Our third fund will be much more active in India: Vertex Ventures MD

We will allocate follow-on dollars so that we continue to back the companies through their life-cycle: Vertex Ventures MD Ben Mathias

Vertex Ventures SEA/India, the venture capital firm backed by Temasek Global, raised $210 million for its third fund. Ben Mathias, managing director and head of India, shares the fund’s investment philosophy with Ranju Sarkar.

How will the third fund be different than the first two?

Our investment strategy will be similar to the first two funds in that we will look for disruptive technology companies in India and Southeast Asia (SEA) and back them early. Our investments will be mostly in the Series-A and Series-B stage and our initial cheque size will remain at the $2-$5m range. In addition, we will allocate follow-on dollars so that we continue to back the companies through their life-cycle. This strategy is consistent with what we had in our first 2 funds.

What was the rationale for setting up a SEA & India fund?

We see a lot of similar trends across SEA and India, particularly in internet and fintech businesses. For example, Validus is an SME digital lending platform across SEA that we just invested in. We had seen similar businesses in India and were, therefore, able to evaluate Validus effectively. Moreover, SEA is generally the first port-of-call for Indian companies looking expand overseas. So we are able to open a lot of doors for our Indian companies in SEA.

How much of this $210 million will be deployed in India & over what time? How much of the first and the second fund were deployed in India?

Nothing fixed but it will depend on the opportunities we see. In addition to India and Singapore, we are actively evaluating opportunities in Indonesia, Malaysia, Thailand and Vietnam. We also see many cross-border companies which are headquartered in Singapore but have the majority of operations in India and the founding team split between the two countries. InstaRem is one such example. We will invest the fund over the next three years and expect to stay in most investments for a 5-7 year time-frame. Compared to Fund 1 and Fund 2, this fund will be much more active in India. We now have a team on the ground in India to source and support investments here. However, we made several investments from Fund 1 and Fund 2 which have scaled extremely well. For example, we invested in FirstCry which has grown to be the clear market leader in its category. We invested in HouseJoy from Fund 2, along with Amazon.

Is this the first time you raised money from external investors? Why?

Yes, this is the first time Vertex SEA/India has raised money from external investors. Vertex was earlier a captive fund of Temasek. However, there was significant demand from investors to be a part of Vertex. A few years ago, Temasek decided to let Vertex raise 3rd party capital and so in addition to SEA/India, our China, Israel and US funds all have 3rd party LPs (limited partners). For this fund, we have raised money from various financial institutions, corporates and family offices across Asia. Temasek, however, is the largest investor.

Have Indian family offices invested in your new fund?

We did not approach Indian family offices for this fund. This would have required us to set up an AIF in India and we were not set up as a team to do that. However, this is something we will consider for the next fund.

How have the first two funds done for Vertex?

With some recent divestments, Fund I (2010) has a Distribution-to-Paid in Capital (DPI) of 1.37x and Total Value-to-Paid in Capital of 2.59x.

Which have been the winners in your portfolio in fund one and two?

Some of our big winners in fund one and two are Grab (SEAs largest car and taxi booking platform), M17 (Taiwan based live-streaming platform), Patsnap (SaaS platform for patent and IP search) and Reebonz (Online platform for buying and selling luxury goods). Additionally, in India, we are investors in FirstCry (India’s largest omni-channel mother & child retailer), Yatra (Online travel) & XPressBees (Last mile delivery for eCommerce). We expect all these to give significant returns to funds 1 and 2.

Which kind of tech start-ups are you looking to invest?

We are actively looking 3 sectors: Enterprise, Consumer and Fintech. However, our criteria to evaluate  each of these is very different. For Enterprise, we look for companies that have a global opportunity. The founders need to be capable of selling the product globally and competing against competitors outside India. Moreover, we should be in a position to help them with our global network. For Consumer and Fintech, we look for India oriented business models but they need to have good Unit Economics. But this we mean, low Customer Acquisition Costs, high Gross Margins and high Repeat Rates.

Can you give us examples of investments in each of these sectors?

We invested in HouseJoy a couple of years ago, along with Amazon. This is a home services marketplace where the consumer is able to use the app to book services like beauty care, appliance repair, home cleaning, AC maintenance, etc. They are able to get Gross Margins of 30-40% for their services. Moreover, the average consumer repeats 4-5 times per year because a household constantly has a need for these service offerings.

On the Enterprise front, we invested in CloudCherry (SaaS for Customer Experience Management) earlier this year. We recognized that the largest opportunity for the company was in the US. The Founder, Vinod Muthukrishnan decided to pack his bags and move to the US. Today, the company has moved from an India centric revenue model to a US and SEA centric revenue model. Similarly, Flutura (Industrial IOT Analytics) has built technology where they can take on GE on a deal and still win. Their three founders, Krish Raman, Srikanth Muralidhara and Derick Jose are very experienced with winning business and managing customers anywhere in the world.

What similarities/differences do you see between founding teams in India vs SEA?

Very similar. When I first moved to India 10 years ago, most entrepreneurs came from business families and you had to deal with a father-son founding team. Today, most founding teams are first-time entrepreneurs typically in their 30s. Most of them have already had some work experience which they can leverage for their start-ups. The founders of Flutura for example, each spent 10 years at MindTree and are leveraging the customer relationships they built there. One notable exception to this is Ashwin Ramesh from Synup who is in his mid-20s and started the company almost immediately out of college. He has built an incredible SaaS business with 50,000 customers in the US, with his entire team in India.