A look back at 2019

Rajinder: Hi, and welcome to Matrix Moments. Happy New Year and wishing everyone a fantastic 2020. I have with me Avnish, Tarun, and Vikram, managing directors at Matrix. And my name is Rajinder.

I want to do a quick look back to 2019 and capture some of the macro themes from the year. In some ways it’s been a record year for the Indian VC industry and a very busy year for Matrix. How would you characterize the year for us and for the market?

If I look back I see deal pace has gone up. We have done a record 20 deals in the year. We have seen the emergence of the famous founder archetype. People who have been there, built successful companies and starting up for a second time or a third time. We have seen examples of companies scaling up to even become unicorns within two years; some cases within a year. And we have seen a lot of activity from large global investors, domestic investors. What has 2019 been like for the firm and for the market in your view?

Vikram: 2019 has been an exciting year for us. It’s probably been our biggest year in terms of number of deals done, and we have done over 20 deals. But I would say that’s a very small part of the overall story for the ecosystem. I think it has been a very busy year in a very good way. Firstly, we have probably backed the most diverse set of founders in 2019. So whether it is serial entrepreneurs, whether it is young founders, whether it’s people coming from FMCG background, people who have give pitches completely in Hindi. So, very diverse background, but also going after multiple sectors. So we have done investments in five in edtech, continued to do investments in fintech, continued to double down on e-commerce and especially social commerce, and travel and transport.

So it’s also been these founders who are going after multiple sectors. So, diverse founders, diverse sectors, which is why it has been super interesting. It’s also that we have seen the emergence in our portfolio and across the ecosystem of call it real companies with revenue of $50 to $100 million. Getting at most times real valuations and sometimes faulty valuations. And finally, I think exits have become more of a choice rather than you thinking where an exit is coming from. So, you are making tradeoffs on whether to sell when to sell once the company has actually matured and become bigger.

Tarun: I think the other thing that we should call about it is we have seen a lot of consumer brands DINVIBs (digitally native vertically integrated brands)as they are called. So, multiple new investments in that sector. We are just seeing overall as the market is deepening, we are able to see founders taking a thin slice out of that market and say, hey, this is the opportunity I am going to go after. Here is where I can build a large opportunity. And it’s early days for some of these companies, but as sort of GDP spend on these categories goes up, we do believe that there will be real companies that will come off it.

Avnish: And we have been the most aggressive also in terms of check sizes. So, Ola Electric is $50 million dollar investment. There is another investment coming up which hasn’t been announced, so we can’t talk about it. But, I think by the time this airs, it will be clear and that’s a $12.5 million. Country Delight, again we are doing our internal round there that will be 12.5 million. So, I would say that sometimes I worry whether that’s the right sizing of the check size. But as markets deepen and as opportunities become clearer, it feels right. And I would say this year you know that Vikram led an investment with Jiten in Amica which is known kind of as the largest seed that has happened.

So, I think we have been more aggressive. We think obviously it’s in line with the market, but we should recognize that there is an element of concept risk that one is taking. And obviously the hedge against that is that these founders are extremely experienced, they are off to the races with org building which a lot of the longer ones take a while to figure out. So, hopefully, all good on that front. But, I would say feel very good about the deal volume, seems to be in line with the depth of the market, but also the most aggressive we have ever been.

Rajinder: So, I mean going to pick up on the first theme on which Vikram spoke of which is just deal pace. That sounds like a lot for an early stage fund. And what’s your sense? Like what do you think is the right deal pace for a market like India? And should that change as the market deepens?

Vikram: So, honestly, we don’t define pace; actually, the founders and markets do. So as company creation is getting faster and faster, it’s up to us to actually keep pace with that company creation. And founders keep discovering new markets. So honestly, this year we have actually just kept pace with that. We are probably also being looking in much wider set of areas. And so we started looking much harder in edtech. Honestly, we were looking hard also in agritech and logistic tech. We could have even done more deal if we actually found investments in those areas. So it’s just that we have actually kept pace with the market.

So if we look at maybe the last three months of the year, the company creation hasn’t been as fast. So if that slows down, then it might end up being a slow year in 2020. So we are just keeping pace with the market. And also the fact that as tech starts penetrating more and more sectors, you start finding more tech-enabled opportunities in every sector.

That said, I think one of the things that we are very careful about is the team’s bandwidth because at the end of the day you can only make so many good decisions in a short period of time. So, that’s one. And the second thing that we care about the most is to make sure that we are available to founders when they need us and we are also able to create portfolio impact especially in early stage companies. So we probably have the largest team on the ground in the venture space if not the largest. So we are able to provide that coverage across the board to these portfolio companies.

So when we see that breaking both our freedom to make good decisions as well as the fact that we are not able to actually cover our portfolio that’s when I think we will really worrying. And there have been times when we are worried and we course correct pretty quickly.

Tarun: I think the other way to look at it is just as over a $300 million fund, we typically want to deploy over a three- to- four-year period. If I look at where we would like to end up, it’s somewhere between 50 to 75 investments in the fund. Medium check size of 3 to 5 million between seed and series A. Now as we are going early, you will start seeing us obviously make additional investments where we call it be loose at entry. But we are trying to make sure that we are taking enough risk while at the same time being capital efficient in terms of where we are allocating dollars in the companies at work.

Second is there are just opportunities that two or three years ago didn’t seem sort of practical in terms of large companies coming out: gaming. But, now we are seeing with the amount of with what’s happened with Jio, with data consumption, it feels like one can build a large company in gaming.

Take agri tech, hard to imagine two years ago, large number of people in the agri tech economy actually using mobile. We are starting to see a lot of that beginning to happen. Social commerce, WhatsApp penetration amongst both consumers and businesses both on the B2B and the B2C side has enabled sort of business models which till now didn’t seem real or at least didn’t seem well penetrated enough. And so, I think the idea to go early after these emerging themes. And just in terms of that I think the deal pace that we have done this year and hopefully what we do next year, seems to be in line with the opportunity.

Avnish: So let me ask you this, I know you have done a lot of this analysis prior. Let’s say between 10 – 11 and 16 – 17, how many large companies emerged every year? Or, an investment was made where the company ultimately became large?

Rajinder: Say probably if you just used a billion unicorn as a metric of large company, let’s call it somewhere in the range of about 12 unicorns.

Avnish: Total, over that period.

Tarun: One to two year.

Avnish: One to two year, right? And if you look out five years, that number is probably going to be 40 or 50. So we are probably at 3 to 4 a year. I mean therein lies the answer. So, if it was 1 to 2 and it’s going to 3 to 4, hopefully our hit rate goes up. I am not so sure. But, we did an analysis and we managed to catch a good company every 5 to 6 investments. So simply by that logic and we assume that the market has deepened, you should be making more investments.

There is inherent error rate in this business. And the more you try to become maybe more regimented, I actually believe the error rate goes up. And therefore part of it is you just say we don’t know. And we have to be more loose at entry, assuming the call that the market is deepening is correct.

Rajinder: I am going to connect something that each of the three of you said. So, one, you said more large company creation that’s coming through 1 to 2 before, 3 to 4 now. You said tech is now getting into sectors that hadn’t been penetrated as well before. You spoke of some sectors seeing just great company creation and tech penetrating into existing GDP. How do you all take this call on new ideas and new GDP and tech kind of capturing incremental GDP versus tech going after existing GDP and just making existing models more efficient?

Avnish: So we had spoken about it as our thesis for Fund III and there was a thought that for Fund III that’s going to be the way it is and which was that if you fundamentally look at GDP per capita, we are in the middle income country zone which is about 2000 to 3000 dollars per capita. That when it goes from 3 to 6 or 7 is the journey where a lot of consumption takes off.

So we took a call and we said at this stage the right strategy for Fund III to disrupt existing GDP digitally as opposed to incremental digital GDP. Now does that mean? Sounds like a mouthful. The former is more transaction businesses. Go after a spend that already exists. Ola is not giving you a new spend. You were travelling. It’s substituted as spend, so it has captured existing GDP digitally. Lot of the lending businesses are capturing existing borrowing digitally. However, if you look at DailyHunt in our portfolio, if you look at let’s say Dream11 which is outside our portfolio, these are capturing incremental digital GDP. This is new spend that is coming on to these platforms.

So the call was that at this stage disrupting existing GDP is going to be the right answer and we have to stick to it. But if you ask me, I think this trend is changing faster than we expected. And what may have been a Fund IV strategy, I think we need to think harder about even next year is that something we need to be more over indexed, thinking through examples like gaming companies. We are making an investment that’s not closed it, which is also going to be this. So I think that in our business the constant is change. And I think that’s something we need to keep in mind.

Vikram: Essentially you are saying you made a thesis and it’s wrong.

Avnish: You made the thesis.

Rajinder: No, but for founders who are listening to this, I think that’s very interesting because I guess people have been kind of coming up with ideas going after incremental GDP for a while, but it sounds like finally that opportunity is kind of coming alive. Is that kind of playing out into some of the investments that have been made in 2019 or the opportunities that we are beginning to see looking into pipeline for 2020?

Vikram: Absolutely. Like Avnish said, the two areas which are entertainment and overall gaming, you are seeing new time spent coming on whether it’s for gaming or whether it’s for entertainment; and new ways of monetizing, consumers paying for that entertainment or advertisers actually paying wherever the large platform exist, so that one clear trend that you are seeing.

And the other one which is sort of SMEs adopting tech. And if you look at 2019, it’s probably the emergence of the Indian SME which has started using WhatsApp for everything. Whether it is customer service or payments or marketing, they just use WhatsApp for everything. And you can find many future companies in that used case that SME is doing.

Now there’s always a question whether that SME is willing to pay because then that would be incremental GDP that’s getting created because it’s software that they are buying which they didn’t buy before or there are other monetization models. But, that would be one trend to watch out for in 2020.

Avnish: But if you look at OTT platforms, so I believe there is always some stimulus that comes into a market from outside which takes it to the next level and you generally find out after the fact. So obviously one was Jio that was clear to everybody. Data consumption went up. I think last year was the year of OTT. And all this I am assuming people know Netflix, Amazon, Hotstar so on and so forth, it’s a very deep adoption. It’s not a crème de la crème 1% adoption.

If you look at all the shows that are coming out, they went very deep into the market. All strata of society are watching. I think that’s a very big deal because to his point, A) You are consuming, but B) You are paying. Now some of the price points are not sustainable. But, I think it’s changing this whole incremental digital GDP. Obviously without Jio, it wouldn’t have happened, but it’s a very big deal.

Tarun: No, but it’s changing consumer behavior, right? For the first time we are starting to see – I mean millennials were always, okay, cut the cord, right? They didn’t want cable TV. Today you are seeing like just small masses are – shows like Mirzapur, number one show on Amazon Video, reality is it’s actually catering to the audience saying what does it take to bring that next 30 – 40 – 50 million people online, get them used to watching content on their devices and pay for it.

And so, I think we are starting while the price points today are low. Over time, the bet has to be that these people once they get hooked it, are going to be willing to pay more.

Avnish: And I think don’t forget that the more mass India becomes digitally, the more the onus remains on innovative business models. So I mean you are FMCG background, the sachets which were unique to India innovation, we have to do all of that in this in economy as it is becoming digital, have the sachet pricing, have all those innovations. You can’t get away from that. But the point is it seems like the time has come.

Vikram: And to that point on sachet pricing, before it wasn’t possible because the CAC was too large and because you had only 20 million people that you could address. But now you have 300 million people to address, the CACs have come down. And at least if you think about growth hacks thatare able to acquire consumers socially and the CACs aredown, therefore that sachet pricing is now possible.

Rajinder: It sounds like 2020 is looking and sounding really exciting. So, I am going to…

Avnish: Who said that now? I think we were talking about the first nine months of 2019.

Rajinder: But if I ask you like what are some of the challenges for a venture firm, it sounds like companies if they find product market fit can takeoff really really fast. Does that mean that deal velocity is just going to keep going up and companies that find that PMF are going to like start raising very very large rounds like they have begun to raise in 2019? And is that a challenge for the VCs out there?

Tarun: So I think the first nine months of 2019, it was a lot more board based. Pretty much anything that showed very early signs or green shoots of something working were getting funded. My view and I guess our collective view is 2020 is going to different. We are already seeing some version of correction that has happened. Companies that have raised and are well-capitalized would be sort of wise to use that capital well because our view is things have slowed down already. It’s not going to be as easy it was in the first nine months of 2019. That said, the reality is good companies get funded in any environment. Sometimes the best companies are created in those environments. And so for an early stage investor like us, 2020 seems like a more normal year hopefully. We will see how it plays out. But hopefully it should give us more time to spend with these companies, more time to see their trajectory, more time to diligence so and so forth.

From a late stage deal velocity perspective, do we expect it to be anything like what we have seen in ‘19? Unlikely. A lot of the funds that have come in have taken bets across sectors. I think they will want to wait and see how some of those play out before recommitting. At least that’s my view. I don’t know Avnish...

Avnish: I think the framework I think about it and you guys know this there is a 0 to 1 which is early PMF and there is 1 to 10 which is scalable PMF. And then there is the scalable profitable PMF which is 10 to infinite. Historically in India, I mean we have all been doing this 12 – 13 years and it’s been painful that to get early PMF would take time. To get scalable PMF - to see a hockey stick going maybe we saw that in Ola that also six – nine months into the investment. It wasn’t on day one. So that hockey stick we weren’t seeing. Nobody was seeing.

2019 was the first time that started showing up. I think people got so excited by that, that they forgot whether there is a scalable profitable PMF. So the business model risk that people have taken in those is already in some cases we are hearing playing out. And even that scalable PMF that one thinks a company has could be a false positive because people are taking the call so early that you don’t really know what the underlying parameters with which it has happened.

So I think jumping forward a little bit I think it’s exciting is it’s the first time you see companies going like this. But I think that’s where everybody always, by the way, I think this is normal. This is a creative destruction business. Disruption only happens when you have disruption even in funding cycles. So this is normal, then it blows up. But in the meantime, you get a lot of good companies, some not so good companies that get funded behind a trend that is correct. The trend is correct. The companies may or may not be taking the best approach to that trend. So once that blows up, the best companies emerge out of it. So these cycles I mean now I sound old, but these are so normal.

Vikram: You are.

Avnish: Yes. So, they are so normal. And I think we are at the end of that cycle. So the end of that disruption cycle where now companies have raised a lot of capital that is saying we will need to hunker down and say where has the real business model? Where is the real traction? Is it driven by cohorts or is it driven by spending?

Tarun: And just to take off from that point, I think traditionally a lot of venture-backed companies in the US and in China the traditional sort of wisdom was if you have enough users and usage, you will find a business model. I am not so sure that India plays out exactly the same way because I think the ability to monetize in some of those sectors is going to be harder. So there was a time for a long period of time people were like can Facebook ever monetize? Will it ever be profitable? And we have seen just how widely successful they have been.

I think in India we are seeing across sectors a lot of usage. It’s to Avnish’s point while the macro trend may be true, in specific cases I think we will see companies that will find it hard to monetize that activity or they will have to be very very creative. And it may take much longer than they think it will.

Vikram: So as investors, very simplistically all investors like growth and return on capital. And if you have both these things and you have a great investment. As VCs, we index on growth because we are trying to shorten the time in the early stages. So you are trying to make sure that you invest in advance and actually shorten the time, so you are investing in growth.

In the late stages, you are more clearly indexed on return on capital. In the middle stages, it swings a bit where markets are looking at growth at a premium which is what happened in 2019. I think 2020, the return on capital it will be sort of that push the same thing that Avnish was talking about which is now return on capital will make a push and you will need evidence of that return on capital in these companies either by unit economics or ideally a scalable EBITDA model.

Now I think the advice for founders is in the period really figure out what is the capital strategy which feels authentic to you. All founders don’t need to follow a strategy which says I need hundreds of millions of dollars or more or billions of dollars to actually find my profitable business model. There are other ways of building this. And find the capital strategy which feels more authentic to you during this period.

Rajinder: That’s good advice. Anything that you all would like to add just in terms of one or two words of advice for founders for 2020 navigating this external environment?

Avnish: So I would say picking up from the earlier point, one is, look, I am not going to say anything that’s not written everywhere which is growth versus profitability. This is the time to think about profitability as well. I think they have heard enough of that. I think on a more positive note, I think they need to – there is a lot more change that has happened in ‘19 on the core fundamental level like you were talking about incremental digital GDP versus disrupting existing GDP, so, all these new models.

Two to three years ago if somebody was going to start something really really new, my advice would have been don’t do it. I think today there is barely anything that one shouldn’t take a shot at. Global products coming out of India, we are seeing a trend. Electric vehicles, we are seeing a trend. Mobility even after Ola, Uber new companies get started, we are seeing a lot of that.

Ecommerce, I think will continue to be disrupted for a while. This whole social commerce. Fintech, we have done a bunch of neobanks, and Vikram has a podcast on that. I think it will continue. It’s just a different sliver. So I actually feel very positive. And let me make - I know at some you are going to talk about predictions. Just moving ahead, 2016 was a bust year. And I think towards the end of 2016, we backed maybe 4 or 5 teams that were coming out of these companies and they were the experienced founder archetype.

I think you might see an acceleration next year of these experienced founder archetype. Now some of it may be for the wrong reasons because they have seen a lot of these people be able to raise a lot of capital. So, they are saying, okay, maybe if I go out, I can raise 5, 10, 15, 20. There my advice is the world has changed. Don’t start a company because you believe that you will able to raise 20. Ten will be the new 20 or 5 will be the new 10, for sure. That change would have happened.

But at the same time, looking back at ‘16 I remember some of these companies that were going through hyper-growth phases where there were these very experienced set of executives or founder material people, they didn’t want to leave when the company was through hyper-growth phases. Next year, my view is a lot of these companies will be in a consolidation phase. That’s when they feel their loyalty is done. They have delivered. They have stuck through. And a lot of them will come out. And in some cases, there is consolidation amongst companies.

And I remember in 2016, this trend playing out and 4 – 5 teams coming out. And there was a little bit more after the Flipkart exit. I think next year we will see a bunch of experienced founders coming out which is a great sign. I mean last time also they came out when the going was – the bubble had burst. Google, Facebook were all founded during recession. So, I think in my view that’s something that we may get surprised by on the upside.

Rajinder: I think super helpful. I think you have kind of spoken of macro trends, predictions. I guess the one thing that we haven’t spoken of is Matrix. I was just wondering how is Matrix going to look different in 2020? I know there is a bunch of things that we are doing different. Anything that you would like to share with founders out there?

Vikram: So, this is one of those though question because we are actually going through own strategy on what does 2020 look like for us. And I think it’s probably 3 - 4 things. The first is how do we ensure that we stay on a reasonable investment pace which is in line with the market, and making sure that we are not concentrated in one area versus the other which essentially means we going to expand our investment team.

And adding both people who are more from traditional backgrounds, guys who were analyzing businesses for a living before as well as founders who are catching on very early trends in a way that an analyst can never. And we are going to have that healthy mix in our team. And we are going to continue to add more people to the team.

The second is we are going to make all these investments and we need to help our companies. And I know you are playing a huge role in building our platform which helps our portfolio. We have invested behind human capital like probably no other VC. We have 4 and I call it 4.5 because we have others also playing that role. We have had networks and communities as a new function on the platform. We are likely to add more in terms of portfolio services that I know you want to keep under wraps, but I would say we are going to keep building that team such that the investment team gets a lot of leverage to be able to help our portfolio. That’s probably the second.

The third is for our LPs we have got a continued commitment to actually manage the portfolio and manage it towards the exits. Like we said, we have got different choices along the way to make, but that’s again going to be a priority for us.

Avnish: I would pick up on the last point. If you look at from the investor standpoint, the bane of Indian VC has been exits. Fortunately if you remember last year when we were chatting we said 2018 will be remembered for Flipkart. But the good news is it should be remembered for a lot more. And we have seen a bunch of news crossing the wires whether it’s Oyo exit. You know there has been Ola exit. Byju’s, Paytm so on and so forth.

I think it’s a new muscle that VCs need to develop which is exits, which by the way we should have developed right in the beginning, but there was no market. And I think it’s exciting because we are having in one of our companies – actually two conservations around IPOs. And then US IPO, Indian IPO what are the tradeoffs, when do you start, it’s actually very exciting.

I mean one of the companies in our portfolio – actually two went public earlier W after we exited and Tree House before that, but it’s a very different piece. If you look at the US VCs, they spend – or global VCs, they spend so much time. So many articles coming out recently about direct listing and so on and so forth. So I think managing exits, it’s a job. And I don’t think anybody – we didn’t have the luxury to do that job. And it was more by serendipity or it happens to you as opposed to something that you work consciously to…

Tarun: The exit windows were very few far between. I think we are starting to see just as the pace for value creation is increasing, exit windows are coming more frequently and hence the choice is becoming even more real about, listen, do I sell now or do I wait a little bit more because you know that - hope is that the exit isn’t shut for very long time after that.

Vikram: And picking on this because we are talking about exits, I think the pace of M&As and smaller M&As – smaller profitable M&As is likely going to get faster and faster. And I think the trend is that we now have currencies that matter in the industry. So you have currencies that are likely – when I say currencies it’s stocks of other companies which are likely to go IPO, which investors and founders both believe in, that’s when you start seeing M&A and consolidation happening.

I was having this conversation with a founder earlier, they say we ended up selling to one of the big unicorns. And he essentially said – he turned down a funding round and he said, hey, I believe in this currency and I don’t think I want to keep raising money, but I want to keep building this business. And I am getting that comfort with this founder, so I am actually going to swap into this company. And all investors supported him. And I think we are going to see more and more of that.

Rajinder: Exciting? Thank you.

Avnish: So, I think on a closing note to your point on 2020 as Matrix, Warren Buffett makes one statement which is People who are great investors don’t know investing 201, 301, 401 whatever you want to call it. They just do investing 101, more consistently, on a daily basis. And I think that’s our job for next year. But I think looking at this wall behind us we talk about this all the time. I want to make a big thank you to the founders. I know that’s my shower test. Everybody here, it is getting more and more exciting. Every cycle, every bubble has a better set of founders. And when that bubble bursts, you are with a set of these really really strong people that’s what keeps going. So thanks again. And hopefully, 2020 is great for all of us.

Tarun: Thank you.

Vikram: Thank you.

Salonie: Thank you for tuning in. And you can find the transcribed version of this podcast on matrixpartners.in. You can also follow us on Twitter and LinkedIn for more updates.