Valuations are high but there is enough under the hood to justify them: Eight Roads Ventures

Starting out as a sector agnostic fund in 2007, Fidelity Growth Partners India has streamlined its investment thesis to back early growth companies in technology and healthcare. The global firm, which  re-branded in 2015 to Eight Roads Ventures India, has a portfolio of 44 companies in India at present, including the likes of epharmacy player PharmEasy, enterprise software platform Whatfix, logistics player, Shadowfax, enterprise technology company Icertis and pharmaceuticals company Laurus Labs. 

Having developed a sector-focused approach, Eight Roads Ventures uses its venture partner network which helps the fund in sourcing and evaluate deals, apart from adding value to portfolio companies by bringing in functional expertise. Eight Roads in India has five venture partners including Shirish Belapure, managing director of Zydus Hospira Oncology, Deepak Kanvinde, former president of sales, marketing and business development at Nicholas Piramal India, and Stephanie Robotham, earlier with companies such as Gainsight and Salesforce.

The fund, which has invested in 20 companies including new bets during the first half of 2021, is willing to take early bets now, with increasing Series A and Series A-plus investments, said Prem Pavoor, partner and head of India, and Shweta Bhatia, partner and head of technology, consumer and financial services, in an interview with TechCircle.

While valuations are riding high, both agree that there is a confluence of capital supply, better ideas and stronger entrepreneurs entering the ecosystem which makes it worth the while.

Edited excerpts:

At what stage in a company’s growth do you come in as investors and what are the advantages of being a single LP backed fund?

Prem: For us the sweet-spot are companies with a product-market fit, but in sectors where we have deep experience, we are okay going in earlier. In the US and China, our best returns are coming from companies that bring together ideas and teams. We have experimented doing that in India, but it is still early days. 

As a single LP fund, we are not confined to the stage of the company. For example we were the first financial investors in Laurus Labs in 2012 but by then it was already making Rs 450 crore of revenues. As a fund we have been unique in partnering with industries. For example we partnered with Cipla to spin out their OTC (over-the-counter) and consumer healthcare products into a separate entity and we invested in them. Another example is Caplin Point where we partnered with them to spin out their US injectables business into a subsidiary, Caplin Steriles.

Has Covid impacted the stage at which you come in as investors into new companies?

Shweta: If you compare, the round sizes are getting bigger and even at the seed stage, companies are raising a fair amount of capital. So by Series A, we see a fair amount of progress made in the company and whether it is enterprise technology or consumer technology, we are coming in way earlier. There are a lot of investments we have made in Series A or Series A-plus. In terms of numbers, they are nearly 40% of the pipeline deployment for us now.

Prem:You are seeing a confluence of capital, better entrepreneurs and exciting ideas. By the time we reach Series B at $50 to $100 million, it becomes too large. 

How did you deploy your capital in 2020 — did you see exits? How is 2021 looking?

Prem: We wanted to see how Covid would play out and we were cautious about investments. We did invest in companies where we had a high level of conviction and ended the year with 20 new and follow-on deals. 

The split will show that we like to continue to support our companies and our priority is to make sure that the portfolio comes first and foremost.

We were reasonably good about taking advantage of the high valuations and driving exits for some of our portfolio.We took advantage of the excitement around the API sector and the run-up in the stocks when it came to Laurus Labs. We also exited our analytics services company, Absolute Data, last year. We also sold one of our biologics companies Richcore to Laurus as they wanted to expand and get their facilities from the tablets and capsules to biologic drugs. 

There are a couple more (exits) we haven’t announced that are in play. 

If you look at the pace of investments, in the first half of this year we have made as many investments totally as the whole of last year.

Shweta: There is an exit which is in the news where Toppr is being acquired by Byju’s. There are also some of the companies on the consumer side which are doing well in that 500-plus million valuation range. If these companies are ready to go public, for others there is still a lot of room to grow.

Did Covid change the investment thesis for your portfolio in technology?

Shweta: Our themes haven’t changed but have been reinforced with Covid. For example, enterprise tech was always a big theme for us that has seen a strong acceleration.

Another theme which has been added to it is that in India we are seeing SMBs adopt tech tools at a fast pace, that is another area where India for India and India for Asia SaaS we are looking seriously.

Another area we are looking at now is B2B ecommerce – enterprises traditionally have been slow to adopt electronic commerce but that has changed in the last 12-18 months. We are looking at all the traditional sectors and sub-sectors which can be digitised and can offer variety, quality and price.

In general, edtech – using technology to democratise quality education is something we have looked at for a while and have been excited about. That’s picked up in Covid, there we made an investment in Quizziz. It might be one of the first true-edtech product companies which is providing services to a completely global audience.

Others include direct to consumer brands. Oziva was a recent investment we made. Fintech continues to be a focus area for us and we continue to be excited about insurance, wealth products, payment companies and how that penetration increases.

What kind of tailwinds did you see in healthcare?

Prem: In healthtech, there were two big trends. One that Covid catalysed and the other is what life would look like in the new normal.

Among the first category of trends catalysed by Covid our enterprise SaaS portfolio company Icertis saw a lot of charge led by pharma and biotech companies in 2020 which were signing up for contract management software. Nearly 30-40% of their customer base is in healthcare and life-sciences.

API Holdings is another one which saw orders doubling during the first lockdown and their doctor consultation platform has reached new highs. We also have CareStack in the dental practice management space which has a back-office in Trivandrum. It is the leading software product for dental clinics in the US which were hit hard through Covid. They saw an uptick because dentists wanted to drive revenues at home, look for contactless payment options, curb-side check-in for patients, tele-consults etc. Oziva is another example.

We invested in a London based company called Proximie which allows experts to virtually scrub in to a hospital operation theatre and collaborate in surgery. 

We will see more global collaboration in the new normal. Also the broader mental health paradigm will be at the forefront. 

Given the number of startup unicorns India has seen this year, do you find the valuations justifiable?

Shweta: If we take enterprise tech companies, the ability of Indian companies to sell to global customers has gotten stronger because companies are okay with remote selling, remote customer support. There is also public market multiples for the sectors. 

The third thing is about demand and supply – there is a global set of investors excited about India opportunity and are willing to back clear leaders. These companies don’t always get priced on today’s metric but 6 month or 12 month metric. This is coming from a place of high degree of conviction that these companies can hit the numbers. Headline valuations are high, but there is enough under the hood to justify them.

Prem: The valuations are premium and that’s a function of the supply of capital but you can’t discount the fact that these are real businesses being built with real revenues and not just ideas getting valued.

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