Entrepreneur turned venture capitalist Sanjeev Aggarwal, of Helion Ventures, says the quality of entrepreneurship in India has improved in the past five years. While the market has grown bigger than ever before, more complete or seasoned teams are coming out to create companies.

eWorld caught up with Aggarwal, the former CEO of Daksh eServices, a BPO firm that IBM acquired in 2004 to gain a foothold in the Indian BPO arena, to know about his role as a VC and get perspectives on the current market.

What do the developments in the US and Europe mean for firms such as yours?

India is, by and large, insulated from the fluctuations in the global economy. India will continue to get its allocation (of VC investments). I doubt the investors will find a better place than the emerging markets to invest in. The class of investors that we work with allocate 10 to 20 per cent to the emerging markets. The allocation to India is inching up. If the economy continues to grow at 7 to 8 per cent, this will further grow. However, there are concerns over inclusive growth, shortage of skills, and corruption, as well as quality of governance.

Do you think the current global crisis will impact your fundraising initiatives?

There will be some changes to asset allocation strategies of people who provide capital to people like us. But, the India allocation is unlikely to reduce. What is more important is how your investee portfolio companies are growing. That's the real data on ground. As long as your micro performance is strong, you should be in good shape. A lot of our investors are University Endowments, who take a viewpoint of 20-30 years. They are not worried about the impact of a particular event as many such events come and go. At every turn, they don't play around with their asset allocation strategies. We have not decided on how much to raise. In the past we raised $140 million and $200 million in two funds. It should be in that ball park.

What are the issues that investors are concerned about?

Corruption — given the scale — is making global headlines. A lot of investors are very impressionistic and a lot of decision-making is driven by anecdotes and news reports. Besides, about a third of population still lives below poverty levels. Every time our GDP grows above 8 to 9 per cent, the country faces skills deficit. But, on the positive side, there is a lot of headroom for growth. On balance, we still are a very good destination.

VCs typically turn stringent in this kind of a financial crisis. Can we expect another round of a hold-up in terms of investments?

Good quality investors keep investing. If we come across good entrepreneurs we will continue to invest. Cautious approach is not because of downturn. You have to have some conviction that the Indian economy is a long-term story. If we start reacting to every such event, it is hard to build. We are not day traders. We have a long horizon of five to seven years and we will stay to the course. Typically we get about 600-700 proposals every year. Within that we invest in six to seven. At any point in time we are looking at 20-30 deals.

How much have you already invested?

We have already invested 60-70 per cent of the $340 million that we had raised (in two rounds). We still have space for two-three quarters. Typically, we invest about $50 million annually in about seven to eight companies.

Are we likely to see any exits in the near term?

We keep getting offers for acquisitions on our companies all the time. From our fund, the average vintage would be three-four years, given that we would have invested over a period of time. The real value in a company gets created at the back-end, when the operating leverage begins to come into play. We would not like to miss out the opportunity for compounding. Therefore, we should stay the full course and not yield to short-term temptation. What we have found is companies that cross $25 million in revenues, their top-line goes straight to the bottom-line and that is a very good period for profit enhancement. It does take four-five years to get a company to get to that point. After having done all the good work, just when the company is beginning to turn profitable, we don't want to sell it off.

How many of your portfolio companies are profitable?

About half of the 17 companies that we invested from our first fund are profitable. Make My Trip is the only firm that we have taken public. We still own about 7 per cent in it. Our second fund is two-year vintage and it will be too early to expect profitability.

Profitability has another nuance. If you try to push companies to profitability too early on then you can stop investing in building a brand, management team and forward looking initiatives. We want to make sure that there is growth of profitability. In the first four-five years we don't emphasise profitability because we want to build and want to invest behind the right initiatives. Once you reach critical mass, then you drive efficiencies.

Which sectors would you like to invest in?

We invest in services-oriented companies that are capital-light and which make use of information technology. We have invested in equity research outsourcing, legal process outsourcing, consumer Internet companies, education services and specialised healthcare. Also, we have invested in companies in fragmented businesses such as restaurants and real-estate brokerages.

But don't you think that schools, real-estate and restaurants are unlikely sectors for a VC to invest in?

VCs normally invest in innovation. Here the innovation is in the business model. These are real white spaces. You can take market share from organised players and also ride on growth concurrently. Hence it can make a viable investment proposition.

Has there been any increase in rate of rejection?

The bar keeps rising. When the quality keeps rising at the input level then you also want to bet on better entrepreneurs. Rejection rate is still high because some of those businesses are not designed to be venture capital style businesses as entrepreneurs don't have aspirations to build very big companies.

> vishwa@thehindu.co.in

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