Seedfund Closes $54 Million Second Fund, To Launch An Incubator [Interview]

Early stage investment firm, Seedfund has closed $54 million in the second round and is launching an incubator – 2,000 sq. feet of space in Mumbai. The fund recently won India’s best early stage investor award (of 2010) at the Apex Awards.

Here is an interview with Bharati Jacob/Mahesh Murthy (two of the cofounders) on the future plans.

Qn: What’s the new fund size. Earlier fund had Google, Reliance ADA as LPs. Who are the LPs for this fund?mahesh

Mahesh Murthy: The new fund is around US$54 million. Many of our LPs from the first fund have returned. But as you can imagine, we need a wider mix of LPs now that we are managing a larger fund and also now that Seedfund has plans for subsequent funds. So in addition to many of our earlier LLPs, we have endowments, pension funds and other large financial institutions who believe our asset class make sense to them to partner with over the long term.

Bharati Jacob – We have close to $70 million under management across 2 funds. Our investors are a great mix of institutions who believe in and are committed to long term viability of early stage investing in India. Our investors include large financial institutions, pension funds, trust funds and a few marquee names from India. We have a few returning LPs – again a great vote of confidence in the team and the early stage investing.

Qn: Early stage investments in India – A lot of money has been invested in ecommerce market. Do you think there is a big story out there? What are Seedfund’s new investment areas (apart from Internet/Mobile).

Bharati Jacob– yes, a fair bit of money has been invested in e-commerce. We do believe that e-commerce (of the right kind!) will do well over the next 5-7 years – may not be in a hockey-stick fashion but steady growth. The number of internet users has increased substantially over the last few years and people seem to have greater comfort using credit card online (especially after dual security measures).

Our investment areas for Seedfund2 are very similar to Seedfund1 – we would like to invest in India markets focused companies; companies that are creating “sectors” and companies that can quickly get to leadership position within the sector. We are fairly sector agnostic but believe the investments will happen in healthcare, education, internet, alternate energy, retail,etc. Our overall vision is to invest in companies that are creating the new India!

There isn’t a difference between Seedfund1 and Seedfund2 strategy except that we have more money in Seedfund2 and hence, can stay support our portfolio for a longer period of time!

Mahesh Murthy: Well e-commerce is still commerce – it has to work as a business. Just putting a lot of money into something which has an ‘e’ in front or a ‘.com’ at the end of the name is neither a necessary or sufficient investing condition. We have never believed in trend or momentum investing. An e-business still needs to be a business.

We invested in RedBus many years ago – when it was unfashionable to invest in e-commerce, and we’ve worked hard on the fundamentals of delivering value to consumers while its rivals got far more money and far less traction. Finally what matters is not how much money you got – but how much you made.

We don’t quite invest with sectors in mind – in fact, in retrospect, most of our investees are in what you can call “not-yet-sectors-when-they-got-funded”. Whether it’s Printo or Vaatsalya or RedBus or CarWale or Edusports or ThinkLabs – these are companies that grew to leadership and in the process defined the sector around them.

We will look at any and all plans that come to us – e-commerce or not. We are not theme investors. We look for a company’s and team’s ability to become a leader in an emerging marketplace – and grow profitably in that space. That is more important to us than whether it’s e-commerce or m-commerce or z-commerce.

That said, we have significant online business experience among the partners at Seedfund – and can probably help and mentor a team with a good e-com plan better than most other investors around.

Qn: End of 2010, Seedfund had a few exits. What were a few learnings you had from the early stage investment in India, so far?

Bharati Jacob -Yes, we are very pleased with the exits we have had in Seedfund1 – it validates our hypothesis that led us to start Seedfund in 2006 – that early stage investing is a profitable business, that we can exit such investments and that early stage investing shouldn’t take a whole lot of money; rather it requires more time than money! These exits have been profitable for our investors as well and that has led to Seedfund2.

Our deal flow is growing – at a healthy pace, month on month, year on year – all pointing towards growing entrepreneurial desire amongst Indians – to be their own boss; create wealth for themselves and the society in a transparent and ethical manner!

Mahesh Murthy:

Well, some of our learnings:

1. Our theory behind our first fund was largely correct. You absolutely could build great companies with a little bit of money and a lot of mentoring if you picked the right team and the right space.

2. Our first fund largely invested in the $500,000 to $1,500,000 range per company. We learned over time that there were unmet opportunities on both sides of those limits. At the lower, sub $500,000 end there were startups that needed a lot of mentoring and handholding and we are creating an interesting infrastructure to handle that in our second fund – an in-house incubator that should be I think India’s first for a VC fund. And at the other end we believe that we should have the dry powder as it’s called to support our companies further through their growth – and hence we now have the ability in the second fund to put up to US$5,000,000 in a company over its lifetime. In simple terms, what was a 500k to 1.5M fund is now catering to a larger startup market – one with a range from 50k to 5M.

3. We were ourselves a startup – now that we’ve proven our basic thesis we can grow our own impact. We started with a little money and a reasonably unusual strategy, to prove that true, risky venture capital is possible and profitable in India. Most of the firms that started alongside us in either the early 2000s or around 2006 have all grown into growth funds or PE funds or even hedge funds – and manage way too much money to be able to look at true-blue risky startups, and mentor them. We believe we now have a system that allows us to deal with that risk that other firms are not comfortable with – and that this gives us some sort of a unique position in the market. We’re now in our second fund and in 3 locations around India – unique for a fund of our relative small size – we can’t do chequebook investing by sending money to a company we’re not in close touch with all the time. We hope that, over time, we can be wherever there are entrepreneurs in India, offering local, hands-on mentorship and guidance, and helping build companies that are what we’d like to think of as “the backbone of the new India”.

- What next?

Oh, raising the money is just the beginning. Now to execute. To find and fund great teams, to offer valuable advice and mentorship. To create market leaders and in that process, make money for our entrepreneurs, our LPs and ourselves.

Lots to do!

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Have questions for the team? Ask them in the comment section.