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https://www.vccircle.com/fund-scan-how-sixth-sense-is-replicating-founder-nikhil-vora-s-paytm-success-story

Just days before SoftBank’s record $1.4-billion investment in Paytm in 2017, an individual investor’s exit from the digital wallet company with windfall gains made waves.

Nikhil Vora, an early investor in Paytm parent One97 Communications Ltd, laughed all the way to the bank with a whopping 75-fold gain on the investment by selling his stake to Chinese e-commerce giant Alibaba.

Cut to two years later, Vora’s investments from Sixth Sense Ventures is showing signs of replicating the harvest he plucked from Paytm and other personal bets that he had made before the launch of the consumer-centric venture capital firm in 2014.

“Our first fund is already at a 45% internal rate of return (IRR),” said Vora. “And with four exits completed, Sixth Sense has achieved a rare feat of possibly being the first VC fund in India to return capital to its investors within three years,” he added.

Sixth Sense’s performance sounds spectacular in an industry where the overall exit environment has been muted. So, what are Vora and his team doing right?

Intuitive investing

Sixth Sense is a pure-play investor in the Indian consumer value chain, covering brands, products, services, distribution and analytics. The VC firm is staying true to its cause of being a consumer fund and not getting swayed by the latest fad, which gives it an advantage over trend investing, said Vora, adding it will stick to these themes while avoiding pure tech plays, infrastructure, financial services, real estate and commodities.

The VC firm’s 10 investments from the debut fund and 10 so far from the second fund have been driven by this philosophy. Together with the idea of remaining true to the sector, Sixth Sense has been guided by the idea of ‘intuit’, from which the firm also derives its name.

“It is not always about how you see it but how you feel it,” said Vora, which sounds paradoxical coming from him given his experience of more than a decade at IDFC Securities crunching numbers as managing director and head of research and a much sought-after star analyst of the consumer sector.

“I have been an analyst. But I don’t think it is great to be obsessed with numbers. How we look at consumer trends and investments are intuitional,” he said. Vora added that the personal investments he started making while at IDFC laid the ground to build the thesis of Sixth Sense and focus on private companies. “If you look at Fortune 500 companies, 90% of them die. Fortune 500 companies to me are symbolic of the listed companies in India that have matured and evolved. That’s not where I want to play. Tomorrow’s leaders are born today, and hence, private,” he explained.

Betting on public companies

Still, Sixth Sense hasn’t completely ruled out investing in listed firms and this strategy has earned the VC firm substantial dividends.

In March, the VC firm walked home with blockbuster returns from its listed portfolio company Hindustan Foods after WestBridge Capital Partners bought its stake in the contract manufacturer for fast-moving consumer goods. It also made seven-fold returns, or 175% IRR, on its investment from another portfolio firm JHS Svendgaard Laboratories Ltd, which makes oral care products on contract for brands such as Dabur, Patanjali and Amway.

“There would be themes and opportunities that could become extremely large and where the fund would love to participate,” said Vora.

Major VC firms such as SAIF Partners, Sequoia Capital India and Norwest Venture Partners have also made private investments in public equities (PIPE). VCCircle, in its analysis of SAIF Partners, had detailed how the investment firm’s PIPE deals were paying off.

Sixth Sense’s second fund has also bet on third-party logistics services provider AVG Logistics Ltd, which is listed on NSE Emerge, the stock exchange platform for small and medium enterprises.

Vora said that increased activity in the SME exchanges has created enough liquidity for businesses to access larger pools of capital and has provided investors and shareholders an exit route.

Last year, early-stage VC firm Blume Ventures’ portfolio company E2E Networks Ltd created a buzz after the cloud computing firm’s initial public offering generated an overwhelming response on the SME exchange.

Vora said that the VC firm is expected to invest around 15% in listed companies from the second fund, higher than the 10% it did from the debut fund.

Doubling down

The VC firm has also re-invested in companies from its first fund by deploying capital in them from its second fund. VC firms generally avoid this investment strategy. For instance, venture firm Lightbox raised an “expansion fund” to double down on investments from its previous fund rather than putting in money from a new fund.

Sixth Sense invested more in JHS, consumer healthcare products firm Soothe Healthcare and supply chain solutions firm Leap India, said Vora.

The second fund will surely invest in businesses funded by the first fund if it finds the investment will give optimising returns, he added.

For instance, Sixth Sense pumped more capital in Soothe, the company behind the Paree brand of sanitary napkins. This is because the business has been scaling rapidly with 10-fold growth in revenue in the last year due to increased depth in distribution. “Investments in capex in the last year has positioned Soothe well to reach peak throughput capacities of over Rs 300 crore,” Vora noted.

Hiccups

While Sixth Sense appears to be in a comfortable position now, the VC firm had to face its share of hurdles early on when it was raising capital for its debut fund.

It had originally targeted to make the final close of its maiden fund at Rs 250 crore by mid-2014. The fund, however, made the final close at Rs 125 crore ($18.5 million) in 2016. The fundraising got delayed as the firm had to incorporate certain changes in its private placement memorandum and refile its papers with capital markets regulator the Securities and Exchange Board of India (SEBI) for registration under its AIF norms.

The entire first fund was raised from domestic Limited Partners including Small Industries Development Bank of India (SIDBI), several CEOs and high-net-worth (HNI) individuals.

In contrast, the fundraising experience for the second fund was successful as the firm marked the final close at Rs 515 crore ($68 million) against the original target of Rs 350 crore ($54 million) within nine months. “This demonstrates the pressing need in the market for an alternative investment product with a unique approach,” said Vora.

However, the VC firm also faced a drawback in the form of management churn. Founding member and managing partner Japan Vyas left Sixth Sense last year to start his own alternative asset management firm, Roots Ventures. Vyas had also worked with IDFC Securities earlier, and so did Swati Mehra, who is partner at Sixth Sense.

“Everyone with years of experience wants to take a shot at entrepreneurship at one point in time. So that is the only reason why he left,” said Vora on Vyas’ resignation.

Other venture capital firms such as Sequoia, Matrix, Chiratae Ventures (formerly IDG Ventures) and SAIF Partners have also seen their share of management exits even as experts stress on the need for team stability in the VC industry.

Future imperfect

Sixth Sense Ventures has been agile on exits, thanks largely to its listed portfolio firms as mentioned above. It also exited hyperlocal logistics company Grab with a two times return on the investment via a strategic deal with Reliance Jio, while it recorded 1.7 times returns from its investment in wedding marketplace Weddingz.in, after it got acquired by budget hospitality firm OYO (https://www.vccircle.com/softbank-backed-oyo-seals-third-buyout-acquires-weddingz-in/).

While its portfolio firms from the second fund are still new, Sixth Sense’s early investments from the first fund are shaping up well and could give healthy returns. Leap India, gaming arcade operator Smaaash and speciality food ingredients maker Veeba Food have raised next rounds of funding.

“I do believe that there is an extremely vibrant market for secondary (deals) in consumer businesses as that’s the only way to participate in businesses which are in high growth and do not need fresh capital,” noted Vora.

Besides, Sixth Sense’s debut investment in Ethos Ltd, a subsidiary of SAIF Partners-backed watch dials maker KDDL Ltd, has tracked healthy revenue growth registering net sales of around 10% at Rs 356.09 crore in the fiscal ended 31 March 2018 after recording negative growth in the previous year. The company also swung to a net profit during the period from consecutive losses in two previous fiscal years.

Vora said that the exit momentum will be maintained across the lifecycle of businesses on the back of macroeconomic growth and favourable regulatory framework.

He added that Sixth Sense will continue to chase disruptors in the market that are operating in the largest and most sticky consumer categories in India. And while he has stopped making personal investments, he said he has been doing “friend-based” and “non-commercial” investments that are totally outside the purview of Sixth Sense. Whether these investments will replicate the success of the VC firm, only time will tell.