Mumbai: Last month, Lightspeed Venture Partners, the Menlo Park, California-based venture capital firm that has backed iconic start-ups such as GrubHub and Snapchat, launched its first India-dedicated fund. The $135 million (around 890 crore today) Lightspeed India Partners I, LLC fund comes more than eight years after the firm started making direct investments here through its local arm Lightspeed Advisory Services India Pvt. Ltd.

Over the past eight years, the firm’s India team, led by managing directors Bejul Somaia and Dev Khare, has put $100 million to work across 14 companies. Some of the notable investments in its current portfolio include budget stays aggregator OYO Rooms, security solutions provider OneAssist and social commerce platform LimeRoad.

One of its first bets here was Bengaluru-based online tutoring firm TutorVista. It booked a profit on that deal when TutorVista was acquired by UK publishing and education company Pearson Plc in 2013 for a reported $213 million. It was also an investor in troubled music streaming start-up Dhingana. The Pune-based company shuttered operations in February last year and was later acquired by San Francisco-based digital music service Rdio.

Somaia, who started Lightspeed’s operations in India, spoke to Mint about the firm’s new fund, its investment priorities and chasing unicorns. Edited excerpts:

Why has Lightspeed waited so long to launch an India-specific fund?

Lightspeed has always focused on investing in technology and technology-enabled start-ups. When we started investing in India, much of the deal flow was in traditional, non-technology growth businesses. That said, as Internet adoption has scaled rapidly over the past 18-24 months, the early stage venture opportunity has deepened significantly. It is in response to this change that Lightspeed decided to raise a dedicated fund.

In many ways, what we are seeing now in India is similar to what we saw in China four-five years back when we raised our first China fund vehicle (Lightspeed raised its first China fund of $168 million in 2012).

Specifically, what’s different about the market now?

When Lightspeed started investing here in 2006-2007, there were less than 15 million broadband users. Over the past few years, there have been a few fundamental changes. First, the addressable market for any consumer Internet company has exploded. With over 300 million Internet users, and significant growth in mobile adoption, there are many more opportunities today that offer the potential for non-linear growth. Second, the quality of raw material for the venture capital business—provocative entrepreneurs with bold ideas—has improved dramatically. And finally, the scale of Internet adoption in India is now enabling several new ancillary and B2B (business-to-business) segments, including areas such as fintech, enterprise software and B2B marketplaces.

Most of your peers have raised much larger funds. Why did Lightspeed cap the fund size at $135 million?

We believe that $135 million is the right size for the early-stage strategy being pursued by the dedicated India fund vehicle. The India fund will typically invest at the seed through Series B stage. Partners spend a significant amount of time helping these young companies set the foundations for scaling. We assist with building management teams, setting appropriate milestones and so on. The ticket sizes at those stages typically range between $1 million and $8 million for significant minority stakes. So, the fund will likely invest in a portfolio of 20 to 25 companies over a three-year period, which offers appropriate diversification while keeping the bar high and remaining selective.

Does that mean Lightspeed will not look at later-stage investments at all?

Lightspeed will continue to look at expansion-stage venture investments opportunistically. In those situations, the firm has the flexibility to leverage Lightspeed’s global corpus (last year the firm raised the $1.05 billion Lightspeed Venture Partners X fund).

How important are seed deals going to be to your core investment strategy?

Seed deals have always been a core part of the firm’s strategy. For example, when Lightspeed first committed to LimeRoad, the founder Suchi Mukherjee was still based in London where she was in the early stages of conceptualizing a differentiated online commerce offering (LimeRoad is a social commerce platform targeted at women. Lightspeed and Matrix Partners co-led a $5 million round in October 2012). The same is true for OYO Rooms, Craftsvilla and OneAssist.

In both Craftsvilla and OneAssist, Lightspeed committed to the companies pretty much at inception. The OYO investment was made when the company was in the early stages of a pivot from the original business model.

The way the firm looks at seed deals is that it will only invest if there is an informed point of view around the opportunity and, if Lightspeed partners can help accelerate the development of those companies. Such investments typically happen in areas where we already have a fairly deep knowledge and relationship base. For instance, Lightspeed was an early investor in GrubHub (the NYSE-listed online food ordering platform). That yielded valuable insights into the category, such as unusually high repeat purchase frequency, that led to the fund’s investment in FreshMenu (Lightspeed invested $5 million in the Bengaluru-based Internet-first restaurant earlier this year).

Overall, we’ve made eight seed investments so far, out of which two are from the new India fund.

What are some of the white spaces you’re looking at that are ready for disruption?

The Indian technology market has moved from travel commerce a decade ago to e-commerce five years ago to services commerce currently. We see increasing potential in areas such as digital content and communities, B2B marketplaces and transaction platforms, financial technology and enterprise companies targeting global markets from India.

What are your learnings from investments in which the thesis did not play out as expected?

I won’t comment on specific companies, but am happy to share a couple of general learnings. First, ad-driven businesses are tough to scale in India, with long gestation periods. Capital efficiency is critical here to give companies time to scale. Second, mainstream e-commerce businesses are extremely capital- intensive with challenging unit economics, high customer acquisition costs and low retention rates. In that kind of scenario, continued access to capital becomes a key differentiator necessary for survival.

Everybody’s chasing unicorns these days. How many do you reckon you have in your India portfolio?

We think we have a few, but just chasing unicorns is missing the point. What matters in the venture capital business is how much money went in and how much comes out. How much comes out depends on valuation and ownership at exit. The latter is impacted by capital efficiency. As an investor, would you rather be a tiny shareholder in a unicorn (a company valued at over $1 billion on paper) or a 20-30% shareholder in a $500 million company?

Start-up fund-raising here has had a frenzied run over the past 12-18 months. Do you see a correction soon?

Yes, I do and while there will be some pain, it will be healthy for the market. During periods of easy access to capital, start-ups run the risk of cultivating the wrong DNA. For example, young companies may try and diversify into five different things before they have perfected one. Or scale rapidly before building a strong foundation and validating product-market fit. Silicon Valley learnt some painful lessons from the “get big fast" and “premature scaling" mentality that existed in the late 1990s, and the Indian start-up and venture ecosystem will likely go through a similar learning curve.

All this said, it’s important to understand that the underlying factors supporting rapid company growth and venture capital investing in India will remain compelling. India is the world’s next big Internet market and will keep moving in one direction. There is a lot of headroom for growth, incredible entrepreneurial energy and now, increasing availability of risk capital. There will be speed bumps along the way, but that will likely not deter long-term, sophisticated entrepreneurs and investors.

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