Deep Dive into the Indus Valley Report: Host Roshan Cariappa speaks with Sajith Pai and Amal Vats

Roshan Cariappa (00:00:48): Hello everyone. Welcome to another edition of the start-up Operator podcast today we have a couple of really special guests, our first guests in the brand new studio that we have, Sajith and Amal from Blume Ventures. Hey Sajith, hey Amal, thanks so much for coming down. Super excited to host you. As I said, you guys are the first guests in the studio. It's a bit of a work in progress, but I guess, we'll make do with that.

Amal Vats (00:01:16): That's a pretty cool set-up.

Roshan (00:01:16): Thanks so much. Today we're gonna talk about the Indus Valley report, for those of you who haven't heard of it, I don't know if you're living under a rock, but it's gone super viral on social media, and everyone's talking about it. There have been memes after memes on people reading the report, and it's very comprehensive. It covers the Indian Silicon Valley or the Indus Valley, basically, and talks about all of the trends and the structure and so on related to start-ups. We're gonna delve deeper on some of those aspects. It's a fairly comprehensive report, 120 plus slides. So first off, thank you so much for putting that together. It's a great service to everyone in the Indian start-up ecosystem.

Sajith Pai (00:01:53): Hey, thanks, Roshan. Yeah, the report did go massively viral. The memes were a bonus. So Amal, and I've been slaving at it for the last, I would say, one and a half months when we kind of go into hibernation, my wife and Amal's girlfriend just give upon us <laugh>. So, it feels very gratifying that it's gone viral. And thank you for having us here. It means a lot.

Why the Indus Valley Report?

Roshan (00:02:13): Awesome. So I've been really looking forward to this. So I guess, the first question I have is in terms of how did the report come about, and what was that process of putting this together? Amal?

Amal (00:02:24): Sure. I'll just go back to last year when we published the first version of this report. So, there is this report that comes out, it's called the Mary Meeker Report which talks about the trends that are seen in internet economy and it's been coming out for many years up until a few years. It was a very interesting report, but broadly it covers more of the US market and more from a, from a global angle, but very less about India. And the idea was to try and produce something like that for India last year. That's where we began, going for that, but when we really started out and thought of compiling various data points, we realized that India is massively starved of ground level data. So, much so that we thought that just putting up a report which was comprised majorly of data points was going to be a very tough task.

From there, the idea kept evolving a little bit, and then we eventually reach a state where we thought that , hey, we have some data, but then let's talk more about narratives, which is coming out from that data and let's split it across various things that we were seeing. So, one of it was just talking about India or just introducing India to the whole world. One area that we focused was introducing Indus valley, as we call it, which is our moniker for the Indian start-up ecosystem. And then, also just talking about how Indus Valley was in the year 2021, so that's how it originated and that report last year was essentially the first effort. So, it involved a lot of breadth, but when it came to this year, we couldn't introduce India again of course we also couldn't introduce Indus Valley again, all that's been done.

So, what you are forced to do was to go into the depths of what all we could cover this time around. And hence this report structure, which talks about one, not just introducing India, but going into the depths of the macro-economic structures. Or what are we seeing as, for example, in terms of developments in India, that, are arising, which affects Indus Valley. Then another bit was how Indus Valley has been in the year 2022. And the third aspect, which was very, very interesting for us was just trying to visualize how Indus valley is India's soft power, where we are seeing that the Indus Valley effects, which far outweigh just its current size in terms of the Indian economic context. So, that's how the report really came about. As Sajith said roughly one and a half, two months of intense work that's gone into it; we went and looked at a lot of reports, talked to a lot of people, not just inside the firm, but also outside the firm, and gained a lot of perspective. And the 125 slide deck that you see is a culmination of all that.

The Indian Consumer Stack and India1, India2 and India3

Roshan (00:04:54): Fantastic. And this year, I feel start-ups have become mainstream. You guys make the point as well where you talk about whether the IPL sponsorships or Shark Tank or even the very colloquial use of the term startups itself. And, for me personally, having been in the ecosystem for the last 15 years, it's, been a big change. When we started out back in 2008-2009, nobody kind of recognized start-ups. You had to justify it to your landlords, your future father-in-laws and, and what not. Whereas, today, everyone has a recall of that. Interestingly Amal, you talk about this India1, 2 and 3. And here again you reference Ireena Vittal as well, where she says that you have to see India in perspective through these various different Indias or Bharats. And that is the first step to really understanding India and really building and solving for India. So can you talk about that in a little bit of detail?

Amal (00:05:51): Sure. So, this whole classification originally is Sajith's brainchild, just to understand how the whole consumer eco-system works in India. It was really beneficial for us and it helped us break down various problems that were being solved. If we visualize India, not just as one unit, but a construction of three or four possible units, which we call as India1, 2, 3, and how we look at it really, and I will also try and put it in perspective of global examples. So, India for example has overall roughly 1.5 billion people and an economy of roughly $3.5 trillion. If you break it down, India1 is where we think most paying consumers exist, people who transact regularly and who sort of interact a lot with the start-up ecosystem.

So, the global parallel is Mexico for example, so roughly I would say 120 million people that are in India1 hence 30 million households. And the average per capita income of this Mexico that we have inside India is roughly $12,000 and that's where most of the start-ups operate now. So, that's roughly $1.4 trillion of GDP. And also inside this India1 is an even smaller constituency that we call India1A, where a lot of D2C brands operate, for example, or someone like a Cred. Then comes India 2, think of it as Philippines, roughly a hundred million people and an average income of $3,000 or so that's roughly $300 billion in GDP.

And we also see quite a few start-ups operating here, and many who also started up with India2, and then tried to move over to India 1 because , that's where the real money lies. Someone like Meesho, ShareChat, who primarily operated in India2, or at least started out with it, and someone like KukuFM or Stage as well. And then either have taken the decision to also include India 1 into their consumer base or are still really expanding into India2. And then you've got India3, which is roughly 1.2 billion people, average income of $1,500 or so. So, that's roughly $1.8 trillion of GDP, which is a massive GDP. But the paying power is very small. And we see very few start-ups start operating like Kaleidofin in our portfolio.

And even if we do if it's a consumer social start-up, they rarely make any money here. So, again someone like a ShareChat or Josh. There are a few who have figured how to make money, but their growth has been slow. So that's how we try to look at India’s break-up of India1, 2, 3. And it's a philosophy or an understanding that we also follow in Blume on a wider basis because it really helps us get into the depths of how all these start-ups are solving particular problems.

Roshan (00:08:47): In terms of India1, 2 and 3, do you see start-ups gaining in India2 and India3? How is that trend?

Amal (00:08:57): We, see them gaining for sure, we have more and more adventurous and visionary founders who want to now build products for India2 and India3; and they have been for some time, but  what's really helped in the recent years is for example, something like a Jio coming in or something like the effects of covid, thanks to which you have got more wider adoption for sure from India2 & India3 for these start-ups. But again, what's been really tough so far is monetisation. Meesho, how it started out for India2 they've got a lot of orders, but it's been difficult for them to make money. Similarly, someone like a ShareChat or Josh for example, a lot of eyeballs or users that they get from India 2 or 3, but it's been very difficult for them to convert them into consumers, or people who actually pay for those sort of apps. If ShareChat has been dependent so far more on ads, then it's been difficult for them to also get ad revenues from that section of people. So, the adoption is wider yes but from a monetization perspective, it's still been a very tough problem to solve so far.

Key trends impacting startups

Roshan (00:10:07): Sajith, you've been patiently listening to this; Amal put it very well as to how structurally we are set-up in India 1,2 & 3. But what are some of these key trends that are happening that is kind of impacting start-ups now?

Sajith (00:10:21): Amal referred to the rise of Jio and now it's been 6 years since their spectacular rise, which sort of pulled, I would say about 200 to 250 million Indians into the digital stream. They were not consumers, in fact, they were not even users but today, those 200 - 250 million have started using the internet, whether it's YouTube, WhatsApp, UPI. So, all of that came through the low bandwidth costs which Jio helped engender, so that is one. Then of course, Amal also referred to Covid as a forcing function for getting people as consumer. There was DeMon (Demonetisation), for instance. So, these are three steroid shots you could say, which kind of spurred the rise of India2, and the number of people even from India3 into using the internet. But I would say if you look at start-ups, for start-ups operate in a slightly narrower spectrum of India, I would say key factors would be, for example, rising discretionary spends.

A lot of the consumption for start-ups from India1, who historically have greater discretionary spends. Even as India2 grows, its per capita income is still $3,000, which is much lower than India1 ($12k). But as their incomes rise, at least say the top 10-15% of India2 start becoming digital consumers so, that helps startups. I would say the rise of formalization, thanks to IndiaStack and when you look at IndiaStack, we of course know Aadhar, UPI, but there is also OCEN which is Open Credit Enablement Network, there's ONDC which is Open Network for Digital Commerce. I won't go too deep into it, but these are, I would say, powerful enablers for driving the next wave of digital products out of India.

And I would say start-ups will take the lead there. Then there is this whole China+1 factor that's emerged, which is really geopolitics making their way… and that is leading to…now I wouldn't say that Indian manufacturing has been non-existent. We have slowly been seeing it grow, but it's always been in the periphery. But today I would say it's become a little more mainstream because manufacturing, for example, is 17% of India's GDP and 30, 40 years back it used to be, barely 10%. So, the rise of manufacturing, the steady rise of manufacturing, its emergence today, thanks to China plus one factor is also helping lot of start-ups in the exports as well as in the manufacturing sphere such as Zetwerk able to grow its business more rapidly. So, these are some, I would say structural internal forces. 

Now, there is one powerful external force, which is capital flows. And if you look at capital flows there, we do have the nature of the US economy to thank. The need for them to keep paying pensions, the need for them to find more attractive income streams leads to them allocating more to tech and venture because they have been the biggest returners. So, the whole rise of alternative investments of which venture forms a key part, and India, of course, has been one of the faster growing ones where allocation is concerned. Some of which we'll have to see how it evolves as interest rates have now gone up. Barring the last year, from 13-14 to around 2022 have been marked by super low interest rates and a lot of money coming into India so we've benefited from that. So, these I would say are all the structural as well as trends that have sort of kind of impacted start-ups. I can double click into more of this if you wish.

Rising formalisation in India

Roshan (00:13:48): Yeah. No, we'll definitely deep dive into some of these. Just a quick comment on what you said, we do something called a Startup Operator roundup on the weekends where we talk about all of the activity from the Indian start-up ecosystem over the week. And when we started out, we used to pretty much cover fundraisers and so on. What we realized, especially over the last six to nine months is that there is such an overlap with industrial policy as well , whether it's the PLI, whether it's the FAME subsidies or even simple stuff such as a redressal portal for social media platforms and so on and so forth which are all impacting start-ups in a pretty big way I would say, If not, at least in a very minimal way how to begin with.

So, yeah, it's a fantastic time in that sense, I wanna pick up on something Sajith said, which is the whole formalisation of the economy through identity / Aadhar and payments / UPI data, which he spoke about OCEN and so on it's an amazing development for us. Earlier when people asked you to formalise, there wasn't really an incentive it just meant that the tax officials would come barking up your spine, but now there's a real incentive for businesses to formalise whether it is access to credit or access to services, access to tech, and so on and so forth. Could you talk about how much of an impact this whole formalisation of the economy has had on start-ups per se?

Amal (00:15:17): So, the impact of formalisation or even the very efforts that have gone into it we can really put it into perspective when we look at multiple examples around this formalisation bit. So, we'll just talk about a few examples there. If you look at formalisation from the lens of taxes whether it's indirect or direct taxes, both of them, if you look at direct taxes, the number of income tax filers has gone up from 40 million to 60 million in four or five years. If you look at indirect taxes say GST, the number of firms which are filing GST was 6 million, six years ago, and it's 14 million now and, out of these 14 million roughly 12.5 Million of them are smaller businesses, which have mostly come on-board in the last few years as they've understood the benefits of GST now they can operate in more states than just their home state because they don't have to pay state-level taxes as much anymore. Or the logistical overheads are less. So, it really helps them understand the benefits of GST, which has helped them come into the taxbase and really helped them formalise as well. Another angle to look at it would be via the lens off social security, you've got various schemes, which has really helped people from even unorganised sectors come into the formalised economy. So, the Atal Pension Yojana scheme had half a million beneficiaries a few years ago, and the beneficiaries are up to 50 million now.

And the examples of formalisation are really widespread If you look at other India policy examples, Account Aggregator for example, it hit 4 million users recently. So, that's really helping ease credit for all these businesses. And if you look at the household or small manufacturing sector, kust the percentage of salaries as a percentage of overall GDP has decreased by around 20% in the last four, five years or so. So, various examples we've seen in the overall economy, which are really pointed towards the fact that the formalisation levels are increasing. How that's really helped is that either on a government level transfer more benefits directly to the people or even for the startups, basically them really understanding how big their customer base is, whether it's MSMEs, whether it's individuals, and then target them & strategise them accordingly think what exactly they can do and how much they can monetise. So, that's been the real benefit of formalisation here.

India’s moment

Roshan (00:17:58): Right. So, Sajith all of this can make one really optimistic and being in VC and start-ups, we all generally tend to be optimistic, I suppose. But you have this, keeping it real slide I'd to call it which is slide 36 where you talk about, previous covers in Fortune, Business Week, Economist and so on where there are these similar predictions that, this is India's moment, India opens for business, rise of India, India is gonna outpace China, and so on and so forth. So we've heard it all before, but somehow someway, this time seems different. Why is it different? Do you think this is India's moment? What are some things that we should guard against?

Sajith (00:18:42): Well you never know how Geopolitics and tech trends and many other factors play out. But I do think this is a unique moment in India's history and context because a set of forces are aligning and it's not all internal to India .After a long, long era of globalization, open borders etc., we are seeing slowly, walls coming up and Geopolitical fissures, including the Cold War that's emerging between China, and to an extent Russia on one side and the West on the other, and their desire to pull India into its orbit means that friendshoring is a very powerful trend influencing India's growth in exports, even though the last quarter hasn't been exactly the way it should be, or even the rise of manufacturing, etcetera. So, I would say that is one powerful factor.

Second is the policies that have emerged over the last, I would say decade, but accentuated over the last six, seven years which as Amal referred to, and he shared stats which kind of show how the economy has been moving in the direction of greater formalisation. So, that matters as well because what it means is it now it makes people more complicit in the development of India. And you rightly said earlier, the incentive to be part of the formalised economy was only that you would get hit for taxes. But now people have Direct Benefit Transfer, and it is huge those numbers. Look at UPI, for example the stats are mind boggling. I won't go deeper into it. So, allied to the Geopolitics, the China+1 friendshoring, then second is the digital stack, essentially our public digital goods.

And we have very evolved public digital goods, on par, if not better than many countries in the west. The public digital goods are digital, they can't be seen. But the physical infra, when you look at the road construction, for example, that's been at a super pace, all of that is going to kind of impact in I would say the friction reduction. So, both public digital goods and then the infrastructure, the highway, all of that is going to mean that the friction that historically existed, which is why logistics, for example, is as much as 13 or 14% of the Indian GDP is very high compared to the US, that will go down. Third is you mentioned FAME, you mentioned PLI again I won't go deeper into it, but for the first time, there is a muscular industrial policy, centred around manufacturing and the desire to improve it. Certain things of course need to improve like our industry is heavily overweighted towards higher-end skills and not as labour rich as, for example, like a Bangladeshi or Vietnamese economy is. So, certainly some things need to change, but the direction is right. So, actually the coming together of all of this allied to a very vibrant start-up ecosystem, and in India, the start-up ecosystem punches well above its weight, It's a non insignificant part of the Indian economy. So, all of this is why I would say that it is India's moment and it is not misplaced to say that the three covers that I shared was more to set the context that we've been here before, there have been some false starts, and look, it happens but this time it's for the real.

The Indian Venture and Startup Ecosystem in 2022

Roshan (00:22:27): Yeah. One of the things that really surprised me was your comparison of mutual fund inflows versus VC capital. And I wouldn't, even being in the Indian start-up have really guessed that the VC funds had outstripped the mutual fund inflows in ‘21. Even given the record inflows and everything, it seemed I wouldn't have even considered that given, what has happened with rising interest rates and 2022 was sort of a pale shadow compared to 2021, the funding dropped from $40 billion to around $25 billion or so where are we in 2023? Because if you look at the global VC funding, we are still a tiny percentage of that for what is the second or third largest Indian start-up ecosystem in the world, where are we at this point of time?

Sajith (00:23:16): We are about 5% of global VC funding. I would say 2023 has been a lot muted, we are only three months into it, but roughly we are tracking at, if you look at the VC deployment ARR, that will be about $12-13 billion. We are doing about a billion a month, certainly less than what we are doing last year. But overall, it is in line with what is happening globally as well, so nothing too far off. And a lot of the developments over the last couple of days certainly mean that it's hard to predict because you don't know how the market will evolve. Will we go into a deep freeze funk for a few months? Don't know. So, I would say that 2023 is likely to be more cautious, especially keeping in mind what's happened with SVB (Silicon Valley Bank) in the last couple of days. I would to kind of just double click into one aspect.

I would say that the slowdown has been led primarily by the (venture) growth side. Growth is a really bigger segment of Indian venture; Seed as such, is barely 10% of the market. For example, if you look at last year it was a $24 - 25 billion VC deployment market and growth was $16bn, two-thirds of it; seed was not even 10%, barely 10% I would say. This is really one factor to keep in mind, and Growth ain't gonna come back, I feel, in a hurry. So, I do feel that if you were to ask me to double click, I would say that I'm always optimistic. You have to be optimistic. You have to bet on the ingenuity of the Indian entrepreneur and fortunate that we are on the seed side, but I would say that I would be cautiously optimistic and I would say I would put the emphasis on the word cautious a little bit more than the word optimist. But yeah, I hope I've been able to kind of explain that to you.

Roshan (00:25:17): I think you put it, well everyone is in this sort of a wait and watch mode, there's just so much of ambiguity now with the macro situation especially. But I do also believe that given that, 15-20 of the VC funds have raised new funds themselves, including Blume as well, congratulations on that.

Sajith (00:25:35): Thank you.

The evolution of the Indian startup entrepreneur

Roshan (00:25:36): So, it's just a matter of time when this capital has to be deployed, it definitely has to be deployed within the next 2-3 years so, we'll wait and watch when the dam sort of breaks loose and this money comes into the market. When I compare the Indian entrepreneurs of today, with folks who came in maybe 10-15-20 years back, I personally feel having seen these folks for the firsthand, these guys are a lot more resilient, a lot more innovative, of course there are the excesses and what not for sure, we can hark back to those days and say that people were a lot more conservative that a dollar went a longer way and all of those things. But there's no taking away from the fact that, these folks are a lot smarter, of course building on all of their predecessors and so on. You obviously, talk to, dozens of entrepreneurs on an everyday basis. What do you notice that is unique with the Indian entrepreneurs today?

Sajith (00:26:33): You said it well, there has been an evolution in the Indian entrepreneur, I dare say the Indian start-up entrepreneur, especially if we look at the evolution of Indian start-up ecosystem, we can sort of look at it as a series of waves. I would say very early on we started with service led start-ups like Mastek and Kale Consultants; these were all venture funded initially, even Mindtree. Those entrepreneurs were not very different from their peers in the industrial economy, they're not very different. But gradually, with the rise of Naukri, Red Bus, the Indian start-up entrepreneur emerged, very conservative, as you said, because the Indian venture ecosystem was not very large, there was still an emphasis on unit economics, cashflow, which is never wrong and given the capital starved nature, given that there were not too many operators, they had to be uniquely focused on profitability much more.

Roshan (00:27:33): The best example here that I often sight is that the hottest Indian start-up in 2012 or 13, I'm not sure, which is Red Bus sold for about $120 million.

Sajith (00:27:44): True. It was a very I would say, un-evolved is not the word, but it was a nascent market.

Roshan (00:27:50): Yeah, exactly. No, it's something that, you wouldn't even conceive of today.

Sajith (00:27:53): Absolutely. You can't imagine all of that value being created (for $120m exit value). Today, it'll be nothing less than a billion right? Full credit to the founders of that era. As the era evolved came all of the different Bansals but the FlipKart Bansals should take full credit for pushing the Indian startup entrepreneur forward as kind of a hero symbol. And I would say there you saw for the first time the bold, fearless entrepreneur who was not afraid to take risks, not worried about profitability and we began to see the rise of the Indian venture kind of ecosystem, Tigers of the world came in, foreign guys came in. So, all of that helped. And so we sort of became bolder, bigger, better, of course and over the last two to three years, I would say a few things have happened. One we have the 2nd time founder coming back, like Mukesh Bansal is a good example & there are many more.

Roshan (00:28:53): Or even the operators or senior operators & the leadership folks as well.

Sajith (00:28:56): Well put, I was just going to come to that, as much as the founders, for there are only a certain number of founders, but there are a lot more operators. And what we are really seeing is for example, Sujeet of Udaan is a great example, he was not a founder of Flipkart but he was a super operator. So, they are coming in and they, they're starting up, or even, for example, there's this classic profile, IIT or BITS then two years in some consulting firm Bain, BCG, McKinsey, and then 2-3 years in one of the hot unicorn-soonicorn like a Meesho or UrbanCo as some kind of a product manager or so then starting up. So, they're not exactly very elite operators yet but they're young, they're energetic, they're vibrant, they've seen growth, and they're able to be kind of, I would think of them as fluent or semifluent founders.

They're fluent with the ways of the trade. They've read all the usual stuff like Paul Graham, they've learnt from YC Startup School, and they're also learning from, blogs and posts and communities like SaaSBoomi, D2C Insider etc. And what we are really seeing is a very bold, well-versed with how a start-up growth model works, fluent in how venture works kind of founder emerge. And that is really, I would say a clear distinction between the founders of that era and this, these guys are more clued and they're able to take bigger aggressive bets. And this is something I've spoken to many VCs abroad as well. They don't see much of a difference between the elite Indian founder and the elite founder in the Valley; there's absolutely no difference. They're on par. Of course, as you go down the percentiles, there is some difference. And this is how the Indian entrepreneur start-up entrepreneurs evolved

Amal (00:30:41): I am just adding something, I think it's been implicit in the answer so far, but especially calling it out, it's also on a softer angle, it's also been the mentorship that new age founders are getting from the folks who started backup in 2015-16, who are either angels in the start-ups or were just guiding them throughout because these people have been through that turbulent phase then. And like for all the founders who are going through this turbulent growth phase now, it's that sort of mentorship that angle really helps them as well.

Cloud factories and parallel manufacturing

Roshan (00:31:08): I couldn't agree more. I think it's the sign of a maturing ecosystem and people kind of come together, there is a greater sense of community, I would say there's a greater sort of an institutional knowledge today. And I remember, 10 years back, you had to sort of look to the West in terms of very operational stuff that you wanted to do, whether it's hiring an engineering leader or figuring out how to scale your operations or whatever it is. But today, there are Indian playbooks for many of these things and that's amazing. So, that coupled with the fact that these guys are just absolutely unafraid to fail. The downside risks have really gone down over the years, which is a very, very good thing.

It's a huge net positive, I would say one of the things that, also piqued my interest in the slide deck, in the report is the whole aggregated manufacturing space that you talk about. And I put it as vertical marketplaces. if you were to think of the marketplaces today, they not just marketplaces in the classical sense of the term where they're bringing demand and supply together, they're also layering software, they're layering services, they're layering financing in a lot of places and the examples you talk about are Zetwerk and Fashinza, could you talk about, how that is sort of building new ecosystems and changing the game.

Amal (00:32:31): So, I'll talk about what someone at Zetwerk or a Fashinza is doing, and then I also probably talk about the broader scale implications of it. So, if you just consider the overall manufacturing set-up in India we've got more than 200K factories, more than 90% of them have less than 500 employees & a lot of them even less than 30 employees. So, most of these are small scale factories. The challenges with these factories is that they don't get as much orders to fulfill, so a lot of their capacity goes almost wasted, doesn't really live up to the potential that they can produce. What someone like Zetwerk did, for example they started out of course with just getting them orders, help them improve their capacity and their output.

But the real angle of innovation was getting a huge order from someone. If they wanted, for example, 10 units of something produced, they will not just give all those 10 orders to one manufacturer. Instead, they came up with this idea of parallel manufacturing, where they would distribute that order across maybe 10 factories or five factories, one to two each. What it really helped them do was one, really reduce the risk of delay of timelines even if one of those units is now faltering. And with that reduced timeline delay, they could take better control of quality as well.

They really used the tech to their advantage in terms of how to outsource all of this and everything. And the larger story that really tells is that now in India, you've not just got founders who are just building startups, which are copycats of something that was built in the global audience, but people are coming up with their own original ideas. And that's been the real implication, and it all ties back to what we've been talking about in terms of the new age entrepreneur being more fearless. They're becoming more creative in terms of the ideas they come up with, the problem statements they want to tackle. And I think this is a great example of it and also the vertical marketplace thing that you refer to is absolutely true.

It's not just really matching demand and supply. Zetwerk originally started off with just selling their software, but then realized that they could use their software much better than their customers could because of all the organizational complexities and all that existed in the customers So, instead they used the software to their advantage and really provided a full-stack service to all of their customers. So, it's not just giving them orders, but it's everything from designing to procurement of raw materials to sending the order out to them Including quality checks and everything, financing too. So, it's really, that sort of an innovative approach to the business model as well as the ideas that's really come out in this manufacturing space which has been really exciting and the level of support that's gone out to this space, roughly $900 million or so of funding have has gone into this space in the last few years So, that's immense and especially considering where India was from a manufacturing purview. And it's really helped also put these start-ups and India's manufacturing also onto the global map.

Roshan (00:35:49): Yeah. What will be interesting is if they start aggregating some of the demand overseas. Yeah. And then funneling that to the Indian manufacturing sector that would be amazing. We can streamline everything and, Indian manufacturing in general, we are waiting for that Foxconn's plant to come up, perhaps another TSMC or something else, so that we can also build that knowledge base and that institutional knowledge. In order for us to be able to produce some of this stuff, we don't have that 3-4 decade leap that China has ahead of us. So, stuff like this will really help.

Startups, gigworkers and employment

Roshan (00:36:33): When we talk about the number of employees that start-ups have, the numbers I've seen range from 2-6 lakh, etc. But what makes it a lot more impactful is the second, third order impact of these. Because how you define these workers itself might vary because those folks on the Zetwerk platform may not necessarily constitute Zetwerk’s employees, but you could definitely consider themselves partners for instance, or however you want to put it as consultants, partners so on and so forth. Similarly, this whole gig economy as such where people can log on, logoff an app and work part-time, full-time as per their sort of needs. So, how has, tech and start-ups created this new class of workers in your opinion?

Amal (00:37:17): I'll try and break down the question. One when you say new class of workers, you've got white-collar jobs and you also got gig jobs, and then also what's been the impact of, creation of these jobs. I think starting with the first part, again, going into some numbers here, so if you look at India's overall job sector, they've got roughly, 35 million white-collar jobs in India now. What really happens is each direct job that's created in the start-up ecosystem, it also helps create roughly three jobs or so in the overall wider ecosystem. So, someone in the finance space, for example, or someone in the admin space or in the creative space. So, directly indirectly, start-ups have now been responsible for roughly 3.5 million jobs, white-collar jobs. That's actually 10% of the overall job sector.

That's a huge impact, considering the number of years that start-ups have been in existence or even though overall size of it versus overall India's macro-economic size. Secondly, more specifically gig workers, right now India has got upwards of 4 million platform-led gig workers. When I mean platform, we mean workers who are partners of Swiggy or an Urban Company or an Uber. So, again roughly 4 million people who have now become a part of, as we call this formalised economy. Again 4 million is a huge number. So, just this impact is something that, I personally especially love when it comes to what we can do with venture capital in the start-up ecosystem. So, that's how I look at it.

Consumer Compounders and not growing ahead of the market

Roshan (00:39:03): Fantastic. Yeah, it's actually very fascinating. The true impact of start-ups even on the labor force, it's something that maybe, there needs to be an academic study of that, in terms of how far it really goes. Sajith - last year or the year before Indian start-ups learnt about this quarter se quarter tak mentality right. A bunch of these folks listed on the public markets and then had a battering. And that obviously has spooked a bunch of other start-ups as well, and they're kind of playing it safe at this point of time. And in the report you talk about the OGs, about the Regulatory Rajas, the Consumer Compounders and BIGwigs and what start-ups can learn from all of these folks to truly build a large and sustainable business in India. I found that really fascinating. Could you talk a little bit about that?

Sajith (00:39:55): Absolutely. What we did was we looked at all of the big wealth creators on the public market; we said, let's look at all of the companies who are about ₹200,000cr+ ($25b+) market cap and when we looked at it, we saw that they fell very neatly into three buckets. And of course for the names we, indulged our creativity.

Roshan (00:40:20): Very creative names.

Sajith (00:40:21): Yeah, thank you for that. Clearly you know about the Infosyses of the world, which really are built in India for the globe, and you know about the HDFCs and the Asian Paints, which are really a bet on the Indian consumer’s rising power. But it was very interesting to look at, for example Reliance, which is really the canonical example, but there's also Adani, L&T, which have the ability to kind of understand what is needed by the Indian government in terms of infrastructure creation. Then take those risks much like Indian start-up founders take those risks. Some of those policies are still evolving and some of the payouts because a lot of them have state payouts, or the state has to, for example, support in other ways like land, for example. But they're able to take those risks, they understand how the government works and use the power that they have with the government.

And of course it's a slight faustian bargain in that sense, and they're able to do what is not easily done. So, India's always lacked a little bit for state capacity, though we can actually see the muscle developing, whether it's Covid vaccine’s 2 billion doses done, whether it's Direct Benefit Transfer muscle that we are able to kind of flex or even for example, the highway construction pace that we are able to do. And parallel to that, for example, the capacity that the private sector is showing in terms of infrastructure creation, whether it's the Mundra port or the Jamnagar refinery or etcetera.

Roshan (00:41:48): Defence as well.

Sajith (00:42:03): Yeah. Defence as well. So, these are all examples of, capacity muscle being developed. So, that's, really what I felt. So, what could start-ups learn? It is tough for start-ups to operate in the Regulatory Raja field, but really on the Consumer Compounders, the big learning, and you spoke about the quarter se quarter tak and the battering some of the listed startups have received in the public markets; one interesting learning and this is from looking at, we actually looked at some of the most successful ones and one insight, and it was well expressed by Ireena Vittal that the best Indian consumer compounders have always paid heed to the nature of the Indian market, which is that it's a smaller consumption market than you expect. A lot of purchasing power is held in the top few, the power law as we call it, and the best Consumer Compounders pay a lot of heed to unit economics, and they ensure that the growth is in line with the growth in purchasing power of the Indian consumer. They never grow ahead of the market. And a lot of the Indian start-ups have not exactly paid heed to this, perhaps on the back of the rich reserves that they've accumulated, thanks to funding. They have invested, I feel sometimes, over-invested in the Indian market because the purchasing power is a little smaller for the money that they're putting in. So, for me, the big learning when looked at the consumer compounder part especially has been to grow with the market.

Subscriptions, monetisation in Media

Roshan (00:43:30): I think the defense is a developing sector, if you look at some of these drone start-ups, we've had a few of them on the podcast as well. Ideaforge, Aarav Unmanned Systems and the likes, these are proper Deep Tech guys getting government of India contracts. And in lot of cases these guys have IIT profs who are directly mentoring, working with these folks as well. And the stuff that they're producing is truly world class. So, that, could be interesting the way it pans out in the future.

When we talk about India1, India2, India3, one of the things that truly has, left me dumbfounded at least, was the rise of this whole subscription economy, especially in sectors that, are deemed non-essential, completely discretionary, whether it is media, entertainment and so on, not even edtech. And here you have a bunch of these folks like Kuku FM, Pratilipi, Stage, some of the gaming start-ups as well who have managed to get the Rs. 5-10-50-100 sachet kind purchases from this India2, India3 demographic that we talk about. You want to talk about that Amal?

Amal (00:44:40): Yeah, I'd like to think that those business models which are more oriented towards subscription, they've been born out of constraints pretty much; when you look at how unsatisfying ad revenues have been so far. So, we also put this Tweet in the report, where we said India can be looked at as a DAU / MAU farm and the canonical example, is like a Daily Hunt with 114-115 million DAUs and their ARR is $175 million so, that's roughly $1.50 per consumer. If you compare that with Snapchat, it's roughly 1/8th , 1/9th of what we see there. So, those are, almost unsustainable from a unit economics perspective. And as a result, what we've seen is a new wave of these start-ups who are not really reliant on ad revenues as much, who instead going the subscription view, where again, the bet they've taken is that if they provide good content on a continuous basis, consumers will pay for this content.

As you said, Kuku FM it's a great example, upwards of 2.5 million subscribers now, Stage it's growing extremely well, 225k plus subscribers now. So, good developments there and also the example that you referred gaming players especially have also really tapped into this behavior. I think in my mind what really helps them on a consumer psychology level is that people typically like being right, they want to be proven right. So, which is why someone like Dream 11 or someone even like those rummy, poker games that you have, the number of paying users in gaming is, upwards of hundred million, that's absolutely huge, it's second to e-commerce on paying consumer level.

Amal (00:46:28): Also, another great example is ShareChat; a year ago FY 21 or so, out of the ₹80cr ($10m) or so of the revenue that they had, most of it was coming from ads and roughly around 3-3.5CR ($400-450k) was something that they've from the feature that they have around virtual gifting in chat rooms and everything. The revenue grew to ₹ 350cr ($45m) this year and the 3 or so cr of gifting or gaming revenue that grew up to 120CR ($15m), it's almost third of their revenues now. So, start-ups have tapped well into that behavior. So, overall the story is just that they're relying less and less on ad revenues and they're growing or finding out other ways of monetizing this consumer base. Just as we referred to earlier, converting these users into consumers, perhaps ads is not the best way, subscription or gamification or just gaming is a better way and a more innovative way.

Roshan (00:47:19): No, the money is definitely there. So, I always used to disagree with the fact that India2, India3 doesn't pay as much I think we haven't really figured out the value…

Amal (00:47:28): ..of how to get them to pay,,,

Roshan (00:47:29): How to get them to pay, exactly. Because if you look at weddings for example, they're as big if not bigger in rural India or outside of the cities and metros than you would find within So, it's about innovative business models. It's about true proper value creation aligned to, what they would want, I suppose and yeah, we are yet to see the full picture on that front.

Sajith (00:47:51): I'd love to come in here and talk about Dream 11; we spoke about innovative models. I remember this conversation that Harsh Jain had with some of our founders and we were listening in and he spoke about how you have to rethink the pricing and not just the pricing, rethink the business model for lower tier consumers. He said the challenge with India2 is not that they can't spend as much as you do, but the way they spend is a little different. So he came up with a CavinKare inspired sachet for consumertech with a distinct pricing for that context. So, he spoke about how, if you're charging ₹1,000 in, let's say India1 you can't charge ₹1,000 per month in India2 perhaps you need to lower it a little bit, but even if you're not lowering it, you should split it into different packets, say ₹20-30 a day.

The India2 user has the ability to pay lower amounts more frequently, perhaps even for 30 days, and that is how you evolve the model. So, you can't take what works in India 1 because they have a lot more ability to buy full packs or pay in advance, whereas the India2 user is obviously cash-starved so, they want to see sachet pricing. So, this is one way in which the start-ups that cater to India2 have thought about it. And they've realized that micropayments have the ability to lure more India 2 users in. So, which is why a lot of the payments, I think Stage is a great example. Netflix is lowest in the world in India, the most basic is about ₹150 per month, Stage is ₹400 a year. So, that is a way you think about pricing.

Amal (00:49:37): Also, this micro sachet is not just visible in consumer apps, but also in FinTech, Jar is again a great example of where we've seen this, where their model really revolves around this micro sachet ticket sizes that they get from the consumers, really helping them expand as the consumer base as well. Yeah.

India SaaS Playbooks

Roshan (00:49:53): Yeah. I think there needs to be innovation on pricing as well as value both, to really attack that market. One of the things for very obvious reasons that I'm very optimistic about is SAAS. I work in SAAS and I do believe it's the moment of reckoning for us in that, I've often made this point on the podcast that, for 3-4 decades we've been building all sorts of software in the backend, whether it is, supply chain, accounting whatever else, kind of software. And over the last 15 years, we've figured out how to productize it, and we are in the throes of figuring out how to really sell it to the world. And, here again, on the SAAS front, you talk about the big phenomena, which is build in India, sell globally. And then you have the SAAStra or the Bharat SAAS phenomena which is building software for Indian businesses. Something that, again, I never thought that I would hear. There were a few things as challenging as selling software or any intangible service to an Indian business. But people are building that. So, on the SAAS front Sajith, what do you think is happening?

Sajith (00:50:59): Yeah, SAAS has really been a big success story for India and historically SAAS or what we think of SAAS was really born in Chennai, I would say in the early 2000s to mid 2000s through Zoho then FreshWorks in early part of last decade to whether it's Kissflow or ChargeBee etcetera. They pioneered this model that we know of as using content-led inbound motion, supported by inside sales, served out of India and built a phenomenal franchise that is really SAAS as we know it. There are variants, there is now an enterprise motion because these names that I mentioned earlier, they all historically started with, and largely so SMBs, some of them have moved into enterprises naturally, but there are a lot of Indian start-ups, like Druva for example, which is natively-enterprise focused.

Then there is the Postmans and LambdaTests of the world with their PLG motion. Okay? What we are seeing is in the BIG (Build in India for Globe) motion now, BIG itself has moved from a single motion towards three motions. Then we have the opposite of the BIG which is Build in India for India. So, Vymo, where you work, is a great example of that, where you started with India and now you're looking abroad. That said, many Indian start-ups have not been as successful as Vymo is in prising open for the Indian market. Tally is an example with 90% software piracy, I believe, at one stage. And if you look at, for example, the Khatabooks of the world, they've not really been able to sell to Indian SMBs. So, I think they've evolved a model whereby they give SAAS at very throwaway prices or virtually free, and try and monetise through something else.

Two examples we could look at; Khatabook is an example of giving SAAS virtually free and seeing if we can monetize through FinTech lending because you get a lot of data, etcetera. ClassPlus in our portfolio has looked at monetising through marketplaces; they do sell SAAS, not free, they do price it, but it's not very expensive. It's affordable at ₹12k or so. But they take a small cut to the marketplace that they enable. So, this is what we call SaaSTra, which is SaaS + transaction, which is one way to survive in SAAS in India if the customer is not paying the full price. A related variant is what Shiprocket and Zetwerk practiced where they started with SAAS, and then realised that, as Amal mentioned earlier, Zetwerk's genius was they recognised that they're the best users of their software, and they realised that rather than focus on SAAS or even SaaSTra, they said just focus on the Tra part of it.

Just give the SAAS virtually free away or just drop the SAAS. And that's a powerful thing as well, okay? Because in India, somehow we hate paying for products, but we love paying for services, we see the person, etcetera. So, that worked. It's interesting that over the last few years SAAS revenues in India have doubled. If we look at SaaS ARR it would be $5-6 billion in 2019. Now it's about 12-13, and typically about 75% is BIG (Build in India for the Globe) and about 25% is domestic Indian revenues. And the domestic part of it has been growing, the percentage has been growing. So, those are really the parallel SAAS playbooks that have emerged and BIG, for example, started with one playbook, but now has three playbooks, and the SAAStra model itself has emerged to kind of cater to the Indian market, now has one variant, which is just a Tra model, I would say. So, this is sort of the story of SaaS in India.

Roshan (00:54:26): Yeah, since you mentioned Vymo, we kind of fit somewhere slightly adjacent into this because in the sense that we are born out of India, we served India, and then we moved to Asia, and then the US and if you pulled our founders today, would we do that same journey? I think no we would be born in the US perhaps. The other thing is the fact that we serve large enterprises as well, and post Covid, what we've realized is that even a large enterprise with its high touch, high engagement sale even there people are sort of receptive now (to a remote sale). People are questioning all of their Salesforces, SAPs, Oracle deployments, and really thinking about, if there is something that can do the job more efficiently, cheaper, faster, in every way.

And that kind of gives us scope for the Vymo like solutions, which are revisiting the conventional software in, that sense, and really asking the ROI question. Absolutely. And bunch of start-ups that I can think of who are doing something similar, Icertis, you mentioned Druva, for example. And the ACVs are only gonna get larger from what I've seen, even the Darwinboxes of the world, they perhaps started at $10-15 k, and then today they're probably $30-40 k. WebEngage is another example they are about $50K or $50-60K now at this point. So, on that front there's so much.

Sajith (00:55:46): I'd love to double click into what you mentioned about the ACV part and I think the Indian entrepreneur whether it's even FreshWorks, they started out catering to SMBs, and have slowly got into the enterprises of the world, slowly but steadily. And this is one part we didn't double click into, but actually I would love to do a chart where by if you could get the data, to look at about 10 Indian companies in say 2010 or ‘12 and what were their ACVs and of course adjusted for purchasing power, et cetera, look at what the ACVs are today. And I would say it would be, you're absolutely right , there would be at least a 3, 4, 5 x difference.

Roshan (00:56:24): For sure. So, when I joined Vymo in 2017, our ACVs were around $50K; today we're approaching the $500k mark. And, US hasn't even matured for us, Japan hasn't even matured for us, we're still in the 1 to N journey in these markets. And so, you can imagine, how much more the growth could be potentially on the ACV front. So, very interesting stuff and, when I see the entrepreneurs coming into SaaS as well , these are folks who are not the, typical out of college grad start-up types, these are folks who've spent, 10 or 15 years in the industry. They know the domain very well and they find a technology partner or co-founder to sort of build this new vision.

Sajith (00:57:08): Just to double click into one part, which is the SAAS corridor that exists, and SAAS especially, is the most evolved part of the start-up ecosystem in India. So, I like to joke that SAAS is the physics of the venture ecosystem, venture start-up world, because, it is very structured in many ways. And one they benefit from the Bangalore to Bay Area corridor, which exists. There are firms, for example Blume itself has a partner in the Bay Area, that is Sanjay Nath, Lightspeed has one. Nexus, for example, was born as a Bangalore and Bay Area firm, they started out like that. There is also greater collaboration with US firms in the Bay Area, which look at SaaS and many of them have Indian partners as well, and so this is one big reason as well. The learning is great and sort of the playbook that is emerged now and there's a lot of collaboration between founders. They ask each other, jow are you cracking your visa to who are you using as your law firm? Or what salaries are you giving? Who are you using? etc., so, a lot of the tribal knowledge is getting shared. And that's helping SAAS founders and the growth of SAAS as well.

Amal (00:58:23): We call it the B2B model, the Bangalore to Bay Area model. Yeah. I think that especially what we see in B2B software, SaaS space hopefully we'll see that on the B2C front at some point of time, maybe in the next five, 10 years. But it's definitely on the B2B side of things , there's so much of a cross pollination of ideas. People have a precedence for, how to hire, how to set up these functions and so on and so forth.

Sajith (00:58:50): They are established standard playbooks now.

Deep Tech and venture funding

Roshan (00:58:53): Alright last few questions before we wind up. Oftentimes, when I talk about VC and start-ups and so on, I get this question, which is, when is VC money gonna find its way into Deep-Tech, into science start-ups and so on and so forth. But we are starting to see the early signs of that, you saw a bunch of these space start-ups, for example, raise a bunch of cash, drone I mentioned. I haven't really heard too much on the biology and core science aspects of it, but I do feel that it's gravitating towards that. Like we see in the valley as well, a whole bunch of start-ups working on nootropics and all of that stuff. Yeah! So, Sajith do you see any tangible movement towards that?

Sajith (00:59:37): I do see, and the next Indus Valley report should take a closer look at Deep-Tech for sure. And Climate-tech, we made a small beginning this time and certainly feel that on all of the sectors that you mentioned, barring, say biology we've seen a distinct movement in that direction. Almost every VC fund has a stake in a space-tech start-up, we have in Pixxel, somebody else has another, etcetera. So, Space-tech for example, had its year this year. This is only the tip of the iceberg. We would like to see more companies in drone for example. Slowly we'll start seeing more. Defense is one area they have started working together and unlikely there'll be any big consumer plays, but there might be some interesting stuff happening for example, medical use, all of that will happen. I would say biology is still some time away, and perhaps we'll start seeing some signs of that in the next year or year after that. There is certainly interest in the Deep-Tech space, like materials is one area where there's a lot happening, look at Log9 for example.

Roshan (01:00:39): Renewables.

Sajith (01:00:41): Renewables, I would say has been more of an infra play, and I haven't looked specifically at Deep Tech as an investor; it's not an area that I look at within Blume. But Deep Tech is something we would want to look at more deeply (next year’s Indus Valley Report). I would say one of the challenges in Deep-Tech, and I'll be honest about it, has been that unlike in the traditional venture where the time taken for product is a certain finite thing like SAAS, whatever software you wanna build, end of the day you get 5, 6, 7, sometimes more engineers into a room and give them the problem statement, they will come out two, three months later with an MVP that you can throw at the market. But Deep Tech is not like that; it needs patient capital; venture, now I wouldn't say it's impatient capital, but it's not as patient as what Deep Tech needs.

Historically, we've not had a flourishing relationship between… I would say, for example, look how the internet came in the US? The military, government invested in it, and that led to the private sector building on top of it. That hasn't happened in India yet. The second is that larger Indian corporates don't spend as much into R&D as they should. So, all of this means that the product side of it needs a lot more evolving or development before it can be commercialized. And that has been one challenge, but it is getting sorted out, with all things slowly and steadily growing, and the Indian start-up ecosystem is chipping at it. We should see a lot more in the space, drone, material science spaces, in the Deep-Tech field in the next few years. Biology possibly will come later.

Amal (01:02:26): I think even developments in biology will be more Agri-led. Like you've had Absolute, for example you'll see more R&D plays coming in from that direction. But otherwise, as Sajith said, we're still a few years away, I would love to see someone like a Colossal coming up in India as well, just reviving extinct animals. But we're still a few years away from that. I think Deep Tech now is geared towards solving very crucial problems in India. And that's where you'll see the first front of innovation coming in. And others, we can just wait and watch.

Roshan (01:02:59): I think we have to figure a way to collapse those iteration cycles, that is key. And if you look at what's happened on the space front, the few things that have made all the difference is ISRO working very actively with the start-ups as well through the Indian Space Association and so on, sharing their resources, facilities and so on. And, the rise of 3D printing, for example being able to print all of this high precision instruments and machines and so on. So, that has made the difference. Maybe, we're looking at perhaps in other fields as well, if there is an equivalent of that we should see some more money coming in, some more VC action for sure.?

Amal (01:03:41): Yeah, absolutely. And while you need to compress the iteration cycle, I think in something like Deep Tech it's, at least now, it seems very difficult to do that because it, is a lot of experimentation and just getting those results back and everything. That's where collaboration with industry, with conventional players also makes it pretty much necessary to the roots of Deep Tech. And we are seeing that already, so those are good signs, but you're right, ideally you need to find a way to reduce all those cycles, because it's not just the seed investors, but it's also the growth investors, all of their capital, which needs to come in to really help these Deep Tech players become bigger, the conventional cycles don't really hold as well for them. So, it's got to change at some point, slowly, steadily, but hopefully changes.

Roshan (01:04:30): With that, we come to the end of a rather long, but very fascinating conversation. folks, if you haven't checked out the Indus Valley report it is at bit.ly/indusvalleyreport2023. Thank you, Sajith, thank you Amal for being on the podcast. This was an amazing conversation.

Sajith (01:04:49): It was a pleasure. Thank you for having us, Roshan.

Amal (01:04:52): Thanks everyone, and see you on another episode.