Vani Kola, managing director of Kalaari Capital, expects this year to not have the same levels of funding as 2015, but believes a bigger challenge is aligning the expectations of founders with that of venture capital firms.
Kola has seen several dips and peaks in the industry since she founded Indo US Venture Partners – later to become Kalaari Capital – in 2006. Previously, Kola was a successful entrepreneur in the US, where she founded RightWorks, a platform that helped companies manage their global procurement. The business was sold in 2000. Undeterred by the dotcom bust, Kola set up her next venture, Certus Software, which specialised in financial compliance solutions. It was bought by Securac Corp in 2005.
Kola, who holds a masters in electrical engineering, wanted a change after that — she advocates doing something new, outside of her comfort zone, every decade — and came back to India to start the venture fund, which initially backed early-stage startups that could expand to the US. She changed the focus later, as it became evident that most of the growth was happening closer home. The name of the firm was changed to Kalaari, after Kalaripayattu, an ancient Indian martial art, to show deeper commitment to the country.
Ten years ago, when she raised her first fund, the environment was tough. “Investors were asking questions like, are there entrepreneurs who can build a scalable company, we don’t see how a venture will work there, what about corruption, and a host of issues. Now that some startups have proven themselves, the environment is better,” Kola said, in a chat with DEALSTREETASIA. Her first fund, NEA IndoUS Ventures, still managed to raise $190 million, exceeding the target of $150 million.
Kalaari raised its third fund last year, which closed at $290 million. It has more than $650 million in assets under management, and funds companies across several sectors that are getting disrupted, with ticket sizes between $2 million and $5 million. It has had successful exits in e-commerce fashion site Myntra — sold to Flipkart for $342 million in 2014 — Apalya Technologies and ISGN Solutions.
“This year will not see the same kind of funding as 2015, but I also think there shouldn’t be a gloom and doom prediction, as if there’s no life left. So I think funding will continue to right companies that manage their positioning and differentiation, have the right unit metrics and good teams, are mature, will get funded, I’m confident. When you have less than optimal metrics, then those companies will struggle. If you can’t show how you can be a large business, you will struggle,” Kola said.
That fits in with the trend among VCs to push their startups towards a goal of profitability so that they can go for successful initial public offerings in future. In the first three quarters of last year, when the majority of $7 billion in venture funding came sloshing into India, startups did not face much pressure on that front, and several were content at staying private in the foreseeable future to preserve valuations.
Kola will focus on startups that have the right metrics and are disrupting traditional ways of doing business. “The eco-system keeps varying. There are core problems are many levels. Mobile and smartphones are going to disrupt a lot of that. New sectors are getting created, such as payments, how people are learning, how they are buying, how services are being consumed, how we are conducting our life as an enterprise or as a consumer. Entertainment is being disrupted, how we consume content is being disrupted. So I am looking at what are the macro disruption drivers, and what are the actual value propositions that can be created. And I am excited about finding them,” Kola said.
This year, the firm has participated in three funding rounds — in Power2SME, Truebil, and RKSV. Last year, Kola brought aboard Ratan Tata, chairman emeritus of Tata Sons, as an advisor. The firm also invested in several startup in the internet and consumer space such as Grabhouse, Urban Ladder, Robosoft Technologies, Zivame and Blue Stone Jewellery and Lifestyle.
For Kola, high cash-burn, as happens in some of her portfolio companies, is not a worry. “The market is growing at a certain pace, and if you can do the unit economics, you need to invest to grow at the market pace. So that’s what they are doing. They are burning money but they are growing. If they were not growing, while spending that much, then that would be a problem.”
Kola also says that it is not necessary that such cash-burn will finally result in one winner who takes a dominant position, something that other VCs have bet their money on. “It might be 3-5 companies who manage to survive and grow in such sectors. I don’t think there will be a single player who takes it all,” Kola said.
The bigger challenge will be to work with founders who might not be used to the expectations that VCs have of them. “Entrepreneurs need to evaluate whether they really need the funding. It might not the right step for everyone. VCs will expect returns in high multiples and that’s where sometimes friction happens. But entrepreneurs need to know that when they raise money it comes with expectations,” Kola said.
She is hopeful that the action plan of Startup India, promoted by prime minister Narendra Modi, will make the eco-system stronger this year. “I believe three things will matter. It will build global investor confidence. Second, shutting down companies when they don’t work out will become easier. Third, there will be a lot of clarity and consistency on regulation and taxation.”
For the near future, Kola says she will aim to be the first to invest in strong entrepreneurs. “Many new generation companies will come up, that will continue to disrupt everything around us. And we will be there to support them.”