Temasek backed Vertex Ventures leans on India in 2024, but will 2025 be different?

*This article is adapted from * Deal Street Asia.

Temasek-backed Vertex Ventures’s portfolio in 2024 was dominated by India, which accounted for two-thirds of its investments driven by a surge in high-quality, capital-efficient startups, a top executive told DealStreetAsia, adding that the firm’s future deal pipeline is also skewed towards the world’s fifth-largest economy.

Vertex Ventures closed its fifth Southeast Asia & India fund in September 2023 at $541 million, approximately 80% larger than its predecessor. From this fund, the firm has completed 16 investments so far, nine of which are in India, Ben Mathias, managing partner of Vertex Ventures Southeast Asia and India, said during an interaction with DealStreetAsia.

Vertex Ventures’s Indian portfolio includes companies like Licious, Ayu Health, Kazam, Kissht, Pilgrim, and Kuku FM, among others. The firm has exited notable investments such as FirstCry.com, Xpressbees, Active.ai, and Yatra.

As one of Singapore’s largest and oldest venture capital firms, Vertex Ventures manages over $5.1 billion in assets across six partner funds in China, Southeast Asia and India, the US, and Israel. Limited partners in the fund include the Japan Investment Corporation (JIC), the International Finance Corporation (IFC), and German development finance institution DEG.

Edited excerpts from the interview with Mathias:

To understand India better, what percentage of your fund do you generally allocate to India, and how does the next year look?

Right now, there’s a lot of activity in India. In 2024, India accounted for about two-thirds of our new investments compared to Southeast Asia. This could change next year — Southeast Asia might see more activity than India. It really depends on the opportunities. Currently, we’re seeing very exciting opportunities in India: strong founders, companies performing well, and operating in a very capital-efficient manner.

What is adding momentum to these deals?

Several factors are driving momentum right now. One major driver is the consumer sector, particularly D2C brands, which are experiencing significant growth due to the rise of quick commerce. Quick commerce is enabling the success of new brands. For example, we’re investors in Pilgrim and Kapiva, and we are currently working on two additional investments in D2C brands. If this trend continues, the consumer sector will remain a major growth area in India, prompting us to continue investing heavily in this space.

You closed your Fund V at $540 million in 2023. What’s next?

We likely won’t start raising our next fund until 2026 at the earliest. We’re currently one- and-a-half years into a four-year fund cycle for Fund V, with 16 investments so far. By the time the fund is fully deployed, we expect to make around 40-45 investments, so there’s still a significant way to go. For now, our focus is on delivering DPI (distributions to paid-in capital) for the earlier funds and generating returns. The good news is that several companies in our earlier funds are actively working towards exits, and we aim to prioritise those in 2025 to drive results.

What do you think about the deal-sourcing environment in India right now? Are valuations becoming more favourable, or do you still see a mismatch?

This is a great time to be an investor in India for several reasons. First, the quality of companies has significantly improved compared to a few years ago. Founders today are more practical in their approach, moving away from the “grow at all costs” mindset that prevailed three or four years ago. Instead, they are focused on building long-term, sustainable businesses with IPO ambitions. Second, the investor landscape has matured. The “hot money” that flooded the market in the past has largely disappeared. Now, those investing in India are serious, hands-on investors, which aligns well with our approach at Vertex. We often co-invest with like-minded peers who have teams on the ground, and we’re not seeing the “fly-in, fly-out”behaviour that was common in 2020.

As for valuations, they have become more realistic. The recalibration has created a favourable environment for sourcing high-quality deals. Overall, it’s an exciting time for disciplined investors to back strong companies in India.

In terms of exits for 2024-25, do you anticipate more M&A activity or IPOs? Are your portfolio companies mature enough for these routes, and what is your plan?

Between India and Southeast Asia, we have at least three to four companies that are mature enough and IPO-ready. However, the actual decision to go public will depend heavily on the market environment. Some of these companies are exploring IPOs on Nasdaq, making it a key exit route for us in the next year.

That said, not all companies are ready for an IPO. Some may be about three years away but have a clear path toward getting there. For such companies, we might consider taking secondary exits in pre-IPO rounds. We’ve done this successfully before — for example, with FirstCry, where we sold our stake three years before its IPO. Secondary exits allow us to take some money off the table while still benefitting from a strong pre-IPO pool of capital.

M&A is another important exit route, especially for software companies. We’ve seen success in this area, with portfolio companies being acquired by major players like Amazon, Accenture, and Stripe. Both IPOs and M&A are viable strategies, and our approach will depend on the readiness of the individual companies and the prevailing market dynamics.

Are there any other sectors you’re focusing on beyond tech and consumer, perhaps in areas like climate or deep tech for long-term investments?

Yes, we’re actively exploring several long-term sectors, including climate-related technologies and deep tech. We recently invested in Kazam, an electric vehicle (EV) charging technology company that is performing exceptionally well and collaborating with most of the major two- and three-wheeler OEMs.

In Southeast Asia, we’re evaluating two solar-related companies. One is a solar technology company developing solutions for solar plants, while the other focuses on solar power financing. Both are areas of growing interest for us, though investments haven’t been finalised yet.

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