Kanwal’s conversation with Archana Rai, Eco Times

Kanwal’s conversation with Archana Rai, Eco Times

Haze on tax laws can slow investments: Rekhi

In 2008, when most risk capital investors were coping with the onslaught of the global recession, Silicon Valley veteran Kanwal Rekhi and his team was busy raising capital for an early-stage investment firm in India. Three years on, Inventus Capital Partners, which manages a $52-million fund, has backed about a dozen start-ups and expects to have up to 20 companies in its portfolio by the year end. In conversation with Archana Rai and Radhika P Nair, Rekhi says the fund is now looking to raise fresh capital for India as early stage investing gains scale in the country.

How do you compare early-stage technology entrepreneurship in India with that in China?

The internet economy in China is more vibrant. There are 200 million broadband users in China while India has 11 million. Last year, over 40 Chinese companies listed on the NYSE while only one Indian company listed on the NYSE. The year before that it was 40 companies from China and none from India. So, India has been losing out in investor mindspace. There is money, but it is not growing. Indian VC funds have not been stellar in their returns to investors yet.

But there is huge entrepreneurial interest in the country. In 2010 we looked at 700-800 entrepreneurs before we made six investments. The problem with China is different. There are some sectors that are not open to foreign investment. You never know when the government will fund somebody against you. But by and large they have done a much better job than India.

What are the issues investors face in India. Can this slow down a booming start-up ecosystem?

Venture capital and private equity investments take five to 10 years before there is a payout. You invest with one set of rules and it changes. A lot of PE companies have been impacted due to lack of clarity on tax. We invested in a US company Sierra Atlantic, with a development centre in Hyderabad. It has been acquired by a Japanese company. It took us a long time to figure out if that transaction was taxable or not. This can slow down investments because people don’t know the rules of the game. But the marketplace is pretty healthy.

We have done six deals in India, which is pretty healthy. Our fund was planning 18-20 more in about 4 to 5 years, the 12th and 13th are already under way. We are keeping the pace we have set for ourselves. Hopefully, by end of the year, we will reach 18. For entrepreneurs and early stage VCs, these are good times.

Is there enough flow of capital and interest from Limited Partners (investors who put capital into venture funds) into India?

In the venture capital space (not PE space), $500-$700 million a year invested that is steady. The PE part is larger, but that has come down a bit. The rewards have not been there. India has not seen a Baidu or an Alibaba.

You have spoken earlier of scouting for investments in India’s Tier 2 cities. Have you identified any?

Tier 2 cities is where the real story of India is right now. Eventually, it will be the villages. That is still where most Indians live. In the last 18 months, I have been to Hubli, Nagpur, Jaipur, Kanpur, Chandigarh, Bhubaneswar, Coimbatore and Salem, among other places. We are investing in entrepreneurs from Nashik. We are talking to two entrepreneurs based in Bangalore but are from Bhubaneswar.

So are you raising a new fund?

We are looking at raising fresh capital of $125 million. We were planning to raise the same for the first fund, but then the 2008 recession happened and we closed at $52 million. We don’t believe an early-stage fund needs more than $125 million. More money starts to be a problem. You will have to put $10 million per company which is too much for an early-stage company.

This leads to divergence of goals between the LP (Limited Partners who provide the capital for a venture fund) and general partners (the fund manager who invests the money). The GPs can make a million or more in management fees while the LP may not be making any money.

Do you see a bubble in sectors such as e-commerce with too much money chasing start-ups?

I think too much money is chasing e-commerce. In the late 90s, when I used to travel to Mumbai, all the hoardings were about dotcoms. This was happening in the US also, but India had just half a million internet users and people were spending this kind of money. Indians are a little bit trendy. Social networks, discount sites are examples.

But you are still investing in the e-commerce sector?

Yes, we have backed online ticketing company RedBus; just closed its next round of funding and there was so much interest. So we are not complaining.

We did a pro rata. They got a very good deal. They have a 5x step up. But then, RedBus, if it gets a share of 50% of the bus tickets in India, they will be close to a billion-dollar company, with just bus tickets. So it is about what kind of e-commerce company you are investing in.

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