Kalaari Capital’s views on investment opportunities and entrepreneurial ecosystem

Kalaari Capital, which recently closed its first $150 million fund, is convinced that there is enormous appetite for funds from early-stage companies in India, the space it invests in primarily. Kalaari Capital – the new avatar of IndoUS Venture Partners – says it managed to raise the funds in a tough economic environment. In a recent interaction, Kumar Shiralagi, Rajesh Raju and Vani Kola, Managing Directors, Kalaari Capital Advisors, spoke about the fund and its predecessor, IndoUS Venture Partners, the investment opportunities and the entrepreneurial ecosystem in the country. Excerpts:

On the IndoUS Venture Fund

Kumar Shiralagi: IndoUS Capital Advisors has been named Kalaari Capital Advisors and we advise both the IndoUS Venture Fund and the Kalaari Fund. The IndoUS Fund will continue until we realise all the exits, return the money to our investors.

We raised $190 million under the IndoUS Fund in 2006. The market then was really buoyant and it got over-subscribed. This time also we said we will do a $150 million fund and we are at over $150 now.

In the first fund, we made about 27 investments. We have exited five-six companies. Over the next couple of years, we hope to exit from some of the companies. We look to have a 20-40 per cent in the companies we invest. We look at a horizon of five years. We have made about six investments from the second fund. In the next three-four years, we will make between 20 and 24 investments. We have an orientation towards technology, but have invested outside of technology also. Rajesh Raju: In India, we would love to invest only in technology, but the market is quite shallow from that point of view. You don’t have highly intellectual property driven companies in India. At the end of the day, you cannot deliver globally without help of technology.

On raising the second fund

Rajesh: It was difficult. We were fortunate compared to our peers and competitors. It is a testament to the good portfolio we have built in fund one. Exits are not that many in India. Investors assess us. Do you have a good team, do you have a good portfolio and most importantly, do you have exits in your portfolio. In India, not many people can show exits. Our exits are still coming.

For the second fund, the first two factors became important – the team that we have together and the entrepreneurs and their companies. It is tough. It is a bloodbath out there. Especially the last six months, since the new budget announcement has come out and those statements on FDI are going back and forth, the tax clarity is not there in India. All these things have really contributed to tough times for people like us.

Our investors are worried. Our pitch to our investors is you should be investing in India when people are running away. High inflation, government not having clarity on many issues, deficits, all these things contribute. They look at India first, then try to pick the best investor in India. They need to have the conviction that India is going to give them good returns back over the long term. We can pick and choose the best and the brightest.

On the ecosystem

Kumar: I used to manage Intel Capital’s investments in India. 2003 is when I started investing. I see a remarkable change in the Indian entrepreneurship – the quality of companies, quantity of companies is significantly different. It seems to be terrific opportunities, which companies are taking advantage of. Which is also due to macro factors, India doing great in terms of growth. Entrepreneurship is getting accepted. There are enough success stories that you can talk about. Those things are contributing to the ecosystem and lot of funds to go out there and raise capital to invest in these companies.

The ecosystem has to mature to a certain extent before investors would have the confidence to put money into those kind of companies (advanced technology companies).

The first stage was a proven model in the Indian IT services and related areas where, it is a bit more predictable and investors have greater faith in those companies. Over time, those became low hanging fruits. There are enough investors, good successes that people are also willing to look at what kind of new things can come from India. As the ecosystem continues to mature, folks will be comfortable investing in riskier things where technology can play a role.

Otherwise, it may be interesting products, you are taking the technology risk. Now it is operating in some other market, in the US or somewhere else, there are too many variables then it becomes a problem. You are trying to curtail the number of variables that are out there.

Rajesh: It is not that we have lack of resources, it is a question of having capital. People like us need to support more technology companies. Innovation and great technology companies are built when you have the ecosystem. You need to have the technology talent, the creativity and the capital to support the creativity. All those things are slowly falling in place.

Significant change over the last six years, part of the Indian ecosystem the quality of entrepreneurs has dramatically improved, the risk that entrepreneurs are taking has changed. To build the Silicon Valley kind of creative companies is going to take some time. India has all the elements to be able to get there. It is a question of time.

On what needs to be done

Rajesh: The whole economy has to mature. First of all, you go to Silicon Valley, your investor is right next door to you. The employees and the skills that you need to bring on board, the talent that you need to bring on board, 5 km radius you can find all the talent. You can go and sell to customers within a 15 mile radius. And, eventually you can sell your company to one of your vendors. The whole ecosystem is right there. For you to thrive, you need to have all the skills, the investors, the vendors, the customers around you. Young companies cannot be thinking globally from day one. The ecosystem around you needs to be strong enough to thrive. That is coming. It will happen.

Vani Kola: It is a virtuous cycle. Starting with services, we certainly see higher value services coming out of India. We also do have products coming out of India. But there is a learning curve that will happen for that to be the case. True innovation at the level of technology and research has not really come from India to the global map. But I am convinced that is a question of time. It is not the same to be building somebody else’s product versus building your own product. I think there was an evolution before one could start saying how do I build my own product. This has happened in other countries.

Learning at a certain time period through innovation of others to becoming innovative yourself. I think that is the phase we are going through in India.

Kumar: Entrepreneurship is not an easy task. If it was difficult in the US, it is even more difficult in India because of structural issues and so on. If you go to tier 2 towns, it becomes even more difficult because of lack of airport, infrastructure. It is a matter of time before you see entrepreneurship especially in the IT space in tier 2 cities.

On the next big wave as far as technology in India

Kumar: We invest in a few different sectors because we believe there are great opportunities in them.

Two things. First, there has to be an opportunity to build a great company. Second, for us to be able to make a great return on the investment. In that sense, we have a few different sectors. We are always trying to bet on the next big thing. Whether it is clean technology or e-commerce, or mobile these are all opportunities. Only time will tell. There are some IT products and services that are happening. In retail too, with things moving from unorganised to organised, there seems to be a lot of opportunities. If you look at it, there are opportunities everywhere and we are betting on some of them.

Vani: Like for example, SaaS (Software-as-a-Service) platform. It is a question of the right business model. Great local software solutions haven’t taken off, but there is a wave of companies that are getting funded and with that we believe some of them will emerge to be significant leaders. I believe there are themes of investments that are happening now in newer generation of software and services, which have that potential.

ramakrishnan.n@thehindu.co.in

(This article was published on November 25, 2012)
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