Having invested in 13 companies since its inception, including the likes of Digit Insurance, which is currently valued at $3.5 billion, Sugar Cosmetics, Exotel, A91 will take slightly larger sized bets from the new corpus.
In August, ET
reported that A91’s new fund had closed and it had roped in limited partners, or sponsors, like The Canada Pension Plan Investment Board and financial services major Allianz group. Founded in 2018 by three former Sequoia Capital managing directors, Abhay Pandey, VT Bharadwaj and Gautam Mago, the Mumbai-headquartered firm had raised one of the largest maiden domestic funds by Indian general partners at $350 million two years ago.
Talking to ET about the latest fundraise, Pandey, said, “Our objective was to invest in companies where we have the possibility of making a 5X return with an optionality for an upside. At this stage we think 80% plus of our companies will fall under that criterion, although we have limited history of just a couple of years on them… Keeping valuations aside, despite two waves of Covid-19 impacting them, these companies have grown very well business wise.”
The funding environment has changed dramatically in the past year with more than $25 billion of risk capital being raised by Indian startups and as many as 36 new unicorns being birthed in 2021 alone, but Pandey said A91 was clear they did not want to further increase their fund size, at least not for now. “ When we launched the first fund in 2018-19, we had a certain set of opportunities in India that we needed to address as per our team’s bandwidth and $350 million was good then..” he said. But the market opportunity has expanded which is why we can now invest $ 25–$30 million across 15-17 companies with a larger sized fund, that’s the math we did, he said. A91 invests across consumer, healthcare, financial services and technology companies and backs companies which have net revenues of about $7-10 million. The fund says it is focused on businesses that have somewhat proven themselves, which may not be an ever standing view but for now it will look to invest in such companies.
Pressure to be larger, more aggressive?
Most India-focussed investors have opted for enhanced fund sizes as the market becomes intensely competitive with the likes of Tiger Global, Falcon Edge and even traditional VCs such as Sequoia Capital closing record number of deals this year. Stellaris Venture Partners raised $225 million for its second India-dedicated fund, almost three times the size of its $90 million maiden fund, launched four years ago. Nikhil Vora’s Sixth Sense Ventures racked up Rs 2,500-crore for its third fund, five times bigger than his previous fund.
Mago said that while there were discussions to raise more, they deliberately chose not to do so as it allowed them to be more disciplined. If we have to raise more money, there is always an option to do that. “ If you spoke to our LPs they should be saying that we are trying to balance the forces of being relevant and productive investors along with being disciplined..” said Bharadwaj.
On the cut-throat deal making and skyrocketing valuations, Pandey said,“ We are genuinely struggling with valuations in an environment where investors have been humbled and made to feel like a commodity due to the surplus liquidity. The level of competition is very high which has meant that there have been many rejections and disappointments in recent months. So what you do is– you pick your spots, and work hard on them.”
The former -Sequoia squad of Pandey, Bharadwaj and Mago had backed companies like Bira, Vini Cosmetics, Oyo and Prataap Snacks, among others during their decade-long stint at the Silicon Valley fund. While Mago left Sequoia in 2017, Bharadwaj and Pandey quit the venture fund in 2018.
Fear of missing out?
While striking a balance between being productive and exercising caution, does A91 miss out on a lot of the buzzy companies and highly-priced rounds? “ The pressure is about .. It is not that we can’t invest in expensive rounds but ideally we do not want to invest in all expensive rounds..” said Mago.
There is always tension between being relevant, which is defined by size, and the fund’s performance. Increasingly mega sized funds are being raised with the likes of Tiger Global, Insight Partners, globally amid an unprecedented funding boom. Pandey said that while founders are inclined towards picking investors who can cut cheques from the series A to much later rounds and even participate in their public offerings, the larger you get it becomes more difficult to maintain the fund’s performance.
Portfolio performance, exits
Talking about up-rounds, markups and general bullishness in valuations, Bharadwaj said that currently the market makes every investor look very smart for every investment they have made but do you deserve to be called “smart”, only time will tell, he added.
Four of A91’s portfolio companies have clear markups but that’s not what the firm is focussed on, Pandey said. “ Markets are changing everyday..In the valuation view of the world…it’s good to be happy for a very short period of time but this should not be the basis of your fund performance and long term happiness …”
On clocking exits in the background of a slew of startups tapping the IPO market, A91 is hopeful a few of the firms like Digit Insurance will mature to go public over the next year or so. “ We are not a fund with a 30-year track record where we do need to show distributions because LPs trust us…people have trusted us with their capital and there is a certain discipline required in the business of returning money at consistent intervals of time..,” Pandey added. Typically, funds start returning capital five-six years from investment. We have some more time, after that we have to start sending back money, he said.
As for a crush of companies going public at valuations higher than private markets, Pandey said it was great for the overall industry as LPs were finally getting back capital that they had been investing in India for over a decade. “Public investors balked at private market valuations but are now paying it back with interest..” he said. M&As were never a likely exit route in India so IPOs will be the best way to make returns. We should be thankful as many companies will see this as a future exit which gives confidence to the broader ecosystem, he said. However, Bharadwaj said that people should not celebrate prematurely as India needs to see a steady flow of these IPOs, so that it’s not a one-off period but something that sustains.
