Despite the current fog of uncertainty, COVID-19 has come as a blessing in disguise for a slew of startups.
“For companies that are profitable, it’s a good time to invest in product, technology and other new initiatives to differentiate the product or service and gain market share,” said Sanjeev Bikhchandani, founder and vice-chairman of Info Edge, which owns and operates India’s largest online job portal Naukri.com, and matrimonial site Jeevan Sathi.
The company that has backed Indian unicorns Zomato (food tech platform) and PolicyBazaar (online insurance aggregator) in their early days, is in talks to raise as much as Rs 750 crore ($100 million) for its debut venture capital fund that was launched earlier this year. Of the total corpus, it is planning to garner $50 million from Limited Partners (LPs) outside the company.
In January, Info Edge had first announced its plans to float a separate investment vehicle — much on the lines of corporates such as Infosys and Wipro.
Earlier, Info Edge was investing in the startup ecosystem from its balance sheet. “What started off as a small experiment on the side has over the years become a serious business,” said Bikhchandani in an interview with DealStreetAsia. “We have already started investing from the fund, Info Edge Ventures, early this year. We have closed six new investments while a couple of others are in pipeline,” he said.
Info Edge Ventures will focus on technology and technology-enabled startups as it seeks to be “the first or one of the first institutional investors into a company. We have the flexibility to come in at the idea stage or once the founders have been able to get early traction”. It plans to dole out first cheques in the range of $500,000-5 million depending on the stage of the company.
What is your take on the COVID-19 crisis and how long will the recovery process be for startups? What is the key to their survival in today’s crisis?
We are seeing promising recovery among our portfolio companies. A complete recovery will possibly take another couple of months for less, while others are already at higher than pre-COVID traffic or topline.
At Info Edge, we have seen multiple crises in our journey of more than two decades. Our advice to businesses that are not profitable and in industries that have been hit by the crisis has been to conserve cash and focus on survival first. For companies that are profitable, it’s a good time to invest in product, technology and other new initiatives to differentiate the product or service and gain market share. To all companies, we are saying that if you can raise capital, do so.
Info Edge is understood to be in the process of raising $100 million for its debut venture capital fund. What has been the progress there? What are the sectors that you plan to target and any indications on the investment amount that you plan to dole out?
We have already started investing from the fund, Info Edge Ventures, early this year. We have closed six new investments while a couple of others are in the pipeline. In terms of the investment strategy, we will continue to do what we have been doing well over the past decade or so. We would focus on technology and technology-enabled companies and our preference is to be the first or one of the first institutional investors into a company. We have the flexibility to come in at the idea stage or once the founders have been able to get early traction.
Therefore, our first cheque into the company could range anywhere from $500,000-5 million depending on the stage of the company. Our investment horizon continues to be a decade or more. The fund is architected to have a life of twelve years extendable by two years.
Given that Info Edge has already been investing in the burgeoning startup ecosystem in India, why did you think of launching a separate fund?
We have been an active early-stage investor in Indian technology startups for over a decade now. Our external investing programme is widely regarded as a success by both our shareholders and the Indian startup ecosystem. What started off as a small experiment on the side has over the years become a serious business.
Our dedicated fund, Info Edge Ventures, is a preferred route to do early-stage investing going forward for multiple reasons. It would be more entrepreneur-friendly from a regulatory, compliance and angel tax perspective. It would bring greater rigour and discipline into our investment strategy. It would enable us to supplement our capital with that of other Limited Partners if needed. It would enable us to attract and retain the best investment professionals in the business. The size of the first fund is Rs 750 crore ($100 million).
What are the key traits you look for in startups while funding them? In early-stage businesses, many investments happen on basis of speculation rather than fundamentals. How do you tackle that?
We have always believed in investing in businesses that could become sustainable over the long term. There are a couple of things that give us an early indication of such long-term success. Key things to check are whether founders are solving an unsolved problem, whether a startup team has deep customer insights, or the product is getting natural organic traction. Besides these, we also check if long-term unit economics are attractive and if a team is frugal, passionate about what they are pursuing, and has high integrity.
In the larger VC/PE investment space, what do you think will be the impact of the Indo-China standoff? Which are the sectors that will be impacted directly? What happens to the existing investments by Chinese investors? Will the current situation prompt them to scout for exit options?
It has had an impact on the early-stage and late-stage funding environment over the past couple of months for sure. However, in the mid-to-long term, the impact might not be much. In India’s early-stage ecosystem, there is a significant amount of committed capital with more than two dozens of VCs operating. And, in the late-stage ecosystem, there are deep pools of capital available globally, which would find their way into promising Indian companies. While we as a nation and as a startup ecosystem remain open for business we must all cheerfully recognize and accept that sovereign interests have to be prioritised over individual interests.
In terms of unicorns in India, we are at an interesting threshold. Even after garnering enough capital, we do not see them going public. Will 2011-22 be the year of startup listings with a slew of them chasing IPO plans now?
A history of profitability helps a lot for a company wanting to list in India. This is why several Indian startups find it difficult to list in India. Over the next couple of years, we should be able to see some of these companies becoming profitable and listing on Indian bourses.
What is your take on valuations? Has that been a tad better in the wake of COVID-19? What about edtech and healthtech sectors? Is the growth here for real and sustainable even after the impact of the pandemic fades?
Valuations and access to capital for companies that aren’t leaders have taken a hit due to the challenging economic and fundraising environment due to COVID. However, for market leaders, valuations have increased and so has access to capital. Moreover, companies in sectors that have got a strong tailwind due to COVID are finding it much easier to raise capital at desired valuations. Broadly, for both edtech and healthtech, there is a significant behavioral shift that has been accelerated by COVID. While it might fade away slightly once post COVID recovery is complete, if the product is solving a real problem, the growth will continue in the post COVID world as well.
Ever since the government announced the lockdown in March, there have been delays in due-diligence and negotiations. Have those altered your investment plans?
Yes, since in-person meetings are not possible, there have been delays. However, that has not altered our investment plans. On the contrary, we are able to meet more entrepreneurs [online] since travel and commute time is down to zero.