Kalaari Capital commands a somewhat envious position in the Indian venture capital industry. It is a stakeholder in two of the country’s most valuable start-ups—etailers Flipkart and Snapdeal. Based on the current valuations of these firms, at $15 billion and $6.5 billion, respectively, the Bengaluru-based venture capital firm is easily sitting on extremely profitable mark-ups on the value of its stakes.
It’s taken some doing, though, for Kalaari to get to where it is today.
Like most homegrown venture capital funds in India, Kalaari started up in 2006. Except, at the time, it wasn’t known as Kalaari. That year, Silicon Valley-based serial technology entrepreneur Vani Kola teamed up with friend and former Intel Corp. vice-president Vinod Dham and Kumar Shiralagi, another Intel executive, to launch a $190 million fund for India.
The fund was backed by iconic Silicon Valley venture capital firm New Enterprise Associates (NEA). They decided to christen the Indian entity that would advise the fund NEA IndoUS Venture Partners. That way, NEA would get indirect exposure to local start-ups and Kola and her partners could leverage the powerful NEA brand. It was also agreed that the fund would also invest in some US-based start-ups.
The marriage didn’t last long. Three years later, NEA decided to make direct investments in India on its own. Since it would no longer be an anchor investor in NEA IndoUS Venture Partners, the latter rebranded to IndoUS Venture Partners.
At the time, IndoUS Venture Partners invested in everything from e-commerce companies to software product firms to even a pharmacy chain. It typically invested $4-5 million at the Series A and B stages and largely avoided seed investing. Some of its bets at the time, apart from Snapdeal, included online fashion retailer Myntra (which was then a personalized gift portal), travel site Via.com and online kids wear retailer Hushbabies.
Soon after the break from NEA, IndoUS Venture Partners would undergo another big and final transformation. This would be precipitated by Dham’s departure from the firm. Kola and Shiralagi, the remaining founding partners, then decided to rebrand and reposition the firm again. They brought a third partner on board—Rajesh Raju, former investment director at Peepul Capital.
In late 2012, IndoUS Venture Partners started life anew as Kalaari Capital with a new $162 million fund. The firm’s big bet was that an upcoming mobile Internet boom would fuel a boom in online commerce.
“By 2011, e-commerce had worked but it was still a limited market. Our bet in 2011 was that growth would come from data connections on smartphones, not broadband. We bet that online commerce and services would be fuelled by the explosion in smartphones," says Raju. The second fund also saw the firm shift focus to e-commerce and mobile-first start-ups. Notable deals from the fund included lingerie etailer Zivame, furniture etailer Urban Ladder, jewellery etailer Bluestone and technology education provider Simplilearn.
The turning point for the firm came in 2014. In May, Bengaluru-based e-commerce bellwether Flipkart snapped up fashion etailer Myntra in a cash-and-stock deal. The cash component of the deal was estimated at $330 million. Kalaari, which had invested in Myntra back in 2008, received an undisclosed stake in Flipkart as part of the deal. It now had a unicorn in its portfolio. The term is used by venture capitalists for start-ups valued at over $1 billion.
“The Myntra deal was a watershed for Indian start-ups. And, we helped facilitate the sale by not objecting to it even though (we were investors in Snapdeal). We believed it was the best thing for Myntra and for the entrepreneurs and shareholders," says Kola.
2014 was also the year Snapdeal, the e-commerce marketplace owned by Delhi-based Jasper Infotech Pvt. Ltd, entered the unicorn club. Kalaari was one of the first investors in Snapdeal, investing back in 2011 from its first fund. It also played a crucial role in steering Snapdeal to the valuations it commands today. Sometime in 2013, when venture capitalists had soured on Indian start-ups, Snapdeal found itself running out of cash. At that juncture, Kalaari stepped in to convince US-based online marketplace eBay Inc. to lead a $34 million funding round. Kalaari itself put up $5 million as part of the round.
The firm’s focus on e-commerce, which constitute the largest chunk of its overall portfolio of 70-odd firms, has, however, come at the cost of enterprise software investments where its record is far from pretty. None of its enterprise investments such as mGinger, VenSat Tech Services and Bay Talkitec have grown meaningfully. While it is still investing in some enterprise software companies, the jury is out on whether it has the chops to make lucrative bets in the sector.
It has some other notable misses, too. It hasn’t made any bets in the booming radio cab hailing segment. Ola is now India’s third most valuable start-up. Following the acquisition of rival TaxiForSure this year for $200 million, venture capital firms such as Accel Partners, Helion Venture Partners and Bessemer Venture Partners have benefited in the form of minority stakes in Ola. “We actually looked at Ola and TaxiForSure closely. I guess we just didn’t have enough conviction to do it. With the likes of Meru, there were a lot of regulatory issues and union troubles. But Ola and TaxiForSure have smartly gotten around those hurdles. We didn’t think it was going to be that easy," says Raju.
Still, the e-commerce bets balance out misses like Ola or TaxiForSure. Its bets in vertical e-commerce plays such as Zivame, Urban Ladder and Bluestone have each raised large follow-on funding rounds from new investors over the last six months, even as some of their rivals succumbed to the 2012-2013 funding slowdown. It has also booked handsome profits from e-commerce by selling some of its stake in Snapdeal and Flipkart. Those successes have enabled it to raise a third fund which closed with a $290 million corpus in September.
In recent months, Kalaari has strengthened its team. It added Bala Srinivasa, a senior executive at Moody’s owned Amba Research, as partner, and promoted Sumit Jain to partner. In terms of investment strategy, it has set aside $75 million from the third fund for follow-on investments in portfolio companies that go on to become valuable. This small but important shift in strategy is an acceptance of the fact that the firm needs to make the best of the few winners in the portfolio since typically most venture capital investments tend to deliver poor or no returns.
Like other VCs, however, Kalaari’s performance will eventually depend on whether India’s e-commerce companies are be able to go public in the next three to five years. “What we have learnt over the past decade is that our venture profile isn’t going to be that different from the US. You need big hits because the failure rate is going to be high. You better have big hits ($500 million or more) from 10% of the portfolio," says Raju.
So far, Kalaari seems on course on those metrics.