Subrata Mitra discussing Accel Investment strategy

"Reproduction of my interview in DARE"

Accel is a venture capital firm specializing in investments in seed and early-stage companies. Before joining Accel as a partner, Subrata Mitra was a partner at Erasmic Venture Fund.

At Accel he focuses on technology, mobile and Internet verticals. Subrata holds a Ph D in computer science from the University of Illinois, Urbana-Champaign, and a B Tech in computer science degree from IIT, Kanpur

Subrata Mitra Partner Accel

What has been Accel Partners’ international focus? What brought you to India?
Accel is a 25-year-old venture fund in the Silicon Valley. We have been very successful in our investments, mostly in the technology area. About seven years ago we decided to move to the UK and create a partnership there– Accel London. More recently, in 2005, we decided to partner with IDG to create IDG Accel China. Last year we decided to start working in India, something that we were tracking for the last three to four years.

Don’t you think your entry has been a little late in the Indian market?
The group that is now called Accel India used to work as Erasmic Venture Fund. The fund itself has been around for four years. Erasmic made its first investment in 2004-05. Now Accel is leveraging on the portfolio and contacts built over the last few years.

We are looking at Erasmic and Accel as a combined entity. The Erasmic fund has made 18 out of these 20 investments, and the Accel fund (new fund) only two. The new fund is poised to make investments. whereas the older funds have built a portfolio that is fairly diverse. The Erasmic fund has been rolled into the Accel brand. The new fund is called Accel II and the old fund is called Accel I. The total money invested so far through Accel I would be about US$ 10-12 million.

Could you tell us more about your new fund. Which sectors are you focusing on and what do you plan to achieve in terms of return on investment (ROI)?
Accel India will continue to invest across a diverse set of sectors, such as technology products and services, healthcare, retail and consumer etc. We would like to be the first institutional investors for most of the companies that we fund. I cannot comment on the ROI.

Which are the companies that you have invested in with the new fund?
Champak and Myntra. The third one hasn’t been announced. So I will not be able to reveal the name. Myntra is in the personalized gifting space. They are doing online as well as offline stuff. The other one is an Internet company.

Given the current economic slowdown, how is Accel reworking on its investment strategy?
We started several years ago with a relatively smaller fund and, therefore, it was imperative that we had some basic principles in place right up front, such as investing in really capital-efficient companies, making funds available in a staged manner as companies grow, and get them to profitability quickly. Thus, we have had to make only small adjustments to our investment strategy in the new environment.

No one really knows how bad it is going to get. We had seen that the buying patterns of enterprises was changing with the feedback our customers were giving us. But until September I guess no one knew how bad it would get, and even then we were still trying to figure out where the end to all this is. I don’t think our strategy will significantly change. Even in Fund I maybe about a third were seed and two-thirds were just beyond seed, which we would call early. Overall, we will probably be in the same ballpark.

What would your exit strategy be, going forward?
We believe that exits are going to be hard to achieve in the current environment, and are therefore open to options, depending on the company at hand, their maturity, markets, etc. In the previous fund we have had two exits, both of which were done rapidly. They were like two years or so, from investment to exit. But then at those times the markets were different. We are pretty long-term investors. We are looking at five-plus year for seed investments, for slightly later stage companies may be four to five years, depending upon how the markets behave.

How are your portfolio companies doing in the current slowdown?
We spend a significant amount of time with our companies. So there are situations where we meet every week. In all cases, we are very well aware of what’s going on at the sales side and the internal operations side. A lot of our companies are getting to a point where things are getting tougher. But I wouldn’t say that any of them have been completely wrong about what kind of numbers they will hit. We are generally okay with how bad the current environment is.

What is your advice to entrepreneurs at this stage?
One should look at today’s time as an opportunity where it will be easier to do certain things. For example, you will get a longer time period to try out variations of your products; you can have easy access to talent; and so on. But on the sales side it is going to be a lot tougher. You need to be patient, make sure that you are building value. Most of the times these downturns are cyclical, so you have to figure out strategies to live through it, reduce costs etc.

Are you considering business plans despite the slowdown? What do you look for in a business plan before deciding to invest?
Yes. You will probably see two to three announcements from us in the next couple of months. The primary focus areas are the team and the market, but we would also like to be convinced that there aren’t too many players/incumbents in a space, and that the team knows how to execute significant parts of the business plan.

In India a lot of entrepreneurial and innovation opportunities exist in small towns. Does Accel plan to tap these hidden treasures?
I know there can be ideas out there, but there is a logistical problem. About 80% of our companies are in Bangalore. Even if they are in Mumbai or Chennai, we end up investing less time with them compared to the ones in Bangalore. If are talking of tier-II and tier-III cities, and if it takes two days to go there and come back, there will be no way we would be able to spend the time that we want to at this stage of the company. While I am definitely sure there are smart ideas out there, it just becomes a nightmare to track them and do justice to them.

What do you think is a realistic return on investment for a VC?
It depends on the stage at which you are coming in. Your risk adjusted return is what you are looking at. The normal way VCs look at this is: if you are taking a high risk, then the return has to be commensurately higher. If you are taking lesser risk, and exit it say in two years, then maybe a 2x and 3x is good. But if you are taking a high risk, and you have to wait for five to seven years, then you look for significant higher returns; it has to be at least 10x to be interesting. But these are very generic numbers.

Have there been multiple rounds of investments in your investee companies?
Normally, when we come in we have some notion of a reserve for every company. We know that we are putting in some money to test out a few hypothesis, but that will not necessarily get them to the next big milestone because we probably do not know how the marketplace is going to behave. So we set a milestone, which, when achieved, we will be able to put in more money. That works well and keeps the founders motivated. Usually the next round would be of a slightly higher valuation, so that they can move the company forward.