With the growth of startups that are disrupting several business areas from finance and banking to hailing cabs and booking movies, opportunities to enter early and make big returns have also gone up. Venture capital firms are also getting into the game, after realising that the market isn’t big enough for later-stage investments.
Manish Kheterpal, managing partner of private equity firm WaterBridge Ventures, is raising smaller-sized funds to invest in early stage startups. “There is definitely momentum in this space. There are VCs that are very happy to do half a million dollars round all the way to $30 million. VCs can hire a few more people and invest at very early stage. Even if they hit the jackpot in 1 out of 10 deals, the returns are still supersized on that. Why should anyone miss out on that opportunity,” said Kheterpal, in a chat with DEALSTREETASIA.
Kheterpal is now raising a fund — the firm’s second — that will close at just under $10 million, and will make 10-15 investments in early stage startups. The average ticket size will be $300,000- $600,000 with a VC-kind of value-added approach in technology and technology-enabled sectors.
The participation of VC firms in early stage rounds spiked in 2015, to about 18 deals from just four deals in 2014, according to data from research firm Tracxn.
“If you look at the eco-system in India, the biggest fall-out rate is between angel syndicate rounds and Series A funding. So the market is not deep and we thought that there is an opportunity for venture capital-style value addition in early stage,” Kheterpal said.
The fund will focus on investments in analytics decision making solutions, e-commerce and transportation, both of which have received big amounts of funding.
“For all the over-funding in these two sectors, what got left behind are companies that focus on these companies to either make their cost or pricing or supply side more efficient,” Kheterpal said. “These are not small opportunities anymore, and we are looking at a couple of those,” he added.
The firm will also look to invest in tech firms that help small businesses become more visible in their markets. A plug and play approach from the US might not work here. “US is a great example that you don’t need to build everything. If you are providing a solution on solving the SME efficiency gap, you need not build an analytics model from scratch. You can get it off-the-shelf. But you can build the decision layer on top of it, and build the customer side because that a US company can’t. A local company will need to do that,” Kheterpal said.
Unlike other firms that are looking at Indian startups to solve global problems, Kheterpal will focus on the local side. “I’m not looking for global solutions from India. That is a big challenge and the risk-return would not be as much developing from India.”
Kheterpal has been an angel investor for several years, and invests in both India and the United States, where he is bullish on firms in the virtual reality and adaptive reality space. His investments in India include bike taxi service Baxi, and online education company Edukart.