When Matrix Partners launched its first India-focused fund in August 2006, like many of its peers, its primary mandate was to invest in early and early growth stage companies. Inside of a year, however, the firm decided to broaden its investment thesis to include growth investments. The expanded mandate has seen the firm conclude 20 deals here from its first $300 million fund, across diverse sectors such as technology, hospitality, microfinance and education. Last month the firm once again realigned its mandate to look more closely at early stage companies with the launch of a seed investment initiative. The firm’s multi-stage, multi-sector focus though remains unchanged. Matrix Partners India co-founder and managing director Rishi Navani spoke to StartupCentral about how the firm will leverage the seed initiative in its overall investment thesis. Edited excerpts:
1. What’s changed in the startup environment to encourage this renewed focus on early stage?
When we just started investing in India six years ago we did do early stage deals but not at a high frequency (the firm kicked off its India deal run in 2006 with investments in online DVD rental startup Seventymm, quick service restaurant Yo! China, local search firm AskLaila and payments company ItzCash). The quality of early stage deals that we were seeing at the time was good but they were not in traditional technology. That has changed in the last 18 months. We’re now seeing much better quality deal flow in segments such as the Internet and mobile. Between September 2011 and September next, we would have made four or five five Internet and mobile investments.
2. But why was it important to institute a specific focus on seed stage deals?
We find that in several mobile and Internet companies, angel investors own fabulous stakes at great valuations. When some of these deals come to us in the later stages, we end up spending a lot of time cleaning or restructuring these companies. To address that problem, we decided to create a seed programme that would work as a feeder for our Series A stage deals.
3. What kind of companies would qualify for seed investments from Matrix?
Within the Internet and mobile segments, we are most likely to invest at the seed stage in a company only if we see the potential for us to also invest in the Series A round. Therefore you will not see us do 10-15 seed stage deals in a year. Unlike angel investors, our challenge is that we are expected to do the Series A round. It is a big responsibility.
4. Why didn’t you choose instead to become an investor in other seed funds or angel networks, as some of your peers have done?
We don’t want to be an investor or limited partner in other seed funds because that can create conflicts and spoil deals. Other investors may not want to invest in a company that we may have passed over. That can become a difficult situation for the company involved. But we would look to co-invest at the seed stage with some of the other seed funds or angel networks.
5. What kind of ticket sizes are you looking at for your seed deals?
It would really depend on the kind of company that we’re investing in. At the seed stage, the lines between the $100,000 cheques and the $1 million cheques are blurring. As part of the seed programme we’ve just committed $2 million to a stealth mode Internet startup. More than the ticket size what’s important is that we invest in companies and people who want to work with Matrix.
6. Are you happy with the way your Fund I portfolio has shaped up?
This is a 2006 fund and the last five years have been an aberration. Considering those factors, we’ve still had two IPOs from the portfolio (Mumbai-based pre-school company Tree House went public last August and Kochi-based gold loans provider Muthoot Finance listed on the bourses in April 2011). Last year the portfolio achieved a median growth of about 60 per cent on revenues and profits. The fund is now fully invested and we think 2013 onwards will be big years in terms of exits from this portfolio. Out of the 20 companies in the portfolio, about 40 per cent, at this stage, look high potential or winners.
7. You raised a second $300 million Fund II last year, of which $30 million is earmarked for early stage companies. Will that be significantly higher than Fund I?
We don’t do target-based investing. We’ll invest as much as is required at the early or early growth stages. That said, I expect there will be more early stage investments in the Internet and mobile sectors from this fund.
8. How much of Fund II has been invested so far? Do you expect to do more than the usual number of deals this year?
Normally we do about five deals a year. Since the last quarter of 2011, we’ve already done five deals (women’s ethnic wear company W, social mobile applications company U2opia Mobile, potable water company Waterlife, mobile games developer Twist Mobile and a seed stage Internet deal). We’ve invested about 10 per cent of Fund II so far.
9. What is your view on the current environment for ecommerce investments? What kind of deals would look interesting to Matrix?
We have recently made an ecommerce investment. We are concerned about the overall ecommerce investing environment. We don’t like businesses with low gross margins where we have to invest significant capital to fund large operating losses and working capital requirements.
10. Apart from ecommerce, what are the white spaces that you find interesting in the Internet segment, particularly for seed stage deals?
There are a number of interesting opportunities. Our endeavor as always is to look for high quality entrepreneurs we can partner with to build large, sustainable businesses.
Image courtesy: Matrix Partners