India has been a poor market as you said for exits, do you see this improving in 2019 – 2022 period?
I think the fact that founders who pass like a three-five year hurdle and don’t die, survive, that’s the first rule. When they survive, hopefully, they’ve created enough value that somebody will come and buy that business. It’s not easy to find buyers and not easy to get premiums on those kinds of businesses. And the good news from an exits perspective is people have been building away for 10-12-14 years today, right? The first wave of venture money came in the first five-six years. So there are a lot of credible businesses out there. Don’t know how many will sell, how many buyers are active. We don’t have too many Indian buyers. So exits don’t happen unless you have an active M&A ecosystem, especially for the venture, or you hit a certain scale where you can have a very attractive IPO. Even that hasn’t happened fast enough. I don’t know whether it will dramatically change in the next 18 months. But I hope to hell it does change after that. I think it’s very important to build a culture of companies that can go IPO, and everything else should be seen as incidental. You can’t build it the other way around, saying Hey, who can I sell this to? Who will I give stock to? Which unicorn can I palm this off to? It’s just a bad strategy in my view. You bloody well build a proper IPO business or don’t bother is my take. Even the US market is saying that and they’ve been doing it for 60 years. There are no hacks to that, right? Eventually, if you want a great cash exit, that’s how it will happen is my take. I don’t think as yet a Cisco or Microsoft or, you know, Salesforce is coming to India and buying a business for $3 billion. And in consumer, no way in hell people are coming and buying because they know unit economics in India is going to be tough as a consumer business. Even the Unilevers, P&Gs of the world have been here for you know, decades together. And they know it’s a tough margin structure business, right? So yes, Walmart paid a premium. I don’t know whether you can count on many, many more of those. So, therefore, let’s build an IPO business. And yes, it might feel a little slower to build profitably. But I mean, enough companies have shown that post IPO if you’re delivering on profit and growth, you get rewarded very literally in the markets. Look at Teamlease – these are companies which grew 30-40% after the IPO and the stocks have done incredibly well. So I think that’s the path I would recommend. And I’m trying to push more and more of my companies way.
As an early stage venture capitalist, which markets have been for you in the last five years where you had a predefined thesis?
We have become entirely thesis-driven in terms of how we approach our pipeline, otherwise, to get 50-60 deals a week, which is what we get, you go mad reacting to the pipeline. So firstly, everything you can assume in the last maybe not as much, not as well thought out in the first maybe four years, we were a little bit more impulsive. But post-2015, I would argue that almost every bet we’ve made has been thesis-driven. So we broadly take an area, let’s say education since you asked. Healthcare, we did about four or five last in the last three-four years. B2B is very broad, I know. But basically, anything which has really cutting edge software technology, things like Squad, Locus and Belong – all of these were done in the last three-four years. And we think that’s the edge; can we be global businesses with Indian edge in engineering, as a thesis area. In education, we’re seeing how the hell is this country going to get out of its cycle of accelerated growth if we don’t educate our people fast enough. It’s not going to happen by building schools everywhere, it’s going to happen digitally. Same with healthcare, you’re not going to build hospitals that 90% of this country can afford. And there’s going to be different hospital delivery and financial services. So actually, ironically, in India side, I would argue that our thesis areas and bets that have worked more typically in what are considered more impact-oriented such as education, healthcare, financial services, and globally, we’ve always had a leaning to B2B knowing that that’s our forte. Can you take great engineering skills, and package that into a global product play? I can’t claim we’ve built unicorns yet. I mean, the good news is there are a few outside of our portfolio which are getting built, I think we want to follow suit. GreyOrange was much earlier but we continued with that stream, and we now allocate almost a third of our capital towards B2B. And that’s where Locus and Belong have come from.
Which markets, where you had a thesis, didn’t work out for you?
I think, where thesis areas were either weak or where we were acting on the impulse of a little bit more emotion and a little less objectivity or getting market sizing wrong is where we failed a bit. Gaming would be an example. The first fund, three bets, nothing has scaled or worked. I don’t think the Indian market was ready. That’s what all the Series A VCs said, never bet on any of them. So became self-fulfilling. All these guys struggled. Two of them are still alive. But barely; they break-even but they are all million dollar businesses.
The other thing I would argue where we failed quite a bit was trying to do vertical product commerce; got into the cycle too late. That entire commerce engine works like a herd mentality. Either everybody is making bets or nobody’s making bets. And then you would bet on something like sports or school supplies. Purplle is the only one who survived (from our portfolio) and I think they have built incredibly frugally from that generation, otherwise, all our bets died. And so there, it’s very tricky, because the business scales, run out of money, if you can’t get the next round, you are screwed. and we didn’t anticipate how critical that will become. I think there was a lot of assumptions that, hey, you show a certain set of metrics when Series A comes. I think in the first cycle, we were as naive as the founders, and realize that it’s such a thin market, all it takes is for six or seven people to say no, or even worse, half of them to be invested in something which is vaguely competitive. And you can’t get a lot of things funded. So the more common themes that get picked are dangerous, in some sense for a small player like us, because then you’re always under headwinds, because there’s a bigger guy who says, you know, I’ve already made a bet in the space or adjust in space wouldn’t fund anything of this nature. So for us, they didn’t work out, not because the founders were not good. We began to appreciate that you have to know the market that you’re selling into, you cannot be oblivious of it. Because at our stage, most of our peer funds are dependent on the larger funds to give at least enough growth capital. Of course, one can argue that theoretically, you can bootstrap to breakeven. It’s not trivial, right, and we have to be conscious of that. So wherever there was capital, heavy capital required, we have suffered.
I remember you pitching in very heavily for Dunzo at a point in time. When they were underfunded?
Yeah…I think this is what my pet peeve in India has been; that India is an opportunity domestically but you have to actually find an Indian-ised solution for our set of problems. Because you got to solve it at Indian price points, that includes our consumption capacity. We don’t have crazy disposable incomes, right. And when you see a certain behavior uptick, then you have to know that something in the product is working, you’ve changed a certain behavior. And in the West, I can’t speak about China, I don’t know enough about China, In the US, if you get a whiff of that, people line up outside your door to fund. In India, it’s almost the opposite. They say where’s the comp (comparable company)? I haven’t seen anything like this work elsewhere? How can this become a great market? How’s this sizable? I have 15 million users who are sticky? Right? I have x million monthly transactions. What are you talking about? But no, they want a comp. And so I think it was that frustration to say that how can you take the stickiest hyper-local behavior, right outside of Milkbasket, which is also our other morning milk delivery, and say that this doesn’t have enough value to be backed. If that were missing, you would never see a Twitter or Google or Facebook ever emerge or an Uber. And it’s because of new behavior creation that incredibly large long term value gets created in the world. And India is almost the antithesis of it. All the long term value we’re trying to create is in me toos. By pumping more money and trying to win market share. What about other stuff? And why can’t we build more frugally, more thoughtfully, more long term? Still, haven’t seen examples, I would love to say that we build a few. But only time will tell.