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Mahesh Murthy On Carwale Exit, Internet Businesses

11 November, 2010

CarWale‘s sale of majority stake to German media major Axel Springer AG and their Indian partner the India Today Group has reignited the interest in the Internet based business models, not to speak of MakeMyTrip’s stellar listing in Nasdaq. Seedfund – an early stage investor in the company, which had put in Rs 80 lacs for a 38% stake in the company four years back, is a big winner in the deal. Sierra Ventures, which committed about $7 million in Series A in 2008, also got a quick exit. The deal is believed to have been valued at about Rs 100 crore. VCCircle speaks to Mahesh Murthy, co-founder, and Partner, Seedfund, about the exit, and what he thinks about early stage investing in India. He said that their strategy of creating spaces and turning raw startups into market leaders has paid off. Murthy also feels that an internet company going for an IPO need not necessarily be Rs 300 crores in revenues, but a Rs 40 crores in revenues also can go in for a listing. He is confident that a few of his portfolio companies will go for IPO next year. Excerpts:

How easy was the exit? Was it well timed?

We were in no particular hurry. The company was doing well and making money. It has a great team. The good thing was no competition could match up to them. We had to, initially, spend a lot of time in working with them, in building relationships with advertisers and so on.

We did not hire an investment banker. (Editor: Avendus Capital was the exclusive financial advisor to the shareholders of Carwale, according to a release by Avendus). Corporates pursued us and we were always open to discussions and finally promoters felt that it was well timed as they were big in size and scale. Till the last stage of negotiation, there was also interest from another Indian and international media/ internet company.

When we invested in the company in 2006, they were just two boys from Bhopal and a business plan on a piece of paper. For us, this exit was about proving the Seedfund model that you can work with raw startups fresh out of college, and make them market leaders in undiscovered spaces.

What is the deal value?

At the time of exit, we had about 25%, but at the time of investment, we had about 38%. It is upwards of Rs 100 crore.  It was a good exit. We have had partial exits so far, this is one of our better exits and the first complete exit.

What does this exit validate?

The bigger validation is of our belief while we set up the fund. We believed that a lot of our interest will be in non pre-existing sectors, and we will look at creating sectors. So, you will see before Carwale, there was no organised auto-classifieds market. Before Redbus, there was no bus-ticketing business, before Vaatsalya, there was no semi-urban hospital ector, before afaqs, there was no advertising and marketing media vertical. We have actually worked to create the sector in each case.

Unlike larger funds, which look at established sectors and leading players in those sectors, we basically took a deeper bet saying we will create the sector.  The question really is whether you can actually turn a raw startup into a market leader with a small amount of money.  We faced the triple challenges : a typical raw startup, creating a space, and then become a market leader.  All these three things were created by the sector and there are still dozens and dozens of sectors that are yet to be created in India.

How did Carwale’s competitors fare?

Indiacar, Automartindia, Gaadi.com, Zigwheels, Cardekho etc. Some of these players came and went, not being able to make a lasting impact. We kept telling Carwale one thing – to keep focusing on customers.  Today I am told that one out of six cars is bought in India today after research is done on Carwale, which is a pretty big number.

Small and focused approach should be the strategy for early stage funds?

For early stage funds like us, what we can hope to do is to create little niche sectors which become big leaders going forward. So, we would rather grow big fishes in small ponds than get into the middle of the ocean and have very small fishes.

Which are other sectors in which you are looking to create niche marketplaces?

Unlike many other funds, we are not waiting to see proof of concept in this sector, we are rather saying is there a need, and can that need be addressed in a way which has sustainable competitive advantage and do we have a team that can execute and can we do with a small sum of money. We like consumer focused businesses, internet businesses and media businesses.  Consumer focused businesses allow you to grow a brand very quickly.

Today in India, there are 100 million internet users. Four years ago, there was no mobile internet usage and now it is one of the fastest growing market in India. We can partly credit ourselves, but it really the fundamentals that have improved so dramatically, that it is a good time to be in the internet business.

What do you think about exits of internet based businesses?

There are a couple of other companies which are going for an IPO.  The conventional wisdom is that you need Rs 500 crores for IPOs, I don’t believe so. I think if you are in a hot sector, you are unique in that space, you can do an IPO at Rs 30 crores to Rs 40 crores.  A lot of our belief is very contrarian.  But I can say from my experience, I took a company- Geodesic public from Rs 4 crores in revenues.

Naukri was about Rs 60 crores when it went IPO, 123Greetings was Rs 22 crores, when it went IPO. The key thing is not IPO, but to get enough market support for your stock. The IPO is not the end, it is the beginning. If you look at all the internet enabled companies, there valuation is more than 4X-5X, and not 1.5X or 2X.

Do you have companies in your portfolio going for an IPO?

Our companies are at various stages of growth and it will be really great of we can. If you look at the number of internet companies out there, how many of them are profitable? We have a few of our companies going IPO next year.

You also closed Seedfund II. How are LPs reading the early stage market?

We have closed the fund. From the LP’s point of view, there are lots of growth funds with $100-150 million, fighting with each other for deals because of which deals get priced very highly and there is not enough which is left on table.  After looking at so much of competition and spreads narrowing out there, they are looking at different avenues where money can actually to be made. They are looking at much smaller sized funds, thinking that they can have a play here also.  They are looking at a balanced portfolio.

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Namit Nangia . 6 years ago

Nice to see a good exit… but these number indicate that seed fund got a 30X return but sierra ventures didn’t make any money, they just got back the money they invested ! Wow how did they agree to an exit !

Sumanth . 6 years ago

As per the numbers above, the valuation of the company at the time of last round seems to be around $20 million post (given that Seedfund’s stake fell from 38% to 25% post a $7 million infusion). That is roughly Rs 90 crores – given this high entry threshold, an exit in the range of Rs 100 crores would be grossly sub par for Sierra Ventures and if the company was doing as well as Mahesh claims it was, it would make no sense to divest.

Ajay . 6 years ago

5 years invested into the company and the revenue had clearly plateaued, with no visible path to double or triple it. While raising new funds is not a challenge anymore given the amount of money pouring into India from LPs, some VC firms need to demonstrate a perception of “successful exits” to attract quality deals. An LP will know how successful an exit was, but an entrepreneur seeking funding will only have info that is publicly available. Hopefully the team got taken care of in this process and if so, then it’s all good.

Shakun Rai . 6 years ago

an exit is an entrance to something else… life moves on for a new day n new story…

Mahesh Murthy . 6 years ago

Shrija did a great job at transcribing an interview from a moving vehicle.


But I wanted to clarify a few points – I am sure Shrija won’t disagree with these:

1. I applaud everyone’s guesses at the acquisition value but none of them are correct. Disclosing that information is not ours but the buyer’s prerogative. 🙂

2. My conversation with Shrija went somewhat thus – you can then make your own guesses.

Shrija: There was a report that the valuation of the deal was Rs. 100 crores.

Me: I read that.

Shrija: Is that correct?

Me: No.

Shrija: How much was the number then?

Me: I can’t say.

(repeated several times, with the same response)

Shrija: More than what was reported or less?

Me: More

Shrija: How much more?

Me: I can’t say (and so on)

So you can draw your own conclusions, if there are any worth drawing from there.

3. Sierra may have committed $7 million, but that was not the actual amount invested. So all calculations based on that number are quite off the mark.

4. All investors, from the angels to Seedfund to Sierra, came out ahead.

5. The company is doing very well, thank you – and shows no signs of any imminent plateauing.

6. It is true that an iBanker was not hired to shop the company around. However when the company received a lot of in-bound investing interest, Avendus was retained to deal with the in-coming parties. Avendus did work hard to put together the final deal.

Hope this helps.



Shashank . 6 years ago

I think Sierra’s investment of 7mn must have given them a higher stake than 35%. I think the valuation at Series A must have been 14mn which must have given Sierra a 49% stake. If thats the case the exit IRR is 25% in two years. Not bad.

Kiran . 6 years ago

Carwale was sinking ship. They lost lots of money. Even though they tried to hype a lot.

BTW Mahesh, Indian customers go to all auto websites and its not just carwale.

Ammembal . 6 years ago

Internet continues to defy gravity and conventional valuations. DotCom boom seems to be back when the likes of say that they can exit at 40cr revenue with no profits to show.

They are excellent salesmen who can put massive “topi” on idiotic investors who lack common sense. 100cr for CarWale? Gimme a break. There are much better places to sink 100cr in.

sanjeev . 6 years ago

not sure about the sense of the deal.

the data, information, reviews etc. on carwale is out of date.

how are they making money?

they i think have a tie up with skoda coz. whenever you ask for recommendations with various parameters skoda cars are way up the order even though they may not deserve to be there.

Mahesh Murthy On Carwale Exit, Internet Businesses

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