Succeeding in troubled times; Lessons from Kalaari’s Rajesh Raju


One of the defining factors of a fund is the people who run it. Kalaari Capital definitely has the right mix of partners managing its recently raised $160 million fund. With each of the partners coming with a unique blend of entrepreneurial and investor experience, Kalaari Capital looks to develop and grow its impressive portfolio of technology startups in 2013.

Rajesh Raju who is one of the three partners at Kalaari, comes with impressive accomplishments from his previous assignments. Here, in Rajesh’s own words, you will find out that 2012 hasn’t been an easy year but how entrepreneurs can navigate these rough seas, and build global businesses from India. Read on to find out more…

On a difficult 2012

Rajesh reveals that 2012 has been a year of mixed results. In a tough environment, Kalaari has been one of the few funds that have been able to raise significant capital targeted at the stage of investment that is of interest to them. Rajesh says, “The Indian economy as such has been under stress and that has percolated into many areas, be it raising the fund itself to making new investments, and to raising follow-on capital for our portfolio companies. It’s been a tough fund raising exercise for us, but we prevailed mainly because of the team that we put together. It also helped that we had a good portfolio from the previous fund that we manage.”

“In a tough environment, people tend to look at companies a lot more carefully and become risk averse. Raising first round of institutional capital and follow-on funding has not been easy for many companies. The environment has affected the growth and liquidity opportunities for our portfolio companies as well. Some of the exits that we were planning for last year have been postponed because of a bad market.

However, Rajesh also sees some very encouraging signs in the Indian entrepreneurial ecosystem. He believes that the pool of entrepreneurs has exponentially grown over the last few years. “Entrepreneurship is no longer confined to people from business families,” says Rajesh, “We are now seeing some highly qualified individuals leave their plush corporate jobs, displaying the willingness to risk it all with entrepreneurship. This is very common in the West but not so much in India. The trend in India originally started in 2007, but it has become more prominent than ever in the last year.”

Rajesh believes that this trend is healthy as it brings a wide variety of people into the entrepreneurship foray and believes that this new breed of entrepreneurs shares its interests with that of the investors - which is to generate returns for all stakeholders.

Rajesh also commends the emergence of organized angel and seed funds over the last two years. “About two years ago, if someone wanted to start a business, you’d have to bootstrap or borrow money from friends and family before you could approach a fund like Kalaari to raise money. This could take about 3-4 years. Now with more organized bodies which can make that initial investment, this time has been reduced to as little as 1-2 years.”

Rajesh’s key learning from 2012 for entrepreneurs is in managing cash flow. “I can’t stress enough about the importance of having access to cash and efficient usage of that cash. We saw so many companies shut shop last year because they didn’t have money to continue operations. I think 2012 has taught us that we will have to maintain a healthy cash position at all times and raise capital well in advance of any possible mishap. We constantly stress the concept of "Cash is King" with our portfolio companies and this has helped many of our companies avoid distress situations that plagued the industry last year.”

Rajesh also adds that the challenge of finding the right kind of management team to scale a business is still very much there. Moreover, the Indian market as such, lacks a deep domestic enterprise customer base and active and efficient capital markets; this impedes it from becoming a complete and healthy ecosystem. He believes that these challenges will continue to plague companies in the near term, and entrepreneurs and investors have to work harder to get around these ecosystem limitations.

Sectors to watch out for in 2013 

Rajesh has an interesting insight into the state of sectors in India. From his observation, he shares that there really aren’t many sectors which are on the verge of avalanching as most aren’t mature yet. The sectors that have matured don’t have much happening in them to pique the interest of early stage investors.

“As far as I see it, the sector really doesn’t matter if you can execute well. Cash will always be available for such businesses. When you take execution out of the equation, then the question of sectors arises. Given the current economic downturn, I expect evergreen and countercyclical sectors such as education and healthcare to attract more capital in 2013” shares Rajesh.

Rajesh and Kalaari are also cognizant of the growing opportunities in the mobile space. Having seen rich dividends through their bet on mobility, namely Magzter, Kalaari touts the increased penetration of mobile devices to fuel a new mobile revolution in India. He says, “Mobile devices, especially tablets, are changing the way in which content is consumed. It is a horizontal play. The use of mobile devices can be employed across sectors such as education and healthcare. Even our portfolio company SimpliLearn is looking to make a mobile application so as to provide a richer experience to its consumers than just the traditional web based learning platforms. Furthermore with the advent of platforms like Android and iOS app stores, distribution of these apps is independent of telcos, which we believe will reenergize the mobile VAS and app businesses in India.

Rajesh also adds that driving exits has been an uphill task in India. “Exits are dependent on the capital markets and unless the M&A and IPO markets improve, there will be a struggle in the exit arena. We really don’t have much of a choice but to work on growing our portfolio companies and hope that the markets improve this year. However, there will be a consolidation phase in some sectors, especially e-commerce, in the coming years. E-commerce is a winner take all sector and we have seen significant growth in the sector overall. But this growth at a company level is coming at a very high customer acquisition cost, which will not be sustainable in the long run. Investors are going to make very calculated bets on e-commerce and raising funds for me-too e-commerce companies is going to be difficult in the coming years.This will force consolidation in the e-commerce sector.”

Rajesh believes that this forced consolidation is very healthy for e-commerce as it would save a lot of capital from being wasted on newer ventures in the same sector.

On successful entrepreneurs 

Kalaari Capital’s investments have predominantly been in the technology space but Rajesh shares that their investment thesis is built around the abilities of a strong entrepreneur. “The single thing that we look for when a company comes to us is a passionate entrepreneur. What they are doing and what space they are looking to target is pretty much secondary. The entrepreneurs themselves are of the highest importance for us. After this, we also look to see the ceilings in the market that they’re choosing to work in. If the market that they’re in has a low ceiling, then it restricts growth quite a bit. We also see if the vision of the core team with respect to their venture is simple. Starting off with a complex vision isn’t the cleverest way to go about starting a business.”

Rajesh regards Dr. Madhukar Reddy, the founder of MedPlus as one of the best entrepreneurs that he has worked with. He says, “The most successful entrepreneurs are strong willed, passionate and extremely hard working. Of course, some successful entrepreneurs also come with big egos, but the ones that really go the distance are those with the heart to admit their mistakes and quickly rectify them and move on. Madhukar was not only very committed to his venture, but was also quick to admit his mistakes.” Other entrepreneurial attributes that Rajesh regards to be very important are – sharing the good and the bad news with investors, seeking counsel from others, and embracing the fact that others will be better in certain areas than you.

Rajesh likens the investor-entrepreneur relationship to a marriage. “5-6 years is a long time and you need to feel comfortable whether you can work closely with the people behind the fund for that time period. As investors, we come in many flavors and each fund is different. You need to do your due diligence before choosing your investor.”

Rajesh also shares from his experience that the biggest points of failures for an entrepreneur looking to scale up their venture include underestimating the requirement for capital and not building a solid management team. Young entrepreneurs find it difficult to let go, delegate, and trust the team to do the right thing.

Predictions for 2013

From the 2012 experience, Rajesh believes that 2013 is not going to be very different in terms of venture capital availability and fund raising is going to be just as hard. He also predicts that global funds are going to shrink their capital allotments to India.

“With more experienced and organized angel and seed funding establishments and the increased funding opportunities in this space, we are going to see an increasing number of companies that come to us with more refined business plans and organizational structure.”

Rajesh concludes on an optimistic note. According to him, we have the potential to build global companies from India and technology is going to play a very important role in taking more Indian businesses to the world.

“While there are exceptions, India itself hasn’t gone completely global yet, but if you see, that is the case with China as well. As far as I know, for a company to stand on its own two feet outside India, technology needs to be leveraged in the best possible way. Technologies like mobility will enable sales of products and services to consumers all around the world. Technology is going to be our biggest tool to go global!

As a light parting note, Rajesh likened entrepreneurs to protagonists from Indian movies. “Entrepreneurship is not easy and as with most of the heroes from the films, the characteristic that pulls them through is persistence. Entrepreneurs should be persistent,” concludes Rajesh. 

Key Takeaways: 

Expect a tough 2013 for both investors and entrepreneurs

"Cash is King", access to cash and efficient usage of that cash are keys to success in 2013

Passion and Perseverance are the key success traits of entrepreneurs

Mobile and evergreen sectors like healthcare, education etc. will be favorable areas of investment in 2013

Technology is going to be our biggest tool to help elevate Indian companies to the global arena

[Original article on Kalaari Capital's blog]


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