Exclusive: Exfinity may invest in B2C cos from planned $200m offshore fund

Following the closure of its $45 million second fund, early stage venture capital firm Exfinity Venture Partners is preparing to float an offshore fund of around $150-200 million. This move to float a dollar fund will not only allow the Bengaluru-based investment firm to back more companies based abroad, but also the provide the leverage to invest in consumer technology firms. At present through its two existing firms the Exfinity is focused on enterprise technology firms in the B2B space. In an interview to DEALSTREETASIA, Shailesh Ghorpade, Managing Partner & CIO of Exfinity Ventures talks about the deployment of their $45 million and plans for the new offshore fund. Edited excerpts:

How is the deployment of your second fund coming along?

We’ve recently closed a Rs 300 crore fund. We’re focussed on the B2B enterprise tech space, primarily pre-seise A and Series A and our typical investment size is $1-2 million. We are there for looking looking for around 16-18 investments from this fund. Ideally we want to deploy half of it in fresh investments and the other half for follow on rounds based on the perforce of those companies.

How may investments have you already made from this fund?

We have made four investments so far from this fund and we will be announcing another couple of investments shortly. We would ideally like to make 18-odd investments from this fund.

With a larger fund, would you also want to go beyond the Series A level?

Typically when you look at B2B businesses in India, Series A is roughly in the region of $5-7 million, which is a fairly large ticket size. And we would not do the entire $5 million also. It would be too large for us to bite. So we’ll probably work with other funds in such cases.

Is there a change in investment strategy in the second fund when compared to the first?

Essentially the strategy is the same as what we have always believed in. When we started in 2013-14 we were the only fund in the enterprise tech space. When everyone was going after consumer tech, we continued to go after enterprise tech. There are funds that invest in enterprise tech but that is a part of a larger strategy, we’re probably the only one solely focussed on enterprise tech. The areas that particularly interest us are artificial intelligence, Internet of Things, Big Data Analytics, Cloud Computing, mobility, cyber security and ideas which solve India’s aesthetics.

India is not the leader in sectors like artificial intelligence or IoT, how have you seen these areas evolve in the last few years?

We also look at the Indo-US corridor because what happened particularly in the enterprise tech space is that, unlike consumer tech, the markets are outside India. Because while you can build products in India; which is what most companies do, they have product development and engineering teams in India; Indian markets serve mostly as a market for testing out products, to scale. However, the the real value can be unlocked when you go overseas. Indian enterprises don’t value IP, and payments is a problem. Therefore, we look at companies which are in what we call the “Indo-US Corridor”. We have made four investments in the AI space and they have all been in this corridor, where they probably have marketing offices in the US and development and engineering teams in Indian.

Can you elaborate on your plans for this offshore fund?

We are planning to raise an offshore fund between $150-200 million. When you’re an AIF fund, which is registered with SEBI in India then there is a restriction of not being allowed to invest more than 25 per cent of our investible corpus in overseas companies. A lot of enterprise tech companies are incorporated overseas for the simple reasons of market access, secondly better IP protection and third better access to the ecosystem and fourth better exits. With the 25 per cent investment restriction really shackles us in that sense from investing such companies.

We thought that we should look at a fund which doesn’t really constrain us from this and that’s how we looked at the offshore fund, because we believe that there’s enough opportunities there. If we play this corridor well then apart from investing in enterprise tech, the offshore fund will also probably do  impact investments in India. Not meaning social impact but impacting systemic issues in India, which could be logistics, supply chain, governance, it could also be niche B2C space. Those are the kind of things which we have not done in Fund I and II because those are focussed  only on enterprise tech. We might actually do some consumer tech investments through the new offshore fund.

What is your fund raising strategy  for this new fund? What kind of LPs are you in talks with for this fund?

For the dollar funds we will be looking at primarily institutions to come in, these would be institutions based primarily overseas, it could be pension funds, endowments, foundations, family offices etc. Most of our existing LPs would not be eligible because its a dollar fund.

Have you already started the process of raising this new fund?

We are in the process of registering the fund, which would take another quarter or so and after that we should be starting to talk to investors. It’s a long process to raise fund, we expect to take about 18 months or so to raise the capital.

How will you differentiate the which investments to make from which fund?

The domestic fund has a particular mandate because of the size of the fund, we primarily do Series A investments, frontier tech and we do only B2B. As I said only 25 per cent of the fund can be invested overseas, so for the first two funds the companies would largely be based out of India. Overseas fund we will have a different fund manager looking at it and it would focus largely on US companies.  Also it will have primary focus on enterprise tech and we are putting out some money for consumer tech also. We may also do some Series B investments in the new fund, which we don’t do in our existing funds.

How do you view this investment ecosystem after the boom periods of 2014-15 then a relatively slower time in 2016?

2016 was lull year in terms if the kind of euphoria that we witnessed in 2015. But 2017 has started on a good note. We have seen deals in the offing deals which have been concluded, maybe there is some dip in valuations particularly in the B2C space and the fact of the matter is that funding is coming back and that is a good sign. That will come because there are a lot of funds sitting on dry powder and maybe 2016 was a tear of reflection and 2017 has begun on a good note and we should see fairly good deal flow and activity in 2017.

Since you have been an focussed investor on B2B businesses, do you now see more investor interest in this space?

Enterprise tech space was never so hyped. A few things distinguish enterprise tech, first that any enterprise tech model is a very capital efficient model, typically on an average $20-25 million before they make an exit. Secondly companies are focussed on building a product, creating value and focusing on cash flows. It’s never about throwing money and buying market share. Third thing its never a winner-take-all market. You can approach the same problem and solve the problem in different ways. You will still find customers if you add value and continue to be differentiated. The fourth, which is most important is that exits in enterprise tech happen. They are not as hyped as the B2C segment but a lot of companies get acquired for example Google buys tens of companies every year. If you look at the exit multiple to invested capital is it much higher in enterprise tech space.

How do you seeing the whole ecosystem shaping up in 2017?

The ecosystem, since the time we started, has developed quite a bit.There is far more collaboration that is happening between funds, funds and accelerators and that is constantly increasing. Where there is still a gap is in early stage funding, particularly angel funding, where we don’t have as many angels as the US for instance. That is also changing. The ecosystem is building up pretty well. Venture capital funds have a particular mind set, they have realised the risks they have stayed back but  a lot of capital which came in like hedge funds etc have left, it has caused a blip in the valuations and all that but in the long term I think it’s fairly good. We are fairly confident of the market, there are enough opportunities, there is enough innovation happening, the quality of entrepreneurs has gone up significantly, the kind of pitches that they make to us are more refined than what they used to make a couple of years ago.

How does 2017 look for Exfinity?

We have raised this Rs 300 crore fund and we are in early stages of deployment and we are fairly active in terms of making investments. We typically do 6-8 investments per year, we look at quite a few companies. The pipeline looks good the deal flow is good and entreprenuers are far more focussed on creating value, creating cash flows and valuing capital.

Are there any other regions that you might be interested in investing apart from the Indo-US corridor?

US is the primary region that we look at, apart from US we see some activity happening in Singapore. We have looked at companies in Singapore, though we haven’t done anything but this is one area where we believe there is an ecosystem building up and happening. There are companies that are coming out of Israel are also interesting. However, the key here is that we have to have lead investors who belong to that geography and actually work with those companies. With us being in India, and we’re going to get an office in US soon, but with countries like Singapore or Israel you need to monitor companies very closely and unless you really have a presence you are compromised. Therefore, we would rather work with a lead investor that is from that region and funds those companies.

We are examining a couple of companies and we find that the propositions are interesting.

Also Read:

India: VC firm Exfinity Venture plans to raise $200m offshore fund

India: Exfinity closes second fund at $45m; to focus on AI, IoT