Sandeep Singhal, co-founder Nexus Venture Partners, is among the handful of venture capitalists (VC) who spotted the India opportunity quite early. Before co-founding Nexus in 2006, he had co-founded eVentures in 1999. Nexus’ strategy has been to invest in entrepreneurs, than just a business plan and taking early bet on technology evolution. Since 2010, it has exited from six companies. Singhal talks to Shivani Shinde about the changing entrepreneurial landscape, e-commerce hype and Nexus India fund III. Edited excerpts:
Nexus managed to close its third fund even in a difficult environment, and which was over-subscribed. What worked? Will the focus change?
Our investors have continued to stay with us. Our strategy won’t change. Our investments in individual companies are driven by the entrepreneurs we see in the market. So, I cannot at this point say we will back these technologies. We are seeing broad trends — mobilisation of enterprise, cloud adoption, and security. We also continue to be bullish on the Indian market, even with challenges like inflation, infrastructure problems, etc.
How has the early-stage segment changed for investors and entrepreneurs?
In 2006, when we started raising our first fund, we saw some early indicators. Like, the shift from a labour arbitrage model to an innovation-led model and the domestic consumption story. Also, several successful India-born professionals were returning home, to either set up operations for MNCs or start their own company. A new wave of talent is coming out, which has been nurtured by these guys. The difference is that the new breed have global exposure and have worked with global teams. These are the guys who are starting companies.
Over the past two years, we have started seeing the eco-system completely shift and become much more valley-like.
From a fund-raising perspective, there was a lot of push-back in 2006. One, because the public markets were doing well and large endowment funds, foundations, etc were only interested in that. Two, investment in a VC fund was considered risky due to a long investment cycle, which meant longer lock-in of capital, and the VC industry was not mature.
Now, the concerns among investors are more macro in nature. Such as, how will India evolve both as a market and for talent? Are people going to be risk-averse due to the macro issues? But what has changed is, unlike 2006, the public markets have also seen a cycle. People have realised that there are various classes of asset management. At the macro level, there have been successes in the VC environment (exits and success scale-offs).
Most of Nexus’ exits have been really early, where you had invested for just about two-three years. Other than the opportunity, are entrepreneurs looking for early sell-off?
None of our sales has been outward-bound. In every case, it has been an inbound interest and which, in turn, has led to an exit. Even now, many of our portfolio firms have offers for acquisition. The decision to sell or not is determined by the entrepreneur. In some cases, it’s the money but in others, it’s the access to resource. For example, when Gluster was acquired by Red Hat, the idea was to take Gluster to a bigger scale. And, within the first year of the acquisition, Gluster’s sales have been 10x. Similar was the case of DimDim that got acquired by SalesForce. We have three guys in our portfolio of firms who have chosen not to sell off. They could have probably made $40-50 million but they have held on to their businesses. People have various drivers, such as financial security. In some cases, even we were surprised. In one case, we also told the entrepreneur not to take that offer, but the deal was lucrative.
...but mChek did not turn out to be the right investment?
The mobile payment market did not pan out. We have moved on. When we made the investment, the thesis was driven by their partnership with Airtel and thinking the mobile wallet would take off. But the RBI rules were bank-oriented than telecom-oriented. So, a lot of bank funded-businesses gained. mChek was clearly an early mover. We could have also gone with the banks but we took a bet on telcos.
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Your investments in e-commerce segment have been selective. Do you think e-commerce was much of hype?
The segment, compared to the other online businesses, is very much like a ‘winners take it all’ model. There is value in backing what you perceive to be winners. It’s a very scalable model. So, if you can get the initial scale going, you can build on it. In some ways, the valuation hype was driven by people’s perception of leadership position. The primary driver for this was Tiger Global: they drew most of the valuations higher, based on their experience in China. That’s what they tried to do in India. You cannot take just one strategy from one market and plonk it in another.
What has been your strategy in the e-commerce space?
We have done a couple of investments in this segment, based on areas where we believe we can create leaders and back deals. We feel the vertical-focused e-commerce was still too early for this market. You need to have reasonable acceptance of horizontal e-commerce — people buying across horizontals via websites, before we see uptick in vertical e-commerce (people buying from focused websites like apparels, etc). We need another three to four years for that to happen in India. The others got into the vertical space because the leader, then, Flipkart, was very focused on one segment.