This month’s case takes you behind the scenes of a venture capital partnership to deepen your understanding of how private equity professionals build their enterprises and make investment decisions. We profile one of India’s largest locally managed funds, and investigate an investment decision it faced in Fall 2008 — whether to back a promising group of entrepreneurs whose company was growing rapidly, but was not yet profitable
Ashish Gupta’s mobile phone buzzed in his pocket, signaling the receipt of another text message. The buzzing reminded him of a decision that the venture investment firm he had co-founded, Helion Venture Partners, must soon make — whether to invest in India’s leading community platform for SMS (Short Messaging Services) texts, SMS Gupshup. The opportunity to nurture talented venture teams such as the one behind Gupshup was why Gupta, a veteran entrepreneur himself, had chosen to become a venture capitalist. However, Gupshup represented a significant risk due to a combination of high monthly expenses and a revenue model that was still emerging. In a season when most venture investors were conserving capital to keep portfolio companies afloat during the difficult economic times ahead, should Helion embrace this opportunity?
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| India is uniquely suited for investors like us because the ecosystem does not have enough support for entrepreneurs to learn from other entrepreneurs. In Silicon Valley, people in your social circle are your advisory ecosystem Ashish Gupta |
The Path of a Venture Capitalist
Ashish Gupta was born in Dehradun (then part of Uttar Pradesh and now the capital of Uttarakhand) in 1966, and graduated with the President’s gold medal from the Indian Institute of Technology in Kanpur in 1988. He then went to Stanford University, where he completed a PhD in computer science in 1994. He stayed in the US after earning his degree, working first for IBM Research and then for Oracle. “I came to the conclusion that large companies are not my cup of tea,” he recalls. “I missed some good opportunities within those enterprises because I didn’t know how to work in a big company. I didn’t appreciate then the opportunities they offered, but in retrospect I didn’t try hard enough. I didn’t have the patience to stick around and build a career there, despite having extraordinary mentors and managers.”
The spirit of Stanford and of the times in 1996 led Gupta, like thousands of others in Silicon Valley, to start his own enterprise with Stanford colleagues Dallan Quass, Venky Harinarayan and Anand Rajaraman. Gupta was the vice president of engineering for the new venture, called Junglee that pioneered virtual database technology. One application was to take data in various formats from the Web and make it look like a set of relational tables to a database, so that external data sources could be queried as if they were part of the database. Says Gupta, “We had some interesting technical ideas, but we had no idea what we were doing.”
The young founders attracted Rakesh Mathur, already a serial entrepreneur, to join Junglee as CEO, and he was instrumental in securing funding from a Japanese angel. Says Gupta, “We implemented an application to manage online classified advertisements in order to advertise the technology, but what we did not know is that this space provides most of the profits of newspaper companies.” As a result, the company secured further investment from the Washington Post and two Japanese companies. Continues Gupta, “When the Washington Post came on board as an investor, they helped us form a coalition of all the major newspaper companies in the US, except for the New York Times, to manage their classified advertisements online. We aggregated the online classified listings of large companies such as Oracle and IBM; and the newspapers collected advertising monies from these companies for distributing these listings on the newspapers’ online employment classified section.”
Although classified advertisements gave Junglee its foothold, it soon located an even richer niche. Says Gupta, “We stumbled into comparison shopping by accident. The Yahoo guys were looking for a solution in that area, and we could aggregate data on products on e-tailers’ sites, so we implemented Yahoo’s shopping engine for them.” Junglee emerged as a leader in the “shopping bot” arena, which led to the firm’s acquisition in August 1998 by Amazon for 1.6 million shares of Amazon stock, valued then just above $185 million. Says Gupta, “Amazon believed they wanted to be in the comparison shopping space, but only after we were acquired did everyone realize that the company was not then ready to cannibalize their core retailing revenues. We all figured that out a year late but that learning was utilized soon after.”
Gupta moved to Seattle and worked on strategic issue for the next two years. He says, “A few of us shared the insight that Amazon had multiple monetizable assets--customers, software, warehouses, and data centers--and we tried to figure out how to monetize these lines of business.” This took Gupta into the software-as-a-service (SaaS) space. Comparison shopping cannibalized Amazon’s revenues earlier in the work flow than what made sense for the company, but by providing its software and customers as a service, Amazon could create marketplaces where independent vendors could sell products, e.g. books.
In 2000, Gupta left Amazon to help start a SaaS company with a former Junglee colleague, Sarvesh Mahesh. “Raising money was easy then, so we made the mistake of taking it, going down a path we should not have gone down,” Gupta says. “The SaaS idea was terrible, but credit goes to Mahesh for saying ‘Let’s make it into a service company.’” Today with Sarvesh as CEO, Tavant Technologies has revenues over $40 million from building solutions and providing end-to-end services.
Throughout his time at Amazon and Tavant, Gupta was an advisor to, and angel investor in a number of startups. He wanted to keep up his investing activities, but had run out of his own capital and wanted to learn more formally about venture investing, so he decided to join the Kauffmann Fellows Program in 2002. This program places promising entrepreneurs with venture funds, and Gupta was assigned to Woodside Fund in Silicon Valley. “That was one of my best experiences,” he says. “I made a lot of good friends in the venture business who taught me what the best investors are like.”
After completing his Kauffman fellowship, Gupta was asked to stay on at Woodside. By the middle of 2004, however, Gupta was thinking about returning to India. “I didn’t want to make a ten year commitment, so I joined as a Venture Partner until I figured out what to do,” he says. Tavant was among the companies that had pioneered the model of having headquarters in Silicon Valley and engineering in India, and Gupta could see its mushrooming potential. He says, “Several venture firms approached me and asked if I would relocate to India as their guy on the ground. But being the lone man in India, dragging along partners who wake up in a different environment was not exciting for me. I didn’t want to become a lonely guy who feels compelled to do something in order to prove he belongs on the team. Sometimes you start doing stupid things to prove that something is happening in your geography.”
Instead, Gupta began exploring the possibility of raising his own India fund. By early 2005, he was talking with three prospective partners about starting a venture investment firm together. Kanwaljit Singh headed The Carlyle Group’s India venture operations at the time after a distinguished career in marketing and business development for Intel and Hindustan Lever. Sanjeev Aggarwal was a veteran of Motorola, DEC and 3com before starting Daksh, one of India’s fastest-growing BPO operations before it was acquired by IBM. Rahul Chandra had been the first India hire of the venture investing firm Walden International. Says Gupta, “These are great executives who are very well-regarded and are considered to have the highest ethics, which is very important to me. They knew India which was crucial for the team; and I added to the global experience.”
By November, 2005, it became clear to Gupta that he and his partners could raise a fund, so he moved back to India. Helion Venture Partners publicly announced the launch of its first fund, pegged at $140 million, in August, 2006. Gupta remarks, “We hit the market at the right time, before India became very hot. Yet not so early as to miss the time when interests in India awakened. We were still relatively accessible in the LPs outbox when the India story hit, so that they called us back. It is seldom the case that you can get the right set of people with the right philosophical alignment when the market is ready to accept what you offer and the environment is ripe to support the results you want to produce.”
Helion Venture Partners strategic positioning
“We decided to distinguish ourselves on the basis of people,” says Gupta, explaining the firm’s strategy. “A venture fund’s assets are money, people, and what the people bring to the table. When we started in India, everyone had money, so people were the only distinguishing characteristic. We provide active capital – namely we give companies help in execution, which is the hard part. All of us have an operational background, and we have more than 50 years of operational experience between us. We understand how to build companies, and among ourselves have started three that reached a healthy level of sales while as angel and institutional investors we have helped other people build more than 50 firms.”
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