The Opportunity in Growth-Stage Investing

In our first blog, we had shared our mandate for partnering with technology and tech-enabled businesses in India and outlined themes which excite us. This post will focus on our growth-stage mandate, including how we define growth stage investing, and why, in our view, the growth-stage market is underserved relative to the market for early-stage or late-stage investing in India.

Our definition of growth-stage investing

We define growth-stage companies as those enterprises that have

• a stable founding team;
• a favorable combination of product-market fit;
• established or emerging leadership;
• credible customer traction, adoption, and ROI;
• visibility on sustainable unit economics; and;
• a tangible path toward break-even.

These companies often raise capital to scale their operations, refine their go-to-market strategies, enter new markets, expand their product portfolio, or evaluate potential acquisitions. This position differs from early-stage companies, for which many of the above conditions have yet to be met, or late-stage companies, which also exhibit attractive growth prospects given India’s profile as a growth-friendly market, but are more mature with respect to competitive positioning, go-to-market, profitability, and likelihood of an IPO.

As a proxy, we have considered deal sizes between $5–15 million to be early-stage deals, deal sizes between $15–50 million to be growth-stage deals, and deal sizes over $50 million to be late-stage deals. We exclude deals of less than $5 million investment amount from this analysis. Of the approximately $30 billion invested in unlisted technology and tech-enabled companies in India between 2015 and 2018, approximately 75%, or $22 billion, was deployed in late-stage rounds, while 9% ($3 billion) and 16% ($5 billion), were each deployed in early-stage and growth-stage rounds respectively. (See Figure 1 for additional details.)

Figure 1: Deal activity by stage (2015–2018). Source: Venture Intelligence, Filter Capital proprietary study

Late-stage Investments are Dominated by Global Internet Conglomerates

Global Internet conglomerates such as Softbank, Alibaba and Tencent have grown increasingly active in late-stage fund-raising rounds of unlisted technology and tech-enabled businesses in India. As shown in Figure 2, between 2015 and 2018, 65% of all late-stage rounds by value were led by strategic investors, including these larger conglomerates.

By contrast, venture capital and private equity investors led less than 20% of late-stage rounds by value. Our view is that global Internet conglomerates have substantially larger pools of capital to pursue the global growth technology thesis, and this capital is often of lower cost and longer duration than that of traditional venture capital or private equity.

Figure 2: Late stage deal activity by investor type (2015–2018). Source: Venture Intelligence, Filter Capital proprietary study

Indian Venture Capital Firms Constitute close to 50% of Early-stage Investments

The early-stage investment landscape, meanwhile, is well covered, in our view, by Indian venture capital firms, which include the Indian affiliates of global venture capital firms, as these firms often raise India-dedicated funds and typically have senior investment professionals based in India. These firms have been in the market for well over a decade, and leading firms have commendable track records, strong networks, and are known quantities. As shown in Figure 3, close to 50% of early-stage rounds by value were led by Indian venture capital firms.

Figure 3: Early-stage deal activity by investor type (2015–2018). Source: Venture Intelligence, Filter Capital proprietary study

The Growth-stage Funding Pool is Fragmented and Underdeveloped

Unlike late and early-stage rounds, in our view there is no dominant provider of growth-stage capital for unlisted technology and tech-enabled businesses in India. To the interested observer, it may appear that entrepreneurs have a wide range of options from which to raise growth-stage capital, as shown in Figure 4. However, we believe that among those firms that do provide growth-stage capital, relatively few are specifically focused on this asset class, and in our view, each type of investor has its own constraints:

• Strategic investors, which led 22% of growth-stage rounds by value, include Softbank and other global internet conglomerates, who are more focused on late-stage investing, as well as corporate venture capital firms, which at times apply a strategic, rather than purely financial, lens to their investment strategies;
• Indian venture capital firms, including the Indian affiliates of global venture capital funds, which led 18% of growth-stage rounds by value, in aggregate deploy more capital in early-stage rounds compared to growth-stage rounds;
• Foreign venture capital and growth funds, which led 17% of growth-stage rounds by value, are primarily active in markets such as the US, China, and Southeast Asia;
• Hedge funds, which led 14% of growth-stage rounds by value, invest in both listed as well as unlisted companies in Indian and overseas markets, and are more active in some years and less active in others; and
• Private equity firms, which led another 11% of growth-stage rounds by value, are more active in sectors other than technology, and in our view are more focused on larger or later-stage rounds given the dry powder they have available and their more conservative risk profile.

Figure 4: Growth-stage deal activity by investor type (2015–2018). Source: Venture Intelligence, Filter Capital proprietary study

Filter Capital seeks to be a leading growth partner

As a result, we believe that opportunities exist for new entrants such as Filter Capital to pursue a strategy dedicated to partnering with growth-stage technology and tech-enabled businesses with a nexus to India. We will seek to be distinctively positioned to build a promising growth-oriented portfolio, aided by our clear mandate to focus on growth-stage opportunities, our understanding of the local market and India-specific trends, and our ability to assist entrepreneurs in addressing issues common to growth-stage technology and tech-enabled businesses in India.

This encompasses scaling the organization, refining go-to-market strategies, evaluating organic and inorganic growth opportunities, defining a clear path to profitability, and ultimately positioning the company for a public listing or trade sale.

In our earlier blog, we outlined our mandate for partnering with entrepreneurs building leading technology and tech-enabled businesses in India. In our next series of blogs, we will dive deeper into sub-sectors within technology where we believe the next cohort of leaders will emerge.