One of the oldest Indian venture capital firms with 37 investments, Sequoia Capital India, recently raised a new early stage venture capital fund of $300 million (Rs1,179 crore) of which $25 million has been committed across three investments.
Managing director Sumir Chadha talks about the market conditions as Sequoia goes about deploying this fund and its one-year-old private equity growth fund. Edited excerpts:
How are valuations across growth and venture?
On the private equity side, I think almost everything is overpriced in today’s market. We know we are going to pay a high valuation, we might get a slight discount because we are Sequoia Capital or we know the entrepreneur or the space, but there is a market price and it is pretty well set no matter what anyone says.
We might get a 10% discount or 20% but it won’t be massive. And not to sound too negative, but in the venture business, with the amount of capital that has come in relative to the size, it’s going to be interesting in the next few years.
Selling time: Sequoia Capital India managing director Sumir Chadha.
Where do you see returns going?
I think people will lose money in venture in India and private equity will probably be similar. On average it is a great time to be selling rather than buying.
We have a whole bunch of exits planned for next year. We see a lot of irrationality in the marketplace today. It certainly will go on for a year, could it go on for two, three, four years? Very possible. It is like the US venture industry—completely over-funded.
Are buyout opportunities coming up?
We are not looking for buyouts, but some are coming our way. There are two problems. First, nobody wants to sell because there is so much optimism about the economy.
The second issue is that the debt markets here are still underdeveloped. The Flextronics deal (Kohlberg Kravis Roberts & Co. bought Flextronics Software Systems’ Indian IT business in 2006) was able to get a lot of leverage because it was an offshore entity. In the US, most of the returns have been made on leverage.
Do you look at PIPE (private investment in public equity) deals?
We have not done PIPE deals, but we are not adverse to them. What we don’t understand about PIPE deals is why would someone go out and pay a 15% premium to a public stock price when the average person could buy the stock cheaper.
And then they are going to charge investors for that 20% of the profits. People have made money on PIPEs, but here’s the thing, a lot of people made money on PIPEs that were invested in two or three years ago when the markets were at rock bottom levels. The problem is doing PIPEs at today’s levels—that is frightening. Generally speaking, PIPEs are not as attractive, but we are looking at a PIPE right now.