A Coming Of Age Of Venture Class Returns In India

There is a coming of age of Indian Internet companies and of “venture-class” returns from investments.

As early investors in redBus, we at Inventus Capital Partners realized high double-digit returns in four years with the June acquisition by MIH/Naspers Group. During that time, the company’s revenue grew 15x and it became profitable, all with less than $10 million in venture financing. It exited with $7 million still on the balance sheet.

Similarly, SAIF realized high double-digit returns in the recent JustDial IPO. RedBus and JustDial are sure signs the venture ecosystem is finding its grip, with many more opportunities to come.

What conditions created these success stories? India has large, but inefficient markets. This offers tremendous opportunity for entrepreneurs to build substantial value by finding high-tech solutions to various problems. RedBus addressed the emerging inter city bus travel industry by building a large network connecting large numbers of bus operators to consumers and travel agents. This gave a big boost to the industry by enabling each player to be more efficient. This is but one example of what is possible.

Throughout nearly two decades working with Indian technology entrepreneurs, we have been very bullish on the India opportunity. For the startup ecosystem to flourish, India has needed six key ingredients:

  • Entrepreneurs
  • Risk capital
  • Inexpensive technology and communication infrastructure
  • A talent pool
  • Large markets
  • Purposeful government policy

India’s substantial talent pool is being exposed to the “Silicon Valley culture ” by companies like Google, Facebook, Oracle, Hewlett-Packard and Zynga, etc.  Couple this with the thousands of talented Indians returning back to India from the United States and Europe, and the raw ingredients needed for the startup ecosystem are coming together.

But the biggest factor for large entrepreneurial successes is the propensity for people to quit their jobs and take risks. Today more people are asking the question: Why can’t I do it too? I fondly recall my first weekend at Google Bangalore when the HR team asked me to talk to a group of parents whose kids had been offered positions at Google. Surprisingly, the questions I received focused on whether Google was going to be around and why the kids shouldn’t accept alternative offers at Infosys, Citibank, Microsoft or H-P.

In the past five years since forming Inventus to focus on Indian entrepreneurs, we have witnessed a massive attitude change toward entrepreneurial risk taking. It is this change that is the strongest indicator for great things to come. I now run into college students in India who want to be the next Sergey or Zuckerberg and soon, the next Phani.

This phenomenon has accelerated growth in the overall ecosystem. We see this in our own portfolio of companies, and I am sure this is also true with our colleagues. We have multiple startups in our portfolio that are on the same or faster trajectory than redBus. We’ve backed similar Indian-led businesses in rental cars, second-hand apparel and commodity raw materials.

Here is one: Power2SME. It is a buying club aggregating India’s $100 billion market in commodity purchases, like steel and cement. Within a year of our investing, the company’s revenues have exploded by 45x.

The basic raw ingredients are in place in India. It is gaining critical mass with large markets, a new generation of technology entrepreneurs, an abundant supply of trained talent, the availability of inexpensive open-source technology, an excellent communication infrastructure and the availability of risk capital. Success stories are beginning to emerge, which will only inspire even more people to leave their jobs and try their hand at entrepreneurship.

The missing ingredient, of course, is the lack of purposefulness from the government. The Indian startup ecosystem is sitting on plutonium, and the chain reaction has started. Positive government policies will add more fuel to this reactor.

Manu Rekhi is a principal at Inventus Capital Partners, a micro VC focused on early revenue stage startups in U.S. and India. In the past he has been an entrepreneur, operator and angel investor.

Photo courtesy of Shutterstock.

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4 Comments

  • I think you are severely misguided as to how long it will take. An ecosystem cannot persist unless there is a sense of liquidity. The IPO market as well as the propensity to acquire companies. As an LP, it shouldn’t be about your IRR, 5% return of $1 billion is better than 15% of $100 million

    • Mary, I do agree that an ecosystem takes time to develop. And India’s ecosystem has been brewing for sometime. The critical mass is finally here and you have the signs of liquidity – two that I mentioned in my article. If you go back 10 years in China, Tencent and Shanda IPO’s started the floodgates. Liquidity was very minimal before that in China. Coming back to India, its a country with over a billion people, over 150M have internet access and growing rapidly, a middle class larger than the population of US and aspirations just like anyone else. This is what we are betting on in India. Hindsight is something I leave reporters to cover.

      As for whether I would take 15% of $100M or 5% of $1B – Well, I would take both! You can’t have all your investments result in $1B exits.

  • Problem with Indian entrepreneurs and companies is that they want silicon valley valuations, but their exits are never that high.

    • Josh, I will have to disagree with you. All of Venture capital (not PE) in India is equivalent to the Venture investments is the state of Washington. There is a shortage of capital for the number of good ideas that can be funded. This results in a lot of bootstrapping and opportunity to invest in somewhat more developed startups. Also here is a relevant article I wrote that addresses your point to the core: FUNDRAISING RULE OF THUMB: $19M, $9M AND $4M

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