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VC Interview: Manish Kheterpal of WaterBridge Ventures

Even as 2017 witnesses a shrinking of overall Early Stage Venture Capital activity, WaterBridge Ventures – a new early stage focused firm - has notched up as many as six investments already during the year. In an interview to Venture Intelligence, Manish Kheterpal, WaterBridge’s Founder & Managing Partner– an IIT-Delhi & Stanford alum who had worked earlier at Providence Equity Partners, Actis Capital and Rho Capital Partners - expands on the firm’s fund raising experience and investment outlook.

Venture Intelligence: You had announced a first close of your INR 100 Cr ($15 M) fund in mid 2016 with about $5 M (INR 33 Cr). How was the fund raising experience? 

Manish Kheterpal: We were fortunate to launch the fund in 2016 without the need for an anchor investor. That helped us get our team, processes and market presence sorted, and also make some early investments while being highly selective about our portfolio. Since we are building a curated portfolio of 15 - 20 companies (as opposed to spreading our bets thin) with a keen filter of high value-addition, we have been careful about fund expansion. 

We started with a much smaller target of INR 50 -75 crores but we are fortunately already over INR 100 crores in commitments and will likely close the fund by in Q1 2018 at around $25 - 30M. Fund expansion from our initial target has not led to any change in our investment strategy but has given us more ammunition to keep supporting our investee companies through their future rounds of funding. Our LP list is balanced amongst organized family offices, financial investors, corporate treasuries, 2nd generation business owners, and HNI professionals from the field of Tech & Investing. At final close, we expect to have a 60% India and 40% overseas representation in our LP base. 

How would you describe the current environment for fund raising for VC/seed funds in the domestic market?

Domestic market is quite robust for the alternative asset class especially for VC funds. Indian economy is at the right juncture for this asset class to become attractive for corporates and HNI’s in-order to fulfill their diversification needs. This spells of maturity of the Indian fund ecosystem. In the next couple of years, I am expecting to see increased interest from corporate treasuries and DFI’s as well. I also expect to see a sharper focus on fund differentiation and returns from more sophisticated LP’s in the domestic market.

Would it be correct to assume your focus will be on Seed and Series A investments?

Our sweet spot is Pre-Series A in a lead role to Series A as a co-lead. On some occasions and as we flesh out our investment thesis in some sub-sectors, we may be involved in some seed deals as well with a clear path to further funding.

How many investments do you see yourself making out of the new fund? Is there a max. allocation per company? 

15 – 20 investments with not more than 5% exposure in any one investee company as a broad benchmark. Having said that exceptions can always be made especially as the portfolio matures and when we are investing in follow-on rounds.

WaterBridge’s early investments have been in Edtech, Fintech and Medtech. Can you talk about the sectors that specifically interest you for new investments?

WaterBridge Ventures is a Catalyst for Tech Entrepreneurship in India. We believe $50 billion of investment will create $250 billion of value in this space during 2015 – 2030. We back passionate entrepreneurs that are solving problems for consumers and businesses with Tech as the exponential enabler. Instead of trying to forcefully create natural diversification within Tech, we analyse every investment opportunity bottom-up. What’s common in all our investments is Passionate founders, Product-market fit in Large markets, Attractive capital structure & Unit economics and a Sustainable moat. 

Instead of looking at each sector like Education or Finance individually, we instead look at Tech disruption playing a role in themes like Work & Home Automation (Machine Learning, AI, IoT); Consumption Enablers (Real-estate, Auto, E-com, Food); Urbanization & Rising quality of life (Health, Education, Travel); Digital Finance; Enterprise solutions; and Core Tech (Robotics, Life Sciences).

Do you see the presence of hyper funded companies like Paytm in Fintech, Byjus in Edtech and CureFit in Healthtech a challenge for new startups?

For every Series C, D funded or later stage company, there are 100’s of exciting early stage start-ups solving problems in a unique way. We always evaluate the ‘800 pound gorilla beating you at your own game’ risk but having well-funded companies does not stifle innovation especially in large markets. If Byju’s was focused on K-12, we supported a company like Unacademy which was unique both in its content creation (user-generated) and Target Group (higher education market). While a CureFit is focused on solving for Consumer health, fitness; our investee company LetsMD is solving for information and price asymmetry of high value uninsured medical procedures like IVF, Bariatric surgery by becoming a trusted patient, hospital partner through medical service provider engagement and the consumer decision journey. Having said that, given the changing regulatory regime, PayTm’s position and presence of other players like Freecharge, Mobikwik, we decided to stay away from the payments space for the time being as we didn’t see much room for innovation. Sometimes hyper-funded spaces also yield a lot of lessons for the next breed of companies which have a better and more robust business model, MagicPin is one such company in our portfolio.

What is your reading of the whole upcycle in funding for consumer Internet & Mobile businesses in 2015-16 and the current down-cycle? 

Like most financial markets, cyclicality is par for the course especially for seasoned multi-cycle investors. VC funding also swings to extremes both in the up and down cycles, this is further amplified in emerging economies with underlying enablers like demographics, high growth potential and yet to fully develop entrepreneurial ecosystem. 2014 – H1 2016 period definitely saw a huge uptick in VC funding activity and by the same token last 12 months have seen softness especially in Series B, C, D funding activity. In the former period, we also saw the entry of big sovereign, strategic groups from other parts of Asia chasing new growth markets, and private market focused hedge funds for the first time in India - which all added to the average deal size and volume of deals. 

Rightfully sectors like E-commerce that had run ahead of their fundamentals have seen some correction in 2016/2017. Overall though, if one peels the onion a bit, entrepreneurial activity has not slowed down as no. of Seed, Angel and pre-Series A stage deals hasn’t reduced and now Series B, C activity is picking up again. There is enough dry powder waiting to be deployed and during this temporary slowdown we have certainly seen average quality of entrepreneurs go up along with sharpness in business plans. The focus has shifted to ‘long-term profitability’ from ‘GMV’s and Irrational Marketing spend based User acquisition’. This cycle has been healthy for the development of the Indian start-up ecosystem. 

Three of WaterBridge’s first investments have been in NCR based companies. Is that a conscious focus?

We have funded 6 deals and are just about funding our 7th deal. This is after having spent time on over 700 opportunities. Our portfolio companies are evenly split between Delhi NCR and Bangalore with one based in western India. We are a pan India player but given we are based out of NCR, there is a natural concentration in NCR deals due to network effects. Our deal pipeline has 45% NCR and 35% Bangalore mix, which is not too far from a pan India industry activity. We will be opening presence in Bangalore later this year which should balance things out for us and given our focus on Tech, it is natural to have Bangalore as a key part of our strategy.

Also in the type of companies we back, HQ location has less bearing on their circles of influence. As an example, we have worked closely with the founders of one of our Bangalore based portfolio company called Dataweave, in their re-location to the US to focus on high Average Selling Price (ASP) and much larger market for their Analytics and Big Data global-scale product. Similarly for a company like 99RetailStreet, we have helped the founding team to focus on Sri Lanka’s virgin Ad Tech and Supply Chain Analytics last mile Retail space. Then there are companies like MagicPin & Ziploan which are naturally growing their consumer and business focus in multiple markets of India given their unique and powerful value proposition.  

What are the primary sources of deal flow for WaterBridge? 

We have a balanced mix of deal flow from 4 sources – Inbound direct + Intermediaries (30%), Angel networks + Incubators (25%); Peer funds (20%) and Proprietary (25%). We feel differentiated funds like us will continue to see an even higher representation of proprietary deals going forward.

What would you advise entrepreneurs to expect in terms of timelines for raising capital - from first meeting to cash-in-the bank?

Always have 9 - 12 months of cash in the bank before initiating the process, run a tight process and expect to get funded in 6 – 9 months. Especially in early stages of the company, we suggest that entrepreneurs use their warm network to reach out to investors before engaging any intermediaries. Few high-quality investor discussions would always yield better funding results and/or learning as opposed to carpet bombing the investor universe. While investors may not admit it, they like proprietary access to deals and entrepreneurs. We also recommend that start-ups look for semi to fully organized (institutional) capital post seed, angel stages as opposed to having a confusing and distributed cap table which can become an issue in later rounds of funding. Not every business requires VC funding but those that do should raise capital early from high quality value-add investors. 

As someone who has worked at large PE firms like Actis and Providence earlier, what drew you to the early stage segment of the market?

I started my investing career in VC 14 years ago and through various stages of venture and growth capital investing with 3 different funds (Rho, Actis, Providence) and my angel portfolio, I have found many common threads. Personally, I have enjoyed high value-add involved investing and seen a high correlation with that kind of investing and return profile of my investments. It has been a lot more fun and learning post investment in such deals too. Over the next decade, I see Tech disruption in almost all sectors of the Indian economy and highest need for institutional investment in the early stages of start-ups (given the high failure rate and fragmented capital). Combine that with my passion of working closely with entrepreneurs to help realize their vision and you will understand my excitement behind founding WaterBridge Ventures as a platform for impact in Tech VC investing in India.

Venture Intelligence is India's longest serving provider of data and analysis on Private Company Financials, Transactions (private equity, venture capital and M&A) & their Valuations in India.

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