Singhal co-founded Medusind Solutions and eVentures India
When Sandeep Singhal, director, Nexus India Capital, sent across a list of deals from the firm’s first fund, I was taken aback. The $100 million fund, which completed fund-raising in July 2007 — see press release — has done 13 deals and is now fully committed. Yes, that is very fast work. Nexus actually started investing a little before it formally completed fundraising — its first deal was Mobile2Win in January 2007. Still, 13 deals in 18 months is an uncommonly rapid deal run (I thought Helion Venture Partners was the only one in a tearing hurry to close deals). Nexus’ investors seem to think that the firm is doing just fine and have just backed a second fund that is more than double the corpus of the first — $220 million (press release). I met with the firm’s affable founder team or rather more than half of the three-member founder team — Naren Gupta and Singhal — last evening to chat about the new fund and entrepreneurship in India. Suvir Sujan, the third founder, could not make it. Edited excerpts from the interview:
What is the final portfolio looking like for Fund I?
Singhal: Fund I is now fully committed. We’ve done 13 investments from it and will probably do two more to complete investments from the fund. On an average, we would end up investing/committing $6-8 million per company.
Does the investment thesis change going into Fund II? Have you been able to keep to the original Fund I thesis so far?
Gupta: When Nexus was launched our intent was to do a lot more offshore, cross-border investments.
Gupta has been investing in tech startups for ten years
However, we found out soon enough that the offshore opportunity for early stage companies in the business services space had played itself out. Today customers of these services want companies that have scale. They are much more comfortable with a Genpact, for instance, building out a new service offering rather than a startup doing it. So, the investment thesis that we have gone with in Fund I is to be sector agnostic, look at every kind of opportunity in consumer and business services, which is a very wide space, and back entrepreneurs who are Six Sigma quality. That will continue in Fund II.
But, there must be one or two areas you are particularly bullish on?
Gupta: Well we think open source is going to be a big play out of India. We are also quite bullish on clean tech, though clean tech opportunities in India are very different from those in the US. Singhal: The emphasis is on going into areas that are not popular yet.
Suminter India Organics is one of the offbeat companies in your portfolio. How was the deal sourced?
Singhal: We met Sameer (Sameer Mehra, founder and CEO, Suminter) at the New Ventures India ‘Investor Forum’ in Mumbai last year. He is a unique kind of entrepreneur. He understands the agricultural environment at the grassroots level and combines that knowledge with world-class logistics processes (Suminter exports organically grown agro products such as spices, oil seeds, spices and herbs).
Within clean tech, any specific areas in which you are actively scouring deals?
Gupta: Clean water definitely. But we have not seen too many good companies. There are a lot of small entrepreneurs doing interesting work at the grassroots level but cannot or do not want to scale beyond Rs10-15 crore revenues. Singhal: One a revenue of Rs 10-15 crore they can easily turn in a profit of Rs 2-4 crore and we have not seen a lot of companies with the ambition or capability to scale beyond that. Gupta: As venture capital investors we need to back companies that want to scale their business 10-20 times or more in order to justify returns.
Fund II is more than double the size of Fund I. What’s the investment time-frame you’re looking at? How much more would the investment per company be?
Singhal: We would probably end up averaging $8-10 million per company over the investment life-cycle. In some cases it could be as small as $3 million and some, specifically the winners in our portfolio, could end up with $15 million, over successive rounds of funding.
But you will continue to back startups? How young could they be?
Gupta: Definitely. We will do pre-revenue companies. An idea and a plan is good enough. We are very comfortable writing a $100,000 cheque to start someone off if it is an interesting idea. Singhal: But we don’t believe in the entrepreneur-in-residence (EiR) concept (Singhal’s earlier experience with an EiR programme at the former eVentures India during the 1999-2000 dotcom rush didn’t end too happily). An EiR programme works if the entrepreneur comes in with the idea and really has the passion to see it through. Otherwise you (the venture capitalist) get saddled with putting someone else’s idea to work.
Even if you do write a cheque for $100,000, what are the ground-rules for handing out the money?
Gupta: You have to be working full-time on the venture. One of the entrepreneurs I backed early, YC Pati of Numerical Technology (NASDAQ: NMTC), was teaching electrical engineering at Harvard University at the time. We happened to meet over lunch, brainstorm and at the end of lunch I was ready to write him a cheque of $100,000. But only if he would take a leave of absence and work on the project full-time. If after a year he felt the idea was not working and wanted to go back to teaching, I was fine with that. It took him three months to decide but eventually he did quit and start the company. (Numerical subsequently raised $21 million in venture capital funding over successive rounds from Mohr Davidow Ventures, Goldman Sachs and Intel Capital before going public in 1999).
The job security aspect is much stronger in India, socially and economically. Have you met many entrepreneurs who would take a similar plunge?
Gupta: Entrepreneurship is tough. It takes a certain kind of person to do it. Actually, in India I think it could work better. Most young people live with their families and so what you earn is like pocket money. You wouldn’t be on the street if you took the plunge. Also, now there are a lot of dual income families and with social acceptance of entrepreneurs growing, one spouse can take the plunge while the other keeps the salary coming in.
Post-investment, what processes do you have in place to mentor companies? Do you separate the investment team from the mentoring team?
Singhal: No, we don’t believe that the two should be separated. The person who leads the deals should ideally mentor the company. It is important to give the entrepreneur continuity. Gupta: You have to understand that the relationship between the entrepreneur and the venture capitalist is forged much ahead of the actual investment. It is a relationship between individuals. The entrepreneur needs that relationship to continue post-investment (The firm has a seven-member investment team, including Gupta, Singhal and Sujan).
Back to Fund II, what is the limited partner (institutions that invest in venture capital funds) mix?
Gupta: In terms of the types of investors, it is an even mix of pension funds, university endowments and fund-of-funds. Geographically, the mix has been quite interesting. We’ve seen much more interest from Asian investors, specifically from Hong Kong and Singapore. So, Asian and Central European investors account for 30 per cent of the corpus and 70 per cent came from North American investors.
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Photo Courtesy: Nexus India Capital
The Numerical Technology story is very inspiring.
It’s heartening to know that someone, atleast, is talking about $100,000 level!!
Vibes from start-ups say that when it comes to ‘actually’ writing the small cheque, “feedback” changes colours. Even if one agrees that ‘seed-funding in India is a happy myth’ may be a little harsh, still gradual shift to later stages is a fact. So here is a question – w/o complaints, if one accepts this as a fact, and also preserves optimism that someone may write the small cheque, are there a few clear pointers for making a successful seed-stage pitch?
I’m still optimistic.
As Naren mentioned, Nexus seeks out and backs six sigma entrepreneurs, regardless of the stage of the company. Six sigma entrepreneurs bring passion and relevant experience, an ability to adapt and motivate people, and a desire to build something large. In the Indian context, where costs are lower, it is easier to get a concept going on personal capital before bringing it to an angel or institutional investor, and these entrepreneurs often prove to themselves that their businesses will scale before approaching external sources of funds.
The reason why seed funding is tougher to obtain is that the amount of work required by the investor in working with the company is higher, but the amount of capital put to work is small and the resulting returns are therefore capped in absolute terms. Although risk is higher, that decision criteria is less material because the amount of capital is lower.
Investors like us want to work closely with our portfolio companies but also have limited bandwidth. A strong entrepreneur can focus the time the investor needs to spend to more critical areas, and that is what helps close the deal.
So I would recommend that early stage entrepreneurs keep both the need for capital and the need for time in mind – the more you can show strengths in the basics of building your business, and articulate how you are looking to leverage your investor’s time beyond just capital, the greater the likelihood of success in getting that cheque.
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