TVS Capital’s Gopal Srinivasan On Raising From Domestic LPs, And His Advice To New VC Fund Managers

A third generation entrepreneur, leading one of India’s most influential business families, and also an investor in next-gen businesses over the past 15 years, TVS Capital Funds’ Gopal Srinivasan has seen the breadth of India’s economic growth.

The chairman and managing director at TVS Capital Funds has not only backed next-gen entrepreneurs and ventures in critical sectors through the years but also seen India’s startup ecosystem come up from scratch. Since its inception in 2007, the fund has invested nearly INR 3,000 Cr in the new wave of entrepreneurs that are emerging with each generation.

If TVS Capital’s original thesis was to back talent emerging from IITs and large IT organisations, its recent investments have been in areas that are solving critical problems such as rural financing, insurance, healthtech, large format retail and more.

And of course, Srinivasan has been a keen participant in shaping public policy for the venture capital and startup investment ecosystem.

Through Srinivasan’s stints at SEBI, the Indian Venture Capital Association (IVCA), the Confederation of Indian Industry (CII) as well as SIDBI’s Fund of Funds for Start-ups (FFS) he has pushed for greater participation from domestic investors. And TVS Capital’s three funds till date have 100% domestic capital, something which Srinivasan is particularly proud of.

“Otherwise we are simply helping grow the pension funds and institutional profits of US-based behemoths,” TVS Capital Fund’s Srinivasan told Inc42 recently.

The TVS Capital portfolio includes Nykaa (exited), Digit Insurance, Yubi, Sarvogram, Five Star Business Finance, Suryoday Small Finance Bank, Wonderla Holidays (exited), and Leap Logistics, among other companies, with the first three unicorns in the form of Digit, Yubi and Five Star. After the Nykaa IPO, TVS Capital saw a 6x return, while Wonderla delivered a 3X return during the exit in 2016. Besides this, TVS exited from retailer Landmark Books in 2013.

After closing its third fund in 2021, TVS Capital is gearing up to raise money for its fourth fund, which will see commitments in 2023 and 2024 at a time when the LP base is particularly shy about making commitments to new funds.

The enthusiasm around the micro VC model has spurred Inc42’s next big initiative — CapitalX — where we would enable investment analysts, entrepreneurs, and angel investors, to learn the art and the science of building and managing a micro VC fund from the very people who have successfully navigated this journey.

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Having seen the ecosystem grow from nothing, Srinivasan is in the advantageous position of guiding not just startups, but also the next generation of investors. And here he delves into what it takes to launch and manage a new fund in this day and age.

Edited excerpts

Inc42: We wanted to delve into the origin story of TVS Capital Funds; What was the thesis you set out to fulfil when the fund was launched in 2007? 

Gopal Srinivasan: Our original thesis which remains completely valid if not even more valid today was that with the growth of the India story, a new wave of entrepreneurs was emerging. We began in 2007, 15 years into the so-called post-liberalisation era.

Entrepreneurs were emerging from large college campuses and the global and Indian companies. After 10 years of giving their talent to IT companies, these individuals were in their mid-30s, which is the prime time to be an entrepreneur. The story of a college dropout founder is absolute American Kool Aid, which should be treated exactly like the sugary substance it is. It was completely unhealthy.

The other stream of entrepreneurs were second or third-generation businessmen who would be ready to take over their large family businesses by 2020. They were part of the succession plan and they had ambitions built around technology.

We could see these two streams would converge somewhere in the mid-2020s. And therefore we called that story empowering next-gen entrepreneurs and first generation founders who have not come from the traditional background of wealth, but have come through professional backgrounds. So those are the people that we thought would be transforming India.

Inc42: Tell us a little about how and why you went after domestic capital for all your funds? 

Gopal Srinivasan: In our view, entrepreneurs are the next generation freedom fighters for social and economic freedom. We really believed in that story and we said let’s raise only rupee capital and let all the profits of investment stay in India. It’s great to hear the stories of unicorns, soonicorns and decacorns, but when you realise that all profit has gone to some American pension fund or some foreign investor, what economic problems are we solving in India?

Whereas we as a country need far more money for infrastructure and lifting the 300 Mn people below poverty line. So besides backing entrepreneurs, our second big objective was to keep the money in India.

With its latest TVS Shriram Growth Fund 3, it successfully closed an extended fundraise with an overall corpus of INR 1,550 Cr. And with a potential co-investment pool of approximately INR 450 Cr from its LPs, the total AUM for this third fund is around INR 2,000 Cr. This makes it the largest fund in India with 100% rupee capital.

Inc42: How does this self-imposed constraint related to domestic LPs complicate the process of raising capital? 

Gopal Srinivasan: When we started TVS Capital Funds, there were really no formal regulations for the private equity industry. But we knew there was a latent interest in investing in next-gen businesses.

We basically leveraged the fact that people or domestic institutions were keen to invest funds in something new. Some institutions like ICICI, HDFC, State Bank of India were willing to step up to the plate and back us. Besides this we had people like Kris Gopalakrishnan of Infosys, who had actually seen the world of Indian IT which we had not seen in 2007. So, we were very fortunate to have actually been able to get their early support.

We started this with the support of all these aforementioned individuals from the IT industry. And we actually did a very average job — we tried very hard, worked very hard, but we ended up giving back pretty much just the capital to our LPs, which after five years means that they’ve lost five years worth of interest effectively.

The interesting thing was when we came back in 2012 and 2013, five years later for another fund, we were actually very hesitant. But everybody said take more money. You’re doing all the right things and it will always be like this. Don’t worry.

The second fund for TVS provided a gross internal rate of return (IRR) of 27.4% with net IRR being in the range of 15.6% to 17.6%, which puts the fund in the top quartile of the Indian ecosystem.

Inc42: Is there a lot more pressure these days (2021-22) from the LP side to deliver returns versus 2012? 

Gopal Srinivasan: So the second fund we raised did quite well. From what I understand we were in the top quartile in terms of returns across funds in India. So after that, it was obviously much easier because we had a track record.

During Covid, LPs wanted to give us even more money. So we designed a co-investment model where LPs could come and invest with us. This gave us a very large corpus to invest from.

I think the pressure on us from LPs is not at all an issue. Pressure is something we put on ourselves, to deliver higher and perform better.

So, I think in my mind the reason we have worked hardest over the past few years is because we want to improve our performance. We always caution the investor that something can go wrong. But I think we are not in a bad place when it comes to the pressure from LPs.

Inc42: How can new fund managers go about setting benchmarks? Should they have a self improvement framework or is it relative to the competition? 

Gopal Srinivasan: You must look at three measures.

One: For any fund, the benchmark is the quality of investments. Have you been able to back the best companies in the business? It’s very easy in this business to settle for the second best with the logic that you got into it for so much cheaper. Investing in a company with the best set of founders, small business quality and acceptable commercial terms is paramount.

Our model has never been led by commercial terms, but the actual business you are investing in itself.

The second measure is the team and their internal capability to grow after you invest. Do they have the capabilities that we want?

So we ask ourselves whether the CEO or entrepreneur is the best in the business. That’s what you will find across our portfolio — whether it is Digit Insurance with Kamesh Goyal or banking infrastructure with Gaurav Kumar of CredAvenue (now Yubi) or MSME lending where Five Star Business Finance has the right expertise.

The third one is tracking your returns. The biggest mistake people make — I’ll call these fake funds — is badly chasing the MTM or mark-to-market returns. This is largely trying to solve for the effect and not the cause. Returns are the effect of a good business and you should always look at the cause and not the effect.

Inc42: You primarily invest in the growth stage. But how do you allocate the corpus between the sub-stages? What is your risk diversification strategy? 

Gopal Srinivasan: Our portfolio construction is around three stages: venture growth, classic growth and late growth. Late growth is kind of moderate returns with very low risk, classic growth is medium risk, medium high returns and venture growth is higher risk and higher returns.

So typically what we have done so far is we invested approximately about INR 300 Cr into venture growth. Late stage sees about INR 400 Cr to INR 500 Cr. And the rest, which is like INR 400 Cr odd, goes towards classic ventures such as Sarvagram or Vivriti.

So I think as a growth investor, you need to build a portfolio across these bases and that helps you get an average ticket size. I’m very comfortable with 10-12 investments in a year, which I think gives you enough diversification and enough concentration.

Without concentration, there is no ability to focus and add value to a business.

Inc42: What’s your take on the current economic situation and the slowdown investments in 2022? Do you see these clouds clearing soon?

Gopal Srinivasan: There are many funds which are like public funds in the private space. They have a portfolio of 30-40 companies by spreading small amounts. This is how a public market investor builds a portfolio where they don’t need any concentration. How will they add value?

There’s going to be a lot of ugly noise in the private market globally. Private credit and also private equity. You build a quality portfolio with a conversation around numbers, the validity of the business, the quality of revenue margin, expansion, the quality of team. You cannot just get away by building a huge portfolio and throwing money around.

Inc42: From a thesis POV, what was your journey like? You invest in financial services and B2B and ecommerce as well as healthcare. How did you decide on the areas you would focus on? 

Gopal Srinivasan: When we started, our thesis was CCDO or consumer-consumption driven opportunities. In India, 30% of the GDP is consumption. So if India was going to become a $1 Tn economy, this is a $300 Bn opportunity. Consumption would be for FMCG, dining, commercial spaces and that’s where we invested.

Then we saw that whenever consumption grows, financial services grow. Even if we leave out banks, 25% of India is actually being catered to by insurance and insurance brokers, NBFCs, tech suppliers for the financial services industry, distributors and so on. So we invested in five such companies, and we did Nykaa of course.

And by the time of the third fund, we focussed more centrally on financial services so we could concentrate our skills. And we added B2B services for supply chain and digital commerce. So that became our thesis. Now we’re thinking maybe we should add IT services, because mid-sized IT services market is going to boom.

Everything that’s happening in India, from the public digital infrastructure to regulatory push from RBI and IRDA is enabling digital businesses. When people are not afraid to go digital for financial services, it creates a huge market for businesses. And of course, urbanisation in many parts of India is creating a lot of new behaviours. 10 Mn people are moving to urban locations every year.

You have to see the ripple effects and that’s why we have focussed on our thesis and whether you are a B2C investor or a B2B investor, you have to develop a concentration through such thinking.

Inc42: How closely do you work with the portfolio at the growth stage? 

Gopal Srinivasan: At least half our companies, we’re very closely involved in terms of helping them hire people, raising money, mentoring team members and advising them on various aspects.

Dr. Krishnamurthy V Subramanian of IISC is one of our advisors. He’s probably the best financial technologist in the country. Gurumoorthy Mahalingam, former SEBI director is our advisor and adds outstanding regulatory knowledge. K Ramkumar, the former head of ICICI, is also an advisor. So you must be able to help the entrepreneurs in terms of value addition. And that’s also where co-investments have been helpful, because we are able to bring more value to our portfolio.

Inc42: Since we are talking about the people associated with the fund, can we delve into the TVS Capital Funds team structure?

Gopal Srinivasan: To any new fund manager, I would say to start with, go very light on analysts and associates. I use them as recruiting positions. Initially more top heavy and in many ways, it’s like a founder at an early stage startup and they have to do a lot of heavy lifting.

What makes a good fund manager in the beginning is the ability to be curious, be very strong in pattern recognition, being able to automate and resilience.

Our pattern is what we call an hourglass model. We have partners and managing partners at the top, very few people in principal partner and VPs, a lot more people at the analyst and associate levels.

The partners and managing partners are key because they are the ones who bring thought leadership. The principals and VPs in the centre get a lot of the work done because they ask the better questions and the analysts and associates find the answers.

Then we have a developmental team that looks at client communication, industry or advocacy community and those activities. Over time, we have realised the importance of research, so I am personally building an investment research team, which ultimately will look at what’s happening in the industry, in our portfolio companies, the sector, what the competition is like and more.

Inc42: Lastly, from an LP management point of view, what would your advice be to first-time or new fund managers? 

Gopal Srinivasan: You must have very high conviction about your capability. I think that is what we sell to LPs.

There is a lot of friction in LP management. Their view about the industry, the past experience in the industry, their own family office, their own needs and of their future generations. The institutional LPs, they are worried about your risk management. What is a key man risk, what is your succession plan?

Ask yourself four questions, which is also what the LPs want to know: team, theme, track record and trust. So the 4Ts approach.

While the track record and team are much more measurable and objective, trust and theme tend to be much softer and are subjective discussions. The only way you can overcome any doubts on theme and trust is to be really convinced about your right to succeed or as the Americans call it right to win. If you have the right to succeed in terms of the team and track record, then LP management can be a smooth journey.