money right now.
What is your exit strategy like?
The companies from our second fund are too young, we have a 10-12 year lifecycle for them. But, our secondary portfolio, which is Fund I, we exited MapMyIndia recently, we sold that to Flipkart. The time line for exit in these companies would be shorter than Fund II. We are open to when people show interest in those companies, but we aren’t on the outlook to exit any company.
The Indian environment for acquisitions is a lot larger than what it was 4-5 years ago. Foreign companies like Amazon and Uber have shown that they will buy companies in India. Also, the Flipkarts, Snapdeals and Olas of India have bought companies. You also have Indian conglomerates buying stake, Tatas just bought stake in Caratlane. Godrej got into the game.