In early 2015, a startup named Housing.com was the talk of town. It had all the makings of becoming India's next big startup. A year later, ecommerce platforms Snapdeal and ShopClues attracted the same level of frenzied attention, valued at $6.5 billion and $1 billion each.
The common thread running through these companies was its investor — the venture capital (VC) firm Nexus Venture Partners. VCs are always antsy about the success of the companies they invest in, but Nexus appeared to have backed all the right horses.
What a difference a few months make.
All the three startups soon suffered a series of reversals. Housing.com imploded with losses and a management overhaul, including the firing of its founding chief executive after a public spat with investors. Snapdeal is a shell of its former self, smothered by competition. Shopclues, once in the who’s who list of Indian startups, is now a ‘who?’
The depressed fortunes of these companies are well known. Not so much of their investor.
In fact, little was heard of Nexus for at least a couple of years after the struggles of the above companies.
But today, Nexus appears to have steadied its ship. The stakes it purchased in other startups such as Delhivery, Postman, Druva and Unacademy hold the tantalising promise of extravagant returns. Some are earlier investments, but all four are unicorns. More importantly, these look like rock-solid businesses.
Nexus also made a killing from the sale of WhiteHat Jr’s sale to Byju’s, earning $140 million in cash from an investment of less than $5 million in 18 months.
In a year when several businesses have struggled due to the coronavirus crisis, Nexus has enjoyed a “bumper, unbelievable 2020,” as one partner at a VC firm said, adding: “We have been investing with them for 15 years now, and they finally look like they have truly arrived.”
What has changed for Nexus since 2016?
This account is pieced together from conversations with a dozen investors, entrepreneurs Nexus has worked with or backed and a few others from the startup world. They spoke to Moneycontrol on the condition of anonymity. Nexus declined to answer a detailed questionnaire sent by Moneycontrol.Origins
Sujan was co-founder of online marketplace Baazee.com, which was sold to eBay for $50 million in 2004. Gupta founded software firm Integrated Systems in 1980, took it public in the US, and merged it with Wind River, which Intel acquired for $900 million in 2009. Singhal co-founded Medusind Solutions, a healthcare outsourcing company, and was an early investor in MakeMyTrip, among other startups.
The founders apart, Nexus today has three more managing directors — India-based Anup Gupta and Sameer Brij Verma and Silicon Valley-based Jishnu Bhattacharjee.
Nexus happened to be one of India’s first homegrown VC brands. The firm was essentially a cross-border fund; it had an investment team in the US led by co-founder Gupta who invested in the booming enterprise software market. The startups it invested in catered to mid-size and large American and European corporations.
This was an opportunity many other VCs spotted only years later. Their thesis was always to invest about two-thirds of a fund in Indian consumer internet startups, given that they need more cash, and one-third in US-based enterprise software startups.
The cross-border software bet was also unique then because Indian VCs once only focused on the Indian consumption story: online retail, online groceries, payments, lending, et al. Nexus too backed the consumption game but its investment playbook contained an emphasis on enterprise software startups.
Performance wise, the two were poles apart. The enterprise portfolio was always stable, holding out the tantalising prospect of early exits (example: Citrix acquired Nexus-backed Cloud.com for $200 million in 2011), and almost risk-proof. The consumer portfolio — led by e-commerce in the beginning — wasn’t as steady but if investors bet right, say Flipkart for example, they were in for dizzying returns.
But like several VC firms, Nexus missed the Flipkart bus.e-commerce tales and strife
Flipkart had raised a small amount from Accel Partners and was looking for more. Nexus did not say an outright no, but were unsure. They stalled the deal.
As Nexus debated internally, a certain Lee Fixel from New York cold-called Flipkart and snatched the deal for Tiger Global Management. In retrospect, this was one of Indian startup’s seminal events. In 2018, Walmart bought a controlling stake in the online shopping site for $16 billion.
The Nexus portfolio was still enviable thanks to other e-commerce firms such as Snapdeal, ShopClues and Housing.com. But all that came apart.
Housing and ShopClues were both sold for a pittance. Snapdeal is running independently, but nowhere near its earlier giddy valuations.
The Snapdeal saga in particular had a profound effect on the firm. Even storied VC firms have one, or two, startups among the many investments that really give them bumper returns.
Snapdeal, which once looked like the jewel in Nexus’ crown, flattered to deceive. The company’s troubles forced Nexus to introspect on its dealmaking strategy, though it pursued consumer deals actively.
The years 2017-18 were the hardest for the firm, where it grappled with questions over its consumer investments at large. Limited partners (LPs) — pension funds, endowments, fund of funds and others that back a VC firm — continued investing in Nexus’ subsequent funds, although they questioned the company on how the consumer portfolio was faring. LPs continued investing mainly because the enterprise portfolio still looked strong as Nexus raised five funds and today manages $1.5 billion in assets.
This was possible thanks to co-founder Naren Gupta’s deep connections in Silicon Valley. Gupta spearheaded the firm’s enterprise portfolio strategy.
After the Snapdeal debacle, according to one person whom Moneycontrol spoke to, Suvir Sujan, Managing Director of Nexus, and its lead investor in Snapdeal and Delhivery, among others, briefly even considered leaving the firm, facing a hard year of self-reflection and wondering what next.
Another person close to Nexus strongly denied this version of events, and said they were only rumours floating around and that although it was undoubtedly a tough time, Sujan never considered leaving. In any case, Sujan eventually stayed on, and has been investing actively and leading the firm.
Venture investing is inherently risky, where only three out of 10 investments usually take off. There is no standard rulebook on investments.
Yet, Nexus has changed tack since 2016. It now warms only to firms that have relatively better unit economics early on and boast a business that’s hard to replicate. It doesn’t compromise on extensive diligence and background checks on the founders.2020 vision
API startup Postman, which helps apps talk to each other, was valued at $2 billion, a valuation jump of six times in a year. Online learning firm Unacademy was valued at $1.45 billion in September, a three-fold jump in barely six months.
Nexus also secured a lucrative cash exits, when Byju’s acquired coding upstart WhiteHat Jr — a less than two-year-old investment — for a cool $300 million in cash. That’s in addition to PayU acquiring online lending startup PaySense for $185 million in January.
Not long ago, Nexus was hung out to dry. So what’s different this time?
To be sure, three of its top-performing investments are business-to-business firms. The emphasis on investing in enterprise software startups has paid off.
Nexus invested in Druva, which offers cloud data protection, in 2011. The company became a unicorn — startups that are valued at a billion dollars and above—in 2019. e-commerce logistics firm Delhivery, which Nexus backed in 2013, joined the unicorn club in 2019. Both are early bets for Nexus, and potentially very lucrative.
The enterprise software companies Nexus invested in have strong foundations. Despite the topsy-turvy valuations that bedevil startups, its enterprise bets are looking solid.
“Celebrating paper valuations is always a bit of counting your eggs before they hatch, but no matter how you slice it, Nexus has had an incredible year, not just for the valuations, but for how sustainable most of them look,” said a partner at a venture firm.
Even the consumer internet portfolio is faring well. Unacademy is one of the pandemic stars, thanks to soaring growth in online education.
Co-living firm Zolostays and regional language publishing platform Pratilipi have grown and piqued investor interest. Delhivery is expected to go public in the next few years.
Nexus’ record would have been spotless but for bike taxi firm Rapido, whose rapid growth was upended by the pandemic.
A person familiar with the operations of Nexus said the firm doesn’t split its performance — even on paper — into consumer and enterprise. Instead it has segregated the business into digital India and global enterprise.
Digital India comprises all business-to-consumer (B2C) and business-to-business (B2B) plays for the Indian internet market. The B2B investments include Delhivery and Infra.Market, an online marketplace for buying construction material.
This categorisation also seems to make the case that Nexus’ India portfolio still has potentially lucrative returns down the road, although the US software companies will still likely outperform.
Few could have predicted a comeback for Nexus, but internally there was some confidence, said another person who is familiar with its operations. For example, while Postman became known to much of the world only earlier this year due to its unicorn valuation, Nexus had already identified it as their best company two years ago, said this person who is close to the firm.
And while other investors, and some of Nexus’ own LPs wondered not long ago whether the firm was struggling, there was one section that was seemingly always happy — entrepreneurs. A founder who met VCs for a seed funding round in 2017 recounted: “It is common practice for the VC to do reference checks on me, and me on him. I did reference checks on all the dozen investors I met, and the two firms where I constantly got positive feedback on their dealing with founders, on just being direct and helpful were Accel and Nexus.”
Even in the Snapdeal episode, Nexus sided with founders Kunal Bahl and Rohit Bansal to build Snapdeal independently rather than merge with Flipkart at a lower valuation.Where are they today?Nexus has long been one of India’s leading early stage investors, but its core identity has been its success in software dealmaking. Other VC firms, in contrast, have chased India’s hottest consumer internet unicorns.
Nexus has earned nearly $500 million in exits over the years, according to data from Venture Intelligence. That amount is still less compared to Lightspeed, which got handsome returns on far smaller fund sizes, or Accel and Elevation Capital (earlier SAIF Partners), which have deployed roughly the same amount ($1-1.5 billion) in India so far. Sequoia Capital has committed over $5 billion in India and southeast Asia, the largest by far.
But the handsome returns of Nexus have happened in a market in which most investors have struggled for exits.
Nexus insiders are exasperated at being termed as a software investor, with some reason. Despite some of its high-profile consumer internet bets floundering, Nexus has still been investing in this space actively.
In the last two years alone, it has backed Rapido, intercity bus startup Yolobus and short-form content startup Mitron TV.
If the perception of Nexus’ software focus is stuck in the minds of other investors, investment bankers and entrepreneurs, it is due to the firm’s consistent success in this segment.But that may be changing.