How Matrix Partners changed track

Matrix Partners India’s founder MD Avnish Bajaj is steering the firm’s transition to a pure-play venture capital shop, which will return to the fundraising game in 2017


(From left) Matrix Partners India managing director Tarun Davda, founder and managing director Avnish Bajaj, and  managing director Vikram Vaidyanathan.
(From left) Matrix Partners India managing director Tarun Davda, founder and managing director Avnish Bajaj, and managing director Vikram Vaidyanathan.

Mumbai: It is unusual for a venture capital firm focused on India’s hyperactive start-up market to not raise a fund every three or four years. In April, Matrix Partners India completed five years since it raised its last fund. A new fund, the Mumbai-based firm’s third for this market, was in order. But instead of pitching for one with its limited partners, it decided to go with a $110 million top-up on its existing $300 million fund.

Shortly after Matrix Partners India II Extension, the top-up fund, was unveiled, several in the local venture capital market speculated that the move signalled difficulty on the firm’s part to raise a new fund. All its peers had recently raised large funds. Its closest rival, Sequoia Capital India, alone had raised a formidable $920 million. The market was in the midst of a downturn and it made sense to bulk up on reserves. Limited partners across the board clearly felt the same way. Except, it would seem, in the case of Matrix Partners India.

Founder and managing director Avnish Bajaj chuckles at the murmurs. “We will raise a fund next year. I have probably never been so categorical about our fundraising plans,” he said in an interview at the firm’s midtown Mumbai office. “The exit environment is good. Given that India has had such a poor track record on exits, we need to fix that first.”

But that isn’t the only reason Bajaj wants to hold back. In December last year, Rishi Navani, with whom Bajaj co-founded Matrix Partners India more than 10 years ago, told his business partner that he had decided to move on. Navani’s departure wasn’t entirely unexpected. Bajaj had known for a while that his co-founder’s heart was no longer in the venture capital business. Still, it was big change for the firm.

Matrix Partners co-founder Rishi Navani (left), and founder and managing director Avnish Bajaj. Navani quit the venture capital firm in April 2016.
Matrix Partners co-founder Rishi Navani (left), and founder and managing director Avnish Bajaj. Navani quit the venture capital firm in April 2016.

“The reality is that the departure of a co-founder is a big deal. Increasing the velocity of things (by raising a new fund) at a time when the firm is going through this kind of non-incremental change would have been poor judgement,” he says.

Over the next three-odd months, Bajaj and Navani would execute one of the smoothest leadership transitions in the country’s venture capital market. Shortly after Navani broke the news to Bajaj, managing directors Tarun Davda and Vikram Vaidyanathan, who constitute Matrix Partners India’s second line of leadership, were brought into the loop. Then, it was the turn of the Matrix global leadership. Matrix Partners India is the local franchise of US-based Matrix Partners, which manages venture capital funds totalling $4.5 billion globally.

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The formal handover of Navani’s responsibilities was set in motion sometime in January. He remains the lead representative for Matrix Partners India on the boards of three portfolio firms—test preparation services provider FIITJEE, corporate accommodation chain Siesta Hospitality and TCNS Clothing Co., maker of women’s clothing brand W. He also continues as an independent director on the boards of Ver se’ Innovation, which owns local language content aggregation app Dailyhunt, and mobile point-of-sale solutions provider Mswipe Technologies.

By the end of January, the Matrix Partners India informed its limited partners—industry parlance for investors in venture capital funds—about the changes at the firm. By this time, both the India and US leadership had agreed that a new fund was not advisable at this juncture.

"...even after being informed of Navani’s exit plans, several of the firm’s limited partners were keen on a new fund"- A person familiar with the developments at Matrix Partners.

Up until Navani’s departure became official within the firm, Matrix Partners India was well on course to raising its third successive fund. “The firm would have raised a $300 million-plus fund and that was the plan prior to his (Navani’s) departure,” says a person familiar with developments, who requested not to be named. In fact, even after being informed of Navani’s exit plans, several of the firm’s limited partners were keen on a new fund. “Some of them pushed in that direction,” says a second person familiar with the developments, who also requested anonymity. They eventually came around, and by 20 April, the firm had tied up all commitments for the $110 million top-up fund.

Navani has since launched Epiq Capital, a private equity (PE) firm, that is currently on the road to raise its first fund and operates out of Mumbai, not far from Matrix Partners India’s offices. He isn’t the only one though who’s starting afresh. In some ways, Bajaj, supported by his hand-picked deputies, Davda and Vaidyanathan, is also starting up again.

Next innings

In mid-March, when fundraising was drawing to a close, Bajaj, Davda and Vaidyanathan and the rest of the team embarked on an exercise internally dubbed Matrix Partners India 2025. Their goal was to develop an operating framework for the next 10 years. “We stepped back for the first time and said, okay, this is the next innings. What should it look like in the context of the market?” says Bajaj.

It was an important question because the market that Matrix Partners India finds itself in today is vastly different from the one in which the firm started up and operated in even four years ago.

“When we started up, Rishi (Navani) and I were more aligned towards non-technology and consumer businesses. That was a view partly predicated by the Baazee experience. The market, we believed, was too early (for early-stage technology investing),” he says. Baazee is the online auctions marketplace, modelled on eBay Inc., that earned Bajaj his stripes as one of India’s earliest successful Internet entrepreneurs. He co-founded Baazee with Suvir Sujan, now a founding partner at Mumbai-based venture capital firm Nexus Venture Partners, in 2000, on the eve of the dot-com bust, and sold it to eBay about four years later for $55 million.

Given their reservations, Bajaj and Navani went on to deploy Fund I, launched in August 2006 with a $150 million corpus (later topped up to $300 million), across a range of non-technology and technology businesses. At the time, the firm positioned itself as an early-to-growth stage investor, a strategy that several others, including Sequoia Capital and Norwest Venture Partners, adopted to navigate an underdeveloped venture capital market in India. “It wasn’t a permanent view. We revisited it every two-three years,” says Bajaj.

When it was time for a revisit in late 2011, a few things had changed. The firm had a new fund, the $300 million Matrix Partners India II, and it had to take a call on whether it should continue with the broad investment strategy it had started with.

“When we looked at the results across the portfolio, in non-technology investments, I would say they were above average. In consumer technology, however, they were far superior,” says Bajaj.

In all, out of the 60-odd companies that the firm backed from Funds I and II, about 25 were non-technology bets. The portfolio included pre-school services company Tree House Education, gold loans provider Muthoot Finance, microfinance firm Basix, eye-care chain Centre for Sight and Siesta Hospitality.

The big nudge towards early-stage, technology investments came from the market. By the close of 2011, the number of 3G subscribers in India had swelled to 39 million. The following year, in May, Kleiner Perkins Caufield and Byers partner Mary Meeker’s Internet Trends report noted that for the first time in that month, the country’s mobile Internet usage had crossed desktop Net usage. “We took a call then and said that the India (technology start-up) market is here,” says Vaidyanathan, joining the interview along with Davda over video conference from the firm’s Bengaluru office. Like Bajaj, Davda and Vaidyanathan are engineers by training who came from operating experience across several technology firms. Vaidyanathan had done stints at International Business Machines Corp. and pay TV encryption firm NDS, and Davda had helped scale start-ups such as Stepout and BigRock. The two, working closely alongside Bajaj and Navani, have played a critical role in altering the firm’s DNA from a quasi-PE investor to a classical venture capital firm.

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Once the call to pursue technology deals had been taken, the firm wasted no time in covering lost ground. It started to develop investment strategies around specific sectors. Consumer Internet and mobility businesses became a big focus. Domain experts were brought on board to build sector teams. By the time Navani left, Matrix Partners India had about 40 people across investment and operating functions, easily one of the largest venture capital teams in the market today.

The new structure and altered focus led to a number of deals in what would later become some of India’s most sought after technology start-ups. In early 2013, the firm led an undisclosed Series A funding round in Mswipe Technologies. Later in the year, it invested an undisclosed sum, again at the Series A stage, in budget stays aggregator Stayzilla.

Then, in November, it acquired a minority stake for an undisclosed sum in cab-hailing services provider Ola. It was a contrarian bet at the time. San Francisco-based Uber, Ola’s chief competitor today, wasn’t yet a well-known company, at least in India. There were other local cab-hailing services firms in the market but none had really been able to scale. Matrix Partners India, and Davda, in particular, believed it was a bet worth taking and they did. Another significant deal the firm closed early was its February 2015 investment in doctor search platform Practo.

Those deals underpin Matrix Partners India 2025, the operating framework that holds the key to the success of the new general partnership now in charge at the firm.

Raising the game

So, what is Matrix Partners India 2025?

In a nutshell, it formalizes the firm’s transition, which has been four years in the making, to a pure-play venture capital shop. The $110 million top-up fund is, in a manner of speaking, seed capital that the new partnership has been entrusted with to prove that it is up to the task.

Bajaj, no stranger to tough challenges, is “super excited” about what lies ahead. “Early-stage start-ups, technology, young founders… it plays to the core of what I enjoy doing,” he says. At an operational level, not much changes for him, except that he has much more on his plate. For Davda and Vaidyanathan, however, a lot has changed since January.

“We were part of the fundraising process for the first time. For a change, we experienced what our founders feel when they go out to raise capital,” says Davda.

“More pressure!” Bajaj chips in. “They have to look limited partners in the eye and say yes, we will generate more returns,” he adds with a chuckle.

"We were part of the fundraising process for the first time. For a change, we experienced what our founders feel when they go out to raise capital"- Tarun Davda, managing director, Matrix Partners India.

He’s making light of the situation because he knows how high the stakes are for the team that leads the firm into the next 10 years. “This (the top-up fund) was sort of a dress rehearsal for the main fund next year,” he adds, on a more serious note. The main fund and, in fact, the success of Matrix Partners India 2025, hinges on one important factor—exits. “I think we all know that limited partners in every venture capital fund out there are saying ‘show me the money’. This is an important year to show exits,” he reiterates.

Like most venture capital firms active here, Matrix Partners India’s experience with exits has been a mixed bag so far (see graphic Exit Run). Out of the 60 companies it has invested in from Funds I and II, it has been able to exit about 20 either fully or partially. “About half are profitable exits and half are not,” says Bajaj without disclosing specific details about the exits. There have been more than a few wins. In July last year, it scored a very profitable exit from online classifieds platform Quikr through a secondary transaction when a part of its stake was acquired by Swedish investment firm Kinnevik AB. The details of the transaction have not been disclosed, but a person familiar with the transaction, who did not want to be named, said Matrix Partners India exited the investment at a 30x multiple (30 times its original investment). The firm entered Quikr in early 2008, picking up an undisclosed stake. At the time, Quikr was known as Kijiji and had just been spun out of eBay India.

In December, Matrix Partners India sold a part of its stake in hospitals chain Cloudnine to PE firm India Value Fund Advisors. The details of the transaction have not been disclosed, but Matrix Partners India, which had entered Cloudnine in 2011 with a Rs45 crore (about $10 million at the time) investment and invested more in subsequent rounds, scored a profitable exit, said a person familiar with the transaction.

On 19 August, it scored another exit from TCNS Clothing. PE firm TA Associates has picked up an undisclosed minority stake in the company for $140 million, creating an exit for Matrix Partners India. The details of the transaction have not been disclosed. In June, Mint had reported that TA Associates was in talks to buy a 30-35% stake and Matrix Partners India would sell its almost 20% stake in the company. Matrix Partners India had entered TCNS Clothing with a Rs60 crore (about $12 million) investment in late 2011 and invested more in subsequent funding rounds.

Bajaj declined to comment on exits that are lined up over the next few months.

For the next few months, before the firm goes on the road again to raise its next fund, Bajaj and his team will be mostly busy getting a few more exits through the door. The big priority will be the remaining non-technology portfolio. Bajaj doesn’t see too much of a problem there. “Right now, if you ask me, the exit environment for non-technology is better than technology. We will try to monetize whichever we can. Some are doing very well and will raise more capital and we will participate in those rounds,” he says.

The firm has also been busy cleaning house. In May, TinyOwl, an online food ordering service that Matrix Partners India entered early last year as part of a $15 million Series B funding round, agreed to merge with hyperlocal delivery services Roadrunnr after battling nine months of recurrent problems with its business model. The stock swap deal gives Matrix Partners India and other investors undisclosed minority stakes in the merged entity, which now operates under the brand Runnr.

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The same month, another portfolio company, education technology start-up Purple Squirrel, shuttered operations after it was unable to raise follow-on funds.

Cleaning house

While it pursues exits and cleans house, investments continue from the top-up fund. Deals will largely be concentrated at the seed and Series A stages, and selectively at the Series B stage. Two factors will drive the firm’s investment run over the next few months—its seed investment programme, rolled out in late 2012, co-working facilities for start-ups that it set up last year in Mumbai and Bengaluru. The one in Bengaluru is located right inside Matrix Partners India’s office, launched in May last year. The Mumbai one is a partnership with the K Raheja Corp. in the Powai suburb, which is also home to Indian Institute of Technology Bombay.

“They give us a tremendous view into what young founders are doing and what may be the next emerging white spaces,” says Vaidyanathan, who relocated to Bengaluru from Mumbai last year. There are currently about 10 start-ups using the two co-working facilities. Vaidyanathan maintains the co-working facilities aren’t a tactical deal-sourcing initiative.

"It takes 15-20 years to build a venture capital firm and we are in year four of being a true early-stage venture capital firm"- Vikram Vaidyanathan, managing director, Matrix Partners India.

This is borne by the fact that between the middle of 2014 and the middle of 2015, the firm concluded 14 seed deals and only two came out of the co-working facilities. He did not share details on the two deals.

Still, the co-working spaces, coupled with the seed investment programme, have played an important role in embedding the firm within the early-stage start-up ecosystem.

Last year, for instance, out of the 10-odd deals that the firm closed, either as the sole investor or as part of investor consortiums, four—Razorpay, Treebo, Belong and Purple Squirrel—were at the Series A stage and three—Housejoy, TinyOwl and Practo—were Series B deals. Its deal run has been slower this year, partly because of the focus on exits and partly because of the downturn in the market. However, out of the five deals it has announced this year, three—OfBusiness, Finomena and Zarget—are at the Series A stage.

"There is a market now and entrepreneurs we like... We are ready to fire"- Avnish Bajaj, founder and managing director, Matrix Partners India.

The team, though, is comfortable with its current pace. “It takes 15-20 years to build a venture capital firm and we are in year four of being a true early-stage venture capital firm,” says Vaidyanathan.

We are at the end of our one-hour interview with the Matrix Partners India team and Bajaj has to rush to his next meeting. These days, he is perpetually in and out of back-to-back meetings.

“There is a market now and entrepreneurs we like. The team is of a DNA that likes both those things. We have a repository of successful founders in our existing portfolio who serve as our references in the market. The network effect is beginning to happen. We are ready to fire,” he signs off.

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