California-headquartered CapitalG, a growth equity fund floated by Google's parent firm Alphabet Inc, makes late-stage investments in tech firms across the US, India and China.
Formerly known as Google Capital, the fund has 10% of its portfolio in India. This includes math learning startup Cuemath, digital healthcare platform Practo, cloud-based customers engagement platform Freshworks Inc and Girnar Software, which owns auto portals CarDekho.com and Gaadi.com.
In an interaction with TechCircle, Kaushik Anand, India head of CapitalG, discusses the fund's investment and exit strategies. The former Sequoia Capital analyst also talks about why CapitalG focuses on long-term potential and pinpoints sectors which he sees becoming attractive in the future.
Could you tell us about your investment strategy?
We invest purely for financial returns. We focus on growth-stage investments and our average cheque size globally is somewhere between $50 million and $100 million, though in India, we have been flexible given that the ticket sizes are sometimes smaller. We typically focus on Series C investments and beyond.
Our main value proposition is that while we invest for financial returns, we do leverage the Googler network to help our portfolio companies in a variety of areas starting from product and tech to sales and marketing and international expansion.
We invest in companies and take an equity stake, so we operate as a growth equity fund. Just as a growth equity fund would have an operating team to help portfolio companies, we think that for companies of scale, having a wider network and having people who are doing it at scale is helpful.
We continue to actively look. We don’t spread too thin. We make highly concentrated bets. We are in some ways choosy. CapitalG makes 6-10 investments globally in a year out of which 1-2 on average end up being in India. There’s no hard and fast rule.
Which sectors and technologies do you consider attractive?
We are long-term investors and we invest with the outlook that some of these businesses will last forever and we will be with them for a long period of time.
Even our LP structure, with Alphabet as our sole LP, gives us the flexibility to hold on for longer if needed. We look at companies which are sustainable long-term businesses.
In terms of sectors, we are big believers in Indian SaaS companies targeting global markets. Freshworks is a good example of that and we continue to be bullish on that thesis. The second segment where we have one investment and where we are still looking is ed-tech and education, including K12 and other sub-segments.
Financial services is a segment where we have been spending a lot of time in the last few quarters.
It’s a segment where we are actively looking at SME (small and medium-sized enterprises) and consumer lending and insurance for potential opportunities in the next one to two years.
Lastly, we are also starting to look at consumer brands, especially sub-segments of consumer brands, where a reasonable share of the sales could be online in the next three to five years.
Broadly we run like any other growth equity or VC fund where we have an investment committee that makes decisions and our capital source, unlike other funds, is proprietary.
What is your exit strategy?
Like most other investors, if an exit is available it would be relevant. Given the stage at which we invest, one or two portfolio companies are further down the line where we would look at exits in the next few years. But these are somewhere we want to be investors for a really long time.
Having said that, we are long-term investors, so our idea in India is to hold companies from the mid- to late-stage for a long period of time which would say be between 5-10 years.
You said that you invest at the mid- to late-stage. How do you see that playing out in the long run?
There are fewer and higher quality companies in this segment compared to some years ago. Companies are focusing on building towards sustainability rather than just going after growth.
We see that segment of the market getting more interesting in the coming years as the quality of companies and teams become better.
Besides the SaaS play, what made Freshworks an appealing bet for you?
Through their innovative business model on being able to sell and build products out of India, they’ve actually opened up an entire segment of the global market which is around mid-market and SME which are both not served or underserved by counterparts in the Bay Area.
They have a team which is very strong on product and which has proven that they can launch and make multiple products successful. Their unit economics are very good and would rank among their global peers.
Similarly, what made Cuemath an attractive bet?
Cuemath’s business model uses an interesting combination of offline for young kids while using tech to improve learning outcomes. We do think that in the early years of K12 education (K to 6), delivery would be offline and Cuemath’s business model is an asset-light model where they are able to use educated women who have dropped out of the workforce and they are able to train and empower them to come back into the workforce by becoming tutors.
It solves both parts of the marketplace problem: there is enough supply and they are able to follow a model where they are able to serve the demand for high-quality math learning.
But the core factor with Cuemath is that it’s a company where learning outcomes on math are very strong.
This interview is part of our InvestorSpeak series in which leading angel, seed or venture investors share their insights on the startup ecosystem in India.