Thick of action

This would make for a curve ball at a trivia contest: What connects Mu Sigma, HolidayIQ, Kaati Zone, Myntra, Virident and Flipkart? No, they are not all technology ventures. The correct answer is that Accel Partners (AP) has funded them all. The venture capital (VC) company, whose India operations are headed by Subrata Mitra, has been furiously funding internet, software and technology related companies for the past few years.

But who is Mitra? The 50-something is an engineer from IIT (Kanpur) with a computer science doctorate from the University of Illinois, who started his career as a software researcher at IBM Labs in 1994. Four years of service later, he turned entrepreneur and started Firewhite, a mobile technology company. After selling Firewhite to Ubiquio, a mobile technology firm, Mitra returned to India in 2002 as the head of India operations of the US-based Tavant Technologies. The entrepreneurial spirit was reawakened and in 2004, he started Erasmic Venture with Prashant Prakash with a self funded corpus of $10 million. Over the next four years, the fund invested around $100,000-500,000 in 14 companies.

In 2008, sensing a much bigger platform, Mitra sold Erasmic to Accel Partners, a Silicon Valley-based technology-focused venture fund. The VC firm has offices in China, London and New York and has $8.8 billion in assets under management. Worldwide, it has invested in over 300 companies including Facebook, Groupon, BitTorrent, Comscore and Admob and closed 2011 with eight deals valued at close to $38 billion.

Erasmic’s other partners, Mahendran Balachandran and Gagan Kumar, too, joined Accel India at the time. Accel’s strong fund-raising muscle and Erasmic’s expertise of the Indian market has led to a fund that understands the needs of technology startups. Take Flipkart, for instance. Mitra led the series A (first significant fund raising) investment round, pumping in $1 million, and joined the company’s board in 2009.

The e-tailer is now reportedly valued at $850 million and closed FY12 with estimated revenue of around ₹500 crore, although it is still to break even. Yet another winning example is analytics firm Mu Sigma, Erasmic’s first seed investment in 2005. The firm was reportedly valued at $500 million in December 2011 when it raised $108 million in private equity led by General Atlantic. Industry watchers believe that Accel exited the company with a manifold return, after reportedly having invested close to $500,000 in its Erasmic avatar.

Flush with funds

Accel is now among the most active seed and early stage tech VCs in India. Accel has funded seven deals so far this year — Hotelogix, Bluestone, EnterpriseNube, Zansaar, PropTiger, BabyOye and Forus Healthcare — for close to $19 million. This recent spate of start-up funding takes the investment count to 40.

Mitra says the venture capital fund is committed to the long term potential in the Indian market. “We expect to raise India-specific funds every three years.” He adds that while the size of the new fund or funds would depend on the kind of market opportunity, chances are that it would be higher than existing funds. “Our first fund was around $10 million, the next $70 million, and now we’re at $170 million,” he says. Most of its deals have been in the $250,000 to $2 million range so far. However, there have been exceptions. Especially, when Accel combined with others to push in money into promising ventures. (See: High flyers)

High flyers

Accel’s big investments have the potential to become segment leaders

Many attribute Accel India’s pace to the pedigree of its local partners. “Most of Accel’s partners in India are technology entrepreneurs who survived the first dotcom bubble in 2000. People like Mitra have founded and sold companies and have a finger on the pulse of technology and market need,” says Arun Natarajan, CEO of Venture Intelligence, a research firm that focuses on PE and M&A in India.

Apart from Mitra, other Accel partners, too, come with solid work credentials. Prakash, for instance, has a masters in computer science from Maryland University and founded Netkraft, an offshore solutions company focused on healthcare and retail, before selling to US-based Adea Systems. Balachandran was the head of Apple Computers in India while Shekhar Kirani headed VeriSign in India after it acquired Lightsurf Technologies, a company Kirani co-founded.

Unlike many other venture funds that tend to have executives with a financial background, all of Accel India partners have started, run and sold companies. And this is what sets the firm firmly apart. “For India especially, having people with an operational background is a must. The challenge in taking an idea to execution stage here is far different from the developed world. People with just a financial background may find it tough,” says Balu Nayar, MD of Morpheus Capital Advisors.

Investees agree that it makes it much easier for them to approach Accel and make the firm understand the power of their ideas and the execution challenges. Entrepreneurs like Gaurav Singh Kushwaha, the founder of Bluestone, an online jewellery retailer that received funding from Accel in January, says that most investors work with companies that have a proven proof of concept (PoC) or a business model that has shown some promise of working.

But Accel even works with teams before the PoC stage. Mitra seems to have the knack of picking and backing a winning hand. “Accel Partners probably knows more about my business than I do. When I talk to Subrata for advice he knows what terms like SEO [Search Engine Optimisation] and SMM [Social Media Marketing] are and gives crisp and in-depth inputs,” he says. Others like Zansaar CEO Jawad Ayaz, too, have a similar view, “There is no other VC who has a better, deeper and clearer understanding of the e-commerce business. Accel brings invaluable insight to our business strategy and operation,” he says. 

Many choices

Mitra’s understanding of technology reflects in Accel’s investments. The funding of firms like Vinculum (ITES) and Hotelogix (Front desk management solutions) and medical devices firm Perfint are some of the bets it has placed in recent times. But the internet has its own place in the portfolio. Mitra, in fact, believes that the internet is at a turning point in India and over time one will see a number of internet models become increasingly viable.

His belief reflects strongly in Accel’s portfolio that has companies like Bluestone, Sher Singh (lifestyle), Flipkart and Zansaar (home décor). “Recently, we’ve invested in a handful of SaaS (Software as a service) companies, with Freshdesk being one of the category leaders there. Historically, we have invested in differentiated services (Mu-Sigma), pure technology (Virident) and medical devices (Perfint),” says Mitra.

He explains that apart from the technology and business model, it is the quality of the team that clinches the investment. “When we invested in Myntra, they had a good combination of people who had worked in US and Indian start-ups. At Flipkart, the founding team covered all aspects of e-commerce: customer acquisition, logistics, supply chain; you name it. At Freshdesk, the founding team came with vast experience in SaaS done from India for global customers. At Perfint, we had an initial team that had built substantial parts of GE’s healthcare organisation in Bengaluru.”

Waiting it out

Typically, PE funds look for exits within five years but Accel expects its exits in India to take much longer as most of its investments is in seed or early investment phase. Also, “Exits are still relatively smaller and take more time as fund returns take longer than mature markets,” says Mitra. But he has made partial and full exits from five companies, but only from investments held by the erstwhile Erasmic.

Four of these have been in Inbiopro Solutions, Wego (acquired by Holiday IQ) Letsbuy and Mu Sigma. Incidentally, Accel had also funded Letsbuy and that could have driven the decision for it to be acquired by Flipkart. For Letsbuy, Accel is believed to have got more Flipkart shares in place of cash. The fund remains tight-lipped over valuations and investments recouped on the whole. “The number of exits in India has been smaller than our other funds; however, some of the exits we’ve had are quite sizeable,” says Mitra.

Looking ahead, Mitra feels that entrepreneurial activity in India has grown significantly but the Indian market needs to evolve further. On his wish list is a larger internet user base as well as an online advertising market worth $2 billion rather than the current $200 million. The private equity ecosystem in India, too, is still developing. “And sometimes it means that it becomes harder to get follow-on financing,” he says.

Also, funded companies often find it hard to recruit and retain quality talent, especially in newer areas. But he remains optimistic and believes that the internet space in India could see 10 or more companies valued at close to $1 billion over the next five to seven years. Some like Makemytrip are already valued above $1 billion, while Flipkart and Inmobi seem close to it. Yet others like online CRM tool company Zoho and cloud-based software service Druva seem promising.

And competition? Accel is not worried. It feels that deals at the seed and early stage capital funding level still have much scope. “We typically make between six and 10 investments a year, whereas we communicate with over 1,000 in the same timeframe,” he says. Looks like Accel seems to have perfected the art of finding that elusive needle in the haystack.