India Quotient in talks to raise $80-million fourth venture fund

L to R- Anand Lunia, Madhukar Sinha, Prerna Bhutani and Gagan Goyal

India Quotient, the venture capital firm known for its early bets on content startup ShareChat and makeup brand Sugar Cosmetics among others, is in talks to raise its fourth early-stage fund of $80 million, its largest so far, a senior executive told Moneycontrol

The fundraise is crucial for the firm amid changes in partnership and some churn among investors and indicates rising interest for Indian internet startups and experienced domestic fund managers.

For this fund, India Quotient also plans to tap investors (limited partners) in the US and Europe, something it hasn’t done before, Anand Lunia, general partner at India Quotient, has said. 

LPs from the US—high networth individuals (HNIs), university endowments and financial institutions—are generally the largest sources of capital for well-heeled venture funds.

“We have filed with SEBI for approval for the fund, and will be the largest fund doing idea-stage and paper plan deals consistently in India. We want to invest in 40 companies from this fund, and will have an average cheque size of $500,000,” Lunia said.

The new fund will also be one of India Quotient’s biggest tests so far because two of its large LPs from earlier cannot participate in this fund. Gulf billionaire BR Shetty—one of the fund’s earliest backers—is battling fraud and forgery charges.  In its third fund in 2018, India Quotient brought in a number of entrepreneurs and investors from China but following the government’s restrictions on Chinese investments, they won’t invest in this fund.

Lunia, however, is not worried. “Out of a Rs 420 crore fund last time, we still raised Rs 250 crore just from Indian high-networth individuals. And I am confident that at least four-five more last HNIs and family offices will want to back us. We have been a top-performing fund,” he said.

India Quotient’s other backers include Flipkart co-founder Binny Bansal, MakeMyTrip founder Deep Kalra and Paytm founder Vijay Shekar Sharma, 

We have filed with SEBI for approval for the fund, and will be the largest fund doing idea

-stage and paper plan deals consistently in India. We want to invest in 40 companies from this fund, and will have an average cheque size of $500,000-Anand Lunia

A first close allows a VC fund to start deploying money, while it simultaneously continues fundraising. Depending on demand, it could even end up raising as much as $100 million. 

Funding trail

India Quotient is a seed-stage investor, generally the first institutional investor in a company, taking 15-20 percent ownership. 

Founded by Anand Lunia and Madhukar Sinha in 2012, India Quotient started with a $6 million debut fund, followed it up with a $20 million second fund in 2016 and a $60 million third fund two years later. In 2018, it also raised a $40 million opportunity fund-earmarked to back its best-performing portfolio companies in follow on rounds. 

From this fund onwards, Gagan Goyal, who has been a partner from 2017, will be a general partner on par with Lunia and Sinha. Partners and general partners have a minor but key difference. In venture capital parlance, general partners are the fund managers directly responsible for investments, fund raising, connections with LPs, founders and so on, and receive the greatest share of profits.

The firm’s fourth partner was Prerna Bhutani, who joined in 2016 but stepped down last year to start up on her own, as Moneycontrol reported. As she figures out her next venture, Bhutani is still working with the firm’s portfolio companies, though not making new investments.

India Quotient has also had a decent share of exits with a few bumper outcomes. It got a Rs 25x return on regional language social network ShareChat in 2018 and took a part exit for Rs 50 crore. ShareChat is raising a round valuing it at over a billion dollars and India Quotient still holds a 5 percent stake, according to people aware of the matter.

It also took some money out of Sugar Cosmetics, which raised money from Elevation Capital (earlier SAIF Partners), valuing it at $100 million last week. Moneycontrol could not immediately ascertain the value of the part exit.

Its other investments include lending firms Lendingkart and Loantap and podcasting startup KukuFM. Sector-wise, many investors see content as India Quotient’s primary forte and the sector they identified before most other VCs did. 

Venture capital fund performances are measured by their Internal Rate of Return (IRR), which factors in the expected annual rate of return for a fund adjusted with the time value of money. Top early-stage funds promise an IRR of 30-35 percent, although globally top funds have delivered even twice and thrice that in good periods.

From its first fund, India Quotient has an IRR of 19 percent, according to documents viewed by Moneycontrol. In India, many early-stage VCs have had middling first-fund performances and then picked up. Its second and third funds have a gross IRR of 49 percent and 40 percent. 

"Building a homegrown VC brand is also important for us because we need domestic wealth creation and absorption. An outsized portion of the startup wealth created in India goes to overseas investors because that is where the VC money also comes from. I think we have a good shot at having domestic investors and creating wealth for them,” Lunia said.

The firm wants to be in the top 10 percent of India’s VC funds in terms of money returned to investors.

“They have been able to pick interesting companies from each fund, and Anand (Lunia) and Madhukar (Sinha) are well-known names in the ecosystem, which makes a huge difference for LPs and founders,” said a senior venture capitalist, requesting anonymity. 

“With the Chinese app ban you could argue luck has played its part but India Quotient seems to be emerging as one of the top two-three homegrown VC brands. This is their largest fund yet, and will be a good test to see whether they can continue generating large outcomes to justify larger funds,” the person added.