It is different from the US Silicon Valley model, where venture capitalists necessarily back only technology product start-ups that promise 100-200% revenue growth year-on-year to achieve supernormal returns. In India, VCs invest as frequently in hospital chains and beauty salons as they do in Internet start-ups and software product companies. Sequoia India showed the way in 2005 when it invested $11 million in New Delhi-based diagnostics services firm, Dr Lal Pathlabs.
The firm’s exit track record so far bears out the unconventional investment thesis. Dr Lal Pathlabs is part of the 18 companies that Sequoia India backed from its maiden fund. BPO firm Indecomm Global Services, software testing company Applabs and Dr Lal Pathlabs are each projected to fetch 4-5 times the initial investment when it exits them over the next 6-9 months. It has already seen seven exits so far, of which four, Brainvisa, Firstsource Solutions, Zavata and MarketRX, have each returned between 2.5 times and 4 times the initial investment (See table: Portfolio). The fact that all these companies are in the cash-intensive services space (an absolute no-no in the Silicon Valley venture market), and are yet able to deliver venture-type returns, is a pointer to how differently venture capital works in India.
Another significant milestone is that two portfolio companies, Firstsource and Zavata, crossed $100 million in revenues (before Sequoia exited). Another two, Indecomm and Applabs, will get there in a few months. These companies were at $2-3 million revenues when Sequoia India invested in them. “That’s an amazing success rate in the venture business. In the US, where a normal portfolio is 40 companies, they may get two $100 million firms. We have four out of 18 and we invested much less in each,” says Chadha, who is currently setting up Sequoia’s New Delhi office. Sequoia India’s Fund I has already returned 70% of the original corpus.
Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of data and analysis on private equity, venture capital and M&A deals in India. View free samples of Venture Intelligence newsletters and reports. Email the author at email@example.com