Ojas Ventures Bets On Cos Leveraging E-com Biz: Rajesh Srivathsa, Managing Partner

Ojas Venture Partners is a $35 million early-stage venture fund sponsored by Nadathur Holdings & Investments. Ojas primarily focuses on early-stage venture capital financing & investment and funds technology-based businesses across diverse sectors such as mobile technology, telecom, low-capex semiconductor, Web applications/services, consumer Internet and other tech-related fields. The fund has been floated by Raghavan S Nadathur, co-founder of Indian IT giant Infosys, and has invested in companies like TeliBrahma, CoCubes.com, Tyfone, RiverSilica and Ziva, to name a few. The firm makes an initial investment of $250,000-$1.5 million, followed by subsequent rounds of up to $3 million per company. In a free-wheeling chat with VCCircle, Ojas' Managing Partner Rajesh Srivathsa has shared his insights regarding funding strategies, e-commerce trends and new investments. Here are the excerpts.

How are your portfolio companies doing?

Currently, we have a mixed pack of 10 companies and given out term sheet for three new firms. But I can't disclose their names right now. All the three companies are into media, financial services and gaming, but not into mobile space. Of the 10 companies, three are already into revenue traction and five others are still in the R&D stage, which means the technologies are not yet validated. We have funded them to get the technologies developed and also to look for pilot customers. They are also going through business model validations. However, we had to withdraw our investment in Bangalore-based Arigami Semiconductor Systems. The funding was for validating certain algorithms but unfortunately, those could not be validated.

Tell us more about the three companies which are in revenue traction mode.

Right now, those three portfolio companies are looking at revenue traction of more than Rs 1 crore per month and we are currently looking at revenue traction of about Rs 4-5 crore in the next 24-30 months. Also, there is one firm in the R&D phase that is stirring up huge interest from customers.

What do you have to say about the current surge in e-commerce investments? Are they somewhat inflated?

It's very difficult to say whether they are inflated or not. But the broad question is: Is e-commerce here to stay? And the answer is: It will certainly stay. We have seen a reasonable number of people getting on to the Internet and transacting. And people now have a fair amount of trust in e-commerce firms. So a growing customer base is well in the making. However, the valuation is anybody's guess. For any e-commerce business, you are bound to lose a lot of money initially to get customers traction and get the volumes. Only after that you can start realising the benefits. I think these companies are currently in that initial phase "they are still getting more customers on board and building brands. So it's difficult to predict the winners at this phase.

In spite of the recent e-commerce boom, why do you prefer to stay away from this space?

There are several reasons. First of all, e-commerce requires significantly high investment in each company and it's not easy. We are very cautious because we are a small fund. Had we been a large fund, it would have definitely made sense to go for some kind of e-commerce play. Then again, with a plethora of e-commerce companies coming up, there will be a huge competition in the market and success will be a much tougher proposition. So instead of making a direct foray into e-commerce, our strategy is to bet on companies who leverage the e-commerce business.

So what's your plan regarding future investments?

We are looking at multiple deals but nothing has been finalised and we haven't given any term sheet yet. We don't have an issue with the management teams or the markets they are looking at. But we do have an issue with the kind of money they require and the kind of competition that's shaping up. So nothing is final, as of now.

Can you give us some defining trends in e-commerce?

I think it's too early for that. In fact, we haven't seen any specific trend yet. Of course, people are buying a lot of products – right from books and gadgets to apparels, cosmetics, jewellery, handbags and even shoes. I agree that first-generation e-commerce companies like Yatra.com, Cleartrip and RedBus are already successful. But these are virtual businesses specialising in ticketing and hotel booking. These vendors are not the actual brick-and-mortar companies whose services we prefer "they are not the leading airlines or the famous hotel chains that you are booking. But even then, more and more people are transacting now and people are surely getting over their initial concern regarding the quality of the products/services for which they have paid. However, it's still an urban phenomenon, at least largely so. Of late, people from tier II cities or even rural areas have started ordering goods online but we need to see where it's leading us. If it happens more frequently, e-commerce will fundamentally become a logistics game in emerging markets. As logistics gain significance, you will see a lot of e-commerce companies invest in that area. Which is again a very wise decision but nobody actually knows which of these companies will emerge winner.

During investment, what are the key factors that you look for in a company?

Basically, there are two things. First, you need to look at the quality of the management team "the passion, honesty and hunger that they have for understanding the space they are in and the business they want to develop. Prior experience is not always necessary, especially as we invest in very early-stage companies. But it matters how passionate they are about their business. Also, we try and find out how large the market is for that particular business, what the target market is or if it is easy to enter that market. Because every market has an ecosystem and you have to play in sync with that. We also look at other factors like whether it is a reasonably new area of business, who the competitors are and how well-funded they are.

Do you have any near-term exit in mind?

Well, we are not necessarily pushing for an exit. We want to build our portfolio companies until they are reasonably valued. Within the next 24-30 months, we want three of our portfolio firms to reach the traction of Rs 4-5 crore per month. But I can't say much about the other five companies, which are still in various phases of research and development. It all depends upon how they shape up.

Till date, your fund has been sponsored only by the Nadathur Group. But are you planning to raise money from other investors?

When we started in 2007, we had been very cautious and didn't invest too quickly because we ourselves didn't know what would work and what wouldn't work in the Indian market. So out of the first fund of $35 million, we still have room for four more investments in addition to the term sheets that we have already given for the three companies. The existing fund will last us till the end of 2012 and we want to make sure that this fund shows a reasonable amount of value creation in the early-stage investment space in India.

As for the second fund, we haven't yet decided what we want to do about it. But in the next six months, we will have clarity about our strategy; we will know where we are headed and we will also have a clear idea about that fund – in terms of focus and corpus size.

Finally, do you regret not investing in a specific company?

There are many such cases. But if you ask me about one specific company, I would say it's Flipkart. My partner looked at it very early on but we were not too sure, partly because we were concerned about the kind of money required to make it successful. Perhaps we should have looked at it more closely but we didn't. However, these things happen and at the end of the day, it's a learning game. We need to understand what works in an emerging market and can't really apply the same principle that works for the west.