New Sequoia GP sets blistering pace in India

Once a nationally ranked tennis player, KP Balaraj is now trying to serve up aces for Sequoia Capital India.

Balaraj, 35, co-founded Indian venture firm WestBridge Capital Partners six years ago with Sumir Chadha, who was Balaraj’s colleague at Goldman Sachs and his classmate at Harvard Business School. Their goal was to become India’s No. 1 venture firm. And they had early success in their first fund, exiting from Celetronix, which they sold to Jabil Circuits for $200 million.

Over the last few years, Westbridge made investments in India with both NEA and Sequoia, which eventually turned into a discussion between Sequoia and Westbridge about merging the two firms. Balaraj and his partners found it too hard to resist a merger with the name-brand Silicon Valley fund that wanted a footprint in India. They finalized the merger in May, with Balaraj and Chadha becoming managing directors in the newly re-named firm. The negotiations to merge took less than a year, arising out of both parties mutual interest in each other’s firm, Balaraj says.

Balaraj got his start in private equity with the PE team at Goldman Sachs Group in Asia, working on deals ranging from business turnarounds to real estate. These days his interest lies in high-growth consumer services on both the Internet (he has led investments in TravelGuru and TutorVista) and on the ground (with investments in Starbucks’ competitor Coffee Day and Royal Orchid Hotels).

India’s frenetic deal-making pace keeps Balaraj on the road 15 days out of every month. He also takes takes three to four meetings with potential portfolio companies daily. VCJ managed to catch up with him, but we had to squeeze our interview into two separate phone calls. Balaraj was on his way to the airport both times.

Q: How did your firm’s relationship with Sequoia come about?

A: We worked with Sequoia in our second fund. We made two investments in India with Sequoia in the fund, including an investment into Bharti Telesoft, a telecom software company in India, and into Mauj, a mobile value added service provider.

Q: What does the relationship consist of?

A: We’re one firm. We [Westbridge] are fully integrated with Sequoia. I can’t, obviously, talk about the economic structure, but both sides are happy with the economics.

Q: Where are you with Fund I?

A: We continue to manage the first fund as Westbridge Ventures I, which has $140 million and is totally committed, but not fully invested. We have about 10% of the capital remaining for follow on investments in the portfolio.

Q: Where are you with exits from Fund I?

A: We’ve had one exit to date, the sale of Celetronix, an electronics manufacturing services company, to Jabil Circuits for about $200 million. That was a joint investment with NEA. Several of our early stage investments in specialized outsourcing companies look highly promising, with many companies evaluating an IPO or strategic partnership in the coming year.

I’m on the road in India 15 days each month, which is not an easy experience. But these are interesting times. There are lots of potential deals, with lots of ups and down, and lots, too much, money heading to India.”

KP Balaraj,Sequoia Capital India

Q: At the same time we’re seeing domestic India funds on the increase. Another misperception?

A: No. All the major institutions in India—the State Bank of India, ICICI [one of India’s largest banks], HDFC—everyone here wants to [have involvement] in private equity or venture capital. And over time I expect to see the major insurance companies entering the field, so there is lots of money becoming available for investing.

Q: We’re reporting on lots of deals from your peers in the Indian industry.

A: We’re seeing that. Citibank, ChrysCapital, Actis and others making PIPEs and minority position deals. Warburg’s focus on larger transactions continues. Other large firms—KKR, the Carlyle Group, Blackstone—are actively looking for deals. The hedge funds are here now looking for deals. Private equity and venture capital is picking up a lot of momentum here. I expect to see a lot of competition between hedge funds and private equity in the passive PIPE space.

Q: That is happening despite a significant market correction in public equities in India?

A: You have to remember that the public markets here went from 3,000 in 2003, to 12,500 six months ago. So, yes, we’ve seen a 25 to 30% correction back to the 10,000 level. That has actually been healthy for private equity. In the long term, a realistic public market is better for us.

Q: What are the challenges that you face in India?

A: The challenge is execution over the long term, picking [strong] companies and teams that can scale. And keeping our expectations realistic.

Q: We’re tracking the flows of money here into sectors like automotive components, infrastructure, pharmaceuticals, real estate and textiles.

A: Infrastructure, real estate and manufacturing are certainly receiving a lot of interest here. Real estate is likely to be the largest sector of private equity activity.

Q: Is there over-funding of deals?

A: Yes, but infrastructure and private equity have seen a big correction. They’re down 40% to 50% from their peak. We can expect a 20% to 30% correction in real estate in the major urban areas like Mumbai, Bangalore and Delhi. That is one sector where the institutional funds like HDFC have been very active. And the sector has the potential to do well for private equity. At the same time there is lots of speculation. Deals [in the sector] are not transparent and finance is not as attractive for the sector as it is in other areas.

Q: I already hear, much as I do about investment in China, that India presents VCs with an opportunity to exploit the proven Internet models already well developed in the United States because it’s such a nascent market. Is that true?

There is valuation pressure and deal size is increasing, just as we see in other markets such as China and the United States.”

KP Balaraj,Sequoia Capital India

A: No. India’s [online market] is largely English language. All of the U.S. and global brands—Google, eBay, Yahoo—are well known here. India is not like China, which is still largely a local market in which the U.S. giants can buy local partners to enter the market. If you’re going to invest in the major Internet niches in India, you have to invest in firms that will exploit something about the local market.

Q: So why have six travel portals been funded by U.S. related VC firms in India, including yourselves?

A: Yes, that is a good example of how markets [are inflated]. I think the actual number is four to date, and travel is a good case in point about the rush to invest in India. Four [is probably too many companies]. You have the two leaders, MakeMyTrip and TravelGuru (our investment), plus Cleartrip and Yatra coming more recently with U.S. VCs. We are excited about Travelguru as they have defensible and exclusive partnerships with many of the top travel industry players in India.

Q: Speaking of over-investment, what about outsourcing?

A: There are a number of folks, like us, who have done lots of investments in the sector. Over time the area will attract more private equity, but the interest is likely to flow to single industries or to one process as funding for new deals go forward. I think we’ll see five to six years of deals in the sector.

Q: Talk about technology investing in India.

A: There is a lot of interest there as well. But the focus is on the Internet and mobile, which are the areas attracting the most institutional investments. It’s a bit early to think of our [portfolio] companies as being global companies. Most of our firms are active locally and most of the investment dollars are going into [domestically focused companies].

Q: What geographic areas in India are attracting the most investments today?

A: Bombay, Delhi, Madras, Hyderabad. But moving forward we’ll see investments spread to the second-tier cities.

Q: What are your observations of the private equity investors in India?

A: The largest investors and the largest deals are taking place there. General Atlantic’s transaction for the GE back office business. KKR’s recent purchase of Flextronic’s software business in India. Carlyle is looking at lots of deals. Blackstone is looking at manufacturing. We’re starting to see the early moves of these big funds. To date they’ve focused on IT, pharmaceuticals and manufacturing. Going forward, we’ll see more work in manufacturing.

Q: India’s government is actively encouraging the VC and PE industry here?

A: Correct. The government is being pro-active, especially for private equity and venture capital investments. A few sectors remain difficult. There are limits on [foreign] investments in domestic retail, on insurance, in banking, and those limits will remain.

Over the next 12 to 18 months, most major U.S. funds will have an India play or they’ll travel to India more frequently like the folks at Norwest or Battery.”

KP Balaraj,Sequoia Capital India

Q: What about telecom?

A: The government lifted foreign ownership to 76% [in the past month] as an example for Bharti, so telecom is opening up and is becoming an area of phenomenal success [for PE and VC].

Q: Startup airlines here have been very active in PE in India.

A: There are good teams working on startups here and good companies. But there are issues with oil-related constraints and with airport infrastructure that are detrimental. Still, it remains an area of big growth potential.

Q: What are your days like at present?

A: I’m in the Bangalore office. It’s hectic at the moment. I have three or four company meetings per day. I’m on the road in India 15 days each month, which is not an easy experience. But these are interesting times. There are lots of potential deals, with lots of ups and down, and lots—too much—money heading to India.

Q: What happened with the Westbridge brand and assets?

A: In May we formally became part of Sequoia Capital and our second fund was renamed Sequoia Capital India II. We’ll continue to invest and manage Westbridge Ventures I.

Q: You built the Westbridge name over the last several years. What was it like to subsume your firm’s name into Sequoia?

A: We had a strong emotional attachment to the name and our work, but we considered the merger carefully given our tremendous regard for Sequoia. It was clearly the right time and the best thing that we could do looking forward to build the dominant investment franchise in India over the next 20-30 years, which is what Sumir and I wanted to do when we started WestBridge.

Q: Has anything changed in how people view you in India after you became Sequoia Capital India? Red carpets everywhere?

A: Oh, it’s not that dramatic. We had a very good reputation after six years. But in some sectors, like the Internet and mobile, where Sequoia was instrumental in investments like Google and Yahoo, the Sequoia reputation is incredibly strong. In some emerging sectors in the technology sector there is such strength in the Sequoia brand that entrepreneurs have a clear recognition of the name and are excited about becoming a partner with us.

Q: You did two deals with Sequoia before deciding on the merger, but you also did two deals with NEA. Did you ever consider merging with NEA?

A: [Laughing easily.] No. But we continue to work and syndicate deals with NEA in India. They’re good friends and partners, and we have high regard for them.