Capital efficiency key; may skip Flipkart-like bet again: Inventus’ Samir Kumar

Venture capital firm Inventus Capital Partners has been around for almost 25 years globally, and in India, for a decade. It has always invested from two funds in companies in the US and India. But this year, the VC firm decided to set up an India-dedicated investment vehicle and has set the first close at Rs 175 crore. The third fund has been set up by Inventus’ local team comprising Parag Dhol, Rutvik Doshi, and Sameer Kumar and will broadly focus on technology companies.

For the second fund, Inventus had raised $106 million in 2014 and had mopped up $51.2 million for its maiden fund in 2007-09. From these two funds, Inventus typically invested between $1 million and $5 million in companies in consumer and business software and technology-enabled services.

Before B2B became a buzzword in the investor circles, Inventus had already made three investments in the segment. Between 1993 and 2006, the firm backed 65 US companies and 26 Indian firms, according to its website. Of the total 91 investments, it has exited 51 companies with a 36% gross pooled internal rate of return with an average holding period of five years, it adds.

The VC firm had made one of the earliest exists in Indian e-commerce when South African Internet and media giant Naspers acquired bus ticketing site redBus.

Samir Kumar, one of the firm’s managing directors, spoke to VCCircle about its portfolio companies, investment strategy, and how the Flipkart-Walmart deal debunked the perception of India being a difficult exit market. Edited excerpts:  

How is your current portfolio doing?

The India investments of the last two funds have done well. The first fund—it was a $52-million fund—was roughly half invested in India. The second fund was $106 million and we made 12 investments in India. The companies have done very well. From the first fund, we had a very good exit with redBus, which happened five years ago. We had another very good exit with digital marketing startup Sokrati, which happened last year, and Insta Health Solutions, which happened two and a half years ago. We have some high performing companies remaining in that portfolio. So, we think that there will be some very good exits happening in the next 12-15 months.

Fund II is also doing very well. 10 out of our 12 companies have raised their next round of funding at higher valuations. Our Fund II portfolio also includes PolicyBazaar, which is almost a unicorn, if not a unicorn. It is one of the few profitable companies in the Internet space that is growing very rapidly. We have had good exits, which is not that common in India. The Walmart-Flipkart deal is very good for the ecosystem because exits are few and far between. This helps the whole exit environment too.

Power2SME is also one of your portfolio companies. Do you think that the B2B sector is going to drive the next phase of growth in Indian e-commerce?

We are not investors driven by herd mentality. Power2SME was an investment we made six years ago, when no one was looking at B2B. If you remember in 2013, 2014 and 2015, business-to-consumer was the only thing that mattered. We made investments in Power2SME, Peel-Works, and MoveInSync—all of which have matured and are doing very well now. In that sense, we are contrarian investors. We don’t necessarily follow the flavour-of-the-day trend. We look at entrepreneurs and it doesn’t matter to us whether it is B2B, B2C or anything else.

Kanwal Rekhi, Inventus’ co-founder and Silicon Valley-based partner, had said that he doesn’t regret giving Flipkart and Snapdeal a miss. Do you agree with that, after seeing Flipkart’s big exit?

I don’t know what Kanwal said and I don’t want to comment on his statement. But would we have liked to be in Flipkart? Seeing this exit, sure. But for us, given the size of our fund, capital efficient companies are critical for us. So, yes I would have loved to be in a $20-billion exit, but would I pass that opportunity again? Maybe I would. For us, companies that need $6-7 billion and still don’t turn sustainable is a very high-risk proposition for a small fund.

There are a plenty of opportunities to invest in companies which turn profitable with $30-50 million and yet reach billion dollar valuation. PolicyBazaar is a clear example of that. It has become profitable on very small amounts of cash. It may raise money or not but it is almost at a billion dollar valuation. We think we can have two to three billion dollar exits with very little dilution. So, those are the opportunities we will pursue.

It doesn’t mean that pursuing Flipkart is wrong or the investors who did it were wrong. The key is capital efficiency. redBus again, it turned profitable on $9 million of cash raised with $6 million sitting in its bank at the time that it was acquired. Those are the sort of opportunities that we will continue to pursue.

Do you think that the word ‘profitability’ is gaining more prominence among VCs these days?

I don’t want to comment on other VCs. For us, profitability was always important. Not that we invest in profitable companies. We are Series A investors. The companies that we invest in are obviously loss-making at that time. At the time of investment, we should be able to see a path to profitability.

This interview is part of our InvestorSpeak series in which leading angel, seed or venture investors share their insights on the startup ecosystem in India.