Seven startups, $46 mn invested. Should Info Edge spin out a VC arm?

Sanjeev Bikhchandani-founded Info Edge (India), the BSE-listed Internet company most well known for jobs portal Naukri, has been flexing some serious muscle in the early stage startup investing space. At the close of its latest financial year ended March 31, 2013, the Delhi-based company had nearly Rs 250 crore (approximately $46 million at prevailing foreign exchange rates) invested in seven startups.

Taking into account two write-offs — StudyPlaces and 99Labels — total investments till date would stand at Rs 283 crore (nearly $52 million). It had invested Rs 4.5 crore and Rs 28.5 crore respectively in the two companies.

The largest exposure in the currently active portfolio, no surprise, is in restaurant reviews and listings site Zomato Media at Rs 86 crore, which is also one among the two companies in the portfolio in which Info Edge is a majority stakeholder (the other is elearning company Meritnation).

Cumulatively, the portfolio closed financial year 2012-2013 with operating revenues at Rs 107.7 crore, Info Edge said in a disclosure. That’s an 80 per cent growth from the portfolio’s combined operating revenues in financial year 2011-2012. Losses though have also mounted. The portfolio’s combined operating EBITDA (earnings before interest, taxes and depreciation) for financial year 2012-2013 stood at Rs 77 crore, up 82 per cent from the previous financial year. Given that most of the portfolio consists of relatively young companies, many of which are currently in aggressive expansion mode, the high negative earnings aren’t entirely unexpected (refer to table for details on individual companies).

Remarking on the portfolio’s performance at Info Edge’s fourth quarter earnings call on May 3, managing director and CEO Hitesh Oberoi said:

“Subsidiary companies are right now losing money, that is why they need more investments. But they are investing for growth, they are investing for the future and we do not expect any of them to breakeven even in the short-term. I do not expect Zomato to breakeven in the next 12 months because they are entering new markets. They are sort of investing behind growth in those markets. But both the subsidiary companies we have, Meritnation and Zomato, are dominant players in their category. They have market leadership and we are very bullish about their prospects in the medium term.”

Gurgaon-headquartered Zomato has certainly been leading the pack in terms of aggressive expansion. Since last September, when it raised its Series C round of funding, the company has been rapidly setting up a presence in overseas markets. It started with the Middle East and added its sixth overseas market, South Africa, last month. Info Edge infused Rs 55 crore ($10 million) as part of the company’s Series D round in February and the company has plans to get into Continental Europe, South America and other parts of South East Asia. It reported an operating EBITDA of Rs 10.03 crore on operating revenues of Rs 11.38 crore for financial year 2012-2013. Read Medianama’s analysis of the financials here. Also read our earlier interview with Zomato co-founder and COO Pankaj Chaddah here.

Ecommerce has been a recurrent theme in the portfolio. Out of the seven companies, three — Kinobeo Software (mydala), Canvera Digital Technologies and Happily Unmarried Marketing — are ecommerce plays and account for Rs 67.4 crore or about 27 per cent of total investments. The company’s view on the ecommerce sector currently though is not too positive. In March, it wrote off its entire investment in online shopping site 99Labels. Responding to a query on the write-off at the May 3 earnings call, Ambarish Raghuvanshi, group president finance at Info Edge, said:

“As far as 99labels is concerned, it is a recognition of two facts. You have to put together the fact that ecommerce businesses are somewhat challenged right now in India, both from a scalability and from unit economics. The other issue is that the funding environment has become a little pessimistic, become weak, and ecommerce businesses by definition need investors with lots of capital, deep pockets and that has not been forthcoming. So, 99labels issue was not so much unit economics alone, but it was also about the lack of access to incremental funding. And since we were not prepared to put more money behind the business where unit economics were not totally proven, we were seeking for investors and those are not forthcoming. That is the reason we decided to provide for the entire investment.”

The admission that even an Info Edge backed portfolio company could find it difficult to attract follow-on funding tells a lot about the prevailing mood among venture capital investors with respect to the Indian ecommerce sector.

That aside, at $46 million invested and a reasonably interesting looking portfolio, it’s perhaps time for Info Edge to institutionalize its early stage investing with a venture capital arm, even anchor a standalone fund.

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