The current slowdown saw the entry of several venture capital (VC) firms, including US-based Norwest Venture Partners (NVP), into the secondary market. NVP, which has a $650-million global fund, has announced three late-stage investments in the first half of 2009 — in the National Stock Exchange (NSE), mobile value-added services (VAS) firm OnMobile and Shriram City Union Finance. In NSE, NVP has invested $50 million, its largest investment in a private firm. In India, NVP has invested close to $100 million in the last six months. In an interview with Shivani Shinde, the firm’s managing directors for India, Niren Shah and Sohail Chand, talk on their plans for the sub-continent. Excerpts:
A lot of VCs made late-stage investments in 2008 primarily due to drop in valuations. Was that also the case with NVP?
Niren: Growth investment is not new to Norwest. When I moved to Norwest, that was precisely what I liked. There is opportunity for diversified investment right from early stage to late (stage). All along, we had been saying that we wanted to do growth funding, but valuations were too high. So, I won’t say it is change in focus, (but) it is about timing.
Sohail: Also, it’s about the opportunity available in India and there is a significant scope for investment at growth stage. While valuations have come down, India is a long-term growth story.
Compared to last year, you have been fairly active in the first half of 2009?
Niren: We have been investing throughout the downturn. But we realised in July-August of 2008 that the growth equity opportunity was getting interesting. So, we shifted gear. By December-January, we got deals that were interesting enough to invest and hence the recent announcements. Besides, valuations were really high last year. There were enough firms we chose not to invest in. For instance, in one case, their market opportunity was too small and in another, the entry barrier was not too strong. Hence, if you look at our investments — though late stage — the firms we’ve invested in are leaders in their space. For instance, OnMobile is clearly a leader in VAS, an opportunity that will grow for the next three-four years.
But a lot many FIIs are looking to exit. Even your last two deals were block deals. Any comment?
Niren: Yes, they were secondary block deals where FIIs were planning an exit. But in all these cases they would have got enough returns. For us, as long as it is reasonable, we will continue to invest. You will also notice that there are several other reputed institutional investors who continue to hold stake in all these firms.
What kind of returns do you expect on these investments?
Sohail: In growth-stage funding, we would like to have a 25-30 per cent internal rate of return (IRR). But then we would like to focus on the growth of the company. We would look at profitability, the potential of the company to expand its revenue and market share over the next three-five years. Our sweet spot for investment in this segment will be $20-30 million per firm.
Do you prefer listed firms in the growth stage or unlisted?
Niren: Unlisted. NSE would be our largest investment so far in a private firm. But if we find interesting firms in the listed space, such as OnMobile, we will invest. Our due diligence is almost similar in both cases. Sometimes, in case of unlisted firms, valuations would be higher than a listed one. The advantage in an unlisted firm is you get to work with them.
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Which sectors would you focus on for later-stage investment?
Sohail: Sectors we are looking at are insurance, banking and finance, agriculture, manufacturing, consumer and retail and infrastructure — ports, hospitals and hotels. We will continue to look at IT and technology, but growth-stage investment is not too exciting in this segment.
What trends do you see in the growth stage as an investor?
Niren: There are three elements. First, there are a lot of firms in India that have strong track records and enough differentiating factors. But they are still like rough diamond. Take for instance the Shriram group. The group has done very well, but very few people know about them. Two, firms with enough differentiating factors and, finally, falling valuations.
So, does that mean your focus on early-stage investment will reduce?
Niren: We will look at both the ends. For early stage, we need to be more selective. Especially, the teams involved and the space they are present in are two important factors. The reason I am saying selective is because the ecosystem is yet to build in India. We do not see many entrepreneurs who started exiting their firms, or a huge success like Google. We have done early-stage funding and will continue to do so. But the bar is being set higher.
Sohail: The Appnomic Systems investment that we announced earlier this year is an instance of our focus on early stage.
