‘We look at investing as being equivalent to a marriage’

By Ankush Chibber

Recently renamed, Reliance Venture Asset Management Limited (RVAM) was launched in 2006 by the Reliance ADA Group with an investment mandate to incubate new business ideas and invest in emerging and high-growth technologies. Harshal J. Shah, its CEO and a veteran of IBM and Accenture, tells us about the firm’s processes and what new trends are emerging in the Indian entrepreneurial ecosystem.

Entrepreneur (E): It has been a rough couple of years for venture capitalists in the country. What has been your firm’s story?
Harshal J. Shah (HS): Last year was a boon and bonanza. We used the slowdown as an opportunity to capture market share. We used it as an opportunity to increase our valuations based on market share. While others were laying off employees, this was an opportunity for us to get some of the best employees at best contracts. More importantly, as a result, we also gained an associated goodwill factor. After all, while the rest of the world was going through hardship, we were trying to make jobs long lasting. Though I can’t talk numbers, I can safely claim that we have been—if not number one in the world in terms of returns on an annualized IRR basis over the last five years—at least amongst the top five in the world.

E: You have also gone global with your focus, have you not? In essence, you are an Indian VC firm taking its game abroad.
HS: And we have been recognized because of this fact. Red Herring ranked us across 12 benchmarks across four months in four stages. Not only did we make it into the list of top 100 VCs in the world out 1800 VC firms across 32 countries, we were ranked at number 30 straight. In fact, we were the only Indian VC firm to be ranked in that list. It is recognition of the fact that here is an Indian company that is going ahead and playing on the global scale now. We are sitting in India and doing the reverse of foreign VC firms coming to India via subsidiaries and branch offices.

E: Let us look at the mandate of your firm. In your earlier avatar, you were called Reliance Technology Ventures and the focus was tech companies. With the re-branding, is there a change in mandate too?
HS: In a way, the name change to Reliance Venture Asset Management reflects how we are shifting our focus from technology, which was our core competency. We have now built our competencies in other fields as well and this has been synchronized with how the Reliance ADA group has evolved.

When we were entering the business, Reliance Communications was our first client. Because of that company, we got to fully understand the market and its dynamics. As a result, we thought it would be a good idea to keep a tech focus.

In time, however, the rest of the babies that were part of the ADA ecosystem—Reliance Capital, Reliance Natural Resources, Reliance Media and Entertainment—have also grown. As a result, our knowledge and competencies in those areas has also increased. We are now focusing not just on tech, but also on entertainment, financial services, healthcare, clean tech, aerospace and defence, and the education sector.

E: What has been the quantum of funds you have invested so far? In how many companies?
HS: We are not disclosing the entire funding amount. But as an indicator, I can tell you that we typically invest $10 million-$15 million in the lifecycle of a company and we have made about 11 investments till now. Usually the sweet spot of this investment ranges across $5 million-$9 million. You can average that out for yourself.

E: Do you think a gap exists in the system as there are not enough institutional players in early stage venture capital?
HS: There is a misconception in India that early stage VC finding has not existed here. Any company that has started in India has seen the founder first take money from friends and family. You are right by saying that there are not many institutional players.

Yet the concept and culture has always been there. If someone has a good idea, he approaches friends and family. Perhaps, through the family network, he may know someone who has money to invest. See, the money is there and the entrepreneurs are there. But the mechanism to end up bringing the two together is not there. In time, maybe we will see smaller institutional players getting into this stage as well. Maybe there will be a better mechanism.

E: Let’s talk sectors. What sectors do you think have been thumbed up or down because of this slowdown? Are there any sectors that you were bullish on earlier but not now?
HS: Prior and during the slowdown, we were interested in Clean Tech. But we began to see there was a lot of hype and froth beginning to build up in that entire space. We looked at that space for more than two and a half years. We saw how a company, which was generating revenue between $7 million-$10 million, was expecting a pre-money valuation of $1 billion in a series C round of funding. That was just ridiculous. We immediately said no. Eventually when this bubble burst, the management came down to $73 million and we still said no. But look, there are still some great ideas in Clean Tech and a lot of them have also become more reasonable.

I see another bubble happening again in the education sector. On one side there is much deregulation expected to happenThat represents a huge market, potentially.

But a lot of companies are raising money now simply because they are in a big market. There are some companies which are doing something good, but there are many who will get their and their investors’ fingers burnt pretty badly.

E: Let’s talk about your investing methodology. You have made some pretty big and interesting bets. How does it go for you?
HS: We look at investing as being equivalent to a marriage. The expectations should be properly aligned. We don’t want to aggressively invest in companies when there is a distress sale going on. Nor do we want to invest in a company when it is at a very frothy valuation.

Either way you will get burnt. Even though investing in a distressed company might seem attractive, it is not always so. In such a case, the entrepreneur might end up getting a $7 million-$10 million valuation instead of $100 million a couple of years ago. If he were to invest in that, in all likelihood, he will be demotivated in some time and so would his employees.

Also, we have reached a point where we are going beyond sectors. We are now looking at not just sectors but the geographic and demographic base. By geographic, we talk of companies that are focused on Tier II and III cities.

Demographically, we are trying to be different. See, the most commonly targeted demographic segment today is the below 25 one which makes up 50 percent of the Indian population. But we are interested in companies that are looking at other segments as well.

For example, with growing affluence, life expectancy is also increasing. Then, is there not a demographic play looking to happen in the needs of senior citizens? What financial services do they need? Or health care? Companies looking to tap this demographic play interest us.

E: As an investor and a partner however, why should an entrepreneur be interested in raising money from your firm? What is your differentiator?
HS: I would like to say here that there are many VC firms in the country with a lot of money. But the color of our money is greener than anybody else.

What I mean by that is that while most firms would look to invest into a company by looking at its term sheets, we look at ourselves as a customer services provider whose client is the portfolio company. Thanks to our experience and the leverage that the ADA group gives us we are able to bring a lot of value to the table as a partner and investor. We understand customers and suppliers. We have the ability to work on pricing requirements. We could help with them infra, hiring, and help them to create policies.

Like I said, in the end, it is a marriage.

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ecosystem, Harshal Shah, Reliance, Reliance Venture Asset Management, RVAM, trends