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Funds In The Driver’s Seat

Business World Jul 23, 2015

Investors sure are pumping in money at full throttle, but they are taking over the controlling rights just as well By Paramita Chatterjee & Vishal Krishna Garnering funds is not difficult for Indian companies. Retaining ownership of companies is. Private equity (PE) and venture capital (VC) funds are only too happy to come on board, but they like to secure their exit route as they invest. As a result, they are increasingly getting involved in the operations of their portfolio companies, especially e-commerce companies and startups. Some are even taking control of the management of investee companies in order to prepare them for exits as in today’s environment investing is easy but cashing out profitably is not. In e-commerce companies, for instance, investors are setting up leadership teams for strategic areas of businesses such as marketing and finance to help them improve efficiency and operating margins and build scale, both organically and inorganically. In fact, apart from the technology roadmap that  founders continue to build, most aspects related to running businesses are controlled by the funds. Fin, a technology startup funded by Kalaari Capital, has an operations team set up by the fund, while property portal housing.com has a new interim CEO, Rishabh Gupta — picked by the fund —replacing founder Rahul Yadav. In many e-commerce companies such as Snapdeal, Flipkart, Olx, Ola, Quikr and Paytm, the founders have given up the majority stake to focus on what they do best. <img alt="" src="http://bw-image.s3.amazonaws.com/FRENETIC-ACTIVITY_300.jpg" style="width: 300px; height: 157px; float: right;"> Furniture and homedecor retailer FabFurnish.com is one of the latest to restructure its management with its co-founders Vikram Chopra and Mehul Agrawal stepping down from leadership positions to advisory roles within three years of starting up. The move was aimed at bringing about a reformation in the work culture and organisational composition. This is going to be a fluidic process but such moves are not going to deter investments. On The Gravy Train Money has been coming easy for some. A few big-ticket transactions sealed so far this year include Baring Asia’s $440-million buyout of ATM cash management services firm CMS Info Systems. This was followed by online cab aggregator Ola’s $400-million draw from GIC, DST Global and Falcon Edge Capital. Other deals during this period include TPG Capital’s acquisition of 25 per cent stake in private hospital operator Manipal Health Enterprises. Recently, Gurgaon-based ShopClues raised $100 million from TigerGlobal, Helion Venture Partners and Nexus Venture Partners, while Rocket Internet AG, along with other investors, infused $110 million in food delivery marketplace Foodpanda.  “Many of the funds are focused on letting the entrepreneurs stick to their core vision, which is technology,” says Sanchit Vir Gogia, CEO of Greyhound Research. “There is a shift in business ideas; today, the intervention of technology-focused businesses is a lot higher,” says Sanjeev Agarwal, co-founder of Helion Ventures. What’s more, risk capital investors are showing great confidence in the new breed of Indian entrepreneurs.  <table align="center" border="1" cellpadding="1" cellspacing="1" style="width: 500px;"><tbody><tr><td><img alt="" src="http://bw-image.s3.amazonaws.com/Small-Tickety-lrg.jpg" style="width: 610px; height: 283px;"></td></tr></tbody></table> “Today, the contours of PE and VC investments in the country have changed with investors eyeing a lot more new age, consumer oriented-companies for investments,” says Avnish Bajaj, co-founder and managing director of Matrix Partners India. The investment firm recently infused around $7 million in two startsups — hotel aggregator Treebo Hotels and Bangalore-based recruitment startup “Belong”. Earlier, in 2007-08, when PE activity was at its peak, traditional sectors such as infrastructure and real estate were the hot favourites of fund managers. “While investors continue to scout for high-quality, high-growth businesses in the traditional space, new age sectors like mobile and e-commerce are also becoming popular with investors,” adds Bajaj. <img alt="" src="http://bw-image.s3.amazonaws.com/Avinash-Bajaj-mdm.jpg" style="width: 206px; height: 321px; float: right; margin: 5px;">The startup businesses that have emerged as hot picks are largely technology firms in consumer services. This is because mobile commerce is growing with deepening digital penetration; there are 150 million broadband subscriptions and 36 million smartphone users today in India. The traditional sectors that have consistently stayed on top of the investment cycle are technology and healthcare. While technology can be classified as both new age and traditional, healthcare is driven by domestic consumption. Investors Love India According to consultancy firm Grant Thornton, in the first five months of this year, as much as $5.8 billion has been pumped into 376 companies. This is about 66 per cent more than that in the corresponding period last year. It is good news for the industry especially since between January and May in 2014, PE and VC firms invested $3.5 billion, 23 per cent less than that in 2013. The investment was $4.6 billion for that period in 2013. “India is in a sweet spot with accelerating GDP growth and stable macro indicators,” says Sanjiv Kaul, managing director at home-grown PE biggie ChrysCapital. He adds that market valuations are high with the potential risk of earning downgrades. “The perception still remains that investment activity has bottomed out, but going forward, deal activity is likely to pick up,” adds Kaul. <img alt="" src="http://bw-image.s3.amazonaws.com/SANJIV-KAUL-mdm.jpg" style="width: 217px; height: 322px; float: left; margin: 4px;">Reduced Deal Sizes Over the last few years, the industry has witnessed a fall in the deal size due to increased activity in the VC space, which, like PE firms, have developed a preference for India’s budding entrepreneurs. A lot of these investments are going into e-commerce and digital — sectors that ride on domestic consumption. Here, the capital requirement is slightly less than that in traditional sectors such as real estate and infrastructure. VC investments typically go into startups that require early-stage funding, hence the investment amount can be as small as $1 million. Private equity, on the other hand, is growth capital provided to mid-sized companies to facilitate expansion. Therefore, their deal sizes are large. Today, the preferred size of any PE/VC deal is $18 million — the lowest in the last 10 years. In 2007 and 2008, the average deal size for PE and VC investments was $59 million and $40 million, respectively.“Today, India is in a very interesting stage with more entrepreneurs churning out winning ideas and attracting millions in funding. With startups mushrooming, the demand for small-ticket transactions has gone up significantly,” says Vishal Gupta, managing director at Bessemer Venture Partners (India), one of the early investors in e-commerce firm Snapdeal. However, there is one thing that fund managers are wary of: high valuations. PE experts fear that going forward, a lot of deals may be sealed on the basis of speculation rather than on actual fundamentals. This is possible as startups usually do not have sufficient earnings hence they do not use standard valuation parameters like price to earnings or earnings per share. The valuation is based on discounted cash flow, an estimate of cash generated on a time series, for the future. Currently, there is too much of capital chasing few good quality deals. It is this demand and supply gap that is leading to inflated valuations.    paramita@businessworld.in & vishal@businessworld.in (This story was published in BW | Businessworld Issue Dated 10-08-2015)