Emergence of rupee capital is a game changer: Sudhir Sethi, IDG Ventures

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Sudhir Sethi, Founder and Chairman, IDG Ventures India

When Indians will invest in India, international capital will come, explains IDG Ventures India founder chairman & managing director, Sudhir Sethi, in an exclusive interaction with this portal, as he highlights the emergence of ‘rupee capital’, which he terms as a game changer. “Today Indian investors account for about 5-6 per cent of total capital in the risk alternate capital area. Give it another five years I think the number will go to 10-15 per cent,” he said.

Bengaluru-based IDG Ventures India, counted as one of the most active venture capital investors in India, with around 15 investments done in last year, had recently closed its third fund at $200 million. The investment firm now has more ammo to up its game, and it has also forged an alliance with early-stage start-up accelerator Axilor Ventures to invest in local technology start-ups and ventures that are working on disruptive ideas.

Sethi speaks about the evolution of IDG Ventures India and its plans to invest in 30-40 companies from its new fund, as well as the current investment climate in India.  Edited excerpts:

How do you view the whole investment ecosystem?

If we look at the overall market and say is there enough capital to fund startups? I truly believe the answer is no. We have to start from a fundamental premises. In 2006, when I set up the fund IDG in one quarter we saw 67 companies now we see 600 a quarter. In another five years we’ll probably see 6,000 a quarter. There is an upsurge of entrepreneurs, especially young entrepreneurs starting new companies, where there are new ideas, where is a business model that is different and revenue model that is different. Broadly speaking India has matured from a deal flow point of view from the number of investors. The one thing that is happening in India which is missed out by many people, which is a game changer and that is the rupee capital.

Can you elaborate on your point about rupee capital

Rupee capital entails Indian investors, either institutional investors or family investors in the market or even ultra high networth individuals. Today Indian investors account for about 5-6 per cent of total capital in the risk alternate capital area. Give it another five years I think the number will go to 10-15 per cent. Interestingly the government is playing a very major role as a catalyst. SIDBI is now a very important catalyst, I consider SIDBI as out sovereign fund. It is creating what I call ‘venturepreneurs’, which is GPs who are getting funded with Rupee capital, which is very important in the ecosystem, it is generating large funds in the market space. I think, the emergence of SIDBI is a game changer, the emergence of investors like LIC and a few banks in the country is also a game changer. Of course there are regulatory issues, which we will sort out. However, we’ve seen movement and we’ll see more movement now.

The emergence of family offices in the country is a big game changer. We need to realise that for the last 15 years international capital has gone through a zero tax regime but Indian capital has  been taxed, it just doesn’t make sense to me. We believe that there are certain issues to be taken care of to attract, very high levels of Indian capital into both venture capital and private equity. Some of them have been taken care of and some of them will be take care of hopefully in the near future because the relevant associations are working on it.

Most important is that in the last two years, we are seeing the government being very responsive. This asset class, which is venture funding and private equity, is creating jobs and value, some of these companies will go public. In the next 15-odd years your BSE index will be at least 1/3rd filled with these companies.

When Indians invest in India, international capital will come.

How you do you IDG Ventures India has evolved over the last decade?

We are much more what I call a ‘Desi VC’ (local VC) than what I used to be or my team used to be. We have to think about what will have an impact in India. We invest in India and not outside, we have to think about how to solve problems in India. If a venture is solving a problem, a real problem, which can scale.

Can you give us an update on your third fund?

We have started investing from it, we’ve made 14 investments from it, we started deploying about a year back.

Is the fund raised?

It’s closed. The $200 million is done, we’ve hired people, we’re investing from it.

What is your deployment strategy for this latest fund?

The deployment strategy will remain broadly the same, there maybe some twists and turns. We’re looking for some innovative companies. Companies which are delivering resolution to a serious problem, which needs to be solved again and again in the market space and we’re finding those problems. I think our strategy from Fund II to Fund III is broadly the same. However, at the more technology companies, disruptive companies where the disruption is at a technology level, a business model level, at the revenue model level or a combination of all three. And, we are funding those.

What kind of LPs have backed your fund?

About 55 per cent of our fund is international and the remaining 45 per cent is domestic. This is what I meant by Indianisation. We raised closed to $100 million from Indian investors in the last two and a half years. We’ve found good response. It’s a new asset class. The enthusiasm is very solid.

With a larger fund, would you want to cut larger cheques?

About 10 per cent of out capital goes into seed, 65 per cent of it goes into Series As and Bs, and about 20-25 per cent goes into late tech. So, not much change from the last fund. What works, why change it.

How many companies are you targeting to invest in through this fund? What sectors are you looking at?

In this fund we are likely to have around 35-40 companies. We’re looking at fintech, we’re looking at health tech, SaaS and Cloud arena, especially with a focus on security. And we’re we’re looking at this whole space of internet, mobile and consumer and building strong technology-enabled brands in the country. We are looking very seriously at taking a number of our companies public in India, one of them hopefully will go public this year, I can’t name which one, but it’s a software company.

So broadly the strategy remains the same but the number of companies will increase because the size of the fund is large .

Talking about your partnership with Axilor, how does it differentiate from the seed-level funding you were doing earlier?

It actually doesn’t. Axilor is a wonderful incubator built by Kris Gopalakrishnan, to that extent we found an opportunity to work together in the market space. Success is about collaboration. Axilor has done a wonderful job in the last two batches of companies that have come out. So we thought it was a great idea to partner with them, to look at companies and investing together.

How do the next couple of years look to you?

Pardon my bias but I’m an eternal optimist and the reason why we do this is first we think it’s a great opportunity and secondly we enjoy it. We’ve expanded our team, we’re now 17 people based in Bengaluru and Delhi. We are very bullish about it, but I think challenges do remain. We would like to see more Rupee capital coming in, which is something we are all working. We would like to see a couple of more exits now as the market is maturing. Indian companies buying Indian companies is the best thing which could happen, like when Flipkart bought Myntra, Quikr bought a couple of companies. Indian companies are buying other companies for technology and that to me is very big thing.

How have the exit prospects shaped up now?

Exits have started happening in a small way in the last 2.5 years, which I never used to see happen. Unless a company had good revenue, it never used to get sold. Exits in India do take a bit longer. The expectation was that exits would happen in billions of dollars, but it doesn’t happen like that. 2007 funds have started existing the last few years. Our first exit from our 2007 happened in 2014. After that it has been regular companies every year. To exit takes a very different mind set, a  lot of hardwork. To make sure those exits happen VCs need to buckle down, work hard for that. There is excitement for investing and there has to be excitement for exiting also When we build a firm, we have to build a firm which gets  excited about exits. Has enough happened? I think not. I think the next three years will be the acid test for Indian venture industry for exits.

Also Read:

IDG Ventures India closes third fund at $200m, backs 14 companies so far from it

India: IDG Ventures India, Axilor form JV to invest in tech startups