A lookback at 2020 & forecast for 2021

Rajinder:        

Hi and welcome to Matrix Moments. This is our first podcast from 2021 and we’ve also returned to work and we had a test before coming back into work so if you guys are okay I’m going to take off my mask and continue the rest of the podcast. Happy New Year!

Rajat, welcome to this, last year we actually did our look back in 2019 podcast with Avnish, Tarun and Vikram and it’s great to have you all on this one as well. We thought we’ll do the same look back with 2020 and look forward. In many ways it’s been a crazy year unprecedented in many ways and through that we’ve actually had a very busy year at Matrix.

Initially there was a very strong focus on portfolio, then there was a lot of momentum around new deals. We actually ended up closing the year with 15 odd deals and that was keeping in pace with our investment pace from 2019. There are two new unicorns in the portfolio more than 15 odd follow-on financings. Frankly it’s been a much, much more busy year and somewhat better than initially feared.

I guess I’d like to start off by just calling out some themes that nobody had spoken of last year which fortunately we saw play out in 2020 and then I’ll come to some that didn’t.

I guess the first one is the fact that the experienced founder cohort kind of arrived. We’ve been speaking of this for a while, many founders who’ve been through successful company building journeys at some of the leading startups had begun spinning out and starting their companies in 2018-2019 and that trend only accelerated in 2020.

I think the second big thing that we spoke of was the market depth was really going up and we were beginning to see real companies with real revenue, real business models and positive profitability and a lot of that has actually accelerated in some part due to Covid. I guess the third big trend that we spoke of last time was the accelerating adoption of tech across SMBs which again is a thing that we’ve been betting on across multiple sectors that played out too.

Fourth and I’ll try and keep this one short, is we spoke about this whole increasing tech capturing an increasing portion of the incremented GDP versus tech capturing and disrupting existing GDP. And our view was that the later was actually more interesting to play in and in  many ways that’s actually played out. GDP actually contracted through the year but tech has only accelerated so clearly it’s about capturing existing GDP.

And then our fifth and it’s a bit of a prescient call and I don’t know if you’re feeling good about it but we thought about the fact that we were coming towards the end of a cycle and that there was a little bit of a bubble and that 2020 would be that year where the cycle would turn and the new cycle would begin which brings me to the things we didn’t see.

Avnish:          

So we predicted a crash but we were precisely wrong about everything, about the reasons for that.

Vikram:          

But we also said we don’t know the triggers.

Rajinder:      

So I guess none of us saw the health crisis that hit society, the economy, every company around us and then I guess none of us saw the follow-on and knock-on effects on the funding environment and frankly the exits environment.

So I’m going to kind of stop with my preamble. I think the question I have for each of you is what were your memories of 2020 and when you look back what do you remember?

Avnish:          

Maybe you guys should start.

Tarun:

I say this in jest but I was almost I think the first person that pretty much everyone I know told me that you’re the first person I know who contracted Covid.

So back then it was extremely, a sort of time of high anxiety, in hindsight I think I was fortunate that it wasn’t as bad as I thought. I think the anxiety or the stress around the anxiety was worse than the disease itself and Avi and Vikram and a bunch of colleagues at Matrix were helpful because I think that in order to get hospitalized in that moment and doing it early was clearly the right call.

But it was – I mean it was crazy, I remember we put like 20 calls to get to the hospital. Fortunately, as I look back it almost seems like it was ages ago and I just got myself tested yesterday and thankfully still have the antibodies, so it really seems like it was a long time away because so much has happened.

I think the memories, the big ones that come to mind was I think for me the most heartwarming part was the initial part where I think all VCs and lot of portfolio founders and other startup founders got together and came together to set up ACT. I remember how quickly it was done, it was this one weekend phone call and like some of us, somehow took the initiative to organize and very quickly it just kind of took a life of its own, became much larger than the initial scope and all of a sudden, I found myself spending like half my day on that and a bunch of other things. So honestly very, very, heartwarming.

Towards the end I took a step back but lot of good work by everybody so that is clearly one big memory and I think it’s just brought together a lot of people that you don’t get to work with each other as much as we would like. So that was a big memory. I think for me that was just I remember all the portfolio triages we did right at the beginning of Covid.

Very often I would question myself whether we’re overreacting, whether we’re pressing the panic button too early. But I think in hindsight overreaction was probably the only reaction and the right reaction because it really helped people get clarity in terms of what they’re doing. And honestly for me it was just a reminder of the resilience shown by founders literally two months ago they’ve raised a new round of financing, they had gone all out made a bunch of offers looking to expand the team, accelerate, and all of a sudden pressing the breaks and sort of almost recasting plans from scratch. So just seeing that for me was it was just amazing to see that resilience and the effortlessness with which they were like treating this. So I’ll stop at these two and I’m sure there’s a lot that you’ll would like to add.

Rajat:

For me the first reaction that I remember was it was just so unnerving because at least I hadn’t seen a full blown crisis, forget a health crisis, any sort of crisis before this.

I was very young in 2007 when the last crisis happened, probably my first job back in the day. And initial few weeks I just didn’t know how to react but slowly and steadily I think things did pan out way better than what we had initially thought. And kudos to the portfolio and I echo Tarun’s thoughts that I think a bunch of portfolio companies saw very extreme situations in my view.

So there were some companies which had dependencies of physical infrastructure or lending companies, there are a bunch of lending companies in our portfolio which were affected very badly on both supply and demand. While there were lots of others which were almost seeing a massive tailwind whether it’s the payment companies or consumer brands or digital first companies.

All sets of founders had to take very different actions, someone had to almost figure out how do I survive and live for another day while the other guy was facing a once in a lifetime opportunity to really grow and it was just remarkable how founders really navigated through all that. I would just tell some people navigated it better than the others and we saw that in the portfolio, outside the portfolio. It was almost like whoever took the bull by the horns early and realized that this is it and I have to react those guys ended up doing much better and some companies turned profitable. It was just very, very interesting to see how it’s all panned out.

Vikram:          

I would say 2020 for me the overwhelming feeling is one of gratitude both professionally as well as personally on how it went for me personally as well as for all of us. I think we’re just lucky and privileged that it sort of went our way and so I’m just thankful for that.

To me I remember getting off the plane along with Avi and Tarun one day before the borders shut and --

Tarun:

Avi told us now you wil realize the meaning of the word risk, I remember that line.

Vikram:        

Yeah. And I remember landing and I remember recalling a conversation with a much more experienced investor and he said in a crisis the person who hits the crisis button first and generates lot of options will then be able to navigate it.

And I think that’s what we did; we hit it first and hit it hard for us, for the portfolio and it helped generate a lot of options and scenarios. And it truly has ended in the top 5, top 10 percent scenario for us at the end of 2020 and that’s why we’re thankful and grateful.

But overall I would say the companies have really discovered their true character through 2020 and discovered that, one, company has discovered grit – some people had to – everybody had to make the hardest choices whether it was low burn, whether it was a pivot, whether it was letting their people go, it was just a bunch of hard choices and the ones that actually worked through them the best flourished.

The second was inordinate focus on profitability and unit economics and I almost feel like once they’ve discovered that habit they don’t want to move away even after they’ve raised rounds through the year, I think that habit is sort of here to stay.

And the last is Covid was an accelerant for a lot of companies where consumers started pulling towards those companies. And again, that’s a habit where you were used to high CAC’s, cash backs - that entire environment went away and I’m hoping that habit is also sort of here to stay.

Lastly I would echo Tarun’s thoughts that startup ecosystems really came together. And there was this empathy that we’re all in it together and I remember the first months there was a group of fin tech founders, there was a group of consumer founders, there was a group of logistic founders and it was all of those founders against the world with each other.

And some of that carried on through the year. I still remember we did this fin tech – state of the fin tech union, maybe midyear September and every fin tech founder was forthcoming with their time just to help others think through moratorium, think through KYC, think through how they’re dealing with payments. And I’m hoping that also continues, those relationships that were formed I think people are still leaning on those relationships as we come through that time. So that was 2020 for me.

Avnish:          

Yeah. I would just add so I think gratitude is the right word and, in some ways, feel uniquely but almost feeling guilty about being in that position given everything that’s happened in the world because I actually when I see people say good riddance to 2020, of course good riddance on a number of points, but personally and professionally speaking I think we’ll look back at it as a big positive inflection point in relationships.

I think for me since I have done some of these forecasting podcasts initially with Rajinder – I mean everybody was just wrong about everything. If you look at the trajectory of Covid or just this heat and humidity theory, who knows what happened to that, India versus US, lockdowns, no lockdowns, what works, maybe with vaccines within a year, stock market will crash to the – you know, this is worse than the Great Depression.

It was U, V, L, W shaped recoveries – now there’s also K somewhere in there in that emergence. I thought the kids will have the worst time, kids are adjusting of course. VC obviously did well.

And I think one learning we should all take away from that is how poor forecasting is. And by the way you will never hear in my view people going back and looking at this and saying how wrong everybody was because forecast changed dynamically and organically and people just adjusted to it, truly 2020, pun intended.

And if you put yourself at that time and make decisions based on that I think you just have to do your own stuff. So this is the fourth or fifth or sixth crisis I’ve seen and this was probably what people got the most wrong amongst all that one has seen till now. But overall gratitude and privileged.

Rajinder:        

Yeah. Echo the thoughts. Vikram and Tarun, both of you actually spoke a lot about the VC ecosystem actually coming together. Can you speak to what was the reaction across different stages both across the early stage investors, the angel investing, later stage investors. How did people react when dealing with their portfolio companies, when evaluating new opportunities, because initially there was just a lot of fear but it seemed to have kind of eased up through the year. What was the narrative within the VC ecosystem?

Tarun:

So I think it started with almost everybody just hitting the pause button like Vikram said you hit the crisis button the fastest, take time to evaluate some of portfolio impact, take time to figure out which companies will be fine and will have the staying power and figure out which companies may be in trouble so that if you need to set aside additional financing for those you’re well prepared.

I remember for the first two, three months pretty much every other investor either they’re co-board members with us in some of our companies or just part of regular catch-up’s with some of them - pretty much everybody was saying hey, you know what, we’re just we’re not ready to do anything right now we just want to wait and watch and see sort of how this plays out.

And then I remember -- so that was phase 1 where everyone was just busy postponing. Phase 2 was I think where Avnish spoke about this K-shaped recovery where it clearly became a story of has and have nots.

So in sectors which started seeing a Covid tailwind, Edtech, gaming, SaaS, you know, a bunch of other sort of verticals all of a sudden you could see large financings very fast, sometimes multiple financings in the same companies kind of rising tide lifted all of those.

And then you had the other side of it, even quality companies in certain verticals where it’s impacted negatively with Covid, basically just had to ensure that they create enough runway. And I think that spurt of late-stage capital, Jio included, it became clear that while Covid is a tragedy in many others, when it comes to digital option it’s actually really, really sort of accelerated the curve.

And we saw the data of the US and there’s that famous chart which talks about the change in a few weeks versus the change in a decade, but on the ground, we already were feeling what was happening in in India.

Every day on my family Whatsapp group there was a new link of some new guy selling fruits and vegetables and you click on it and there was a digital catalogue and you bought from there and my mom was suddenly figuring out how to use Netflix and Amazon Prime for the first time and so we could see that there is just a lot of organic option happening. And I think that’s when we started seeing the next cycle of innovation come in which is consumer brands, new social and media companies, looked at a bunch of social commerce. And so I think my sense and you spoke about September-October timeframe I think that is where at least I felt not only we continued to be active but a lot of other investors started looking at new opportunities with a very different lens saying that, okay we know now broadly how Covid has played out and is likely to play out and now what the next step one needs to take. Vikram, I don’t know if you want to add something.

Vikram:          

Sure, from an investor mind perspective and when something this big happens it just explodes the number of unknowns and risk that you’re seeing. So, you go to a place of fear, and in fear you’re looking for familiarity. And I think that’s where everybody drifted which is people they’re familiar with, sectors that they’re familiar with initially and started making some investment decisions - “I already know this person from before so I’m more comfortable investing in that person over video” and I think that’s how it started. And in sectors somebody liked Edtech, somebody liked SaaS and so you were essentially looking for familiarity.

I think like Tarun said there was at some point of time we started looking at Covid tailwinds and that led to a new set of investments being made and for me what was heartening to see the set of investments that we made and others made is that it was a very varied set of entrepreneurs that emerged, small towns suddenly emerged both in SME tech and Agri tech and Health tech and so on. It was a very different set of entrepreneurs that started emerging and I think they’re here to stay.

And the second is a varied set of GTMs that we suddenly started learning about and started believing in much more which were either content generated or there was a virality to them because they were on our mom’s and grandmother’s Whatsapp groups and they were getting shared and there were these farmers Whatsapp groups and farmers communities where they were getting shared. And I think that’s also here to stay where there is an appreciation for very different GTMs and ideas to grow.

Avnish:          

One other thing Vikram just mentioned is about knowns versus unknowns and the fear and greed.

So a lot of the tailwinds became obvious at least in India post July, maybe Zoom and all a little bit in April, May, June but I was blown away by what Jio did in April-May. The fact that they got and not just that they managed to raise 20 plus billion dollars, what the Facebooks of the world actually missed. Then I don’t know if you guys recall there is this quote by Brian Chesky saying, “It took us 12 years to build and we lost almost everything in 6 weeks” , today I don’t know what the market cap is but hopefully it goes to 100.

And Silverlake invested in Airbnb at 18 billion dollar pricing when nobody – I mean people would have thought this is not coming back. And I was just reading some report over the holidays about simple analysis that they did that people over the previous year searched more for Airbnb in Google than for Hilton or Marriot or whatever. That doesn’t go away in 12 months, right, and it reminded me of what Warren Buffet did with Goldman Saks, the GFC.

I think personally for me that’s been actually a big learning that some of these – I remember him saying that end of March I backed up the truck into HDFC, like pick two, three of the blue chips. And I think even the seasoned investors get fearful. I mean Warren Buffet didn’t buy, he thought it was just too frothy or too uncertain but I think there was the other big takeaway for me -- there are people who played offence, so Jio played offence, and then when the tailwinds became clear lot of people jumped in on defense.

So we’re hearing about other large industrial houses now looking to play the internet and buy. I think that was the other data that played out which hopefully I’ll try to remember the next time.

Rajinder:        

I think we also saw a lot more – one is of course just syndication went up, the other is I think a lot of later stage investors suddenly saw things taking off and they started coming in earlier. I think there are multiple changes, of course Jio, then the emergence of our local M&A market I think got a couple of marquee transactions that also happened this year. I’m just wondering a lot of this is positive for the ecosystem in general and so I’m curious to hear what you all think, what are the trends and what are the learnings from 2020 you think will carry forward into 2021?

Avnish:          

I’ll take a shot at that because I think it’s a little bit of a contra view also, one is this experienced founder that we’ve talked about.

They used to be the exception, they used to be the 20 percent, I think now they’ll be the 80 percent because everybody is getting exposure somewhere or the other and I think so I guess the contra point there is it’s no longer going to be a novelty. Everybody or most founders will be experienced founders. So now we’ll maybe talk about the inexperienced or the fresh out of college founders.

One of the things I’m waiting to see - Indian internet companies- starting with Naukri, have been built on the back of people on the street. I’m waiting to see if people would realize and internalize where you can do it without people on the street now going forward.

And I think video because of Covid has been such a big inflection that even that tier 4 city is now used to it and TikTok  we discussed in our earlier episode, so I’m waiting to see if that happens.

That would be very interesting but I will tell you that my view is we’re not done yet, just in terms of your saying what trends to look out but we think we’re done with Covid but we might be not be. And I have a feeling that there is some negative surprise that we haven’t yet figured out and that’s more instinct, just feel it’s too good to be true.

I know the death in the US are pretty high but for a pandemic of this scale so I don’t know if it is that people are already saying that post vaccine you may not have a bad reaction but you may still transmit so you still need to wear masks, you can be reinfected. How long immunity lasts, what are the side effects, whole bunch of these things. So that’s the little bit of wariness I have on this particular thing which relatedly or unrelatedly I’m again going to say there’ll be a 20-30 percent market correction. So it’s on the way in ’21, everything seems to be priced but you can come to that – but I think in terms of macro that is something that’s in the back of my mind.

Rajinder:        

Rajat, I know you and I chatted and you actually have a more positive view on some of the sectors that you cover and how those trends play out. What do you think?

Rajat:

I think overall if you look at the entire digital economy it’s got tailwinds across the board whether it’s healthcare, whether it’s education or fintech again in parts which are the sectors that I cover but otherwise also like consumer brands or others like SaaS have always been interesting, it’s become much, much more in vogue now. So there is tailwinds that we’re beginning to see, so for example what Avnish said that even in tier 2, tier 3 cities would have tried a TikTok or would have tried any OTT platform for that matter. Most people would have tried a UPI payment through this time so people are going to transact more and more online going forward which is why we’re going to have a ripple effect. So as more consumers come online, for example consumer brands grows 90 fold. Similarly a grocery startup like DealShare in our portfolio which targets tier 2 audience there TAM grows manifold.

Linked to it is logistics services, linked to that is point of sale credit, all of that is going to explode in some shape or form. Similarly, if you look at the SME side a bunch of new sellers are coming online for the first time. They can build  SME oriented businesses, or pick-&-shovels business, or discovery businesses and Dukaan is an example. So by and large I think the digital economy is going to see very positive track over the next 2-5 years and it’s going to be across sectors.

I think specifically to Edtech was like crazy this year, I think for some of those sectors in 2021 maybe there’s going to be bit of a rebound to offline – I was chatting with Vikram this morning saying our kids are done with Zoom and they’re itching to go back to the old ways of their lives. So I think there’s going to be some rebound that’s going to happen but I think the new normal will be very different and much higher than what it was. It is fundamentally some of these things are truly value oriented like if a person in a small town is being taught by a top-tier teacher in Bangalore that’s just not possible in a physical world. So I think net net --

Avnish:          

Sorry to jump in here but I’ve been thinking a lot about this- will the sectors with tailwinds see headwinds and I’ll tell you a framework that maybe be useful for our listeners.

I don’t know if it is correct though but at least it’s my theory, that you have to look at adoption versus adaptation. So is it a sector which has accelerated adoption versus it is something that we have to adapt to because of the situation. I think the adaptation sectors by definition is more so a lot of these Zoom classes, my kids are like pulling their hair out over it, they don’t want to do it. I think they will slow down they won’t go away, we’ll probably continue to do these Zoom meetings but the big inflection may actually result in a year-on-year decline at some stage because we’ll go back to normal. Versus adoption, where adoption has accelerated.

I used to order at home for the entire family. Now she has her own account for the food apps or all the UPI apps or all the e-commerce sites, so on and so forth. That’s a fundamental increase in adoption, wherever it is adoption led I think it is stickier where it is adaptation, I think that’s a contra point, I think we’ll be surprised how quickly people who don’t want to adapt anymore and prefer to go back to what – I think ultimately most of us I think have lived decades in one way and then one year and ten months another way. I think that memory is also speaking.

Vikram:          

I think I’m just going to double click upon that, for me there is obviously the SMBs the doctors, the teachers who have all started using tech for the first time and using it more. But I also think its new persona emerging in pretty much every sector like if you take fin tech there are savers and investors who have come in by the millions for the first time. If you take agri there are farmers who’re coming in as social users for the first time into the digital ecosystem.

So I think people have to recognize that there are these new personas which are here to stay and then how do I actually build for this new persona and that to me is actually sort of like the step jump that you were talking about or this stickiness that you’re talking about.

I want to go back to that experienced founders point that Avnish made and now given that it’s this 80 percent might be the experienced founders, I think there’s a lot to learn from how they behave and at least for us how we interact with this experienced founder set.

For me one was they’re highly orientated on relationships whether it is in team, whether it is in who they choose as investors, whether it’s who they choose as advisers. And I think there’s a lot to learn for all founders from that. I think the second was the team that most of them ended up creating through Covid was one of those one person can do the work of five people type teams and that was never possible before because the talent in the ecosystem didn’t exist for them to be able to do that and I think that’s the second thing that I think is sort of here to stay and what experienced founders are doing different than the others.

And the last is that highly having focused on that initial GTM and how they get the product in the hands of their core consumer and customer very, very sharply. I think the other thing for the less experienced founders is they’ve started surrounding themselves with the experienced founders and the experienced founders are really giving out their time and advice to the less experienced set, so to me it’s actually everybody is experienced because the experience is getting shared amongst the founders.

Avnish:          

Actually that’s another good point, right, it’s probably – I don’t know if it is Covid, how much of it is Covid or non Covid but it almost feels like the tightest founder community we’ve ever seen that everybody kind of investing in each other, knowing each other, like you said. And Covid probably accelerated some of it.

Rajat:

Actually on that point one thing that’s very likely to happen in 2021 is this acceleration of the angel investment ecosystem, it’s going to be pretty much crazy. A lot of ESOPs even today I think there’s news that Cred announced a buyback of ESOPs, Razorpay has done that a couple of times. So a lot of wealth creation is happening in the ecosystem and a lot of it is going to go back to startups, it’s going to be pretty interesting in 2021.

Rajinder:      

Yeah, I think there’s also for all of us in the ecosystem I think the number of companies that are planning to hopefully go IPO is another fantastic marker of the ecosystems maturity, another big thing that changed in 2020 was some of these large companies are their journey towards profitability is just accelerating really fast. And then we have profitable companies, add scale with the path of IPO with a large amount of ESOP wealth creation that’s happening hopefully 2021 should see a lot of really high quality founders looking out and possibly doing things that are really interesting for us to back. I’m going to leave it for open for all - any final thoughts or predictions for 2021?

Avnish:          

I’ll just say for the last piece which is I think India is always going to grow versus  profitability, I think it’s the first time that the economics is ooking. Hopefully one of our companies, but I’m pretty sure one of the companies in the ecosystem will go IPO - I don’t know exactly which one but there are a few candidates, it does depend a little bit on this dual listing regulation that comes out because I think if that comes out the way it should which is no dual listing or three years timeframe given, then you can have a bunch, I think that would complete the whole startup cycle. The cycle starts with angel investment and generally ends with IPOs not M&A’s, the maximum value comes in IPOs. So that would be something and I think it will happen.

Vikram:        

For me one of the biggest things that we discovered is work from home and the productivity of work from home. I think this year we’re going to discover the other side of it which is actually the lack of mentorship that it has led to. And given that the entire startup ecosystem is very young professionals who are sort of starved for mentorship and I read this quote that young people want to go to a place to discover people to hang out with, discover people to date but mostly for peer as well as leaders who can sort of mentor them. I think there’s going to be a big emphasis on that because people are going to realize that the talent was highly productive last year but are not stepping up to the plate today.

Tarun:

Just double clicking on that I think at least my own personal journey was: I loved work from home to begin with, loved the flexibility, loved the sort of savings on commute time but I think maybe I don’t know at what point in time it happened but I think 4-5 months in I was like literally I think the monotony of just the same routine every single day I don’t know if you all saw the paper yesterday which had this term which is I think it’s called “firebrand” or something, it’s a German term which basically says that there is a distinction between home and office and generally it is the commute, the change of clothes when you go home and it’s a sort of mental reset. Just some of the small things like literally just driving home to work and it just refreshes you. So for me I think this year is going to be much more hybrid, we will come to the office continue to work where we used to but I think we all have also understood that the balance of being more productive on certain days, doing certain things that require more thinking time, require more personal time. So I’m actually happy that I’ve experienced both and hopefully we’ll find what works best.

Avnish:          

So when you start work two hours in Bangalore on the roads you’ll be saying this is part of –

Tarun:

I know what Vikram said, we had one whatsapp going around a couple of days ago, I think we have also understood the value of some of these softer casual sort of corridor chats or water cooler chats and just how young people require some of that, we all require some of that, our founders require that. So honestly I’m looking forward to – it’s been a year of grueling exhausting Zooms, I’m looking forward to meeting people this year.

Rajinder:      

It’s been fun doing this with you all. We’ll see how many of these predictions come true in 2021 and I look forward to catching up all this in a year’s time.

Avnish:          

We just discussed, don’t –

Vikram:          

Again, predictions are useless, predicting is useful. So this is the cathartic value of predictions that we’ve done and then we’ll figure it out.

Rajinder:      

Excellent. Thank you, everyone.