Start-ups should be realistic about valuations: NVP’s Promod Haque and Niren Shah


NVP senior managing partner Promod Haque (left) and NVP India managing director Niren Shah.NVP senior managing partner Promod Haque (left) and NVP India managing director Niren Shah.

Palo Alto, California-based venture capital firm Norwest Venture Partners (NVP) raised $1.2 billion this week for its 13th global fund, dubbed Norwest Venture Partners XIII LP. This is the third time that the firm, which focuses on early- and growth-stage investments, has raised a $1.2 billion fund over the past seven years. Its total funds under management now stand at over $6 billion.

The latest fund, raised in a challenging venture capital market, continues with the three-way diversification strategy that the firm adopted in 2009. The strategy saw NVP broaden its investment focus in terms of sectors, stages and geography. As a result, its current global portfolio of over 130 companies (it has funded over 575 companies since inception) runs across sectors such as software, consumer Internet, financial services and healthcare, multiple stages from seed to growth, and three countries—the US, India and Israel.

NVP debuted in India in 2005 with an investment in Pune-based telecom software company Persistent Systems. It set up local operations in January 2008 and has since invested $700 million across 30-odd companies. Apart from Persistent, other notable investments in the portfolio include online classifieds platform Quikr, medical devices company Perfint Healthcare, food ordering and delivery service Swiggy, furniture e-tailer Pepperfry and private sector bank RBL Bank. Last year, two companies from its growth portfolio went public—Snowman Logistics Ltd and Sadbhav Infrastructure Project Ltd. It also booked profits on its early investment in Quikr on selling part of its shares to Swedish firm Investment AB Kinnevik.

NVP senior managing partner Promod Haque and NVP India managing director Niren Shah spoke to Mint on the new fund, the downturn in the venture capital market, unicorns (start-ups valued at as much as $1 billion) and early-stage investments. Edited excerpts:

The new fund comes amid a correction in the venture capital market. What are going to be some of the key challenges and how are you going to navigate the downturn?

Haque: We are not a hedge fund or a mutual fund where we have to produce returns quarter-on-quarter. Yes, there is a correction. Valuations have gotten very high. Lots of investors were investing in late-stage companies at very high valuations. Our view is that many of those crossover investors, such as hedge funds, have withdrawn from the market. When we invest in companies, our perspective is not influenced by what the public markets are doing. We look at what is the rate of innovation happening in the market and that’s not going to slow down.

We’ve been through many cycles. When limited partners invest in us they don’t look at the current market. They look at how we’ve performed through boom and bust cycles. We are very disciplined investors. When valuations are high, we slow down, we are selective.

In general, the challenges will be more for later-stage companies. The expectations there were either to raise money at very high valuations or to be acquired or to go public. In the current market environment, all that changes. Valuations will come down, initial public offerings (IPOs) will happen later than expected and they will have to make their money last longer. The market is reinforcing capital efficiency. On the flip side, with valuations coming down, some of the later-stage companies will be more attractive and we would want to get involved in those.

You have several unicorns in your portfolio. How concerned are you about the recent revaluation of some of these?

Haque: If anything, it reinforces the strategy (the three axes diversification strategy) we’ve been using for a while. We’ve generally stayed away from late-stage investments over the past few months. On the other hand, in some of these companies (the unicorns), we got in early and paid a low price. Now they’re raising money at astounding valuations. If they can continue to raise money at high valuations, that’s good. But, our advice is, be realistic about valuations. What’s really going to matter is how capital-efficient you’ve been when you get acquired or go public.

Is the downturn in India somewhat different from that in the US?

Niren Shah: The Indian market hasn’t really gone through a major down cycle since the 2000-2001 bust. There was a tiny downturn in 2011 and 2012 but that was short-lived. This one is proving to be much bigger than that. Over the last five-six months, a lot of the late-stage investors, mostly hedge funds, haven’t been coming in. As a result, like in the US, capital efficiency is being reinforced in a big way across venture capital portfolios.

At Norwest, in India, we actually started anticipating the downturn, especially in the consumer Internet sector, 15 months ago. People were raising money quickly and burning through it even quicker. It was beginning to feel a lot like 2000-2001. Also, we’ve seen a bit of a herd mentality to copycat US business models. But, that doesn’t always work. For example, in the US, an e-commerce company doesn’t have to build out the entire logistics network. Then, there’s mobile Internet. The next 200 million Internet users are going to be driven by mobile Internet. So we have to do things a bit differently. In one of our portfolio companies, Quikr, 80% of the traffic is coming from mobile apps. In the US market, the average would be less than 50%.

The downturn is probably a good opportunity to decouple in a few areas from the US. As we see a new generation of talented founders start up, we expect that people will look for business models that are more India-appropriate.

So, more early stage deals over the next few months?

Shah: Yes, over the last few months, we’ve gravitated towards more early-stage deals. It makes sense to do that when a market is in the process of correcting. When it has corrected and valuations have settled to reasonable levels, we will also do late-stage. But, for the next three-four months at least, we will back more companies at the Series A, even seed-stage. The advantage of investing from a global fund is that one has the flexibility to switch strategies in line with changes in the market.

Where are you seeing innovation moving in terms of sectors or market segments?

Haque: We are seeing a lot of it in software infrastructure and applications. The cloud has created a very different environment and there’s a lot of innovation going on around security, for instance. In data, people are using a lot of big data analytics to do predictions. Predictive analytics is affecting applications and end users.

There’s a lot of automation coming in, which is going to affect the way information technology services will perform. That’s the biggest threat to some of the largest information technology (IT) companies. You are seeing where IBM and Infosys are going. Even a product company like SAP is trying to automate. In the US, we’re seeing a lot of innovation in healthcare. Again, for instance, people are using predictive analytics to drive better outcomes. E-commerce and other consumer Internet companies will also benefit from these innovations.

Are you seeing similar patterns emerging in India?

Shah: There’s already a lot of software- and data-led innovation happening in e-commerce on the supply chain and logistics fronts. In Pepperfry, for instance, we created a lot of software and built on data to determine how movement of goods should happen more efficiently. We’re building automation into Swiggy’s operations to reduce the waiting time for end-consumers. You will see much more technology being used over time across the India portfolio to help overcome execution challenges and build scale.