Sateesh Andra on DFJ's India Strategy

Apr. 1, 2008

DARE: How big is the DFJ team in India; what are the areas of focus?
Sateesh Andra: DFJ in India is a team of three people. It has Mohanjit Jolly (Executive Director) and Anurag Jain (Analyst) based out of Bangalore, besides me in Hyderabad. As for focus areas, DFJ is interested in companies that are in the areas of consumer services, technology, cleantech, life sciences, and healthcare.

For the allocated $75 million for investment in India, what kind of companies are you looking at?
The current set of investments we have made in Asia is largely in sync with DFJ’s global strategy. Among Internet-based companies, we have invested in ClearTrip (travel) and Seventymm (movie DVD rental). In the mobile space we have mCheck in the payment space, and mGinger that is an SMS-based mobile platform for targeted advertising. We have also invested in Live Media which is in the out-of-the-home (OOH) media space. Reva, the electric car company, is also in our investment portfolio.

We have not invested in the life sciences or nano-technology space here in India yet. However, for all our focus areas, we are looking for excellent teams to invest in. Even first-time entrepreneurs are welcome. We are very open to taking a lot of risk and get ourselves involved in some very early-stage ventures that are not big but have great teams running them, and in very interesting markets at that.

What do you look for in an entrepreneur coming from the nano-tech or cleantech sector?
In this field, we have not seen much fundamental research happening in the country. In India, it is mostly applications of these technologies that happen. So, we are looking for entrepreneurs who have some intellectual property (IP) in these areas. We are also open to entrepreneurs who may not have the IP, but have access to the right set of properties; IP from elsewhere but that which can be applied in an Indian context. This would enable quick growth and scaling up of the business. Having said that, we are looking at teams that understand technology, benefits of the applications, and applications in the Indian context that would create critical mass quickly.

Does your set of requirements differ from, say, IT companies as compared to those from nano-tech and cleantech companies?
Technology investments or enterprise applications are more IP focused, and of course, a great team is needed in a market that is growing. In cleantech we are okay even if the entrepreneur hasn’t invented anything new here, as long as he knows how to apply what is already available. However, he needs to have entry barriers and advantages that others will not be able to replicate very easily.

Looking at the current market flux, has there been a change in your investment objectives or methodologies?
Not really. I know people are talking about recession in the United States, and investors in India are being wary and cautious. A majority of our investments are at an early stage, typically having a 3-5 years’ window, and a lot of them are going after local markets. Of course, we also do some late-stage investments in companies with revenues that run into tens of millions of dollars and are set to go public in a horizon of the next 12 to 18 months. We believe in the growth story of the Indian markets. We have already seen the telecom sector doing business of a billion dollars plus in several large local markets. Similarly there are other sectors, like financial services, retail, manufacturing, and consumer services.

My belief is that events such as the current US market recession do not affect venture capitals as much as they affect the private equity (PE) and private investment in public equity (PIPE) investors.

This is not to say that VCs would not be affected at all; of course VC investments will be made more cautiously and sparingly.

Do aspiring entrepreneurs, especially in IT, have a reason to be worried by the current market flux?
No. We have been through such situations even in the Silicon Valley. There was this huge market crash resulting in a nuclear winter for a couple of years, post the year 2000. Anyway, I think, this is a good time for startups to build a business. Because, it would take at least nine to twelve months to get the product or solution ready, roll it out in the market, and then commence getting customers and partners. So this is the time when your business expectations and even the expectations of your employees are reasonable. It is in such times that you will try and make all the right moves, such as building your product or solutions in the right way, managing the burn rates on a monthly basis, not overspending money assuming windfall profits as soon as you roll out, and so on. Often, these are the best times to build businesses as long as you have the discipline.

In addition, venture capitalists look at opportunities and investment windows of three to five years, not just the next six to nine months. My belief is that the aspiring entrepreneurs need not be worried about fund raising. Yes, one will not see that many investments happening at the moment, but just because the market is going down, investment opportunities are not going to be turned down by venture capitalists. From a startup’s perspective, this may be the best time to build it because of all the realistic expectations from the employees, board, team, investors, etc.

In late 2005, Tim Draper said that DFJ will look at launching a $200 million fund for India. What is the news on that?
We are re-evaluating our India strategy. As you know, DFJ has offices in more than 33 cities. It has a combination of its own team plus a network of partner funds. DFJ has its core team members in the Silicon Valley, China and India, and partner funds in the rest of the places. Once we have re-evaluated, the fund size is definitely going to be a big step up from the earlier $75 million allocation. We are also looking to increase the team size. We are also increasing our ticket sizes. In ClearTrip, for instance, we invested $10 million. Whether the India fund size will be $200, $150, or $225 billion, I do not have a number as of now. It is, however, definitely going to be bigger than the current $75 million fund size.

What are the key elements that you look for in an entrepreneur who approaches DFJ for funding?
The first thing we look for is the background of the entrepreneur. Second, we look at how passionate he is about his business idea. We look at the fact that an idea that is discussed is not just another idea, but an idea that he has already taken steps on. Like, creating a prototype or putting a team together, or working on it on weekends even if he has a 9-5 job, or already incorporating a company, etc. Basically, we evaluate how serious he is about that particular business plan.

Thirdly, for entrepreneurs in the early stage, we also look at whether and how he has done market validation, whether he has identified some potential customers, and what are the key partnerships and market strategy. Has he done a lot of competitive analysis of the targeted ecosystem?

Lastly, does he really understand how much money and resource he will need to create the right set of matrix, create value and take his company to the next level? We know that no entrepreneur has a crystal ball showing how the business will look like in the years. But does he have a gut feel about how will the business shape up in the next one year, based upon looking at the trends, analyzing other markets and correlating that in an Indian context?

For entrepreneurs in the mid-stage, the set of key elements differs a little. This is because they have got the product out, have customers, partners, etc. So, we try and learn more about what the company is all about and which market sectors it is playing in. We then analyze what were its assumptions to begin with, its learning from the market and whether it has tweaked its business model based on his learning. We also look at: How soon can the business scale up? What are the critical success factors for the company? So the focus for mid-stage companies is really on more such aspects such as the pipeline, deal closure, customers’ references, ROI for the customer, and scalability.

For late-stage companies, we look at the revenue margins, cost of sales, market leadership, competitive landscape, the traction—all these are very critical. Then, there is a lot of emphasis on due diligence on financials, sales, customer references, pipeline, partners, leverage, IP if it is a technology-focused company, and the team itself.

After deciding to invest in a company, how much time does it take to complete the process?
The thought process that goes behind making an investment is simple: Whether this company has something that excites me to begin with, and then if this company gets my partners’ excitement levels high too, such that we all can go and take a bet on such a company. For us to decide that we do not want to invest in a company takes not more than 10 to 15 days. However, if the answer is yes, it may take anywhere between four to six weeks. And then there is the normal due diligence, which is a simple process if it’s an early-stage startup because there is not much that we need to look at. Basically, four to six weeks to get a verbal yes, and another four to six weeks to complete the rest of the process before the money is transferred into the bank.

For mid-stage and late-stage companies, this would take two to four more weeks. This timeline also depends upon where the company has been incorporated, e.g. Mauritius, Cayman Islands, US etc. Depending on all these factors, a typical time frame to complete the process is about two months for an early-stage company, and three to four months for a mid-stage or late-stage company.

What sort of continued involvement should one expect from the team of DFJ pot-investment?
We invest in businesses that we understand very well and to which we can add value. Of course, in early-stage companies we have to roll-up our sleeves as board members and investors. In them, we participate actively in things such as hiring the team, product validation, getting the early pilot customers or channel partners, etc. However, in mid-to-late stage companies, we look at things such as what are the key matrix for the business to scale up, etc. We do involve ourselves in hiring at times. We also follow on financing and work out how to arrange more funds. We analyze whether the company is on an IPO or M&A path and more such things.

Typically how long do you remain invested in a company?
We remain invested till the company either goes public or we conclude that the business is going nowhere.

What kind of returns do you expect when investing in a particular company?
There are not set expectations when we go in. Of course, if we put in 2 million, we may want to make 20 million. What we look for is that whether we can create success and value such that the company is either the number one or the number two player in that sector, and build a large business.

Just to give some examples, DFJ has been one of the early investors in Hotmail (acquired by Microsoft), Baidu (the Chinese version of Google), Skype (acquired by eBay), Overture (acquired by Yahoo), and EnerNOC in the cleantech space which went public. DFJ has invested in great companies across the world and the goal in it is not doing a lot of math to figure that we want 3x or 5x. The way we go is, will the companies be market leaders in their segment, and how big can they get and then is there a potential IPO or M&A with healthy multiples.

Typically how do you plan an exit in investments?
We can’t plan. The exit is entirely decided by the entrepreneur, CEO and his management team. It is them who will have to decide where the business is going, whether the expectations and assumptions in business plan are being met, etc. It is the team that decides whether it is enthused and wants to take it to the next level. It could also happen that certain assumptions are not panning out and there is a great offer put out on the table. As a team, if they think that this is the right thing for the company, we as board members and investors end up listening to the company, as opposed to taking our own decisions about an exit. Based on the team’s gut feel, pulse and inputs, we collectively make a decision.

What kind of exit do you prefer at DFJ?
If the company can go public, that is great for everyone—the team, the entrepreneur, and the investor. Many believe that an IPO is the end event. The fact is that an IPO is just the beginning of a company’s journey. Of course, there are lots of challenges that the company will have to be prepared for as a public company. For instance, you have got to have a great price-earnings ratio (P/E ratio), which depends on the earnings per share (EPS), to have a good market capitalization.

Sometimes even M&A scenarios play out well, where the company has built value, and then a bigger player decides to enter the game. Companies like Cisco, Microsoft, and Google are all acquiring companies, because from their perspective, it makes more sense to buy a company already doing something they want to get into to get the time and market advantage as well as a team that has already done it, rather than do it on their own. However, we do not get into a deal thinking that this company is going to be acquired sooner than later; we do not have that crystal ball. What If the market goes down? Then the market capitalization of these potential acquirers will also go down. In this case, they may delay the acquisition or not acquire the company at all. You would end up getting caught between a rock and a hard place if the business has been built based on an assumption that it is going to be acquired very soon.

Do you see Indian companies reaching the level of say, Hotmail, Skype, etc? What will take for an Indian entrepreneur to build his company to that level?
I would say we are at an interesting stage. We have not seen any significant success stories yet. Naukri.com is a great success story; they went public and have a healthy market capitalization and good market leadership. However, we don’t have many case studies yet. Now, we are seeing an entire ecosystem being built around entrepreneurs in an Indian context. So, my belief is that we will see more and more case studies in the years to come. I think in the next three to five years, we are definitely going to see a couple of big success stories.

For Indian entrepreneurs to make it that big, I would say, they have to play in a market that is growing very fast. For instance, look at online travel and online jobs—these definitely have huge growth markets. It did take time for that market to evolve. The question is, can the entrepreneur spot that right market opportunity that is going to grow very fast and be a market leader? If possible, you should have a global outlook, as a local outlook is just not sufficient. The opportunity initially may lie in India but then eventually if it becomes global, then growth will be even faster at that point of time. Such opportunities are the ones that will scale faster and create value for entrepreneurs as well as investors.