This post was originally meant to illustrate, using placeholder data, the returns made by each investor in Redbus. Then hell broke loose. After all, I was an insider and I am not supposed to analyze information even if it is available in public records. In addition, some of the readers felt that I am doing a disservice to the ecosystem by saying that it was not a big win. I think $100 million-plus is a great exit for any founding team in India, it’s a rare achievement, and to do it in such a short time is even more rare. No compliments will be enough for Phani and team at Redbus. Redbus aggregated a large fragmented market, was capital efficient, profitable, and became a household name.
The question I raised was whether the VC industry, and the LPs who invest in the industry, will be happy with the outcome. Given purchasing power parity, such exits are great for founders in India. But the ‘startup’ funds in India are as big as those everywhere else, and that is the point of discussion. One reason is that LPs almost thrust large amounts of money at VCs. A very good study on this is here : Kauffman Foundation: The venture capital model is ‘broken’.
If you are still interested in the math for Redbus, find the cap table from the Registrar of Companies and multiply for yourself. Or you could count the number of parties involved – three investors and one founding team to guess how much each party made. Either way, one conclusion is clear — a $100 million exit does not move the needle for a $200 million fund, especially when there are three or more investors involved.
Since companies like Redbus are rare, a dozen exits like Redbus for EACH $200 million-plus fund are near impossible. This is just to return the principle amount!!
So what will work? Perhaps a $500 million exit. But that’s a NASDAQ or India IPO. Read MMT or Justdial. So the conclusion is that if you are a large fund, you need to have at least one company in your portfolio which goes to an IPO.
Some funds in India have a strategy of going solo in their investments in the first round, and sitting on large stakes, even majority stakes, till the company reaches an IPO stage in 6-8 years. The qualities here are courage (for going solo), stamina, energy reserves, patience.
Some funds are trying another strategy of having a string of quick exits, especially from Silicon Valley tech plays with an India base.
Some funds have remained small strategically, but even their fund size is now creeping upwards slowly.
Some funds that have grown big have decided to play at both ends — at the Series A stage and at a late stage where you have stable companies with clearer path to IPO.
And some funds have a simple strategy of chasing headline news making companies and impressing investors and raising larger and larger funds. They usually do this in hordes to reduce risk. This phenomenon was demonstrated most aptly by a portal selling Fashion, and you know who I am talking about. After all, if you thought that your stock options (it’s called ‘carry’, a more exclusive term) are not worth much, you will definitely go for a higher take home.
I am sure every VC has a strategy. As an entrepreneur, you need to know what is the strategy of your investor and what does he have in mind for you. Do some research, and do some math.
VC performance data is always private and perhaps rightly so. But it will be healthy for the ecosystem if there was debate. There is plenty of money wanting to come to Indian startups and we need to discuss the strategy, execution and performance of the intermediaries. We all enjoy discussing how various startups, their founders, senior management are performing in public forums. But looks like in ‘Secular’ India, we cannot discuss Minorities and VCs!
Author Bio: Anand Lunia is the founder of Mumbai-based early stage venture capital firm India Quotient (IQ). Prior to founding IQ, Lunia was executive director at Seedfund, also a Mumbai-based early stage investor. Earlier, he co-founder Brainvisa, one of India’s earlier elearning companies. Follow Lunia on Twitter.