It’s a season of pain for even some of the most storied venture capital firms in India, and Omidyar Network is just the latest one to succumb.
The firm, which has backed the likes of 1mg, Bounce, Indifi, ZestMoney, Drinkprime, DealShare, Vedantu, Pratilipi among other startups, is shutting down its India operations.
While the announcement has come this week, Omidyar Network India will completely transition out of the Indian market by the end of 2024.
“After several months of deliberation, it has been decided that Omidyar Network India will stop making new investments and will completely transition out of the market by the end of 2024. Over the next two months, the board and leadership team will assess how best to manage the organisation’s portfolio while recognising the long and trusted partnerships that the Omidyar Network India team has built,” a statement from the firm said.
Active in India since 2009, Omidyar is among the handful of VCs that have seen the startup ecosystem grow to its current size from a nascent part of the economy.
There’s some speculation of a division within the Omidyar Network India (ONI) management to further separate the Indian investment vehicle from Omidyar Network’s global investment arm. But at the moment, the firm remains tight-lipped about the next steps.
What we do know is that in a conversation with some founders of its portfolio, ONI has set a 3-5 year horizon for exiting its investments and the firm is likely to also transition out of many boards where its representatives are currently directors.
“The leadership had a short call with some of us portfolio founders and informed us about the next steps, which included the estimated exit horizons and also boardroom changes,” one founder who was present on the call told Inc42.
The founder said Omidyar was clear that there would be no change in management at least until December 2024 and indicated that the firm is not likely to be in a hurry to liquidate its assets, even though that will be the primary focus area.
But before we look at the implications on its portfolio, it’s important to understand what exactly forced Omidyar to quit the Indian market, and as we will see, there are multiple factors at play here, including the firm’s problems with Indian law enforcement. The fund managers and partners we spoke to called it a “sudden-yet-expected” departure.
Omidyar’s India Experience
Backed by eBay founder Pierre Omidyar, Omidyar Network India is a veteran in the Indian startup ecosystem, having invested in new-age ventures since 2009 onwards.
While its core focus has been on impact investing in nonprofits and grassroots organisations, it has also branched out to back startups in the mobility, fintech, edtech and other for-profit sectors, and has invested through three separate entities from its early days.
As per its website, the company has a total AUM of $673 Mn with over 120 portfolio companies. Over 70% of this corpus has been invested in private for-profit ventures.
In 2023, Omidyar invested in Indifi’s Series E round, as well as Series A rounds of SatSure, Sequretek, Kiwi, DGV and ZestMoney, which incidentally is in the process of dissolution. Most recently, Omidyar Network India led dairy fintech startup Digivriddhi Technologies’ (DGV) INR 50 Cr ($6 Mn) Series A funding round.
Over the years, ONI has also seen exits from the likes of WhiteHat Jr, Dailyhunt, Pickrr, NowFloats, Credlfow, IndusOS and 1mg, many of which were acquired by leading companies. Indeed, its exit track record is healthy for a firm of its vintage, given that even the likes of Tiger Global and others have struggled to extract high returns in recent years.
For instance, WhiteHat Jr was acquired by BYJU’S in August 2020, netting a 17X return for Omidyar. Besides this, 1mg was acquired by Tata Digital in June 2021 in a high-profile deal; NowFloats was acquired by Reliance Industries for $20 Mn and IndusOS by PhonePe for a reported valuation of $60 Mn in 2022.
Despite these positive outcomes, it seems Omidyar has lost patience with the Indian market. Or was its hand forced by external factors that are not related to its portfolio, as is the speculation in the immediate aftermath of the announcement?
Why Omidyar Is Quitting India
The undeniable fact is that Omdiyar’s track record of exits has also come alongside controversies related to its investments in non-profit organisations, some of which have come under the radar for the source of funding.
For one, Omidyar Network India came under fire in 2021 when it was placed on a watch list by the home ministry, which came with restrictions on the foreign donations it could accept.
Omidyar was named as an accused by the Central Bureau of Intelligence (CBI) for allegedly conspiring to illegally facilitate the registration and renewal of Foreign Contribution (Regulation) Act (FCRA) licences. FCRA licences are mandatory when receiving funds from foreign sources for charitable purposes.
Additionally, Omidyar has come under fire from members of the current ruling party in India for being associated with alleged iPhone hacking warning messages and its monetary contribution to entities that are said to be working against the interests of India.
Moreover, in June 2021, SEBI alleged that Franklin Templeton’s Asia Pacific head Vivek Kudva and his wife Roopa — ONI’s former managing partner — had violated insider trading laws and barred them from investing in the capital markets for one year.
While this is unrelated to Omidyar’s investments in startups, having the country head named in such a case would undoubtedly have carried some reputational risk for the firm.
The challenges with law enforcement and the general crackdown on FCRA violations by the Indian government have coincided with some pressure on Omidyar’s portfolio in 2022 and 2023.
Many of its portfolio companies have, in recent times, come under stress due to the tough market conditions as well as a paucity of funds. Doubtnut, for instance, was acquired by Allen Career Institute in a distress deal. Doubtnut is said to have been acquired for $10 Mn, despite raising more than $50 Mn in its lifetime.
One ONI portfolio founder told Inc42 that the firm is likely to have booked a loss of over 75% on its investment in Doubtnut. The state of other portfolio companies is also not great. The likes of Bounce, Dealshare, Healofy and others have come under scrutiny for weak business models, founder exits as well as slow revenue growth.
Interestingly, the leadership situation at the firm is less than clear after Kudva’s exit. One noteworthy point is that Omidyar’s decision-making layers have dedicated directors as well as partners. It’s not clear exactly who is calling the shots.
On the director level, the firm has leaders such as Amol Warange, Aditya Misra, Lakshmi Pattabi Raman, Sarvesh Kanodia, Sushant Kumar and Treasa Mathew. At the same time, the firm also has partners such as Siddharth Nautiyal, Badri Pillapakkam, Mahesh Krishnamurthy, and Shilpa Kumar.
This leadership structure is largely due to the fact that Omidyar’s focus was split between private investments as well as funding and grants to nonprofits. However, many VCs believe this is an antiquated structure and often results in delays in investment decisions.
And finally, there is the changing landscape of impact investing in India. When Omidyar arrived in India, its impact investing focus was on grassroots organisations and community-led MSMEs. But today, impact investing is moving into areas such as manufacturing and large-scale production which offer higher potential for employment and economic growth. As such, Omidyar’s thesis is perhaps also a bit outdated in the Indian context and might be better suited for other geographies.
VCs Feel The Heat
Portfolio problems are of course not exclusive to Omidyar — other VC firms have seen partners exit by the droves and are in the process of dissolution in some form or the other. We have seen changes at firms such as Lightbox, Orios VP, Together Fund and others in recent weeks.
Tiger Global partner Scott Shleifer’s comments earlier this year about the lack of big returns from India also signalled a change of heart for some of the biggest investors in India. Plus, there is a great deal of competition in the early-stage ecosystem where Omidyar likes to operate.
As we have reported throughout this year, the changes at the partner level at VC firms is largely a result of poor performance of the funds and pressure from limited partners. However, this does not seem to be the case with Omidyar, according to the founder and CEO of a unicorn startup in Omidyar’s portfolio.
In the case of Omidyar, the firm is likely to have faced little to no pressure from its limited partners given the fact that most of the firm’s invested corpus comprised the personal wealth of founder Omidyar.
Another factor is that India’s foreign direct investment (FDI) rules excluded Mauritius from the list of geographies exempted from the so-called angel tax. This meant that ONI, which invested through a special purpose vehicle named ON Mauritius, would be subject to tax action in relation to the gains in valuation when investing in startups.
According to the founding partner of a Bengaluru-based early-stage firm, the word within VC circles was that a lot of firms are likely to quit the Indian market due to portfolio trouble and the changing landscape around investment thesis particularly for emerging technologies.
“While this is the moment for impact investing in India, Omidyar’s troubles with CBI were well-known. Most VCs are only surprised by how quickly the firm has announced its exit, not the fact that it has,” the partner mentioned above added.
Of course, the exit of a major investor (at least in the case of some startups) is likely to be a headache for the startup founders. What does Omidyar’s exit mean for its portfolio?
The Portfolio Impact
“In the call with founders, Omidyar was clear that the Indian ecosystem is maturing and that it no longer sees room for the role it played in the past decade. They called it a decision taken by the global leadership which would see the focus shift to other geographies,” one Delhi NCR-based portfolio founder told Inc42.
Naturally, we wanted to know what it meant for some of the companies that had already raised significant amounts from Omidyar in the past year. The likes of Indifi are at an inflection point, having also reached profitability, while others such as Vedantu, Bounce and Dealshare are said to be transitioning to better unit economics. Will Omidyar’s departure have ripple effects that disrupt this momentum?
“The biggest impact will be on the startups which have just raised a seed or Series A round from Omidyar. The exit of one major backer is a signal to the rest of the market, but again this depends on the stage of the company and how much stake Omidyar owns in the company,” the founder quoted above added.
On the positive side, another founder pointed out that given that the firm has announced its intention to exit the portfolio, it will likely make it easier to execute secondary share sales. “Typically investors are okay with a discount when they want to exit, so secondary sales might even see a discount of 40%-50% in some cases. This means founders can buy back some shares at a low rate if they have the capital,” added another Bengaluru-based founder in Omidyar’s portfolio.
Ultimately, M&As are also a possibility for some startups that are staring at an uncertain future. Given the fact that ONI’S portfolio includes some unicorns such as Dealshare and Vedantu, these startups could even acquire some of the distressed startups in the firm’s portfolio.
Whatever the fate of the portfolio startups, Omidyar’s exit is a major signal for the Indian VC and startup ecosystem. Will this be the first of the old guard to give way to a new breed of investors?
There’s also a positive undercurrent in the Indian market for domestic investors and increasing participation of HNIs and Indian corporates in the VC ecosystem. Omidyar’s global DNA runs against this grain. But many in the ecosystem feel its exit from India is nevertheless sudden and there could be a domino effect in store.
The post Behind Omidyar Network’s ‘Sudden-Yet-Expected’ India Exit appeared first on Inc42 Media.
