Avoiding the capital guzzlers to net niche players

Ventureast, an India-centric venture capital firm that invests in seed and early to growth stages, will continue to back businesses in the internet space, but where capital is not the main competitive advantage.

This could be B2B businesses leveraging the internet; for instance the financial technology space.

The venture capital firm has always invested in internet-driven businesses, not necessarily of the Flipkart or Snapdeal type, which, Sarath Naru, Ventureast’s Managing Partner, describes as a “winner takes all” kind of model. Businesses such as Flipkart and Snapdeal require deep pockets where you have the capacity to keep on investing or have the ability to attract investors that will regularly pump in funds. At the end of the day, the one with the deepest pockets emerges the winner. “That is the game we have not played. We believe in backing companies where capital is not the primary competitive advantage. There are other advantages you need to show. They will be a little bit more niche businesses,” says Sarath, a B Tech from IIT-Madras and an MBA in Finance from the Booth School, University of Chicago.

Ventureast is in the process of raising fresh funds as it has more or less exhausted the funds under management, barring of course for investing in companies where it has already put in money. Ventureast’s last fund was $110 million and Sarath says the new fund will be more than that, with the first close likely in the first half of this calendar year. The investors in the new fund will be more or less of the same type that invested in Ventureast’s earlier fund.

According to Sarath, the investors will be of three types; all institutions. The first category will be Indian institutions such as insurance companies and banks, SIDBI and the Technology Development Board. Then there will be the multilateral overseas institutions like IFC, Washington; CDC, UK; Asian Development Bank and some from Europe, including FMO.

Another category of investors will be the pension funds and large family offices (these manage investments and trusts of wealthy families). “These three groups are our investors and the proportion of each of that keeps changing,” says Sarath. With the new fund in place, Ventureast will continue with its strategy of investing across stages – seed, early to growth. Earlier, it had a $15-million fund that invested in seed stage companies, with the amount invested ranging from $100,000 to $1 million. It also had a $115-million fund that invested in growth stage companies, with the ticket size in the $2-10 million range, over multiple rounds.

“Both are now combined. We will operate from one fund. We will continue to do seed stage, continue to do early stage and then go up to Series B,” says Sarath.

Given the risks in investing, funds are now looking to co-invest even at the seed stage, says Sarath. The risks are high and the amount of capital needed is so large for subsequent rounds that investors are collaborating and co-investing, he adds. Does the balance get upset when larger funds start investing in seed-stage ventures? Sarath discusses the likely outcomes of this. One, the valuation over-pricing happens from an early stage itself.

Second, there is plenty of capital available which could lead to the quality of the deals suffering.

On the positive side, since the investors get in at an early stage in the business, they are likely to pump in money in subsequent rounds of fund raise when the valuations are bound to be higher.

The investors too have more ownership as they had got into the venture quite early. If investors continue to be prudent and start co-investing and investing in clubs, which seems to be the norm, then there will be wisdom and common sense, and, hopefully, there will not be the over-heatedness, according to Sarath.

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