Nobody knows Nikhil Vora. At least in the traditional venture capital circles of India. He is not nominated for awards, doesn't boast unicorns in this portfolio, and is not a regular fixture at the typical venture fund events and conferences that top funds or companies host.
Yet, everybody knows Nikhil Vora. The former IDFC Securities executive, who founded Sixth Sense Ventures, has suddenly become the talk of the town. When you talk about the venture and growth capital scene in India with family offices, listed companies and billionaires, Vora’s name is now coming up more often than his better-known peers and VC marques that raise money only from foreign investors.
Sixth Sense is closing in on a record Rs 2,500-crore third fund, nearly three times what its chief executive Vora had planned to raise, and five times what he raised for this second fund in 2018. More interestingly, this was raised entirely from domestic investors- typically large family-run businesses, stock market veterans and consumer product giants who on social media lament about high startup valuations for companies with widening losses but privately double their commitments to this asset class.
“Nikhil has silently been building a solid fund. He is one of the only few fund managers to talk about fund performance publicly and reveal numbers, and that’s because he’s doing well,” says a person who has invested with Vora over the years, requesting anonymity.
“But none of that could have justified such a large fund. Nikhil’s new fund should be seen as a proxy of the Indian startup story. This is real, crazy and getting serious now,” the person said.
Managing a Rs 2,500-crore fund is an entirely different ball game than managing a Rs 500-crore fund - just the way a seed-funded startup and IPO-bound company are two different entities, united only by their names and an idea.
Vora talked about his strategy, misaligned incentives for fund managers, uncommon ways of drawing investors and comparisons to more conservative private equity funds in an interview with M Sriram of Moneycontrol. Excerpts from the interview:
At Rs 2,500 crore, you’re in the league of Lightspeed, Matrix, Elevation, Stellaris and many top funds that are brands today.
We really didn’t expect this sort of fundraising environment. When we started raising the third fund six months back, we though we’ll raise Rs 900 crore with a greenshoe of Rs 600 crore (greenshoe gives the option to raise more if there is more demand). That would have been the absolute peak. And we kept that greenshoe was because we were getting some overseas interest. Dollar investors, say endowments, have a higher ticket size of $20-25 million. We needed to keep that space. But domestic interest has been huge, and so fast, we didn’t even go to overseas investors.
We would be the largest domestic fund raised in India so far. The big change is that a lot of corporates have participated. Earlier, it was proprietary or family capital coming in. Now, pharma companies, consumer product firms, financial services, they have all invested.
What do you think is the driving factor?
These legacy companies are getting a line of sight on future businesses. Nykaa and Purplle should have been the domain of a Lakme or Maybelline, or Veeba Foods should have been cradled by a Maggi or a Kissan. And all this has happened in the last five years. Legacy consumer companies cannot start niche categories on their own. So, the only way they can do it is invest in a fund like ours, track these businesses for first 4-5 years, and see whether it makes sense and is a potential candidate for them (to acquire or compete with). Alternate investing also has become mainstream today.
We are one of the only three specialist consumer funds in India along with Fireside (Ventures) and DSG (Consumer Partners). For 50 years, this space wasn’t disrupted, and the same companies stayed on. Today, if you think disruption will happen, then this fund is the place to be.
How much did an LP (Limited Partners are the HNIs, institutions and endowments that invest in PE and VC funds) invest?
The largest LP invested Rs 100 crore, quite a few guys invested Rs 40-50 crore, and retail investors put about Rs 3 crore on the average.
That’s interesting because large fund managers often don’t like taking small cheques. For a Rs 2,500-crore fund, how do you manage so many investors when people put as little as Rs 3 crore? Isn’t it like a company having a complex cap table (list of varied investors, small and big)?
That’s so true. But we started out that way, from HNIs and smaller investors. And today, 80 percent of investors from my first fund are part of the third fund. And many of them have more than doubled their commitment.
In my first fund, an investor had put in Rs 3 crore across three family names. Thsi time, he invested Rs 65 crore. The heartening part is that they have had a good journey with us, and that is what matters.
How else did you attract LPs?
We did a zero-percent management fee structure. It was first in the world. Generally VCs everywhere operate on the same 2 and 20 model (VCs typically take 2 percent of the fund as management fees, akin to salaries over the fund life of 7-10 years. Towards the end of the fund when it sells its investments, it keeps 20 percent of the profits made, called ‘carry’ or carried interest, returning the rest to its investors. The management fee alone generates more income for fund managers relative to other industries, but for a top-performing fund, carry can often generate life-changing or generational wealth for investors). We don't want to make money if our LPs don’t, so we did away with that.
Can you explain this a bit more?
We have two options in this fund- 0/20 and 3/0 (where Sixth Sense will charge 3 percent management fee, but zero carry). Investors can choose whichever option they want to. I think this is an extremely fair way to work. Because if your fund is not delivering, that 2 percent really bites you over a period of time. For any business in the world, if you make a bad product, you get penalised. Fund management is the only business where a bad product never gets penalised. As fund managers we never lose money. Right?
How did LPs choose between the two structures? Indian LPs generally frown on management fees. So, ideally most should have opted for 0/20.
In fact, all new LPs take 0/20 as an option.They are thrilled that someone has skin in the game and says for 7-8 years Nikhil will fund the business (rather than taking fees) and that they pay me only if they earn. Because, over time, if the fund is not performing, then that management fee every year can add up to a lot and really grind LPs.
Almost all the second time investors, though older LPs, take 3/0 as an option, because they have seen that the fund has out-delivered quite consistently, (so they know they can rake in more profits later- and thus don’t mind paying the management fee). Of the total fund, about 30-35 percent is 3/0, while 65 percent is 0/20.
Were you able to bring your team on board with this structure? They can go somewhere else and do the same work for more money?
It has worked so far. Our team is one of the most passionate in the country. We have three partner-level resources. Ketki (Paranjpe) joined from the world’s largest consumer fund, L Catterton. Nimisha (Nagarsekar) was with Colgate for 16 years in finance and investor relations. And, Swati (Mehra) has worked with me for 15 years. These people could have gone pretty much anywhere.
Will you cut bigger cheques from this fund?
We think we are fairly strong in the Series A zone. That’s where consumer businesses originate, and that will be two-thirds of the fund. But we have the flexibility to invest across a company’s lifecycle. We did Noble Hygiene, for instance, which is an Rs 800-crore business. That’s not an early stage business by any stretch of imagination. But the business still hasn’t penetrated fully. Bira is similar. Rs 30-50 crore will be our first cheque, but we can go up to Rs 100 crore across rounds. We’ll do about 35 investments.
What about ownership? In the Series A deals, you get a 10-20 percent stake, but when you invested in Bira, for a miniscule stake, you aren't one of their largest shareholders. How does that work?
In every Series A investment, we will own 25-40 percent, and we will get diluted as the company grows. In a Bira or Global Hygiene, we would be at 5-15 percent. I don’t think percentages matter at all, as much as whether we can add value to the business and have a role to play. We aren’t a dormant shareholder.
But what if there’s a great company with a great founder who wants a dormant shareholder, to use your term? You will still make money from that.
Not really. We haven’t done any transactions like this. I don’t think founders come to us for just capital. There’s more than enough capital in India right now. We have seen consumer entrepreneurship very closely for the last three decades. It is not important to be on the board but be the company’s sounding board.
Your fund size has shot up significantly. Do you think you face pressure to deploy money, given that the market is so hot and you have all this money to invest?
From our second fund, we invested Rs 500 crore in three years. This year, we have invested Rs 500 crore in three months. I started Sixth Sense because I thought consumer disruption had to happen. That trickle has become a flood now. In the third fund, for which we did a first close just a couple of months back, we have done 11 investments (including footwear brand Neeman, plant-based meat maker Good Dot and healthy snacks brand Open Secret). There’re five more in the pipeline. Hopefully we become the de-facto player to go to for consumer entrepreneurs.
You call yourself a consumer VC, but your strategy is akin to a PE fund. You’re not taking moon-shot bets, and it looks like most of your companies will work in some way or another, they won’t die. Would you agree?
I feel comfortable when the breadth of your investments does well. You will get outliers anyway but that happens because of the environment. You don’t have to do much. But when you get the breadth of investments and founders right, it means you are picking the right spaces and people. So far we have made 37 investments from the three funds- 35 of them are doing fantastically. That’s more than any venture fund. You will get your (high) IRRs (Internal Rate of Return, the benchmark upon which a VC’s fund performance is measured) when you get the breadth right.
You’ve had about 30 percent IRR for the first two funds so far. Do you think you can continue that with a much larger fund?
It is very tough and we don’t pre-plan it, but what I can say is that business life cycles are shrinking disproportionately. So if founders deliver, then value will unfold a lot faster than we see. Very often, the same business, the same guy, the same dhanda will suddenly see investors come in at a higher price. It is the belief that this will become big. So it is looking good.
A 4x-5x return on a $300-million fund sounds very big, but that is what LPs expect. Can you deliver?
I don’t know whether it should be 4x or 5x but as long as we deliver returns significantly higher than the cost of capital, we should be good.
We are seeing speed and momentum in investing and startups like never before. Deals are more competitive than ever. Does that mean you will have to take more risk to get good bets?
I have been an analyst all my life, so we are fairly careful of the price we pay for the businesses we like. I hope we are not driven too much by trends around us. The 11 investments done this year, I would have done them irrespective of market trends. That’s how I look at it.
When you plan portfolio exits, would a sale to one of the Thrasio-model startups be a new exit option for you?
I really doubt it but never say never. So far we have had four strategic exits (sales to Oyo, Reliance Jio, Cure.fit and Reckitt Global), making up 1 percent of the portfolio. Around 65 percent of exits will be by deeper investors who will come in and buy us out (via secondary share sales). Another 15-20 percent of businesses can go public, assuming they have enough money, good investors and future growth.
How do you plan exits? You seem like one of the funds taking exits regularly, not necessarily waiting long for the absolute best outcome.
If you see, 70 percent of PE/VC funds in India have not returned money to LPs during the tenure of the fund, which is a very poor statement to make, especially when entrepreneurship has taken off so much.
The first priority is, are we optimising for our investment and able to return money to investors? We also have to remember that there will be overvaluation and hype at some point, where it may not merit us to stay on for a long period of time. It has worked well for us so far.