A look back at 2021 & forecast for 2022

Rajinder:

A Happy New Year to everyone. it's great to be back with Vikram, Rajat, Tarun, Avnish. I was doing a review of, you know, the 2020 podcast that we did on predictions for the new year and I was just thinking, you know, 2021 is actually been very similar to 2020 started off, unfortunately, with the health crisis and you know, personal loss in the extended family and across the portfolio, then followed by V shaped recovery and then the euphoria with, you know, liquidity surge, acceleration towards digital, and frankly, fed into, you know, probably the best year for matrix as well, in our history. Largest increase in NAV, largest capital deployed, largest capital return to our investors. So it begs the question, was all of this just a function of, broadly the external environment? Or did we do something differently in 2021, versus 2020? And I thought, I'll ask each of you that question. And maybe if you reflect back on 2021, for your Self.

Vikram:

I think you got every prediction right.

Rajinder:

No, we'll come to that. That's actually the next question. But why don't you start Vikram? I think, just for you, 2021. What was it like?

Vikram:

Yeah, I was going back to the podcast last year. And I think the overwhelming feeling for me was gratitude for the protected and privileged life that we leave, and the opportunity to create this big impact in the ecosystem. I think this year, it is that same gratitude. Because it has been that kind of year, plus unbridled excitement, because the ecosystem has finally arrived. With this state of IPOs and exits, we no longer have to answer the question to the global investors on whether the india start-up ecosystem can sustain itself, because now we can, because we can generate exits, which will actually fuel more capital and now we are on that virtuous cycle. So for me, that's what the is the big inflection for this year. Congratulations to everyone. I think everyone had exits, everyone had IPOs. So congratulation to everyone in the ecosystem, we had our fair share of unicorns, the exits. So we're very grateful for that. On the team front, it's also the most number of people that we've added. We added a lot of young people. i think we struggled initially as did everyone else with remote and trying to figure out how to provide the best type of apprenticeship to our young folks.

But then we all sort of came together. And we, probably had the best off site ever, when we all sort of came together. And the energy coming out of the offsite I think is going to sustain ourselves for a long time to come. And i can now truly see that, you know, each person has some bond, each person has sort of locked in on hey, I'm going to mentor this person. And now that seems to be clicking as well.

Rajinder:

Good. Whoever wants to go next

Rajat:

I will just add that, you know, after a long time, it does feel like that the timing is right and it's here and now and that's what's leading to all the magic, both internally and externally. I think it's just great to be in the ecosystem right now and I think we have the right ingredients as well as a team now, to really take it off from here.

Tarun:

I'll just add two three points. I think, double click on one thing Vikram said and add a couple. So I think a lot of us have had this conviction for a few years, which is why we do what we do every day. But I think for me, 2021 will always be the year where what legitimacy to sort of the broader skepticism around start-ups valuations. is this real?

is this all gonna go bust? i think it has rightly sort of given the spmc to the ecosystem, largely done by iPOs that have happened. But i also think that for the first time, there is a lot of  confidence that multi year, potentially multi decade secular builds up, in just digital Startups,  in india, i think what China saw maybe for 10, 15 years before us, i think we're gonna start seeing that. And i think we're finally all feeling like we're fishing in a deep pocket.

And the results are basically what we've seen in the last year 30 billion plus deployed, we should talk about that capital that came in and China impact on and all that, about 30 sort of new unicorns in the year. So i think it's all kind of come together. And it's good to be and grateful to be, sort of part of that ecosystem and you know excited about what’s going to extend this way.

Avnish:

So it's a bubble. But I think it's a cyclical bubble in a secular like TD said, in a secular run. We have discussed, you know, the all three V's of a bubble are in play, whether it's volume, value or velocity of deals, but it's the most secure I ever feel while being in a book while recognizing that we are in a bubble. And while being nervous about that.

it's also the most secure I think. And it is because of all the factors that the market is real. And by the way Zomato has gone public like TD said, FreshWorks has gone public, you don't go.

You get valuations may be out of whack in bubbles, but you can't sustain public markets. And I think that is starting also being the eldest here and having lived the 99 bubble. I wonder whether this is 99 or 96 equivalent? i think Netscape which doesn't even exist anymore went public 95 and or 96, then Amazon, Yahoo, eBay, you know, just so I,  almost feel that that's where we are, that this will actually the crescendo is three years away. And this is just the beginning.

But let's see no way to predict. I will tell you the other penny that dropped for me. And we have discussed this a lot internally, right. So and it almost gives goosebumps when you think about it that we have discussed that. imagine if you were in the 80s and you had a ringside view, to be alongside Mukesh Ambani, or Anand or those Dhirubhai, Ambani, Anand Mahindra, Sunil Bharti Mittal, and maybe Narayan Murthy along the way. Then Mr. Sunil Bharti Mittal, all these guys Ratan Tata, back then we are having a Diwali party here tonight, the new equivalents of that are going to be here, right. And we are so privileged, so privileged.

So this digital nation building, you know, not just doing it for the obviously have to make money for our investors and ourselves. But it's just that, for me was the biggest penny that dropped. And COViD had market level inflection. But i think it also had a founder level inflection, i think resilience really showed up, people really came together. And therefore to me, that's actually probably the juice that will sustain me for the next 15, 20 years in this.

Rajinder:

Avnish, you put it very well, but I'm actually going to take you back to something that you said last year. I listened to the episode. I'll tell you what you got right. You said there will be one big IPO that will happen in the Eco system. Yeah, there were actually two perhaps there'll be more by the end of the year. But you also said that there will be a market correction by 20 to 30% and markets are actually up 30% 40% year on year. What do you think is going to happen next year?

Avnish:

I didn’t say by when. So even a broken clock is right twice a day, which is why forecasts have to be time bound mind don't, they will be a 20 to 30% market correction. But on a serious note, look, if I knew it would be a trillionaire. Right? One would be able to time these things. There is something coming where, when, how, we don't know. I have actually never seen I've seen bubbles before.

But I've never seen this resilient a market like you can throw like i at one point we thought this Evergrande or grand however you pronounce it Chinese company might be there just seems to keep but people say that at the peak, markets keep climbing wall of worry. Right and they keep going. So i don't know it's going to come we won't know where it will come. I'll tell you one thing that i have learnt. You guys have met him, one of our my peer group guys said that, you know, people who are older like us, specifically me, we worry too much about bear markets.

They are very sharp. They are very painful. But they are very short. And bull markets are multi year. And i am going to try to keep this perspective that he was saying that it's a secular 10, 15 year run along the way, there'll be very, very painful corrections. One last point. i know Vikram, you're trying to say something the last time when these corrections happened, companies had down rounds. i don't expect that anymore. i think the markets are real, their businesses are much more real. So it may have zero IRR for one or two years, maybe in some if they are overvalued, but i don't see that kind of pain, but i bet you i'll be wrong.

Vikram:

That's what I was going to say and this is what happens when you work with each other for too long. But I think there are going to be lots of bubble pops and at least where companies are and where company's balance sheets are which are very fortified. I think there is going to be a pop, it's going to be short. And in that period of time. I don't anticipate a bloodbath for our companies because they're well funded. And they're incredibly resilient with what they went through wave one and wave two with the kind of scenario planning and you know, of creation execution that everybody displayed.

I don't expect that we have blood bath where a lot of companies will go under. And I would echo that it's going to be very short. And we need to keep in mind that we're in the middle of a secular bull run and but it never goes like this, it goes like this and these blips are going to be short, and maybe high frequency.

Rajinder:

No, Vikram, I'm going to repeat the favor that said. The things that you said last year that i feel like we got right not you. You said software would have a big year, just given you know, work from home, teams or remote. You know, companies need to figure out how to manage, you know, systems in a different way.

And so there will be an acceleration. You also said millions of new customer personas would come online, and that would create this pool for software, whether that's doctors, lawyers, farmers, you know, whoever, right. But there's another thing that you didn't call out, which was, you know, Crypto, Defy, you know, web 3.0. And that's kind of taken off and really overtaken the narrative in Fintech for sure, but other sectors over time, too. How do you feel about last years predictions?

Vikram:

I feel very good, and i think i got one more right, I forgot which one. I think the crypto, defy thing is coming, it's just been incredible to see the number of projects that are taking off in India. And we just had this discussion, and we are a brainstorming session around how we think about blockchain. And at least for me, the layer one mining, coin innovation, plus infrastructure, that first wave, we couldn't play as a country as well.

But as it moves into the application layer and the middleware layer, we're just seeing teams just spawning all over the place. And so we're very excited. And I'm going to call this that's the year that it truly becomes mainstream, where I think every fund is going to have multiple investments in that space.

Rajinder:

Any other predictions or any other sector trends you want to add?

Vikram:

For me, the one big one is, we're going to see more M&A is in this year, than perhaps you've ever seen before. And I think that trend is going to continue, because now there are currencies in the ecosystem that matter. And everyone believes in there are already companies that are public.

And then there are companies on their way to becoming public. So both founders as well as investors are going to believe in these currencies and I already see the largest companies, setting up cop dev teams, figuring out how to invest, figuring out how to acquire, and I think all of that is sort of going to come together this year.

Tarun:

Yeah. I'll just add two more to that. Sorry to interrupt, I think, embedded within everything that he said about M&A. See, what's also happening is there is now so much esop liquidity, multiple companies, have obviously, the IPOs and exits have created a lot of millionaires. But there is a lot of esop buy back that that is happening real time. i think what a equity has, again, become real in the minds of employees, I don't think in China or US in the valley, people who are constrained by capital, they've always constrained by ideas are in sort of time to market and execution.

I think India's entering that phase, I don't think if there is a person with a good background with some domain experience starting off today, I think it is almost given that there is going to be somebody that is going to be willing to write them a check. it could be an angel, it could be a colleague, it could be somebody else. And so I think, vast democratization of just getting access to the first round of capital, I think is huge. I don't think that's great.

The other prediction I'll make, I don't know how bold it is, but I read this about somebody had made this about the US market twenty years ago, I think when we look at NiftyFifty today, there's like basically zero venture backed companies maybe or employees now or but that was from our sort of past era. I won't be surprised if by sitting in 2021, 2030 I will not be surprised 30% of companies are virtual companies. And I think that's that, to me, that is really this coming of age. So I don't know if this is sort of too outrageous and too bold. But I think there's some reason that you know.

Rajinder:

Rajat, last year, you had actually said, director consumer brands are going to benefit in a big way and you had said tier two, tier three is just going to take off and it seems like both of those definitely played out. But you also said that there will be a bounce back with, you know, offline attack and a bunch of other things which I'm not gonna list out. But if you look back, you know, and you look forward, which are the ones that you feel most excited about for 2022.

Rajat:

I'm still excited about the first two that actually all three in my view, that D2C brands will continue to rule the roost. The infrastructure is reasonably present now. We'll see the first IPO of a D2C brand pretty soon as well and it's becoming easier to start companies that are more people to fund in D2C brands and downside is reasonably protected with all the classic players out there.

So I, a firm believer that D2C brands will continue to grow and because consumer is also becoming more and more choosy about what they want, what they don't want, and some of these brands does much better than legacy brands out there. I think on the tech part, we are beginning to see our schools open up. Like even last year, when I had made this statement, wave two hadn't happen and obviously, that was devastating. But this year, assuming there's no wave three, I still think a lot of the offline first players will come back to the scene to Byju’s acquire, Akash, and we've seen checks price, the US share price fall off a cliff soon as US schools open. So I think it will happen again. I do think offline post cases, will come back. Offline will also be a big part of consumer brands because (inaudible 6:13)that is true for digital platforms. And to get to the next level of growth.

When I talk to all my friends who are running large BDC brands today, most of them are thinking about how to scale go from the first 100 to the next 200 crores,300 crores will likely happen offline for some of the reasons. The only thing I'll add is you know, as the overall ecommerce ecosystem matures even further, the role of ecommerce enablers will become even more relevant because not every brand, not every company needs to solve for everything.

We have one or two of those in our own portfolio. But we do believe that when it comes to video, led commerce and so on and so forth, there will be point solutions that will exist and will become more realistic.

Rajinder:

One trend that seems to have started playing out globally, which hasn't yet happened in India, is this a regulatory backlash and China seen some of that in the last year, some version of that has begun to play out in the US as well. How do you all think this is expected to play out in India? Do you see the government getting more active or continuing to play an enabling role?

Avnish:

I think more enabling for some period of time, remember that in both those markets, the businesses became very large and were affecting a very large number of consumers and it became a political topic in different ways in both markets. I think we have some way away from that, in pockets stuff will keep happening, like gig economy issue, this issue, that issue, but if you notice, I would say we are one of the most underappreciated, digitally enabled government in the world, or basically digital enablers right from the government on down. So I'm actually optimistic. There are areas like in Fintech where when the regulator like RBI comes in, and for the right reasons, they are more conservative. But i think that's, powerful.

Vikram:

I going to pick up that thread on Fintech and RBI regulation and I do think we have one of the most progressive regulators in the world, because the way Digital finance has just taken off, and it's a pool product for every single Indian, I don't think has happened this quickly anywhere else in the world, maybe with the exception of China and their role, the regulators role is to figure out when you know, something becomes too large and is causing systemic risk. I think the regulator intervenes whenever there is something which is causing systemic risk, and they should, that's their role.

I would say this is the year where i would look forward to a lot of enabling regulations like payments, where payments should generate its own revenue streams. And I think we're on the verge of seeing something like that, credit on UPI going mainstream. I think New banks some level of regulation, which enables them not stifled them coming into place because I think there was a lot of systemic risk because Fintech exploded, and we didn't know how to handle it. Now, I think there are going to be more enabling regulations, which helped Fintech’s along the way.

Rajinder:

You know, one big regulatory piece, perhaps it may not be out in 2022. But maybe the year after is 5g. And, you know, obviously, a bunch of things will change, but video will definitely, you know, get further, you know, bigger part of our life. There are some industries which get directly impacted. There's gaming, there's, you know, social media apps, there's commerce. I'm curious to hear, you know, do you think some of that is already beginning to play out in some of these companies, and I know Tarun last year, you had said, to be gaming will be a big year in 2021 and that actually worked out.

Tarun:

So I think, very clearly, you know, as I think it also goes, back to the theme that Rajat mentioned, which is a lot of tier two, tier three audiences, right? Just imagine when we first got our first mobile phone, I still remember there was a game called Snakes, I used to spend a lot of time on that right and as you now fast forward back and say, what are the people coming onto the internet for the first time?

How are they going to start spending, their time, right and if you start solving for those experiences, I think that's what's gaming is doing for us. So we have a portfolio company called Zupee, right  if you see 80% of the users are beyond the approach that we think but those, people are highly engaged, spending a lot of time playing games that probably we've outgrown. But they are massive, they're still in use.

So I think some of that we will continue to see. I am personally very excited by all talking about this, I think, e commerce, we continue to see a lot of activity, the way to get to these consumers for the new sort of E commerce delivery models is going to be video alert, is going to be twitter alert, is going to be some sort of community lead models, and we will start to see that play out as well. So we see a great year, you're obviously so much more social take on sort of tier 1, tier 2, tier 3. I think as we look at different verticals, home, fashion, we will see similar themes playing out over there and I think videos, may well be the way to get that and i remember we used to visit you know, China a few years ago, and just see how ecommerce used to work there and we look at our E commerce experience and it literally look like you know, we're operating in two different sort of universes, right and I think those will start becoming a lot more so.

Rajinder:

And since we're on the topic of video Vikram ,daily hunt and Josh have had a fantastic year as well.

Vikram:

No, it's it has been the year of video and not just for Josh daily hunt. But I would say it's got an horizontal impact across our portfolio, whether it's consumer brands using video for, for the top of the funnel, middle of the funnel conversions, we made a bunch of exciting investments in the going from the infra layer to the application layer to democratized, how videos used to build apps and I think we're going to continue to see that and, you know, while we're on that, you know, a bunch of our companies have had exciting years of business five star, and you know, to name a few and I just want to thank all of the founders that we've invested in, as well, as you know, founders we've had the fortune of working with, because we ended up in the capital because they acquired us. Thank you. it's been a big year for you guys, and therefore for us, and not the other way around and we recognize that.

Rajinder:

Actually, final question on this, you know, overall change in infrastructure theme, there's a few weeks ago, there was this climate thing, but it's become a big narrative now globally. And the Indian government has also had massive, you know, subsidies towards electric vehicles and we have an investment in that category or in that space, which has also gotten off to a very strong start-up initiative any views on how that's likely to play out the Eb space in india?

Avnish:

Well, I mean, it is, like I said, at the beginning that sometimes we get paid to do this job. But sometimes you would want to pay for the privilege of watching what is going on around, right, we visited, the  OLA electric factory, Bhavesh has been just incredible to see the scale of the ambition, the disruption, by the time this comes out, hopefully, we'll have these scooters, you know, running around in the cities and their music blaring.

i really believe in the next couple of years, they will transform the urban traffic and infrastructure, right and hopefully, you know, in a very good way, because you see some of this cutting edge stuff coming. So yeah, OLA Electric is very, very exciting. India's the largest two wheeler market in the world, i would commend the government the amount of push that is coming and even to your point on climate change, you know, the government signing up for a target that earlier, we were negotiating right. So just very exciting. These things come with their ups and downs. So i think we all need to keep a perspective. But i feel that we have a ringside view to a generation defining company here.

Rajinder:

And, you know, they fully echo the thought and there’s this other big initiative that the government kicked off like, five, six years ago, which was make in india and you know, it's great to see that a play out with this company, but it's also great to see the entire SMB universe just take off the B2B ecosystem, i would say, in 2021, was just on fire. And I'm wondering, Vikram, you know, again on B2B.

Vikram:

i want to toss that on back to you. You did the first B2b investment.

Rajinder:

No, actually, it's a privilege to work with you and Ashish and Ruchi and Rohan, head of business, you know that companies again had a fantastic year, I think, a tapping into the, you know, clear need for raw material and financing across the manufacturing ecosystem, but also just the digital adoption across the SMB universe. I think this is the year, frankly, for me and for everyone on the ecosystem where, you know, adoption has really taken off in the SMB ecosystem, which I've never done, should have never so done before.

Now, I'm going to close by just keeping it open and just asking you all on thoughts on the current environment. i mean, frankly, there's a lot of optimism, but, you know, there's always that, you know, worry of, you know, what's around the corner? What do you all think about, you know, what will likely be out in 2022?

Rajat:

i can go first may be, in my mind, I think the two things that are potentially worrisome are just this liquidity and inflation, global inflation is likely to play out over the next 12 months and specifically for India, you know, this barbell, almost, from a wealth creation perspective happening right. The rich have gotten more richer and poor have really suffered, i think this inequality is going to play out in some shape or form in the next 20,24 months. To me, those are the two biggest watch outs. i don't know how that plays out, specifically but worrisome for sure.

Avnish:

At the macro level Rajinder, one of the things i remember, the 2004 ish timeframe, the India shining, and then you know, they went for an election and shockingly lost. And then for the next three, four years, you used to hear a lot of optimism, from the industrialists and from like a lot of people in my friends circle and of course, we are in the digital ecosystem. So right now everything is optimistic.

it's the first time I'm seeing that confidence come back. So my prediction, and hope is that a year from now, we'll be sitting here with hopefully an acceleration of GDP from Fy 21, fy22,  So meaning the next year, basically, Fy 23, I think we are projecting 9% in 21, I just feel a lot of things are in place, banks, NPAs have been cleaned up government is investing significantly in infrastructure.

I can see the capital formation investments coming back, right. So we are seeing this digital microcosm, which who knows when the bubble burst and all of that I'm actually optimistic on the macro and  I do worry about inflation and all that. But India has actually grown despite inflation, historically, is that 5, 6, 7 percent and yet grow.

So we'll see. I think the way some of that plays out in digital is we'll have 15, 20 companies maybe public bythis time next year. i think, at least 30 to 40% will blow up in terms of post IPO performance and i think that may be the trigger, and that will bring and that will be a very good thing because everything doesn't always go like this, right. So people have to balance it out. But I'm overall much more optimistic, mainly because of the macro economic and more the animal spirits.

Vikram:

So one of the things closer to home is, you know, what Tarun was talking about with the number of exits, and esop buybacks, everybody has a lot of money, and everybody has become an angel and before I used to walk into a Starbucks, and you know, everybody had a start-up. Now, everybody has a micro VC fund, and which is fantastic, because it's going to lead to an explosion of start-ups and there is a lot of resources available at an early stage for founders, which we're very excited about.

What we are afraid about is or what worries us is how do we parse the number of opportunities coming our way. And so, for us, it is about choosing some areas of focus. But one of the things we're also thinking about is how do we enable the angel ecosystem to work closely together and figure out how we are sort of in the middle of this nation building because I think enabling this angel ecosystem will actually lead to that digital nation building and it's something that we are working on for this year.

Avnish:

So actually in that working angels you're saying, just say we are all architects like  how do we bring that into the angels all together.

Rajinder:

it's interesting that you mentioned that Vikram, you know, I always felt that, you know, angels a, are getting far more sophisticated than, you know, when we started out, like, for 10-15 years back and b honestly, I think they're catching on to themes even faster than you know VCs are and it's super exciting, I think some of the stuff that you were talking about earlier around, crypto NFT, and, you know, defa now there have been multiple angels who started into making investments in those spaces before VCs have.

Vikram:

So we're, we're excited, and I think, energized by this concept of this digital nation building and I think there are many architects to this, and I think angels will play a big role in architecting, a part of this in the start-up ecosystem, I think they see things from a lens that we just can't, because either they are in, you know, networks of young people, that they're seeing something in those young people or they're in a business, which is taking advantage of video or crypto, and therefore they're seeing an angle that we can't, and that's why we want to collaborate with them and enable them.

Rajinder:

Any thoughts, guys, and just plans for matrix India in 2022? What will we do differently?

Avnish:

Well, hopefully do more of the same Rajinder. So we actually deployed the most amount of capital in 2021. I think to Vikram’s point earlier, we are learning how to work more collaboratively, with the angel ecosystem. So some tweaks keep happening on the strategy, should we do more seeds? Should we do less seeds?

Some of that is just par, for course, right?  just think things are getting deeper in almost every sector and  think we need to keep pushing ourselves to be smarter and we don't have to be the smartest person in the room. But we have to be at least maybe networked with the with the smart people, whether it's crypto, whether it is Saas, whether it is B2B, you know, they're a bunch of these. But ould say super excited, even keeled deal pace, somewhere along the way, there'll be another fund. But, you know, that's not what prevents or changes anything for us on a daily basis. But I would just like to close by saying the most excited I have ever been and I've been doing it for 15 years.

Tarun:

I think what changes? I think if I look back two, three years, right, the big moves we've made as a fund is I think we caught the trend of experience founders already and I think that's played out. Well. The second trend we caught early was getting into the best companies is going to be more important then optimizing for ownership at Intuit. Right and I think that  was a trade ofemail. But I think that's worked out well for us. I just think we need to get smarter on newer areas and we have some of the discussion today around crypto being a user theme. I think we renewed our commitment in enterprise SAS. I think that along with maybe starting to have a little bit more of a India first, I think first generation companies that got built, were X for India. I think next few years are going to be built something in India and how does it go outside India? And I think we will start seeing more of these examples. Like an out business for, you know, ABCD right and we made some of those investments in India, I think we'll start seeing other companies around the world.

Vikram:

So I heard this from multiple founders who had raised huge rounds IPO and so on and I asked them what’s changed? and they said nothing. It's back to work and that's what this is. It's back to work for us. Because this is just sort of round one of this journey and we have been doing this collectively all of us for close to 10 years and I think marketers arrived, it's time to actually focus and double down on what you know and so for me the theme for this year is to focus and really build strength in certain areas and recognize that we are in round one of this journey

Avnish: And just getting started like we discussed at the offsite.

Rajinder:

Awesome thanks guys cheers. Thank you. Happy New Year everyone.