Venture Intelligence: What are Ojas’ criteria for investing in a company?
Rajesh Srivathsa: Ours is a technology focused seed fund. We have two criteria for investing. First, we look for companies that are predominantly in India. While we make some exceptions, we prefer that both the management team as well as the company is in India.
Secondly, we expect the company to have a technology product or solution. We do not normally invest in services companies. We look at consumer services companies as long as they have a technology platform which offers a significant differentiation from the competition.
So the underlying theme is that the company has a differentiated technology solution or uses technology to offer a consumer services solution.
VI: Within technology, mobile seems your preferred area. Why?
RS: If we look at the traditional happy hunting grounds for VCs the world over, it encompasses technology companies across communications, CAD, silicon, embedded, networking, enterprise software, consumer Internet, consumer mobile and now, clean and green..
When we started two years ago, in India, most of the seed stage companies that were innovating were in the mobile domain. That was the reason we happened to invest in mobile companies. Even in our investments within the mobile domain, there is a significant range. We have invested in Mango Technologies, a hardcore mobile company, where the end customer is a mobile OEM/ODM. Then there is Ziva which is a consumer services company offering search solutions, using mobile as a platform for delivery. Tyfone could be classified as both a mobile company as well as a financial services firm providing payment and banking solutions. Telibrahma creates a mobile channel that is complementary to the the operator network. So except Mango, all the other companies have intersections with other areas. Telibrahma is a mobile-media company. Tyfone is a mobile-banking and payments company and so on.
VI: Will the focus on mobile continue?
RS: No. From a fund perspective we are already overinvested in the mobile sector. Unless we see a company that offers a significantly differentiated offering, we will not consider mobile now. Our last two investments – Cocubes and Arigami - are not in the mobile area.
VI: When the technology is complex, like in case of Mango Technologies, how do you make your investment decisions?
RS: We are comfortable in investing in companies where we can understand the technology behind the company. For example, while we are keen on clean energy, we have not made any investments yet because we don’t yet have the expertise but are continuing to build up our expertise in this area.
In our opinion, the only way to do due diligence is by talking to the customers and ecosystem partners; and we spend considerable time on this before investing. For example, before investing in Mango, I went to China and South Korea and spoke to OEM/ODM players there. Before we invested in Tyfone, we spent a lot of time talking to banks and operators. Without talking to customers, we cannot make qualified investments.
The unfortunate consequence of this is that when we make a hardcore technology investment, it may take a couple of weeks longer than if it were a relatively simple consumer services company. It also works the other way round. Since we already have made contacts with the customers and potential ecosystem partners, if we do make an investment, we send note saying ‘Thanks for your time. We have made an investment. Let’s know if this company can help you’. So it acts as a door opener as well for the startup company.
VI: Talking about your investment in Arigami, how do you look at semiconductors as a potential area of investment?
RS: We are surely looking at the semi-conductor ecosystem. We are one of the early VC members of Indian Semiconductor Association. But typically semi-conductor companies take in a lot of money before they can see the light of the day. We are a small fund. Given our fund size, we are constrained only to invest in those companies which are more towards the embedded CAD or IP side. We cannot invest in a company that is directly building a complex chip since they will run out of the limited money we can provide before reaching a validation stage. We look to invest only in those companies that can get to positive cash flow with reasonable revenues. This will prove as a reasonable validation for other larger VCs to become interested and potentially provide scale stage if required.
In Arigami, our investment was driven by the fact that it was a fundamental technology play. They are using concepts from Vedic and Indian Maths to see how power consumption can be reduced significantly. They have already filed four patents and have demonstrated considerable power consumption reduction in VHDL simulations. We are funding them to validate it now on a real chipset. Even if you get a 10%-15% reduction, you are doing a tremendous job.
VI: What was the driver for your investment in Cocubes (an online platform that enables colleges to manage their campus placements)?
RS: At the end of the day, we need technology only for three reasons: 1. Can you provide a differentiated value proposition to the customer as compared to the the competition? 2. Can you provide a better, faster, cheaper solution while having higher profit margins? and 3. Can you scale nonlinearly (i.e., scale without having to hire more bodies)?
Cocubes is a services company that leverages a technology platform that it has architected to address all three of the above points – and thus, hopefully, help it grow to be a scalable, profitable, high margin business.
VI: What was the rationale for investing in Telibrahma which had already received a round of VC investments before you got in?
RS: We do not necessarily need to be the first investor. In cases like Telibrahma, where a round of funding has already happened, we would still be interested if we find the technology compelling. We did significant amount of due diligence and found that there are only two other companies in the world that are close to Telibrahma in technology – one is in the UK and the other in the US.
VI: Which sectors are you actively looking at and conversely, which sectors will you not invest in?
RS: Firstly, we ask: Is there a real differentiator in this company which has a basis in IP or technology? We then don’t care what sector it is. Secondly, we need to be comfortable with that sector. If it is an area where we have no understanding, then we will not invest. This is important because we are investing in seed level companies where we expect to get involved with the company in a significant manner. Otherwise, there isn’t much value add that we provide to the startup; and we are not protecting our investment either. We will ask ourselves if we are comfortable with the market and post-due diligence, if we can continue to be plugged into the ecosystem. If the answer is ‘no’, then we would not invest. If it is completely a non-technology play or an IT Services firm, then there is less likelihood of our investing in it.
VI: What do think of the current deal flow environment?
RS: We have not seen any change. India has been affected in the downturn no doubt, but I do not think at the seed level people have been affected. On the whole, we have not seen any decrease in deal flow.
VI: For your portfolio companies, has it become tougher to raise the second round of funding?
RS: If our companies can get to a point where they can get reasonable revenues and become cash flow positive, then they will not face difficulties in second round fund raising. Also, if we find that in the current environment, a company that we have backed doesn’t enthuse VCs, then we look to customers and ecosystem partners directly for Series B funding. This is what we done in one of our portfolio companies and have found a tremendous response from partners and customers.
VI: How does having a single investor (Limited Partner or LP) behind the firm affect your outlook compared to regular VC firms?
RS: There is no difference in terms of return expectations. However, a single LP certainly makes it easier in getting approvals if there is a change in direction - on issues such as exceeding ceiling norms for investments in one company in the portfolio, or number of companies in which we are totally invested, etc. At the same time, having multiple-LPs will help us with a broader network. Our next fund will be a multi-LP fund.