BackSequoia Capital bets big on hyperlocal start-ups in India
The venture capital firm is taking large stakes in at least seven such start-ups, some of which are direct rivals
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Bengaluru/New Delhi: Venture capital (VC) firm Sequoia Capital India Advisors is racking up the biggest position in the booming (in terms of interest and funding, if not actual business) hyperlocal start-up business, taking large stakes in at least seven such start-ups, some of which are direct rivals.
Hyperlocal deals platform Groupon India, which is backed by Sequoia, said on Monday it will rebrand itself as Nearbuy and operate as an independent entity from its parent Groupon Inc.
Apart from Groupon India, Sequoia has stakes in Grofers (Locodel Solutions Pvt. Ltd), PepperTap (Nuvo Logistics Pvt. Ltd), TinyOwl Technology Pvt. Ltd, Zomato Media Pvt. Ltd, Roadrunnr (Carthero Technologies Pvt. Ltd), Goodservice Labs Pvt. Ltd and Helpchat (Coraza Technologies Pvt. Ltd).
Of these, Grofers and PepperTap are direct rivals, competing in grocery ordering and deliveries while TinyOwl and restaurant discovery portal Zomato compete for food deliveries.
All told, the company has invested in at least nine firms that are either in the hyperlocal business or have a hyperlocal aspect to their business.
Seven of these nine start-ups have together raised more than $125 million from Sequoia and other VCs. The others are Zomato and Practo Technologies Pvt. Ltd, two large start-ups.
“Our thesis (on hyperlocal) is a combination of two points. One, that every business will go hyperlocal because it’s better for consumers (to get products and services) in terms of being able to get them faster, cheaper, fresher, locally, so on; two, a majority of our spends are offline today and are in cash. It’s time they became online," said Mohit Bhatnagar, managing director, Sequoia India. “Five, six years back we used to say, companies are going mobile because the mobile trend was coming and every company will shift there. In a similar way, all companies are going to go hyperlocal."
With its large bet on hyperlocal businesses, Sequoia Capital has overtaken the likes of Tiger Global and Accel Partners as the most aggressive investor in Indian e-commerce in terms of the number of deals this year.
Given that Sequoia has stakes in several start-ups, some which are direct rivals, there are concerns about conflicts of interest. How does Sequoia ensure information on one start-up’s strategy isn’t shared with a rival start-up? Is the VC firm’s thinking about one start-up influenced by its other investments?
“Companies evolve, but whatever the situation, we try and do the right thing. One is we don’t invest if there’s direct conflict (at the time of making the investment). If we see a company that could have some overlapping, we go and talk to the existing company (before investing). If a founder has pivoted (changed a company’s business model), we put in different board members and create information walls between the Sequoia board members. One thing we will never do is come in the way of a company. We will never say that because Sequoia is an investor in these two, why don’t you guys work together? Entrepreneurs know that we won’t do anything behind their backs," Bhatnagar said.
For instance, before investing in TinyOwl, Sequoia ensured its existing portfolio company Zomato had no reservations about the deal, he said. When Grofers shifted to selling products to shoppers from a business-to-business marketplace, Sequoia moved board members in Grofers and rival PepperTap to avoid a conflict of interest, Bhatnagar said.
TinyOwl chief executive officer Harshvardhan Mandad, Grofers CEO Albinder Dhindsa and a Zomato spokesperson confirmed Bhatnagar’s comments and all three said Sequoia had been transparent about its investment plans whenever there were potential conflicts.
There are cases of such potential conflicts with other start-ups and VCs, too. Tiger Global was a large investor invested in Flipkart Ltd, Letsbuy and Myntra. Over the past three years, Letsbuy was merged into Flipkart and shut down as an independent entity while Myntra was also sold to Flipkart, though it continues to operate as a separate brand.
Earlier this year, Tiger led a $100 million investment into another Flipkart rival, ShopClues (Clues Network Pvt. Ltd). Another ShopClues investor Nexus Venture Partners is an influential shareholder in Snapdeal and was forced to set up Chinese walls within the VC.
Sequoia itself holds stakes in Practo and rival 1MG Technologies Pvt. Ltd.
In the US, several start-ups have common investors.
For instance, at one point, well-known VC Kleiner Perkins held stakes in Google Inc., Twitter Inc. and Facebook Inc. Sequoia Capital US, the parent of the Indian arm, itself has been questioned in the past about its ties with Cisco Systems Inc. Cisco has close ties with Sequoia US and has bought at least 12 firms funded by Sequoia, apart from co-investing in some other companies, according to a report dated 26 May 2003, in the Los Angeles Times. However, in general, VCs and entrepreneurs are stricter than their Indian counterparts about imposing provisions that avoid conflicts including banning board membership, in some instances.
“There are ways to avoid conflict in cases when there are common investors in rival start-ups," said Vaibhav Parikh, partner at law firm Nishith Desai Associates. “One is that you ensure the rival start-ups don’t share the same board members. Second, you have a so-called Chinese wall, which means that the investor representatives don’t share information about the companies with each other, thereby maintaining independence. These provisions can be inserted into shareholder agreements."
Given Sequoia’s bullish view on the hyperlocal business and its stakes in several start-ups, the investment firm also potentially faces a so-called signalling risk.
If a VC firm declines to back one of its early stage start-ups in a later round of fund-raising, potential new investors become wary of putting up money. Such a situation can become worse when capital isn’t as easily available as it is today.
“If a company is getting 10 inbound requests every month, the signalling value of the insiders matters less. We would be pre-disposed (to back every hyperlocal start-up in our portfolio)," Bhatnagar said. “Our investment thesis on hyperlocal will play out over 10 years so Sequoia will not get worried about a downturn (in the funding environment). Sequoia will continue to invest in a downturn. Sequoia will not get taken by all this enthusiasm. We will step back if we think rounds have gotten too frothy and not participate."
“In many cases, investors make multiple, early stage bets in a certain sector they are bullish on," said Rahul Matthan, partner at law firm Trilegal. “There is some potential for conflict but both investors and entrepreneurs go in with their eyes open. Having multiple positions gives the investors an opportunity of helping shape the course of that sector and potentially drive consolidation at some point."
Sequoia wasn’t always so sweet on Internet businesses. However, the surging valuations of Flipkart and Snapdeal— which are worth roughly $15 billion and $5 billion, respectively —over the past one year have fuelled a rush to invest in e-commerce firms, leading firms such as Sequoia to join other VCs in the search for the next big thing.
Sequoia even became an investor in Snapdeal earlier this year when the online marketplace bought its portfolio company FreeCharge.
“When we saw a lot of the large e-commerce businesses early on, we read the tea leaves to know that there will be lots of money needed to fund companies like those. What was less clear to us was whether there would be lots of money available to these companies. The second has fallen into place now (with the entry of large investors such as SoftBank, DST Global and others)," Bhatnagar said.
“It was hard for us to predict that."
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