Vertex Ventures’ Piyush Kharbanda On Why Big Investments In Deeptech, Sustainability Are Still A Few Cycles Away

This article is adapted from Inc42

SUMMARY

• Vertex Ventures SEA and India Fund has invested in around 30 Indian startups and closed Fund V last year with a corpus of $541 Mn, surpassing its original target
• The early stage fund focusses on consumer consumption, fintech, software, health, mobility and sustainability, ensuring tailored approaches for different markets
• Piyush Kharbanda, GP of Vertex Ventures SEA & India, explains how valuation spike triggered by cheap capital hurt VCs

The nuanced world of venture capital, a financial superhighway connecting visionary founders and investors, may not yet be past its golden era. However, VC firms are becoming more realistic, overcoming the fear of missing out (FOMO) and moving away from astronomical valuations. A thorough analysis of returns and growth potential is the new watchword after the funding winter, and most VC funds are now cautious about investing until startups can offer compelling propositions and solid numbers.

Unlike many of its storied peers, Singapore-based Vertex Ventures Southeast Asia and India (VVSEAI) was quite active even during the recent turbulence. Set up in 2010, it is one of the biggest and oldest investors in SEA and closed its fifth fund in September 2023 with a corpus of $541 Mn. Interestingly, Fund V is nearly 80% larger than the previous one ($305 Mn) raised in 2019 and has surpassed its target of $450 Mn.

The latest fund is supported by existing and new limited partners (LPs), including sovereign wealth funds, financial institutions, corporate houses and family offices across Asia and the EU. Japan Investment Corporation (JIC), International Finance Corporation (IFC) and DEG (a German development finance institution) are the new LPs onboarded for Fund V.

The early stage VC fund has already invested in around 30 Indian startups across its funds. Among these are IPO-hopeful FirstCry (Vertex has exited the business), India’s first D2C unicorn Licious, profitable fintech app Kissht, leading audio content platform KukuFM and fintech AI platform Signzy. In fact, Vertex has funded a host of AI startups, such as Threado AI, Active.Ai (sold to Gupshup), Attentive and Validus, even before AI and GenAI took centre stage.

In 2022, the fund led a $9 Mn Series A round in its portfolio company BeepKart, a Bengaluru-based e-retailer of pre-owned two-wheelers. In January 2024, it also took part in the $6.3 Mn Series A funding of Mumbai-based on-demand manufacturing platform Karkhana.io. This investment was made from Vertex Ventures Fund V. In 2021, Karkhana.io also secured its pre-Series A funding worth $1.2 Mn from Vertex.

Asked about its diverse range of India investments, Piyush Kharbanda, general partner at VVSEAI, emphasised the fund’s market expertise and constant search for sustainable startups. “We don’t look for vanity metrics like high valuations. Our partners working for a country-specific market are not parachuted, either. They have a profound understanding of the local market and make the decisions accordingly.”

An alumnus of Delhi College of Engineering and IIM-Ahmedabad, Kharbanda joined the fund in 2016 and worked closely with a number of startups such as Kissht, KukuFM, Signzy, Ayu Health, BeepKart, Tortoise, Threado and Certa.

In this edition of Moneyball, Inc42 has an exclusive interaction with Kharbanda, who speaks about the evolving VC landscape, emerging sectors, fintech’s regulatory hurdles and why the omnipotent AI may only operate as an in-built component across existing platforms. Here are the edited excerpts.

Inc42: What are the key verticals Vertex targets? Does your investment focus vary based on the market you are in – it won’t be the same for India and Indonesia?

Piyush Kharbanda: Vertex caters to multiple geographies, including Singapore, Indonesia, India, Vietnam and Thailand. But we do not operate as outsiders parachuting into different markets. Instead, we draw upon our local expertise and work with dedicated teams to focus on local investments and growth sectors.

The fund house is guided by a unified set of themes, but we understand that each market is unique and the specifics vary. For instance, consumption [consumer trends] is a significant theme in emerging markets like India and Indonesia. Therefore, our India investments span beauty and personal care brands, pre-owned two-wheeler platforms, healthcare and more.

Depending on the market, our investment strategy adopts different approaches to the same themes, including consumer technology, fintech, SaaS, local and cross-border software solutions, health and wellness, mobility and sustainability/climate-related initiatives.

Inc42: How many startups have you invested in, and how many are part of Fund V? Please tell us about your follow-on investment strategy.

Piyush Kharbanda: We manage an active portfolio of 52 startups and have invested in 80 businesses. Among these, approximately 30 are Indian startups. Fund V is quite active and has already backed nine companies, five of which are Indian ventures.

We have also seen some notable exits, including FirstCry, XpressBees and Recko, among several others.

Our investments range from $2 Mn to $10-12 Mn. We consider ourselves long-term investors, reserving capital for follow-on rounds. On average, we commit $10-12 Mn per company, depending on its size, scale and scope.

Inc42: How long does it take to write a cheque after a startup pitch?

Piyush Kharbanda: We engage with startups well before they raise the money. It takes three to six weeks to initiate due diligence and issue a term sheet. An additional six weeks are required to complete due diligence and finalise the deal. This process can be faster sometimes, but closing an investment takes about three months.

Inc42: How does Vertex support portfolio companies beyond funding?

Piyush Kharbanda: Every venture fund supports its startups, but the extent of that support often hinges on the size of its portfolio. We have a manageable portfolio at Vertex, allowing us to allocate time and resources to each company. Our partnerships team also leverages our extensive global network to help portfolio companies.

Active business development is a crucial part of our investment strategy. Recently, we organised a CIO meetup in Japan, giving our startups access to prominent Japanese corporations. In another instance, we introduced large clients to a portfolio company called Certa. These initiatives underscore our commitment to fostering meaningful connections and opportunities for our startups.

Inc42: What about the exit strategy at Vertex?

Piyush Kharbanda: We have to consider exit from Day 1 because we are accountable to our partners. It is not an easy conversation, though, as you typically seek to work with someone aiming to build a lasting legacy business. But we must discuss these matters with our founders at times.

We are very transparent during these discussions, regardless of the startup’s stage or condition. Our founders also understand our perspective and recognise its importance. It doesn’t mean we bring up exits at every board meeting, but there are appropriate times for such interactions.

We ensure that the founders are aware of the exit options, not just for our benefit but also for theirs. This involves staying in touch with competitors, potential strategic acquirers and everyone else in the ecosystem. This approach helps build a better business and opens the door for a favourable outcome. Then again, we are always mindful of the business model’s sustainability. So, these are critical conversations integral to building a business and developing an exit strategy.

Inc42: Early stage funding saw a 29% decline in FY24, compared to a 17% dip in overall startup funding. Why did early-stage investors lose interest?

Piyush Kharbanda: We are on an upward trajectory if you consider the trend during 2017-2024. The spike in 2020 and 2021 was an exception. An influx of cheap capital drove it and many startups secured funding with ease. But the market has since normalised and investors are now more cautious, focussing on sustainable business models.

Inc42: A valuation reversal is underway, with dozens of unicorns and soonicorns losing their coveted status. What’s your take as an investor?

Piyush Kharbanda: We don’t focus on unicorn status as it is a vanity metric. The trend reflects the aftermath of the 2021-22 valuation surge when many startups were overvalued without sustainable business models or unit economics. Some of these entities may bounce back. Others will fail to raise capital or may soon seek funding at lower valuations.

Inc42: Which emerging sectors will grow significantly in the next three to four years? Is the current hype around AI sustainable?

Piyush Kharbanda: AI is crucial for the future of software. But it will become a feature within existing platforms rather than being the sole focus of standalone companies. Not every company can become AI-native or immediately disrupt all industry segments. But yes, established players with strong distribution networks will continue to thrive.

Beyond AI, we are bullish on the consumption economy, especially new consumer brands, cross-border B2B platforms and technology marketplaces. These sectors have substantial growth potential.

Inc42: What about regulatory issues? Do they impact VC investments such as in fintech?

Piyush Kharbanda: These issues should not affect businesses adhering to the law. We have not invested in fringe or under-regulated sectors, as success in financial services demands agility and strict compliance with regulations.

Inc42: VCs like Rocketship claim to be 100% outbound and data-driven, but many others rely on networks for deal hunting. What does Vertex do?

Piyush Kharbanda: Vertex works with exceptional founders, taps into thriving markets and nurtures robust business models. There must be a place and time for data to stay at the centre of these core elements for effective outcomes. The strategic use of data is paramount at this point. Just think about how the efficacy of a business model is validated through data over time.

On the other hand, cultivating strong relationships remains equally critical for long-term success. Many would underscore the human element when deciding upon a VC partner or a startup founder. Our global network also helps us understand where markets will be tomorrow rather than where they are today.

I would say there is no right or wrong answer here. Even within Vertex, people have different perspectives and put more weight on one aspect or another. Some people lean towards market-driven investments. Others are more founder-driven and value founders’ vision. Again, some may focus on business models and data. The beauty of the VC model is that all three approaches can work.

As a team, we consistently ask each other probing questions to ensure a clear understanding of all critical factors. We are intellectually honest with each other and very transparent. This helps us do what we are doing.

Inc42: How do you see the VC landscape especially, investments in hardware and sustainability evolving over the next five years, given that current investment levels in these certain segments are still low?

Piyush Kharbanda: A collective ecosystem is out there and VCs are part of it. They focus on different segments based on their expertise and priorities. But as you said, there are certain sectors which are underinvested. We need a broader ecosystem to address that, as we don’t have enough people with a deep understanding of how to invest in areas like, say, hardware. [I am also one of those people lacking special knowledge.]

These investment cycles may evolve slowly, but certain sectors will soon gain momentum. Hardware, for instance, will see more expertise being built and attract more investments. We have witnessed this in the semiconductor space and other areas. I think it is just a matter of a few more cycles before these sectors become extremely relevant.

As for the VC ecosystem, we are at a crossroads. We are going to see a lot of churn following a prolonged funding winter. Some big names may struggle to raise capital, and consequently, some large funds may have to reduce their subsequent fund sizes. We may also see new managers spinning out of existing VCs and setting up CVCs. Meanwhile, smaller funds which have spun out may become larger and gain prominence. Overall, there will be a lot of churn in the next five to seven years across the ecosystem.

For the latest news on Vertex Ventures SE Asia and India and our portfolio companies, follow us on Linkedin or subscribe to our monthly newsletter.