Seed Capital: Inventus Capital Partners

1M/1M ambassador Irina Patterson talks with Parag Dhol of Inventus Capital Partners.

Irina Patterson: Please tell us briefly about your personal background and about your fund.

Parag Dhol: Inventus Capital Partners is a U.S.–India venture firm managed by successful entrepreneurs and industry operating veterans who have backed over 100 entrepreneurs with operations in India and/or Silicon Valley. Inventus backs entrepreneurs first and foremost. The companies financed by Inventus include redBus (acquired by MIH/Naspers and our biggest success), Vizury, Credit Sesame, Savaari, PoshMark, Power2sme, Policybazaar and eDreams, among others. Inventus started investing out of Fund-II earlier this year.

I am an engineer and MBA. I got into VC in the early days of Indian VC (ICICI Venture). I’ve had stints with two other corporate VCs – GE Equity and Intel Capital, and I have been with Inventus since mid-2008.

IP: How big is your fund?

PD: Fund I is $52 million, and Fund II is $100 million.

IP: Do you or any of your partners have particular industry expertise?

PD: Most of us have entrepreneurial/operating experience in technology firms. There’s Kanwal Rekhi (his company, Excelan, merged with Novell); Samir Kumar (Wipro); John Dougery (Silicon Graphics); and Rutvik Doshi and Manu Rekhi, who spent four years each at Google. Most of us also have significant (i.e., more than a decade each) of VC/angel investing experience. Among us, we have made more than 100 VC/angel investments, primarily in the U.S.–India corridor.

IP: What is your geographical focus? Do you consider yourself a regional, a national or an international group?

PD: We are an India-centric fund, with our investments headquartered in India. But we could target both domestic or overseas markets. Because our investments headquartered in India, we leverage Indian talent or the Indian market.

IP: Is there anything else specific that makes your investing different from any other fund?

PD: Very few funds in India have a team as experienced as ours. Our U.S.–India presence gives us visibility to trends, connections for our portfolio companies, and cross-border deal flow. We also like to believe that we are not susceptible to flavor-of-the-month trends (e.g., e-commerce, mobile value-added services). We also have a reputation for being WYSIWYG [what you see and what you get], and this and entrepreneur-friendly helps to differentiate us.

IP: What are some of your success stories?

PD: RedBus, which was acquired by MIH/Naspers in June 2013; Sierra Atlantic, acquired by Hitachi Consulting in December 2010, and ViVu, acquired by Polycom in October 2011.

IP: What are your current sources of deal flow?

PD: Personal contacts, for example, Wipro (where Samir is from has traditionally been a huge source of entrepreneurs). Also, organizations like TiE. LinkedIn is a source, and we have a presence/speaking slots at start-up events. Angels and angel groups are another source, as is direct approach through websites. [Using] boutique investment bankers is a more limited source because of our smaller deal sizes ($1 million to $3 million).

IP: Out of those, which are your best sources and why?

PD: I have believed that our (VC) business is about diamonds in the rough – doing those five or six high-quality opportunities out of the more than 1,000 that come our way every year. Given that, discriminating between deal sources is, in my view, barking up the wrong tree. I treat every entrepreneur I meet with an open mind and decide thereafter based on what I hear.

IP: If you could imagine an ideal system of deal flow, how would it look?

PD: For the reason stated above, I do not think in terms of an ideal deal flow system. “Lay your net wide and then pick the right ones” is the philosophy. In India, where the technology industry is more diverse than deep, sieving, I believe, is misplaced.

IP: How can entrepreneurs who seek funding reach you?

PD: We try to respond to every entrepreneur who approaches us (through any means) in a reasonable amount of time. Are we always successful? No. But we try (and try hard).

IP: On average, from all sources, how many pitches do you receive a month? How many pitches would you like to receive?

PD: We receive 70-100 a month between the U.S. and India. We find that level of deal-flow manageable between the six of us.

IP: Of all of those pitches, how many deserve a closer look?

PD: I would say that for 20% of them we take a second meeting – a second opinion from another partner being the typical reason.

IP: If you see a promising pitch, what are your next steps of engagement?

PD: We have a unanimous decision-making system. So, if one of us meets someone we like, another two of us take a physical meeting. Assuming three of us like it, we have a physical meeting or a video conference with the founders. A term sheet follows soon thereafter. Legal, financial, and due diligence documentation comes after that.

IP: Do you hold regular meetings where selected entrepreneurs have a chance to present? How often?

PD: Each of us takes ten to 12 meetings or calls with entrepreneurs every week (on our own or with other partners).

IP: What factors do you give the most weight to when debating whether or not to fund a venture?

PD: The entrepreneurial team is first. Market opportunity and differentiation are second. However, given the moving parts here, this probably takes more time.

IP: Is there anything by which your group is very different from other groups in using to valuate a start-up company?

PD: I would suspect not. Valuation at this stage is more of an art than a science. However, I would suspect our reputation is that we don’t overpay!

IP: How do you usually conduct your due diligence?

PD: Calling customers, partners, ex-employees, experts, and so on.
Financial and legal due diligence are outsourced to small firms. (They do a deeper job than the big names is what we have found.)

IP: In the past twelve months, how many investments have you made?

PD: We have completed five investments till date in 2013. We should exit 2013 with six completed investments.

IP: What is the dollar amount you usually invest?

PD: We usually invest $1 million to $3 million.

IP: How often is your investment the “first money” for a startup?

PD: In about 50% of the cases. Lately, though, we have noticed that there is an angel or group before us more often than not.

IP: How long does it take a company to receive the funding from your group?

PD: Two to three months.

IP: What is a typical valuation of a company that you invest in?

PD: It’s $3 million to $6 million.

IP: In terms of percentage, how much of a company’s equity do you usually seek?

PD: It’s 20% or more.

IP: What is a typical return you seek, and over what period?

PD: Tenfold-plus over five to seven years is the internal “hurdle” we set for ourselves. We have gotten there in one of our exits and halfway there in the other two (in much less than five years, though).

IP: What stage of the business development do you usually prefer to invest in? (E.g., an idea on paper, product ready, validated with customers, without revenues, with revenues?)

PD: For services or platform-led services, we would want to see some ($10,000 to $20,000) revenues. For products, we want to initial validation with customers (beta) or beyond.

IP: What should be the TAM (total available market) for the company’s product/service?

PD: $200 million is the rough yardstick we have used.

IP: It has been said that angels usually invest in someone they know personally. Is that true with your group?

PD: Not really. Today the world is so well connected that doing a 360 degree on a person/team, is not that difficult.

IP: Do you invest in teams straight out of school, or do you require previous business experience? If only with experience, what level of experience do you require?

PD: There are no hard and fast rules, but some experience helps. For example, Phani at redBus was three years out of college when he started. The folks at Unbxd are 28 to 29 years old (we just invested in them). We also have invested in 50-year-olds!

IP: Do you invest only in complete business teams? Or does a single founder also have a chance?

PD: We believe that entrepreneurship can be a lonely journey – hence single founder will be an exception. Our teams are definitely not complete when we invest.

IP: Are there some character traits of a founder or founders that could clinch the deal?

PD: Intellectual honesty, passion, and persistence.

IP: What is an average number of deals you review a year, and how many you usually invest in out them? What is your ratio?

PD: Five to six out of more than 1,000.

IP: What do you do with the businesses you don’t invest in, if anything?

PD: Given that most of us are closely involved with TiE, mentoring is part of who we are. We try to provide constructive suggestions wherever possible. We also have a “track six months later” category in our deal-flow for people we like but who are not yet there.

IP: Do you have any sector preferences?

PD: Several: e-commerce, web 2.0 and web 3.0, SaaS/cloud computing, enterprise 2.0 and enterprise 3.0, that entire group. Essentially technology, broadly speaking: Internet, mobile, software and services.

IP: Do you have to have an exit strategy, or would you invest in deals that can go on generating dividends over a long time?

PD: No, we would not look at a dividends-type opportunity.

IP: What is your preferred investment type? (E.g., common shares, preferred shares, royalties.)

PD: Preferred shares.

IP: Do you do debt financing, convertible, non-convertible, or terms?

PD: No, we don’t.

IP: How long you prefer to stay invested before you exit in case of deals that are likely to go through M&A?

PD: At the stage we invest in, we expect to be in companies for five to seven years. Our track record of the past (investing as VCs/angels in our previous avatars and our three exits) is in this range.

IP: What exit strategies did you have in the past?

PD: M&A predominantly; IPO less so.

IP: Do you have a preferred exit strategy? If so, what is it?

PD: Ideally IPO – but the statistics shows this is likely to be possible only in a minority of the companies. M&A is more likely.

IP: To finish up, could you tell about an investment that had a particularly interesting story?

PD: You have heard the redBus story, so let me give you the Vizury one. This is a product company out of Bangalore, incorporated in 2008, and has more than 85% of its revenues coming from international markets. It has 30 people in China! The company has grown 25x in the last two years. They do retargeting (an online display technology; check Criteo, the French–American company that listed a month or two ago on NASDAQ for “comparison” purposes). We invested in October 2010 when 98% of its revenues were from India.

IP: What is a single most important thing that angel-backed founders could do to increase their chances of success?

PD: Focus.

IP: What is a single most important thing that angels could do to increase their returns?

PD: Not follow the herd.

IP: Do you track your cumulative internal rate of return/IRR? Could you share it?

PD: Yes, we do. I can’t share the exact number, but LPs tell us that Fund I would be in the top decile (per accepted benchmarks for U.S. VC funds of our vintage).

IP: What are your daily challenges as an angel?

PD: Exits in India are still few and far between. We also wish there was less friction in the business environment in India.

This segment is a part in the series : Seed Capital