Seedfund’s unique experiment is spurring early stage investing in India

CLUB SEED: (From top left) Shreyas Srinivas of Level 10 with Seedfund’s Pravin Gandhi, Mahesh Murthy and Anand Lunia (BW Pics By Satheesh Nair)

Most people redefine themselves in one way or the other when they make a comeback. This holds true for the Indian venture capital industry, where former adventurers got tamer after the 2000-01 Internet boom-and-bust. Pravin Gandhi and Mahesh Murthy, however, have remained exactly the same. And, yet staged one of the industry’s most successful comebacks with Seedfund.

Tuesday afternoons are usually a good time to visit the Seedfund office, tucked away in a by lane off the Mahalaxmi racecourse in mid-town Mumbai. Gandhi, Murthy and team members Anand Lunia and Paula Mariwala can be found poring over monthly reviews of portfolio companies or talking deals. Sometimes Bharati Jacob, the firm’s Bangalore-based managing partner, joins. Tuesday is also when the team catches up with each other’s lives. They mostly work from home or are in the field the rest of the week. It is a throwback to the informal way many VC firms worked when ‘dotcom’ was not a bad word. “It was a good experience for this country as it chastened a lot of people. The true entrepreneur — driven by passion and willing to make sacrifices — began to emerge after that,” says Gandhi, referring to the excesses that marked the era.

Yet, it did not change the way Gandhi and Murthy saw VC investing. In 2006, when they raised Seedfund’s $15-million maiden fund, they had no doubt that they would back only pre-revenue startups. “There was enough money above us. So we picked the seed stage as our sweet spot,” he says. This is where firms need that critical $50,000 (up to $1 million) to build a prototype and test their idea in the market. The strategy was validated last November when German media company Axel Springer bought majority control in automobiles classifieds portal CarWale. Seedfund had picked up 25 per cent in the firm for $690,000 in 2006 and made a profit of $25 million on exit. When the firm invested in CarWale, it had not even raised its first fund. “They wrote us a personal cheque of Rs 30-odd lakhs,” recalls Mohit Dubey, founder and CEO of CarWale.

Teething Time: MyDentist, founded by Vikram Vora, is incubated by Seedfund. It offers affordable dental care

Firms such as CarWale fitted nicely in Gandhi’s own sweet spot. Gandhi has never enjoyed investing in mature firms with proven business models. An active angel investor since 1996 and an early-stage investor with Delhi’s Infinity Ventures, he continued to back ground-up startups well after the crash. In Murthy, who earlier ran early stage fund Passion Fund, he found a kindred soul. While Murthy used the void left by the dotcom crash to start digital advertising firm Pinstorm, he continued to engage with startups as a mentor. “At one point, we were practically running every business plan contest in India,” he jokes.

The exposure to startups of different hues had a big role in firming up the belief that there was a clear need for a specialist seed-stage fund. This unique approach, which mirrors the classical VC style of investing in the US Silicon Valley, has led to 16 deals so far. The first 12 have come from Fund I, which is now fully invested and already in exit mode. Another four have come from Fund II, which the firm raised with a $55-million corpus this February. “We will announce three more deals,” says Lunia, executive director at Seedfund. While a larger fund will allow the firm to put more money to work, the investment thesis will remain the same. “We try to invest in ideas we think will become sector leaders, often creating new sectors,” says Lunia.

So far, this thesis has been borne out by most of the firm’s investments. Vaatsalya, founded by doctors Ashwin Naik and Veerendra Hiremath, is now the acknowledged pioneer of affordable hospitals for smaller towns. It has just raised a $10 million round of funding from Singapore’s Aquarius Capital and is surging towards 20 hospitals by end 2011. Online bus ticketing portal redBus has notched up Rs 120 crore revenues and 3.6 million users. Education solutions startup ThinkLABS Technosolutions now has a presence in 25 schools and 10 colleges. It expects to reach Rs 10 crore revenues by March. “When we met Seedfund in 2007, we did not even know what VC was. It played a big role in helping us become a full-fledged business,” says Gagan Goyal, founder and CEO of ThinkLABS.

Seedfund has had a few other exits, too. It sold its 54.5 per cent stake in online financial services startup Rupeetalk to Delhi-based NetAmbit. It had invested $940,000 in the company in November 2007. It has also partially exited personal health records portal Healthizen and sold off its stakes in SaaS startup Uhuroo and social networking startup Lifeblob (bought by Printo). Not all the exits have been successful, though the investment in each has been under $1 million. “We realised early that some would not make it, and it made sense to cut losses,” says Lunia.

The experience with some of the early exits also drove home the point that a larger fund may have enabled the firm to stay invested in some firms longer. Fund II gives it the ability to do that now. It will invest in companies in e-commerce, mobile value-added services, media, healthcare, education and SME-focused IT products. The ticket size will be $2-3 million to begin with.

All For Cubs
Even as it embarks on investments from the new fund, the founders are on to their second experimental initiative: Seedfarm. This is an incubator for young entrepreneurs who have an idea, but not resources, both in terms of money and office to build the business prototype. The ‘farm’ has already signed up two. Shreyas Srinivas, who founded comic book startup Level 10, is relocating himself and his team from Bangalore to take up residence at the incubator.

The second incubatee is Mumbai’s MyDentist, founded by Vikram Vora, which will operate as a remote incubatee. MyDentist offers affordable dental care at self-branded clinics and already has four such clinics up and running. The uniqueness of the business, apart from being affordable, is that it makes the process of going to a dentist transparent. “When a patient comes in, we first analyse his problem and then offer him a standardised price list. Show me one dentist who would do that!” says Vora.

Seedfund will invest up to Rs 1 crore (about $222,000) per incubatee, which it thinks should be adequate for the first 12 months. If the firm stabilises within the year, it will bring a $2 million round as follow-on funding. Incubatees will also have access to Seedfund’s network of mentors — industry experts and successful entrepreneurs — who will work alongside the startup.

In setting up an incubator, the Seedfund team is addressing the same funding gap they sought to plug in 2006. While they have been partially successful with their first fund, it is clearly not enough. Fortunately, and in further validation of their investment thesis, the need to invest in younger entrepreneurs and businesses is finding some resonance in the VC industry.

New Delhi-based SAIF Partners, which manages over $3.5 billion in funds, is now incubating an apparel e-commerce startup in Bangalore. “We now see a better climate for early stage deals and will ramp up activities in that area,” says Mukul Singhal, vice-president at SAIF. The incubation project, ongoing since January, was born out of an idea that the SAIF team liked. “This kind of a project requires a lot of bandwidth and we may do one more in the next three years,” says Singhal. The firm intends to invest a minimum of $2-3 million in such firms over a period of time.

In Mumbai, Nexus Venture Partners recently unveiled Nexus Seed, which aims to invest in technology, retail and ecommerce startups. The ticket size of funds will range between $50,000 and $500,000. “A lot of high quality entrepreneurs are building capital-efficient businesses using tools such as cloud computing, crowdsourcing and viral marketing. There are not enough sources of capital for them,” says Sandeep Singhal, managing director of Nexus.

To be fair, most VC firms active in India today do not abhor funding pre-revenue startups. For instance, Bangalore-based IDG Ventures India was among the first to incubate one, Aujas Networks, under its entrepreneur-in-residence (EIR) programme. It spun Aujas as a separate firm in 2008. Helion Venture Partners had backed young firms such as Ngpay and R&R Salons. In Delhi, Canaan Partners runs an EIR programme and brought on board former Yahoo India R&D head Sharad Sharma in 2009. Mumbai’s Norwest Venture Partners teamed up with Reliance Venture and TV18 to inclubate travel portal Yatra.

That said, most VC funds that started investing in 2004-05, prefer stable firms. Seedfund shows Silicon Valley style investing can work in India and with reasonably good results. It is time for others to get on to the bandwagon.

-Snigdha Sengupta

(This story was published in Businessworld Issue Dated 04-07-2011)