Lightspeed Venture Partners and Sequoia Capital have reportedly earned around $400-500 million collectively as their share of the profits.

Lightspeed and Sequoia executives rake in big bucks by selling shares in OYO deal
Atom Deal Friday, December 20, 2019 - 17:20

The promoter of OYO Hotels & Homes, Ritesh Agrawal had announced that he is buying back some shares of his company from the investors. This itself was not a routine occurrence in startups. As eor an Economic Times report, the buyback process is complete, and two VC firms, Sequoia Capital and Lightspeed Venture Partners have received over a billion dollars for their stake in the hospitality venture.

The transaction in this case involved a Cayman Islands registered firm, RA Hospitality, owned by Ritesh Agarwal purchasing shares in OYO to the extent of $1.3 billion from these two investors. With this purchase Agarwal has upped his stake in the company to 30%.

Now, the significance of this development is that the general partners (GPs) at these two VC firms have themselves earned around $400 million as incentives from this buyback deal. This is a rarity as far as the Indian startup ecosystem is concerned. The break-up for this amount is $250 million to the GPs at Lightspeed and $150 million at Sequoia.

For those not very familiar with the way the venture capital firms function, the general partners or GPs in these firms are like the fund managers in mutual funds. The GPs pick and choose the startups for the VC to make the investments in. When the investments result in a windfall as in this case, the GPs take home a handsome 25-30% of the VC’s earnings. These earnings by the GPs are called carried interests. The overall earnings by a venture capital firm is first shared by the fund’s partners or sponsors to the funds, whose cash has been invested in the first place. When the fund decides to exit a firm they have invested in, then the earnings are calculated and shared.

Readers would be immediately reminded of the last huge transaction in the Indian context, that of Walmart buying Indian startup Flipkart. There, two investors, Tiger Global and Accel Partners made a killing since they were early stage investors.

This development is interesting since it does not happen so regularly in India. Venture capitalists here rely more on fund managers who are paid a fixed management fee. You don’t have that many exits here as well. It is possible the ecosystem may evolve over a period and such rewards and earnings can become commonplace.

There has been a sprinkling of VCs off-loading of shares partially from startups like Byju’s, Swiggy, BookMyShow and Delhivery etc. All of them earned in the process.

There are optimists who claim there is still lot of hope for the Indian startups to come good.

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