VCs share deals to improve success rate

Venture capital (VC) firms such as Kalaari Capital, IDG Ventures, and Accel are sharing early-stage deals, especially in the consumer internet space and improve their chances of success with a start-up. ‘‘By sharing deals, we are sharing the outcome,” says Shekhar Kirani, partner, Accel. 

For instance, SAIF Partners and Nexus are close to investing $5-7 million in Jaipur-based LifCare, which focuses on subscription-based sales for chronic illness. Interestingly, investors are not sharing deals in the business-to-business spare or enterprise space, but as “the consumer space gets highly competitive, you need some sort of consortium”, says Kirani. 

“If two investors back two start-ups, they would compete and struggle. If both invest together in one start-up, they can both pitch in when it raises follow-on funding,” says Anand Lunia, partner, India Quotient. In 2015, investors had backed multiple start-ups in several categories. 

 

Lendingkart, for instance, had two investors: Mayfield and Saama Capital. When it raised a new round, Bertelsmann invested $10 million; the other half was shared by the two existing investors. “Sometimes, two investors can help you raise a bridge round,” adds Lunia. 

Investors have been sharing deals. Myntra was backed by NEA-IndoUS Venture Partners (now Kalaari), IDG Ventures, and Accel India, after initial funding by Accel and Mumbai Angels. Power2SME, which was initially backed by Kalaari Capital, received Accel’s funding next year. 

Accel, for instance, has partnered with 30 investors, doing at least two deals with each of them. “Companies need money to grow and it is still early days for venture capital in India,” says a VC investor. 

Co-Investment in Early-Stage Deals

“A company needs to raise $50 million till it breaks even. No single early-stage VC firm has that kind of money. Two investors can bring in two more investors in the next round and increase the odds of success,” says Kirani. 

What’s interesting is that investors are sharing even smaller deals. “For every fund, $1.5-2 million is a seed round. If it goes bad, they can write it off without reporting to the LPs (limited partner),” said the founder of a VC firm, asking not to be identified. 

But, not all investors are sharing deals. Sequoia Capital and Lightspeed prefer to go solo. “Lightspeed is not a big fund, but a bold fund. It is comfortable doing bigger deals. But, it is very selective as it does four-five deals a year,” said another VC investor. 

Sequoia is a large fund, and has a lot of money to deploy. “When they move the needle, they need to make a large investment — they would rather pick up 30-35 per cent stake in a start-up than share a deal and settle for half,” said another VC investor.