Menlo Park, California headquartered Mayfield Fund, the early stage venture capital firm that entered India in 2008, recently launched its second India fund with a $108 million corpus. The investment mandate for Fund II is a bit different from the firm’s first fund. When Mayfield kicked off investments here with its $111 million Fund I, the firm decided to go with a multi-stage investing approach and a focus on broader, non-technology sectors. That strategy has seen it invest in companies such as Sohan Lal Commodity, PayMate, IndiaProperty, Persistent Systems, Fourcee Infrastructure (exited), Securens Systems, The Beer Cafe and Amagi Media.
Mayfield’s investments in India are advised and managed by Mayfield India Advisors, founded by Nikhil Khattau and Vikram Godse. Prior to Mayfield, Khattau founded, built and sold SUN F&C Asset Management, one of the first private sector mutual fund companies in India. At its peak, Sun F&C had over $350 million under management and over 100,000 investors. Post exiting Sun F&C he was an angel investor in several companies.
Earlier this month when we met him at Mayfield’s Mumbai offices, Khattau spoke about Fund II, how the new mandate takes him back to his roots, and why exits have been tough in India. Edited excerpts:
What’s going to be different in Fund II in terms of the investment strategy?
Fund I, which we launched in 2008, leaned towards later stage investments and mostly in non-technology sectors. With Fund II we’re going earlier into companies and looking much more actively at the technology space. We think that the market has developed enough for us to now have a stronger focus on technology and technology enabled businesses.
How will you evaluate deals? What’s the broad criteria?
The criteria doesn’t change much. We’re looking at companies and founders that address a clear pain points in the market. Obviously we’d like to back capital-light business that have the potential for non-linear growth. We’re also keen on cross-border companies which are building products or services that can go global.
Does that mean you will invest in younger, earlier stage companies?
Yes, we’ll invest more at the Series A stage, even earlier if the opportunity looks good.
So you will look at seed stage deals as well?
We will do seed stage deals though on a very selective basis. We’d prefer to go with founders who we know well through our networks, who we are able to reference. For instance, Securens Systems is a deal that we got into fairly early. We knew Sunil (founder Sunil Udupa) from his earlier life as CEO of AGS Transact Technologies. When we invested in the company it had just completed beta tests with a few banks. (Mayfield reportedly invested $4 million in Securens in its founding year in 2012. According to recent reports, it is investing another $6 million in the e-surveillance systems company).
Several of your peers have institutionalized seed investing by setting up specific programmes. Will you do that too?
No, it doesn’t really make sense to do that. We typically like to invest anywhere between $2 million and $8 million over the life of a company. So while we may enter a company at the seed stage we would want to roll up that investment to the next stage over time. Which is why it becomes very important for us to pick the right company and founder at the seed stage. If you institutionalize a seed investing programme, you are under pressure to show deals. We’d like to catch companies earlier and therefore will look at seed. But we will not invest in a company if we don’t see an opportunity to take it to Series A and further.
You’ve been more of later stage investor for a while. How will the team re-orient itself for early stage?
Well, if you look at our past records, in a sense we are going back to our roots. Vikram (Mayfield India Advisors co-founder Vikram Godse) is a hardcore venture guy. He was involved in Infinity Venture Fund, one of the earliest venture capital funds here. I started my own company back in 1995 when private equity was not even present in India. We had to raise angel money from family and friends and got in a strategic investor later. It took us 10 years to successfully scale that business before we sold it to Principal Financial Group in 2004. I was also an active angel investor before we launched Mayfield in India. So there is that combined experience already there in the team.
How is non-tech investing different from investing in technology companies? Are you dealing mostly with linear businesses?
To begin with you’re dealing with a different sort of entrepreneur. Because you are dealing with companies that are more mature, you are also working with people who have significant domain knowledge. The pain points that they address are also different.
But are they necessarily linear because they are not like conventional technology businesses? Not really. For instance, we’ve invested in a company called Sohan Lal Commodity. They operate in the agri-logistics area and provide warehouse management and procurement solutions to farmers and intermediaries. The main accelerators of the business model are technology and finance. They use SAP to tag and trace thousands of bags of grain across the country. There’s nothing linear about that business model. That’s not to say that we don’t have linear business. Genesis Colors is an example. That’s a consumer story.
How is the Fund I portfolio looking? Is the fund invested?
We’re in the money so far on the portfolio. We are still investing from Fund I. We have some dry powder and will probably do a couple more deals from that fund. We haven’t started investing Fund II yet. We expect to score some exits this year. There is inbound interest in several of our companies, both from strategic buyers and financial investors.
(Mayfield exited logistics company Fourcee Infrastructure Equipment in 2012 by selling its stake to General Atlantic. It reportedly made a 10X return on the exit).
Exits have been tough for the industry in general. That has affected the fundraising environment. What’s not working?
In terms of fundraising, India, it is true, has not been the flavour of the month for a while. Limited partners (investors in private equity and venture capital funds) are asking fund managers to demonstrate that the market can return money. I think the industry in general needs more discipline around entry valuations. That has been a failing partly because of the youth and inexperience of the industry. When we started investing in 2008 we took the call that we wouldn’t rush in to deploy funds. We don’t have to do a certain number of deals per year. That’s probably why we’re still investing from Fund I even as we have completed raising Fund II.