 "Start-ups need mentorship and understanding: V Balakrishnan")
After closing its maiden fund of Rs 100 crore, Exfinity Fund, the technology-focused fund promoted by IT sector veterans including T V Mohandas Pai, Deepak Ghaisas, Girish Paranjpe and V Balakrishnan, invested in Virtual Power Systems (VPS), a US-based start-up, last month. Ace technocrat and investor Vinod Dham too participated in the round. V Balakrishnan, co-founder and chairman, spoke to Bibhu Ranjan Mishra about the investment strategy and reasons why the fund is so bullish in the start-up space now. Edited excerpts:
How do you differentiate Exfinity from traditional PE/ VC funds?
A majority of the start-ups don't require money; what they need is mentorship, hand-holding and understanding, which can help them scale up. This is for the first time that a fund has been formed by people who have cumulatively got more than 120-130 years of experience in the PE sector.
Look at India's IT sector. It is worth about $100-billion, but purely services-driven. The next $100 billion for the IT sector will come from products, productised services, platforms and intellectual properties. However, none of the big players in the industry is investing in innovation; they are not investing in products. So to that extent, there is a big gap. At least in the US, there is a good ecosystem of start-up companies where large companies, even though they don't invest, can buy those start-ups in the ecosystem to build certain practices.
What is the typical investment size? When do you expect the fund to be fully exhausted?
Typically, it would be in the range of $2-4 million. We have already raised Rs 100 crore and we are in the process of raising another Rs 25 crore, which will happen in the next one month. We have already invested in one company and are looking at a couple of more. We will invest the whole fund, may be in next 18-24 months, and then the exits would probably start happening by the end of the third year or the beginning of the fourth year.
What would be your exit strategy?
This is a five-year fund, which is extendable by another two years. Our exit will happen when large companies come and buy out these companies. Or if our portfolio companies really scale up and become big, they have the option of going for IPO. With so much happening in the technology space, most of these companies would be bought out by large firms.
What attracted you to invest in VPS?
It has got the software that large data centres can use to reduce power consumption. This is important because the biggest cost for large data centres is the power cost. With the adoption of cloud, large data centres are coming up everywhere. Unless these data centres optimise on the power cost, they can't be cost-effective. VPS' business model is quite innovative and globally scalable.
Have you spotted similar companies in India?
India is evolving. Earlier, we did not have many start-ups coming up. Today, the ecosystem is nicely built-up. If you look at educational institutions, 15-20 per cent of the students are trying to start their own companies. They are not willing to join any other company. Their families are also supporting because a lot of entrepreneurs are seen working for two or three years without taking any salary. More than that, technology has changed dramatically and the industry has also matured. With the help of cloud computing, you can start a company with just about $1,000 as opposed to at least $150,000 earlier.
How does the PE / VC space look at the moment in India?
Earlier, there were two problems in the PE space because a lot of people went in and did angel investment. That means, you invest in a power-point, an idea that is not established. A lot of these people burnt their fingers on such ideas. That's why we said we will invest in companies that have productised their ideas and have some revenue stream. There, the risk is less. Second, enough exits were not happening in the past; exits have started happening now. Large players such as Facebook and Google are snapping up companies in India. Besides, since larger Indian companies are not investing in innovations, in the next one or two years, probably all of them will have to go and buy these ideas from the ecosystem.
How do you differentiate Exfinity from traditional PE/ VC funds?
A majority of the start-ups don't require money; what they need is mentorship, hand-holding and understanding, which can help them scale up. This is for the first time that a fund has been formed by people who have cumulatively got more than 120-130 years of experience in the PE sector.
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What is the rationale behind floating a fund now?
Look at India's IT sector. It is worth about $100-billion, but purely services-driven. The next $100 billion for the IT sector will come from products, productised services, platforms and intellectual properties. However, none of the big players in the industry is investing in innovation; they are not investing in products. So to that extent, there is a big gap. At least in the US, there is a good ecosystem of start-up companies where large companies, even though they don't invest, can buy those start-ups in the ecosystem to build certain practices.
What is the typical investment size? When do you expect the fund to be fully exhausted?
Typically, it would be in the range of $2-4 million. We have already raised Rs 100 crore and we are in the process of raising another Rs 25 crore, which will happen in the next one month. We have already invested in one company and are looking at a couple of more. We will invest the whole fund, may be in next 18-24 months, and then the exits would probably start happening by the end of the third year or the beginning of the fourth year.
What would be your exit strategy?
This is a five-year fund, which is extendable by another two years. Our exit will happen when large companies come and buy out these companies. Or if our portfolio companies really scale up and become big, they have the option of going for IPO. With so much happening in the technology space, most of these companies would be bought out by large firms.
What attracted you to invest in VPS?
It has got the software that large data centres can use to reduce power consumption. This is important because the biggest cost for large data centres is the power cost. With the adoption of cloud, large data centres are coming up everywhere. Unless these data centres optimise on the power cost, they can't be cost-effective. VPS' business model is quite innovative and globally scalable.
Have you spotted similar companies in India?
India is evolving. Earlier, we did not have many start-ups coming up. Today, the ecosystem is nicely built-up. If you look at educational institutions, 15-20 per cent of the students are trying to start their own companies. They are not willing to join any other company. Their families are also supporting because a lot of entrepreneurs are seen working for two or three years without taking any salary. More than that, technology has changed dramatically and the industry has also matured. With the help of cloud computing, you can start a company with just about $1,000 as opposed to at least $150,000 earlier.
How does the PE / VC space look at the moment in India?
Earlier, there were two problems in the PE space because a lot of people went in and did angel investment. That means, you invest in a power-point, an idea that is not established. A lot of these people burnt their fingers on such ideas. That's why we said we will invest in companies that have productised their ideas and have some revenue stream. There, the risk is less. Second, enough exits were not happening in the past; exits have started happening now. Large players such as Facebook and Google are snapping up companies in India. Besides, since larger Indian companies are not investing in innovations, in the next one or two years, probably all of them will have to go and buy these ideas from the ecosystem.