Co-investing gains momentum as early-stage VCs hedge risk

Co-investing gains momentum as early-stage VCs hedge risk
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First Published: Tue, Mar 31 2009. 12 50 AM IST

Two’s company: Both Srivathsa (left – Hemant Mishra / Mint) of Ojas Venture Partners and Mitra of Accel Partners say going alone is no more a good idea.
Two’s company: Both Srivathsa (left – Hemant Mishra / Mint) of Ojas Venture Partners and Mitra of Accel Partners say going alone is no more a good idea.
Updated: Tue, Mar 31 2009. 12 50 AM IST
Bangalore: The wave of caution sweeping investors in the economy has not left managers of risk capital untouched. Venture capital, or VC, firms backing even early- stage start-ups are learning to manage risk by looking intensely at co-investments.
Two’s company: Both Srivathsa (left – Hemant Mishra / Mint) of Ojas Venture Partners and Mitra of Accel Partners say going alone is no more a good idea.
The first step in this direction will be syndicated deals, industry executives predict. “Earlier it was more of an exception than a rule to co-invest in early-stage companies, but due to the ongoing market conditions, it will become a norm,” said Sudhir Sethi, chairman and managing director, IDG Ventures India.
There are early examples of such deals already. Recently, Bollywood portal Chakpak.com raised an undisclosed amount of funding from Canaan Partners and early-stage backer, Accel India, earlier named Erasmic Venture Fund. In January, Schoolmate, an education start-up incubated at Birla Institute of Technology and Science, Pilani, secured funding from the Chennai Fund as also received angel backing from two investors. A month later, Clearstone Venture Partners and Granite Hill co-invested for a second round of funding in logistics firm Elbee Express Pvt. Ltd for an undisclosed amount.
Late last year, Bangalore based online customized merchandising firm Myntra Designs Pvt. Ltd, raised first round funding of $5 million (Rs25.5 crore) from NEA-IndoUS Ventures and IDG Ventures with Accel Partners. New Delhi’s D.light Design, which provides affordable lighting and power solutions, also raised $5.5 million in first round funding.
The round was led by Nexus India Capital, along with Draper Fisher Jurvetson (DFJ) India, Garage Technology Ventures, Mahindra and Mahindra Ltd, Acumen Fund and Gray Matters Capital. Investors say, despite the economic slowdown deals will be struck this year, albeit with partners. “I don’t think going alone is a good idea,” said Rajesh Srivathsa, managing partner, Ojas Venture Partners, adding that co-investments make strategic sense also, particularly for the early-stage companies which need a lot of handholding in terms of hiring, new markets, business strategy and financial planning. “Opportunities that multiple investors can bring to the table are massive. A co-investor can help in marketing in new geographies where the other investor does not have a presence.”
Investors say that with two co-investors coming at the early stage, follow-on funding becomes much easier. “When it’s two investors, follow-on funding is no longer reliant on one investor alone,” said Subrata Mitra, partner, Accel Partners. Also, by providing for follow-on funding, the investors can continue to be an investor for a longer time.
Earlier this month, PubMatic, an ad revenue optimization company, raised an undisclosed second round funding from investors, including Helion Ventures, Nexus India Capital and DFJ. In January 2008, PubMatic had raised $7 million in first round funding from Nexus India and DFJ.
Still, some venture capitalists predict deals amounting to less that $1 million will continue to be funded by stand-alone investors. Investments above that will see a surge in syndicated deals. “For a small deal—less than $1 million, we would do it on our own, as we can take a substantial stake in the company and it comes under the risk profile of our fund,” said Accel Partners’ Mitra. He, however, added that for $2 million or $3 million investments, they will definitely look for syndicated deals.
While syndicated structures decrease risk, one factor stacked against them is limited returns, especially for early stage investors, who typically seek a substantial stake in a company that they back, which whittles down as the number of backers increase. “Syndicated deals are always a desirable approach for investors at any stage, but venture capital business economics are more conducive to this approach in Series B or C funding,” said Harish Gandhi, executive director, Canaan Partners.
Other issues, too, present a flip side. “There should not be mismatch in the fund sizes,” says Accel Partners’ Mitra. For instance, in a down round (a follow-on round of funding at a lower valuation), he feels, the smaller fund would have less appetite to fund the firm and the bigger one grow its share. Investment outlook and tenor too need to match, he added.
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First Published: Tue, Mar 31 2009. 12 50 AM IST