New Enterprise Associates veering away from investment in India

By Shalini Pandey

New Enterprise Associates (NEA) is an American-based venture capital firm with more than $20 billion in management. It has decided to manage its investments in India from the US, and defer its Indian investments for some time. It will, for the time being, co-invest along with local venture firms while it revisits its India strategy.

NEA focuses on investment stages ranging from seed stage through the growth stage. It invests across a broad array of industry sectors. With over $18 billion in assets under management, NEA was the world’s largest venture capital firm in 2007. The firm is headquartered in California with offices across the globe. Since its founding, NEA invested in over 650 companies and realised nearly 500 liquidity events, thus making it one of the most prolific and successful venture capital firms.

Factors leading up to this stage

NEA’s decision comes after a decade of investments and strategic and personnel changes. This change of heart is not surprising, considering two major Silicon Valley VC firms—Draper Fisher Jurvetson (DFJ) and Kleiner Perkins—also exited India in the first part of this decade. This underlines the difficulties that start-up investors have faced in an internet market that looks attractive on paper but is yet to live up to its billing.

NEA’s decision to go slow on India comes amid a drop in venture capital deals in the country from the highs of 2015. According to VCCEdge, the data research platform of News Corp VCCircle, the number of venture deals dropped to 441 in 2016 from 598 in 2015. Deal value dropped to $3.38 billion last year from $6.33 billion in the previous year. Following this trend, the number of venture deals stood at 225 with a total value of $2.18 billion from 1 January to 13 September 2017.

It isn’t just VCs that are struggling. Online marketplace eBay—which entered India in 2004 with the acquisition of Bazee, the biggest start-up deal in India at that time—sold its India unit to Flipkart in April and invested $500 million in the Indian online retailer. eBay’s investment in Flipkart is seen more as a way of having a presence in India rather than a strategic bet.

What does NEA’s decision actually imply?

All the firms that followed in the footsteps of eBay were among the earliest entrants in the Indian start-up and internet business, which took off in 2006. That partly explains why they have given up their bullish view—the internet market started booming only four years ago. However, it also highlights the fact that more often than not, investors have overestimated the potential of the internet and tech market here.

It is important to note that NEA remains interested in investing in India. It has only decided to hold back fresh investments in the country for at least a year. That is primarily on account of the somewhat disappointing performance of the existing portfolio of investments. Some well-known internet investments in its portfolio include Naaptol, FirstCry and its latest investment in Bengaluru based fin-tech startup MoneyTap. Nova Fertility and Nepholife (acquired by Davita) made up the rest of the portfolio.

“Moving forward, we believe that the most effective and efficient way for us to advance innovation and create value globally is through a combination of direct investments and co-investments in partnership with local independent teams,” Ravi Viswanathan, general partner at the firm’s Menlo Park offices, said in an email.

How did NEA arrive at this decision?

NEA’s investments in India were led by former ICICI Venture executive Bala Deshpande. Its current stance may be the result of reports saying Deshpande has proposed an independent investment firm called MegaDelta Capital Advisors. NEA may participate in some of MegaDelta’s investments as a co-investor. It is also expected to be one of the limited partners in MegaDelta’s proposed $250-300 million fund.

“We have adopted a similar approach in China, where NEA has helped establish two new funds over the last several years, one with a longtime NEA partner at the helm,” said Viswanathan.

This is NEA’s third attempt to find the right strategy for India. It entered the market in 2006 as an anchor investor in IndoUS Venture Partners, the $150 million debut fund founded by former Intel executive Vinod Dham and entrepreneur Vani Kola. The partnership didn’t survive and in 2012, Kola started a new fund called Kalaari Capital. NEA decided to go its own way and set up shop in Mumbai.

Viswanathan has increased his involvement in India since last year. “NEA has tried different things but it hasn’t worked out for them in India. So they finally decided last year that they didn’t need a team… Ravi (Viswanathan) has been looking after India but the firm thinks India will take at least one or two years to build the depth that they want before investing,” one of the key actors was reported saying, on the condition of anonymity.

Have other players followed suit?

The Indian market remains the last big unconquered internet and tech market in the world. Despite the drop in deal numbers, other global venture capital firms such as Sequoia Capital, Accel Partners and SAIF Partners have been raising new India-specific funds. In June, Sequoia Capital topped-up its fourth India-focussed fund for the second time, by $125 million. This was despite the venture capital firm reportedly closing its fifth India-focussed fund worth $920 million last year. In July, SAIF Partners raised $350 million(Rs 2,247 crore) for a new fund. Besides, other domestic VC funds such as IDG Ventures, Fireside Ventures, Stellaris and Endue Partners have either made the first or final close of their funds to invest in startups.

The dichotomy is clear—Indian start-ups are attracting large amounts of cash, particularly from Japan’s SoftBank Group Corp., and the two largest Chinese internet companies—Tencent Holdings and Alibaba Group Holding. Silicon Valley firms such as Sequoia Capital, Accel Partners and Norwest Venture Partners continue to invest aggressively. While eBay decided against having a direct presence in India, its US rival Amazon continues to be attentive to expanding its Indian business.

“LPs and investors are still largely positive about India. From a macro and global perspective, India remains one of the most attractive markets. The only ones in the US and China who aren’t positive are people who came here really early on and didn’t make it or people who believe their domestic market is more attractive. But that set of investors is small, compared with those who are bullish,” said Ajay Lakhotia, a partner at Fosun RZ Capital, an investment firm owned by China’s conglomerate Fosun Group.

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