Fund houses shifting focus to B2B tech startups for higher returns: Infy ex-CFO

V Balakrishnan, co-founder and chairman of Exfinity Venture Partners, and former Chief Financial Officer and board member of Infosys, is at the forefront of Indian startup ecosystem. With more than two decades of experience in global technology industry, he currently spearheads the investment decisions of Exfinity Venture Partners in startups focussed on Business-to-Business (B2B) technology ­firms including SaaS, enterprise, deeptech, platform business and new consumer techs. The PE fund currently has $81 million of assets under management in 22 portfolio companies as per fund house's website. In a conversation with the BizzBuzz, V Balakrishnan- popularly known as 'Bala' in Bengaluru's tech circle- said the fund house is in the process of raising its third fund worth around Rs500 crore, which is expected to be closed by April of next year. Commenting on contemporary technology trends, he said fund houses, of late, are focusing more on B2B tech startups. He is also of the opinion that the government should increase surveillance over crypto transactions than bringing in harsh regulations given the nascent nature of the industry

Exfinity Venture has a primary focus on investing in B2B (SaaS, Enterprise, Deeptech), platform businesses and new consumer tech opportunities. How the journey has been so far?

We have returned capital with some returns to investors (of our first fund). The balance, we will exit by August or so. As far as the second fund is concerned, we have not taken any exit as it is too early for exit. We have completed all the investment, but it will take some time to exit. In the startup ecosystem, you can't work alone because you have to co-invest. So, it works on a very collaborative way.

Are you planning for a third fund as the investment through the second fund is over?

We have already planned a third fund. We have raised close to 40-50 per cent of the corpus. This fund will have a corpus of Rs 500 crore. We plan to close this fund by March-April of next year.

Will the focus area change for the third fund or will it remain same?

It will be the same. The focus area will be B2B (business to business), deep tech technology companies.

Of late, investors' interest on B2B startups seems to be rising. Can we see further interest from investors in this space?

The initial interest in startups were in B2C or consumer tech companies. Of late, we see a lot of interest in B2B space. Because the capital required is less as compared to B2B space and the returns are higher. Let's say, it will take $30 million to $40 million for setting up a B2B tech startup, whose valuation can easily go up to $300 million to $400 million in the market. So, the multiplier is higher. This is less capital intensive and returns are higher. Obviously, there are a lot of funds focusing on B2B startups now.

Can you throw some light on what kind of return the fund house is generating?

If you look at our second fund, it is generating a net Internal rate of return(IRR) of more than 37 per cent.

We have seen a record number of unicorns this year. However, some also raise concerns over the valuation many startups are receiving in recent years. Do you feel valuations are bloated?

In the B2B space, valuations remain realistic. But, in B2C startup space, valuation have gone beyond reality. There is a lot of liquidity in the system and there is a FOMO (fear of missing out) effect. So, there is some froth in the valuation. In the public market, some of them are valued and some are not. It will get corrected over a period of time.

Twitter recently got its new CEO, who is an Indian. There are many Indians who are heading global corporations. However, there is a debate now over brain drain from India. What are your views on this aspect?

Earlier, India didn't have much of opportunity. Therefore, people went outside. The people who went earlier, they worked through the organisations and become CEOs. Now, there are a lot of opportunities available in India itself. A lot of startups are coming and there are opportunities where people can build a billion-dollar organisation and create value. So, things are changing. What has happened in the last two decades, that we see in most of the global corporations.

In a globalised world, where economies are deeply integrated, should we be overly obsessed with Indians becoming CEOs. How do you see the whole trend?

All this doesn't matter. Ultimately, the proof of the pudding is creating the Googles, Apples of the world from India. That is the key. That is a long way to go.

Central government is readying to present the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 in the ongoing winter session of the Parliament. Meanwhile, concerns with regard to banning the cryptocurrency has led to panic among investors. What are your views on the proposed regulations of cryptocurrencies?

Wherever government regulations come in, it will be difficult for innovation. It is better that the government stays away and allow the innovation to happen. Crypto is still a small part of the whole global capital. Normally, you can warn the investors not to be carried away with all the advertisement. Regulate the advertisement, which attracts investors of assured higher return but regulating the industry is too much of a stretch. When the industry is just coming up, regulating it too much will lead to death of the industry.

As far fears of money laundering are concerned, that can be solved through increased surveillance. The United States is already doing that. You have to increase surveillance than bringing in too much regulations.

Do you expect that even if regulations come up in the space of cryptocurrency, other industries using blockchain technology will continue to grow?

Cryptocurrency is one of the use cases of blockchain technology. There are many other use cases that use the technology. The government is proposing to regulate the crypto space not the other industries.