The following questions have come up in our conversations with prospective and committed investors in Unitus Ventures India (USF India). In the event of any discrepancy or conflict between these answers and the terms of the Private Placement Memo (PPM), Contribution Agreement, or Subscription Agreement, the terms of the PPM and all formal USF India agreements shall prevail.
Q: When is your first closing of USF India fund?
The first close of USF India fund is scheduled for March 2014.
Q: What commitments do you have so far?
We have 20 crores committed from the investors listed on our public website, as of 31st December 2013.
Q: What is the expected capital call schedule? How much will I need to deliver at first close, and how much per year?
As with other venture funds, USF India only calls committed capital when we are ready to put it to use. The following table shows an “estimated” (but not guaranteed) capital call schedule. Funds in aggregate cannot be called in excess of 100% of commitments, but timing of needs are not yet known; hence the required flexibility.
Q: How often will you make capital calls? Can I just put the money in all at once, or pre-pay once per year?
We anticipate no more than quarterly capital calls. We can make arrangements for pre-payment if desired, although this will impact your realized IRR, as we will not receive a good return rate on short-term liquid asset deposits.
Q: When should I expect to receive distributions?
There is no way to predict when first liquidity events would happen. It’s unlikely that distributions would come during the commitment period (4 years following first closing), as it takes time for companies to grow and achieve the scale needed for a corporate or private equity acquisition. Also, the fund managers have the discretion to seek increased total fund return by reinvesting capital received from portfolio exits during the commitment period.
Q: Why are you investing small amounts in 30-40 companies rather than larger amounts in fewer companies?
More bets means our odds of hitting multiple winners are higher. A higher volume of smaller deals also provides opportunity to fail more cheaply which we expect will happen with some of our investments. We get better valuations on early rounds, so the fund is more capital efficient. We also reserve substantial capital to double or triple down on companies which make good progress.
Q: Are others doing similar seed investing in India? If not, why not?
There are no other rupee-based domestic seed funds in India with a similar sector and strategy focus. There are a few offshore seed funds (e.g. Blume Ventures) focused on purely technology startups. There are also larger funds (e.g. Aavishkaar) focused on rural development which may do the occasional seed-stage investment, but that’s not their specialty.
The reason others don’t do more seed investing is simple: it’s expensive to do high-quality seed investing, and so it is less lucrative for the investment managers, even though it can be equally if not more lucrative for the investors.
Q: Is there enough downstream investor capital to fund scale-up of your investees?
There is a significant amount of Series A (and later) investment capital for the sectors we are targeting. In October 2012, we conducted a survey of more than a dozen venture firms who are actively making investments in our targeted segments in India. We identified more than INR 2700 crore in funds currently available, with more expected to be raised in the next 12-18 months. There is an increasing allocation of capital to these sectors overall some of which is coming from diversification away from the historically dominant microfinance sector which is now being served by private equity and public markets. Additionally, we are seeing strong interest in later financing rounds for sectors including healthcare, housing, water, technology and more by global venture investors including Sequioa, Helion, SVB, Mayfield, Catamaran, NEA, LightSpeed and more. See a list of some relevant India venture investors >
Q: Why have you selected the 50 crore fund size? Isn’t is small compared to others?
We plan to raise roughly 75 crores for our Global Fund and 50 crores for our India-domestic fund, combining to about 125 crores (~USD $25M). There are two reasons we’ve selected this fund size: First, USF LP is the first fund of its kind (seed only, cross-sector). First funds are always smaller, as we have to prove our investment thesis and our ability to manage the fund well. The second reason is that we want to be certain that we can deploy our investors’ money well. We have visibility into a deal pipeline that we are confident will produce 30-40 excellent investment opportunities in the next 3-4 years in India. If we had a large fund, we’d have to find many more opportunities, and/or increase the average size of investments. We want to stay focused on the seed stage with modest-sized (50 – 75 lakh average) investments as we prove our investment thesis.
Q: Who is advising you on securities matters? Tax exempt matters? Indian law?
Tatva Legal, an expert on fund formation, are advising us on the creation of the fund and regulatory matters. E&Y India advises us on India tax matters. Pankaj Jain of Impact Law Ventures is counsel on transactions and investments in our portfolio companies.
Q: How will you find enough quality deals?
Unitus has a strong brand in India. We already have multiple deal channels through Unitus’ 10 years of experience in India. We are connected with all the major downstream investors, incubators, Unitus family 40+ investees, and others. We also get multiple good seed investment inquiries per week from referrals and online activities.
Q: How much support are you providing to entrepreneurs? Is that enough?
We provide strategic advice, networking and fundraising support to our portfolio companies. We have multiple partnerships with mentors, incubators, professionals and other support systems we facilitate. Our rigorous selection process for self-reliant entrepreneurs is critical, as despite what we do, an inexperienced or weak entrepreneur would need more. We announced initial 20+ members of our Venture Advisor network in January.
Q: Do you have the right team? Why Bangalore + Seattle?
Srikrishna brings strong India small business operational experience, deep understanding of India ecosystems and strong networks in BoP sectors. Will & Dave bring decades of entrepreneurial and enterprise operating experience, strong relevant India & global networks, and deep early-stage investing knowledge. Additionally, Dave has a finance background to manage back office operations. More info here: https://unitus.vc/team
Q: What is the relationship between USF Global and USF India?
Our global fund, for which we completed the first close in December 2012, is suitable for investors from anywhere but India. Our India domestic fund is suitable only for resident Indian investors. We apply the same investment strategy for each of them and manage through the same investment management team. The funds will co-invest pro rata in Indian startups in most circumstances.