After three write-offs, is it the end of the road for the Infosys Innovation Fund?

Last week, Infosys wrote down yet another startup investment, this time in Mountain View, California based Waterline Data. Infosys had invested $5.5 million (around Rs 360 crore) over two tranches, in 2016 and 2018, in the data analytics firm. The write-down marked the third one in a row for the Bengaluru based information technology (IT) services company from its Innovation Fund.

In all, the Innovation Fund has backed eight startups across the emerging technologies spectrum. Of those, three, including Waterline Data, have been written off. 

In late January this year, it sold its stake in Danish artificial intelligence startup Unsilo for $0.8 million (Rs 5.7 crore), taking a big haircut on its original Rs 14 crore (around $2 mn) investment. Earlier, in 2017, it wrote down its entire $15 million investment in DWA Nova, a spin-off of movie production company Dreamworks Animation. The Unsilo and DWA Nova investments were made in 2015.

The portfolio has also seen one moderately successful exit. In 2017, it sold its minority stake in Israeli cloud computing startup Cloudyn Software for $4.4 million when the latter was acquired by Redmond headquartered technology major Microsoft. The Innovation Fund had invested $4 million in Cloudyn in 2016. 

The remaining portfolio includes Trifacta, TidalScale, ideaForge, Speck, Airviz and Whoop. Apart from startups, it also has investments as a limited partner in venture capital funds Stellaris Venture Partners, and The House Fund.

The write-offs are the only activity in evidence from the Innovation Fund at present. Since 2016, it has not made any new investments, barring a $10 million limited partner commitment to The House Fund early last year.

So, why is one of India’s most successful homegrown IT services companies stumbling with its corporate venture capital programme?

When Infosys first announced the Innovation Fund, back in April 2013, the plan was to get off the ground with a modest $100 million corpus. Then, in January 2015, five months after SAP executive Vishal Sikka took charge as CEO of the IT services company, the corpus was bumped up to $500 million.

The expanded capital pool, the company said at the time, would be used to invest in young companies world-wide that were innovating in areas such as artificial intelligence, automation, internet-of-things collaboration and design. The investment objectives were aligned with what was dubbed the ‘Infosys 3.0’ strategy which aimed to refocus the company on IP-related products, platforms and solutions (PPS) businesses and enable it to move higher up in the value chain.

As part of the same initiative, under Sikka, Infosys also acquired startups to bolster the company’s emerging technology capabilities. Notable among those were Tel Aviv-based Panaya and San Francisco-based Skava. In 2015, after having paid a combined $320 million to buy them, the company had to write down most of the value of those acquisitions.

The Innovation Fund seems to have lost steam with Sikka’s exit from the IT services company in August 2017. Prior to his exit, Sikka was under considerable pressure from Infosys’ founder-promoters and external shareholders over several matters, including corporate governance issues, forcing him to put in his papers.

Incidentally, about a month before Sikka put in his papers, Yusuf Bashir, handpicked by Sikka from SAP to head the Innovation Fund, also put in his papers. The post remained vacant for nearly a year before Infosys put long-serving executive Deepak Padaki in charge of the portfolio. 

Despite Padaki, who is also executive vice president of strategy and M&A and chief risk officer, being in charge for nearly two years, the Innovation Fund has largely remained in cold storage since Sikka’s departure.

That situation may have a lot to do with Infosys’ refocus, again, under its new CEO Salil Parekh, who took charge in January 2018. This time the company has turned its focus to augmenting its traditional services portfolio with large acquisitions including Simplus and ABN AMRO among others. 

"Many of these investments (from the Innovation Fund) were made in the Vishal Sikka era. I think the thinking of the current management is different and they are investing in complementary services capabilities. If they are able to extract any value from the past investments, they would continue. Else, they will write-off," says Shriram Subramanian, founder of Bengaluru based corporate governance and advisory firm InGovern. Subramanian also headed Infosys Consulting between 2002 and 2010.

Given its somewhat tumultuous recent past, it would be fair to say that the Infosys Innovation Fund never really had the opportunity to play to its full potential. 

"...a portfolio approach has to be taken and Infosys would have needed to make 20 to 50 investments to really evaluate success or failure. I don't think Infosys and other Indian IT services players have the teams and mindset to make venture capital style investments," Subramanian says.

It is important for large firms such as Infosys to have a clear idea about what they want to achieve from these investments. “The company’s investment pattern showed that it was not a cohesive plan with some random exotic investments,” says another former Infosys executive who requested anonymity. 

"The startups' solutions should be in the periphery of what your customers want. Just by acquiring startups, a legacy company cannot become digital. You need to play to your strengths such as a large client base, scale or reach, customer relationships and the system integrator ecosystem," the executive cited above adds.

Strategically, Infosys’ aspirations for a corporate venture capital play are neither novel nor misplaced. A host of global technology leaders from Intel to Microsoft to Salesforce, even Sikka’s former employer SAP, have built out large and successful corporate venture capital programmes that have earned them rich monetary returns and allowed them front row access to some of the latest innovations in emerging technologies. 

"The idea of a venture (capital) fund or startup investments is good. It gives you an idea about the latest innovations or disruptions happening in the industry,” says Sanat Rao, managing partner at San Francisco-based Shyn Capital, a venture capital firm that bets on blockchain and digital assets.

“However, the quantum of benefits for a services company is negligible. In most cases, small startups or minority stakes won't add anything to your topline. Making such investments work for you is difficult," he adds.

Rao, who previously worked with the Intel and Microsoft startup investment divisions, said that many companies make random startup bets when they fear being disrupted by innovations. "You don't understand the new innovations happening around you and you react in a knee-jerk fashion," he says.

For now, it would appear that the experiences with the Innovation Fund so far, notably the write-offs, have compelled Infosys to err on the side of caution.

"Under Parekh, Infosys is playing the defensive game. This will work in the short term. But are you innovating enough? In 2015, the fund was started as a knee-jerk reaction to disruption in the industry. Will history repeat again?" the former Infosys executive cited earlier wonders aloud.