Bengaluru-based entrepreneur Ryan Valles had a business meeting in Koramangala,a 30-minute drive from his home Lavelle Road. Like any resident, Valles knew the best way to get there was by autorickshaw, so hopped into the nearest one and asked the driver to head to Koramangala Club. So far, so ordinary.

“Are you going to the Accel office?” asked the auto driver, half-way through the trip. Valles was taken aback. He was, indeed, headed to the venture capital firm’s office, which is opposite the club, but he did not expect an auto driver to know that. In India’s startup city, it may not be too much to expect auto drivers to know the offices of prominent startups, but investors are not as famous. Or so Valles assumed.

“Are you going to meet Mahendran sir or Subrata sir?” continued the driver, startling Valles even more. Mahendran Balachandran and Subrata Mitra are two of the partners at Accel, and Valles had a meeting with Mitra. Meeting or not, Valles settled down to chat with the auto driver. It turned out the man had been Mitra’s driver for many years before deciding to become his own boss.

We’d like to call it the Accel effect. The Indian arm of the U.S.-based VC firm, Accel has invested more than $500 million in India in the last 10 years, making it one of the most active VC investors in the country today. A marquee venture capital investor, which competes with the likes of blue-chip Sequoia Capital in the U.S. and India, Accel has raised five funds in India so far, with assets under management of more than $1 billion. That’s no mean feat in an industry where mortality rates are high and raising subsequent funds extremely hard.

Venture capital investing picked up steam in India in the early 2000s, when there was a crying need for capital to fund mushrooming startups. These are the epitome of ‘high risk, high reward’ investments; VC investors are often the first financial backers for promoters who sometimes don’t even have a business model in place. VCs gamble on an idea and not necessarily a sound business, and so the chances of failure, what the industry gloomily calls mortality, are high. Equally, rewards can be several hundred times what has been invested.

Taking early bets can be hugely risky, but Accel seems to have done it right so far. It has backed some of the marquee names in India’s startup history: Flipkart, Swiggy, Myntra, Blackbuck, BookMyShow, Freshdesk (now Freshworks), and UrbanClap, to name a few from its roll of honour. Some 25% of Fortune India’s 40 Under 40 list is in Accel’s portfolio.

The cheques handed out to these ventures are not too large. Typically, Accel’s investments range from $1 million (which it calls small) to $7 million (slightly larger or Series A-B) in one round. Depending on the company or entrepreneur, Accel funds several rounds, as Bengalurubased startup wunderkind Mukesh Bansal can attest. In 2007, Accel invested in Bansal’s startup, online fashion retailer Myntra when the business was still at the ideation stage (more on that later). Over 10 years, Accel has backed Bansal (whether at Myntra or his latest venture CureFit) across nine funding rounds. Now that’s conviction.

So far, over 40 companies in Accel’s portfolio have had follow-on investments. “It becomes so much easier when you trust somebody, their judgment. Most good entrepreneurs will land somewhere and build something massive,” says Mitra, who focusses on e-commerce, finance, and healthcare. Mitra was the first investor in Flipkart, big data analytics firm Mu Sigma, Myntra, CureFit, and CoverFox, among others.

Of course, a lot of this success is what bean counters call notional. That is, if Accel were to exit today, it would make a killing. But like most VC firms, Accel is yet to see massive exits. Of the over 35 exits it has made so far, 18 are through mergers and acquisitions (M&As), according to data from Tracxn. The investor made returns of 1x to 12x in these exits, the estimates indicate. That hardly looks dramatic but remember that with exits in firms such as Myntra and TaxiForSure, Accel didn’t get liquidity but got stock in return from the buyers, Flipkart and Ola.

Exits are a challenge, concedes Prashanth Prakash, partner at Accel, who started investing in Indian technology startups as early as 2004. According to him, a lot of exits through M&As are driven by public companies. “In India, we don’t have enough number of public companies that absorb the new generation of companies. Today M&A is possible only from large companies such as Flipkart, Ola, and Freshworks,” he adds.

Equally, Prakash is convinced that over the next four years or so, several startups will be ready to go public. Once the IPO route opens up, he says large private equity investors, such as KKR, who have stayed away from the consumer internet space in India, will start getting active.

Accel is not worrying about exits as yet. With an investment horizon of 12-15 years, it knows it has time on its side. In the meantime, the investment firm says it has already returned its first fund and is on its way to offer attractive returns to its limited partners (LPs) of the second fund.

In all this, Accel has remained loyal to its strategy of investing in seed stage or early-stage startups and has made only a few bets on mature tech startups. Currently, 60% of its portfolio is in seed stage, while 30% is in Series A-B level.

“A seed fund can dabble with small businesses which are interesting, but for a fund like ours, we have to be very sure that the companies we invest in are truly game changers. We take a lot of time to form our views about a space and a company,” says Prakash.

Taking early bets seems to have worked for Accel. Its first investment in Flipkart, its most feted portfolio firm, was done at the time when the Bengaluru-headquartered online retailer was selling 50 books a day. In 2009, Accel invested $1 million in Flipkart. In August last year, SoftBank invested an eyepopping $2.5 billion in the online retailer, in what is easily the biggest private investment in the country’s consumer technology space. The latest funding round is believed to have valued India’s largest e-commerce firm in the range of $7 billion to $8 billion. While financial details of the worth of Accel’s stake are not available, Flipkart will definitely give its earliest backer whopping returns when it exits.

It was a similar case with Myntra, although the earliest round in the startup was by Erasmic Venture Fund, which was later taken over by Accel. Post the Erasmic merger, Myntra raised $5 million in its Series A funding round led by NEA-Indo U.S. Ventures and IDG Ventures India and Accel. Six years later, in what was seen as the biggest consolidation in the Indian e-commerce space, Flipkart acquired Myntra which had emerged as a noticeable online fashion retailer, in an estimated Rs 2,000 crore deal.

Multiple exposures are not just restricted to one firm or a promoter. Accel has invested over $20 million in food ordering and delivery startup Swiggy over five rounds. The investment firm owns about 16.2% of the company now.

Over the years , Accel has outlined three broad themes or areas of interest in terms of investments: Consumer (internet, products), business-to-business (B2B both India and global enterprise), and healthcare. “We try to see if the company fits to some of our core tenets like being an asset-light model, the business has to be tech-enabled in some way. We try to see if the business is exciting for a fund of our size. It is also about the right timing of investment,” says Prakash.

“Ours is not a consensus-based partnership,” says Shekhar Kirani, partner, Accel. “In most VC firms, everybody on the table has to agree, but in the case of Accel it is partner-based, which means that for small investments if one partner says we should do the deal, we do it. For slightly larger tickets, two people have to agree.”

Kirani is talking from experience. At his behest, Accel invested $6 million in U.S.-based Zenoti, a cloud-based enterprise management software for spas, salons and fitness centres. Started as ManageMySpa, Zenoti was not looking at a large investor like Accel, but Kirani was persistent.

“Shekhar had a very good insight on making our company a billion-dollar venture. We were focussed on very short-term goals (like reaching a $10 million revenue target, winning big accounts). Our approach was very quarterly and yearly, but he always had the big picture in mind,” says Sudheer Koneru, founder and chief executive, Zenoti, adding that since the investment, Zenoti has been growing about 150% year-on-year.

After the initial $6 million, Zenoti raised $15 million in the second round from Norwest Venture Partners, in which Accel invested $3 million.

The idea of partnership is not restricted to within Accel; the company, like its U.S. parent, believes in the value of partnering with founders from inception through all phases of growth. The other learning from the U.S. firm is in backing good ideas early on. Accel (U.S.) is best known for backing Facebook during its early days in 2005 when the company was valued at an estimated $100 million. Accel’s $12.5-million investment in the social media giant has seen a return of over $6 billion.

In India, the closest big-bang equivalent is possibly the investment in Flipkart. When Accel chooses to exit that investment, it could be one of the biggest the ecosystem has seen.

“If you look at the kind of companies that are being built by Sequoia or Accel or the top five VC firms in the U.S., you will realise that the best ideas/models always come to them. They may not take money from us, but they will definitely show us the plans. Our first 10 years have gone into creating a baseline here,” says Mitra.

Accel is also leveraging its U.S. partnership to help its portfolio firms that are aspiring to go cross-border. Dinesh Katiyar, who joined Accel in 2011, focusses on early stage cross border (India-U.S.) companies. Almost all of its SaaS—software as a solution—portfolio firms, including the likes of Zenoti and Freshworks, are going global, with a sharp focus on the U.S. market. Accel calls it the ‘Valley-Bengaluru’ corridor. The VC firm has a similar strategy for some of its healthcare portfolio firms: the ‘Boston-Bengaluru’ corridor.

In the case of Zenoti, it was Kirani who pointed out that if the company tapped into the U.S. market, it could be a much larger player in its space. The company has since moved its headquarters to the U.S. Today, 50% of Zenoti’s business comes from that country. Accel helped in “rationalising our positioning and pricing in the market,” says Koneru, adding that for the second round of funding, Accel got Norwest Venture Partners on board. “Once Accel has invested in your business there is a lot of interest among other investors to know about it,” says Koneru. He points out that Zenoti is on track to achieve its billion-dollar turnover target in the next three years.

For CoverFox, which started in 2013, Accel invested from two different funds. The initial investment round of $2 million and the next round were from Accel. For the third round, Accel India and Accel U.S. joined hands.

Meanwhile, the perils of the startup world plague Accel. In FY17, while Flipkart’s revenue rose by 29% to Rs 19,854 crore, its losses increased by 68% to Rs 8,771 crore. Ola is in the same boat. For the year ended March 31, 2016, Ola posted a consolidated loss before tax of Rs 2,313.66 crore and consolidated revenue was Rs 758 crore.

Mitra says losses don’t bother the investment firm too much, as long as they can see value generation in terms of growth and scale. “Just because a company is burning capital it doesn’t unduly perturb us. Because if it is going to burn and still create a lot of value, then the right investors will come,” says Mitra. He adds that 20% to 25% of companies are generally in the “worry list”, referring to Accel’s watchlist of companies based on the capital available. Accel does a quarterly analysis and examines the ‘runway’ of companies, referring to capital available with the company to sustain it. It gets worried if the company has a runway of less than six months and also watches out for firms with a runway of 6-12 months.

Anand Daniel, partner at Accel, who focusses on investments in consumer and healthcare technology and online marketplaces, feels unit-level economics is one way to look at loss making startups. “In other words, how much money they are spending to get a customer and how much money you are making per transaction. Are customers repeating the transaction to make enough money? We spend a lot of time looking at these aspects,” says Daniel.

One unexpected challenge for Accel is the growing dominance of global players against its portfolio firms such as Flipkart and Ola.

The investment firm says the focus needs to be on building businesses that are strongly India centric. “A lot of the new opportunities that are starting to emerge in India include the likes of Blackbuck (online marketplace platform for freight), AgroStar (direct-to-farmer digital platform), RentoMojo (online furniture rental platform), and FabHotels (budget hotel chain). I think, standalone, these companies are going to be big and will be built like other big players that can go for an IPO,” says Prakash.

Accel’s USP lies in consistently spotting investment opportunities early on; Flipkart, Swiggy, Myntra, are all sterling examples. “They were also the first VC investor to go out and look for investment opportunities in SaaS. If you see, today, their SaaS portfolio is doing well,” says Anil Joshi, managing partner at Unicorn India Ventures, a venture capital fund.

So, what’s going to be the next big thing for Accel? While there is no concrete answer, Accel’s partners say some amount of innovation will be seen in the agri space and in B2B. As more entrepreneurs see that their audacious ideas get backing from the likes of Accel, the startup scene in India is bound to get more vibrant. Which will lead to better returns for investors. It could be the beginning of a virtuous cycle on planet VC.

(The article was originally published in 15 March-14 June 2018 special issue of the magazine.)

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