Synopsis–Once a pioneer of India’s venture-capital scene, Kalaari lost its momentum as a large set of its investee companies died, went stagnant, or sold out cheap, leaving just a few bright spots. To script a turnaround, the firm needs a new fund and a stable team.
Some eight years ago, venture-capital firm IndoUS Venture Partners rebranded and adopted Kalaari, an Indian name to emphasise its strong desi mooring. The gravity-defying combat tactics of the martial-art form Kalaripayattu was the inspiration. The VC firm may well like to employ some similar moves to change its fortunes.
The Indian venture-capital market is abuzz with the news of a likely investment by Reliance Industries in Kalaari’s upcoming fourth fund. Some of Kalaari’s most notable startups rolling into Reliance’s fold has signalled a growing relationship.
For Kalaari, a new fund, should it eventually succeed in putting together one, will come after a gap of more than five years and its size is expected to be significantly lower — possibly a third of its previous fund. Such a long gap and a smaller corpus do not augur well for a pioneering VC firm, and puts the spotlight on the struggles that Kalaari went through in the recent years. It saw the collapse of some of the most notable investee firms and the continuous exit of partners even as its efforts to raise a new fund stretched into two to three years.
Kalaari’s moment of reckoning came when its crown jewel Snapdeal fumbled in mid-2017. Kalaari managing director Vani Kola stepped down from Snapdeal’s board when its founders Kunal Bahl and Rohit Bansal about-turned from a distress sale to rival Flipkart. A year after the Snapdeal meltdown, Kalaari got out of Zivame, another notable, albeit much smaller, investee company. Later, Kola stepped down from the board of Urban Ladder. Reliance acquired the online furniture seller a fortnight ago for a fifth of the venture capital money it had raised.
To be fair, Kalaari had cashed out a portion of its stake in Snapdeal at 11x in 2015-16 when SoftBank entered the scene. But the remainder of its stake in its most-important bet was sold cheaply and thus its total return averaged out lower.
Having a number of stressed assets is common in portfolios of most venture-capital firms. But top VCs more than make up for those losses by a bunch of outsized gains in other portfolio firms. The trouble for Kalaari is that most of its bets have either gone dud or vastly underperformed, taking the sheen off the entire portfolio. This happened with Snapdeal, Urban Ladder, and Zivame.
In recent months, two other Kalaari portfolio companies also met with the same fate. While struggling B2B commerce platform, IndustryBuying, was acquired by a Japanese firm, used-car marketplace Truebil was acquired by its larger rival Spinny, again in a distress deal.
Kalaari is among the earliest set of venture-capital firms which came on the scene during the 2006-08 period. At one point the firm, led by Vani Kola, was the second-largest in terms of the size of the fund it managed. It has so far raised about USD650 million, deploying a very large portion of it across around 90 startups. Its peers — Accel Partners, SAIF Partners, Nexus Venture Partners and Sequoia India — have five to eight unicorns each in their portfolios. Each of them has another set of half a dozen startups with valuations in the range of USD500 million to USD900 million. In other words, a fresh set of startups are waiting in the wings to enter the celebrated unicorn club. Whereas, Kalaari had just one unicorn (Dream11) and one soonicorn (Cure.fit). It significantly cashed out its stake in Dream11 in two recent funding rounds. Cure.fit is still some time away from a major liquidity event.
Now let’s look at the next set of startups in its portfolio. Only four companies, other than Dream11 and Cure.fit, have crossed the valuation of USD100 million — Vogo, BlueStone, Power2SME, and ElasticRun. Of the existing companies in Kalaari’s portfolio, around 40 startups are in the Series A or below stage while 14 are in the Series B stage, according to data from startup and VC database firm Tracxn. Only a dozen companies are in Series C stage or beyond. For a VC firm in the business of investing in startups for 14 years, this would mean a large portion of its startups haven’t made much progress and only a small number of them are demonstrating good growth.
No team, no steam
About nine companies shut down and half a dozen were sold in distress deals. At least half a dozen startups haven’t raised money for more than two years while they are still making losses, a sign of shortening runways. A large set of its startups that are stagnant, dead, or were sold cheap and just a few bright spots prompt a question: How has Kalaari, once highly regarded, ended up in a rather unenviable situation? To find an answer, ET Prime reached out to several persons with close relations with Kalaari, who spoke on the condition of anonymity.
“It is very simple. She (Vani Kola) could never build a team,” says a leading figure in the Indian startup ecosystem. “No partner stayed for long.” In the past three years, seven partners and venture partners, some of whom were long-timers, left the firm or dissociated from future activities.
Rajesh Raju, a general partner other than Kola, and therefore the second most-important person in the firm, would not be part of the future funds, while remaining involved in the management of existing funds. Kumar Shiralagi, another founding partner, moved to a venture-partner role, signalling limited involvement. Sumit Jain, another long-timer, left. Bala Srinivasa and Prashant Aluru, too, moved on.
Three venture partners joined to fill these gaps — Sreedhar Prasad from KPMG, Devneet Bajaj from Mitra Agro, and Saurav Banerjee from NDTV, but Prasad and Bajaj left in 2019 after short stints. Banerjee recently floated his own venture. Besides Karthik Nageswaran, CFO, three principals — Mandar Dandekar, Rahul Garg, and Darshit Vora — are Kola’s key aides.
Almost all the people who spoke to ET Prime agreed that Kalaari lost its steam primarily because of the high churn in the team. The departure of the partners, who led investments in some of the startups and represented Kalaari on some of their boards, affected the investee companies. But that is just one problem.
The other is the bandwidth challenges that it has created. The firm’s ability to work deeply with its startups, spot trends, track sectors thoroughly and pick bets is seriously tested when it grapples with continuous exits at the partner level. Kalaari almost entirely missed the rise of fintech, ed-tech, and SaaS startups. As one former insider puts it: “It is seen as an ‘e-commerce VC’.”
Others add that it is run by just one person. VC firms generally display collective leadership and consciously disallow investment-committee decisions from being disproportionately influenced by one person purely out of self-interest — to avoid mistakes. While selection of startups is critical, venture investing is to a large extent a relationship business. India’s mid-to-late teens startup ecosystem at the top level is still a closed circuit. Several VC firms make syndicated early-stage investments and collectively manage to bring in bigger investors in later rounds. Kalaari does not seem to be as successful as its peers in such network activity.
“Kalaari is a lone investor in many cases. For instance, in the portfolios of Accel and Sequoia, you can see comparable bets. In some cases, they are co-investors, too. Then Tiger Global would come in the next round. You don’t see such companies or trajectory in Kalaari’s investments,” says Arun Natarajan, founder of Venture Intelligence.
‘You need fund after fund’
Kalaari did relatively well from 2008 to 2015, but faced issues in terms of team and investment performance thereafter. It raised its largest fund of USD290 million in 2015, a remarkable feat at that time. Among its fresh investments from this third fund, only Cure.fit went on to achieve a certain size.
The Indian startup ecosystem grew well and a large set of unicorns and soonicorns — soon to be unicorns — have come up since 2015. Several of them raised their earliest institutional round of funding in 2015 or later. Be it Swiggy, Urban Company, ShareChat, Oyo, or any such startup which rose to prominence after 2015, Kalaari is not seen on any of their cap tables. The grapevine is that Kalaari passed up some of them such as Swiggy and Meesho. “Fund 3 was a great opportunity. That was missed,” says one person.
In short, Vani Kola and Kalaari played a significant role in the development of the startup ecosystem in its early phase, but when it began to flourish, the VC firm looked unprepared to take advantage of the growth. India’s venture-capital ecosystem barely passed one exit cycle, and a VC firm’s fate is to a large extent intertwined with that of one or two of its marquee bets. For Accel, it was Flipkart, and SAIF (now Elevation Capital), it was Paytm. Unfortunately for Kalaari, Snapdeal’s unravelling took away a demonstrable success of its venture-investing prowess.
While Kalaari’s fourth fund is still in the works, its peers have bulked up their firepower with multiple funds running into USD1 billion to USD2 billion. Its own struggles on the fundraising front impacted Kalaari’s ability to provide sustained support to its startups. “You need money, fund after fund after fund. Only then you can build companies. Gone are the days when you put in 2 million (dollars) in a company and that grows. It doesn’t happen that way,” says another person with deep knowledge of Kalaari.
Early-stage funds pick a few breakout startups among its investee companies and double down on investing in them. Leading early-stage funds have backed their winning horses consistently for the first five or six rounds. Such consistent support is essential for surviving existential risks and quick scaling.
The long delay in coming up with a fourth fund poses another problem for Kalaari: the ability to attract pedigreed founders. Smart entrepreneurs — many of them are now second- or third-time founders — take the first cheque from funds which can support them over a period of time. Other VC firms have benefited from investing in second-time and third-time founders. In some cases, like Nexus, the founders and investors sync up one successful exit after the other. For Kalaari, Mukesh Bansal of Cure.fit is a rare example in this respect.
A few good exits
All this, however, does not mean Kalaari did too badly in terms of exits, the determinant of a VC firm’s performance. It had 10 exits with varying degrees of success. Some like Dream11, Snapdeal (even though it underperformed in the latter half), and Myntra gave good returns.
Kalaari’s investment of USD6 million in Myntra was worth USD32 million (around 5x) when Flipkart acquired the latter. Flipkart’s valuation then quadrupled when Walmart acquired it. It is not clear at what point Kalaari made partial exits from Myntra-Flipkart. On a portion of its investment which it held till Walmart’s buyout of Flipkart, Kalaari might have earned 21x gains. It is, however, not clear whether all these helped Kalaari return the first fund of USD190 million it raised in 2007 and register good gains on the second fund of USD150 million it did in 2012. “For the funds of that vintage, Kalaari may have done okay. Returns were low for most investors,” says the former insider who was quoted earlier.
“Until 2017, Kalaari was seen as a leading VC firm. Things changed later,” he adds. In the process, its biggest fund, as mentioned earlier, is left with just a few startups that show promise and it has almost entirely missed out breakout startups that are potential “fund-returners” for their respective investors. Kalaari struggled as the team withered.
Kola was a pioneer in starting the seed-funding programme K-Start, which offered an opportunity to catch startups early, and provide mentorship besides capital. Some of the startups, such as Winzo, Signzy, Active.ai, Mall 91, Affordplan, Perpule, and Vernacular.ai are K-Start portfolio companies which raised follow-on funding. However, K-Start was not without its share of volatility. At least three key persons — consultant Ajeet Khurana, and partners Muthiah Venkateswaran, and Revant Bhate — left after short stints. Firms such as Sequoia started seed programmes on a grander scale, after K-Start was launched.
Nearly two years ago, Kola announced the fourth fund, the status of which is not disclosed yet. Given the current strength, the new fund would be a “single GP fund”, which will be managed by just one general partner unless Kola brings in a new partner or promotes someone from within. A single GP fund will by default be smaller in size compared to funds managed by multiple partners.
In the mid-2000s when Kola returned to India from Silicon Valley with two decades of experience as an engineer-turned-entrepreneur with successful exits, she was uniquely positioned to steer a venture-building and investment firm. “Her knowledge is unparalleled. She knows her stuff,” says one person who has worked closely with her. “Amazing level of knowledge. She adds great weight to a board,” says another. “She believed in us and understood the segment when others did not,” says a founder. Some of those who have worked with her add that she can be mercurial at times. “Love or dislike — there is no in-between. A straight shooter. Not many would like that,” one of them says. “She is a fighter. She will pull this off. Even if she doesn’t, nobody can write off her work and the contributions she made.”
An Ambani-backed new fund would be a fresh start and a couple of big wins could add another chapter to that.
(Graphics by Sadhana Saxena)