Draper Fisher Jurvetson (DFJ) director Mohanjit Jolly moves from Menlo Park, California, to Bangalore this month to lead DFJ’s investments here. Jolly was earlier managing director at Garage Technology Ventures and specializes in investing in high-tech, intellectual property-based technology start-ups. DFJ will invest $75 million in India out of its global $600 million DFJ IX Fund. The firm has been investing here as an offshore investor for the past two years and already has a portfolio of four companies. It plans to add another 12-15 companies through the $75 million allocation. Jolly spoke about DFJ’s investment gameplan for India in an email interview with Mint. Excerpts:
How would you describe your personal approach to start-up investing, keeping in mind your earlier stint with Garage Technology Ventures?
Often when one is investing at the seed or early stage, none of the three “Ts”, as I call them, are available. There is typically no technology/IP, no complete team and definitely no traction. At that point, as a venture capitalist, you have to trust a combination of your gut feel as well as your belief in the core team to deliver on the vision. Usually half way through a typical early stage company presentation, there is an epiphany where the stars line up and the investor(s) nod in complete agreement with the entrepreneur. That’s the “ah ha” moment when you know the founders are on to something, which may be at the formative stage, but has the potential to be truly disruptive.
Within the technology space, what are your comfort areas/niches as an investor?
I am admittedly a generalist, and given my training as an aerospace engineer, I know enough about a lot of different technology areas to be dangerous. Also, over my eight years at Garage I worked with startups in a variety of areas ranging from enterprise software and mobility to web 2.0 and material science. If you look traditionally at what has made DFJ the top tier firm that it is today, it’s primarily consumer facing investments like Hotmail, Skype, Baidu and Focus Media. This focus will transfer to India. But, I will also be looking at areas such as retail, infrastructure, logistics/distribution, ITES, mobility/wireless, software, material science, biotech/health sciences and power infrastructure.
Have you had an opportunity to assess Indian technology start-ups yet? What are you initial impressions?
I have been involved with Indian companies, in terms of evaluating and/or working with them through the ISB or TiE for the last two years. Overall I have been observing the Indian startup environment for the last several years. My overall take is that for the most part, product innovation or true IP is still lacking. However, there is a trend from services driven businesses to technology and product based enterprises. With the influx of institutional capital and venture investors, along with the migration of management talent of Indian origin from the US and elsewhere, the ecosystem for technology startups is solidifying. I think there is a fundamental change occurring socially when it’s ok to take risk and furthermore it’s ok to fail, something that has traditionally been a stigma on the Indian psyche. The influx of capital and expats with both successes and failure is helping foster innovation and risk taking in tech startups not before seen in India. Indian tech startups have a long way to go in terms of churning out global powerhouses, but the foundation for that is being laid today.
DFJ has been active in India as an offshore investor for a while and has even hosted a business plan contest for start-ups alongside The Indus Entrepreneurs. Why has the fund chosen this particular time to set up a ground presence here?
DFJ had discussions with several teams over the past couple of years to establish an India presence, but for one reason or another, those discussions did not come to fruition. With Fund IX, which closed earlier this year, there was very strong interest on the part of the LPs to establish a presence as part of the core fund in both India and China, which is precisely what DFJ has done.
Will the firm’s investment thesis for India differ very much from the one its follows in the US? How will investments here differ from China and other Asia markets?
Yes and no. The investment thesis for India is the same as any other for DFJ. We are looking for game changing companies that can be strong standalone entities and provide incredible returns for our LPs. On the other hand, the areas of focus will be much broader than they are in the US, for example. While strong emphasis is placed on intellectual property in the US, I will look at not only high tech with strong IP, but also mid tech and low tech. In India, we will very much look at non-traditional sectors (from a US perspective) including ITES, retail, logistics/distribution, and infrastructure. Investments in India will be in Indian companies initially serving the Indian market. Over time we will invest in companies in India with a global market footprint. Investments in other parts of India are, like the Indian thesis, centered round markets in those particular geographies. Obviously in countries like Japan and Korea, the broadband infrastructure is much more developed than in India. As such, we look at making investments that are pure online players. In India, however, we will be looking at a hybrid model with both online and offline components or with online and mobile components. Bottom line is that there are similarities and differences between investments across Asia depending primarily on the underlying technology, market and socio-economic trends.
DFJ had earlier spoken of plans to raise a specific $200 million fund for India. It now seems to have allocated $75 million from its $600 million Fund IX to this market. Why has the strategy changed?
The strategy overall has been to have a commitment to the region. With the strong interest shown by the LPs and the timing of the raising of Fund IX, it made most sense to extend the core fund into India rather than build a team and raise an India centric fund.
What segments of technology will DFJ invest in here? What will be your average deal sizes? How many companies do you target funding over the next three years?
DFJ will be stage and sector agnostic in its investments in India. The goal is to make 12-15 investments over the next three years with an average of $5-7 million per deal over the life of the company.
In many non-US markets, DFJ has chosen to pursue investments through affiliates. Why made you choose a direct investment strategy in India?
Again, DFJ feels very strongly about certain regions in terms of the long-term opportunity that they present…specifically India and China. There is no better way to show commitment to a region that to dedicate direct resources as we have done in both China and India. We may at a future date add to the core team by partnering with another fund under the partner network model as long as there are obvious synergies with the core fund.
How many people will the India operations have? Why have you chosen to be based out of Bangalore and Hyderabad?
I will be here initially along with Satish Andra, our venture partner. The decision to base the office in Bangalore was a combination of personal as well as professional reasons. On the personal side, education, weather, affordability, housing were key variables. On the professional front, we had to take into account deal flow and proximity to deals, business development opportunities, syndicate partners, and an established ecosystem for transaction. Three of our four key investments to date are based in Bangalore include Reva, Mchek and Seventymm.
How do you assess the opportunities for seed funding in this market?
Given the initial focus on investing in companies targeting the Indian market, we have to get comfortable with the overall size of the market and the opportunity. Additionally, especially at the seed stage, the investment is in people. So, chemistry with the team and a strong belief in their ability to execute is paramount. Finally, it certainly helps if the team has surrounded itself in terms of employees, advisors, board members and early alpha or beta customers and partners who provide some level of credibility to not only the pain that the company is addressing but also that the solution is valuable and something customers are willing to pay for. Additionally there is a methodology I refer as the credibility continuum where on the one end are paying customers, but short of that (especially in a seed situation), one looks for the credibility of the team, the employees, the advisors, board members and other who have put their own brand or credibility on the line by backing a given seed stage startup.
How does DFJ prefer to source deals – through intermediaries or proprietary deal sourcing?
We expect to have an inbound stream of deals from the service providers, corporate network, academia, government organizations and other venture firms looking for syndicate partners. But we also intend to be very outbound through events, panel presentations, speeches and the press. Bottom line is that we have $75M to invest in India over the next three years and we want all entrepreneurs with interesting ideas in search of venture capital to know about us.
Could you elaborate on the deal due-diligence process DFJ undertakes? Typically, how much time does DFJ like to spend with a prospective company before closing the deal?
The amount of diligence varies according to a variety of variables, including the stage of the company, the industry, the competitive landscape etc. The India team will initially take a close look at the company and upon initial diligence, will involve 2-3 key partners in the US office to provide feedback and support. Assuming it passes that hurdle, the company would be either asked to present to 2-3 additional partners or the entire partnership. A term sheet is typically issued following partnership approval of the investment pending additional diligence to be done. Entrepreneurs should expect the entire process to take roughly 2-3 months. In some cases it can be shorter and in others longer.
Do you see investment cycles/horizons in India being longer than those in the a) US and b) China?
I expect the cycles to be roughly the same as other parts of the world, including US.
Where do you see India’s relevance and size of portfolio in three years, in the context of the firm’s global portfolio?
In three we expect to have made 12-15 investments out of the current fund, which will represent roughly 10-15% of the overall fund and a slightly larger percentage of the overall deals done in Fund IX.