Mohan Kumar, Founder and Managing Partner, Avataar Venture Partners, is convinced that there are enough opportunities to create companies that build software products that cater to specialised, niche verticals and which, over time, can grow into $100-200 million businesses.
It is this thesis that got him to start Avataar Venture Partners, a growth-stage venture capital firm that will invest $10-30 million in such companies, with annual recurring revenues of about $15 million, engage with them operationally, help them grow and sell their products in the global market.
“The market is ripe right now,” says Mohan. He adds, “You can pick a narrow industry which is large enough and create specialised software for that industry. There are thousands of such verticals. You can pick any of them – hair salons, spas, skin clinics, restaurants, fashion, financial services, mutual funds, private equity, insurance.”
He points out that if you narrow it down, the requirement of each is unique. “Avataar’s focus,” he adds, “is to identify and work with founders and help them scale. That is the simple thesis.” He started working on the concept of Avataar in 2018, even when he was with Norwest, and spent some time figuring out what to do – whether he should invest in early-stage ventures or mid-stage companies or go in at the growth stage. He realised that there were enough funds doing seed and early-stage investments, but the number gets smaller when the ventures graduate to the next level, especially after they have done a Series A fund-raising round.
Mohan decided to focus on ventures at this stage as it would also help him share his operational experience of working in large companies. “The Avataar fund is to help scale companies that require $10-30 million capital, which have already got $10-15 million in revenue, and take them to $100-200 million in revenue,” says Mohan. He roped in Nishant Rao, who was COO of Chennai-based unicorn Freshworks, as partner. Mohan plans to rope in a few more team members, all with experience in operating companies.
Once he had worked out the framework of his fund and when he conveyed his decision to quit Norwest, they wanted him to continue to monitor half-a-dozen ventures in which he had invested through Norwest. Mohan’s strategy also changed. Instead of launching a fund and raising investments from limited partners (LPs) – those who invest in VC funds – he decided to talk to Norwest to see if he could buy out the six companies he was involved with from them.
When Norwest and he agreed on a price, he went out to potential investors and told them that he was coming with a portfolio of six companies. And, HarbourVest, a Boston-based global private markets investment specialist, came in as the lone sponsor and put $300 million into Avataar.
Mohan says Avataar’s fund is of five years duration, which means he has to make all the investments in the next 18 months, find exits within five years and return the money to his investor. Thanks to his changed strategy, Mohan was able to raise the $300 million fund in just six months, which must be a record of sorts in fund raising.
In buying mode
According to Mohan, if he had gone in for a purely fresh fund – one with no portfolio – he would have raised $150-200 million and it would have probably taken him much longer, at least 18-24 months. The six companies that he bought from Norwest fit into his investment criteria – of $10-15 million in revenue, operating in niche B2B and SaaS verticals, will require $15-30 million to grow and are looking at cracking the US and other English-speaking markets such as Canada, the UK, Australia and New Zealand. Avataar’s stake in the ventures will be anywhere from 15 per cent to 25 per cent, depending on the velocity of its growth. Avataar would come in typically at the Series C stage.
How much of the $300 million that you raised is left for you to invest now? “We have about $120 million left. Which means about four companies,” says Mohan. Avataar spent about $180 million in buying out the six companies from Norwest. His exit options would be either a strategic sale or an IPO. He believes that the six companies can be scaled to $150-200 million in revenue in five years. “I believe there is a 3x to 5x upside from here in the next 3-5 years,” says Mohan. One of the six companies in his portfolio is India-focussed, while three have cracked the global market and the remaining two are work in progress.
“The criterion we look for is — is the company capital efficient. But that is not the most important criterion. We are looking for founders who understand where they are spending. What happens is, before you know who your customers are, before you know whether your product fits the market, you go throw money on marketing, it doesn’t stick,” says Mohan.
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