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October 07, 2010

Interview: The Sequoia-SKS Saga

For Sequoia Capital India, its 2007 investment in SKS Microfinance, founded by former McKinsey consultant Vikram Akula, was one of its first outside the technology sector. With SKS’ successful August 2010 listing, Sequoia, which had invested $32 million in the company over three years, is now sitting on returns of about 13x (at the mid-September market price).

Extracts from an interview with Sumir Chadha, Managing Director of Sequoia Capital India, , who represents the firm on the SKS board, on the path-breaking investment. This interview was first published in the latest quarterly Venture Intelligence India Roundup Private Equity report.

Venture Intelligence: Tell us how the original investment by Sequoia in SKS come about.

Sumir Chadha: In early 2006, we identified the microfinance sector as an area of interest, and proactively reached out to the top players in the sector. At the time, people forget, but SKS Microfinance was the third largest player in the industry. However, Vikram’s fantastic vision and the quality of the management team really impressed me, and based on that we decided to invest in the company. We saw a large, virgin market opportunity and a very well run company. Since our investment, they have emerged as the dominant market leader in microfinance.

VI: Given that SKS was one of Sequoia's first non-tech investments, how did you and your team go about engaging with and adding value to the company?

All high growth companies face a similar set of challenges regardless of sector: recruiting high caliber executives to fill in gaps, building strong financial and operating metrics and discipline, creating the right culture for success, etc. Our experience in helping many companies in India over the past decade was helpful. We helped lead the search for SKS’ current CFO, Dilli Raj. We also recruited prominent board members such as Pramod Bhasin from Genpact and Tarun Khanna from Harvard Business School onto the board. We assisted the company in measuring, monitoring and incenting performance. And finally served as a sounding board for important strategic decisions.

However, I don’t want to overstate our role, most of the credit goes to Vikram Akula as well as the key executives including MR Rao and Dilli Raj.

VI: SKS attracted a series of new investments since Sequoia's entry culminating in the August 2010 IPO. Can you tell us about Sequoia's role in raising the further rounds and the IPO process?

We tend to play an important role in raising additional private capital for our portfolio companies as well as shepherding them through the IPO process, especially since for almost all our companies, it’s the first time that they are raising follow-on private equity or doing an IPO. It includes introductions to investors who are a good fit for the company, assisting in negotiations, selecting bankers for the IPO process and helping manage the key decisions around the IPO.

VI: Apart from SKS, Sequoia has investments in two other microfinance companies - Equitas and Ujjivan. How are these firms differentiated (from SKS)? And are you open to making more new investments in this sector?

Equitas has built a very operationally efficient model that has scaled extremely well. Ujjivan focuses on urban and peri-urban microfinance and is led by a very capable management team. Never say never, but we are not looking to make additional investments in the sector at this time as we have a fair amount of exposure to three industry leaders.

VI: Is microfinance an unusual sector (in terms of its hyper-growth) or can India throw up several more sectoral opportunities that can provide similar returns?

Microfinance is unusual in one very important respect in that India is the world’s largest market for microfinance given the size of our population and the number of poor that we have – far greater than China. This means that in the microfinance sector, India will produce companies that will be the largest players in the world and will drive innovation in the sector. SKS has already become the world’s largest microfinance firm by loan book outstanding and continues to grow very fast.

Having said that, there will be other sectors that throw up very good returns and we are already seeing this across our portfolio – for example, we recently exited Manappuram (a leading lender against gold) and Dr. Lal Pathlabs (a leading healthcare diagnostics company) – both at very attractive returns. We also have many other rapidly growing companies in our portfolio in India across many sectors.