Sequoia is a venture capital firm with about $1.4 billion of funds under management in India. It manages the corpus through two growth funds and one venture fund. As part of its recent strategy shift, it has started investing in early-stage ventures. In this recent interview in his Bangalore office, Mr G.V. Ravishankar, Managing Director, Sequoia Capital India Advisors Pvt Ltd, talks about the industry and Sequoia's plans. Excerpts:

Could you give us an update on how the year has panned out for venture-capital and private-equity players?

This year is an interesting one in that the first half was a buoyant environment. [In] Second half, the private markets are still buoyant. We are seeing a lot of activity, significantly higher level of entrepreneurship than possibly almost ever seen. We are seeing most action at the early-stage level. We are seeing a lot of maturity in the kind of companies in the early stage, particularly in software, Internet, e-commerce. There is now a critical mass of technical talent in the country and people aspiring to create global companies out of India. This was the theme we thought would play out in 2000 when things were looking great. It didn't play out then. It started a little bit in 2006-07, but people hadn't figured out how to sell globally. The Internet has allowed companies to dream of a global audience. We are constantly meeting companies that are young but aspiring to target the global audience. [In] The domestic market the way Internet has taken off in India, people willing to buy online, payment mechanisms, delivery infrastructure — lot of progress has been made and that has allowed companies to launch across the country and have people buy. We are seeing lot of young companies, young entrepreneurs [in] early 20s stepping out, doing something on the Internet, seeing traction early on.

It is a great time for entrepreneurs. There is capital available. There are lot of seed funds in the market that are willing to back young entrepreneurs in early stages, which was hard to come by five years ago. You would have barely one or two funds that would support early-stage. Today you have a fairly large ecosystem of funds that are willing to support. A lot of the venture funds are doing early-stage as well, which is again encouraging for entrepreneurs.

Public markets being what they are, growth investing is a slightly different situation, [there are] not many opportunities for companies to go public. They know that they won't get the best valuations in the market. A little bit of slowdown in the market from that perspective where people know that they will have to wait it out before the environment comes back for larger ticket sizes.

Why are more players targeting investments in the early stage?

There is lot [of] activity, people want to invest and supply-demand situation is such that high quality companies can bid up. What we are seeing is that between going early, the seed stage to even the Series A when you are talking to a venture capital investor, the bump-up in valuation is significant in today's environment. You are better off taking the risk early on instead of waiting for the company to develop a little bit because the valuations are significantly higher. So more people are moving early and doing that. That is one. That is more a tactical issue. The more strategic reason is thanks to makemytrip and some of these investments creating large outcomes, there is lot more confidence in the early-stage business today that people from India can create businesses which can give you the multi-baggers, which traditionally not many people have achieved. As you see, more success there will be, more support for early-stage investing and the ability to take risks.

What about Sequoia's plans?

For Sequoia, it has been a good year. We made one significant change in how we were looking at business since the time the transition happened. We are a well-known firm for early-stage investing, backing young entrepreneurs in early situations. That is a cause that we always had in mind. But over the last few years we started doing slightly larger tickets. We said with the transition it is a great opportunity to re-pivot ourselves to be able to do early-stage investing, which is what we consider we are extremely good at globally. That is a conscious effort to do more in the early stage and probably little less in the public markets, which is again what something that we will do opportunistically and not as a strategy. You will find us more in the early-stage events, encouraging entrepreneurs, meeting them, guiding them, mentoring them, also making several investments not just doing the conversations and being in the circle, but also walking the talk by making investments.

What would be your typical investment levels?

At the early stage, we can invest as low as Rs 1 crore. Then there is a category of companies which may have Rs 30-50 crore of revenues, business model is not questioned. It is only the scaling risk that you take to go to the level where they are ready to go to the next phase of growth. [In] That phase we invest from Rs 15 crore to Rs 50 crore. [In] The third stage, which is growth funding, we are happy to invest Rs 50 crore to Rs 200 crore in any one particular investment over the lifetime of that investment. We are reasonably active in all three.

How does the deal pipeline look in these three stages?

Very strong in the early-stage bucket and reasonably strong in the middle and early-growth buckets. [In] The later stage, given the markets, there is some slowdown in terms of number of opportunities. When you have bad public markets, the good companies will go and hide. They don't want to dilute at a time when it is not favourable to them. There are some who are directly going to the public markets. What is happening is because the public markets are cold, [in] some pre-IPO type opportunities they want investors who can anchor and support. Selectively, where the company is a great company and we actually want to be a private investment in the company, we are going ahead and making those investments on a case-by-case basis.

That will also affect the exit opportunities, right?

This is not a great time to exit in the public markets. The reality is that there is generally not that much demand. [For] Investors who are looking to exit, we are seeing a lot of secondaries — one private equity investor selling to another private equity investor. That has become another avenue to exit if you can't list in the public market and get an exit through that.

Typically what kind of stake do you pick up in companies?

We look to pick up significant minority stake. Very rarely have we gone and done a majority deal. In early-stages we look to own between 30 per cent and 40 per cent of the company, so that we can bring all the help that we can provide. We want to have enough so that the outcome can be meaningful. We try to keep it in the band of 25-40 per cent range for early-stage investments. For the later-stage investments, it depends on how much capital they are raising. There are companies where we own 5 per cent, 10 per cent, but there this is not the same level of intensity of engagement that they expect. They expect us to help with top management recruitment a little bit, finishing the team, putting together a good board, helping them with public markets or with secondary markets or capital markets. They are looking for credibility, some improvement in processes, but they are not looking at us to hand-hold them on a day-to-day basis in any form.

Related Topics
comment COMMENT NOW