State of the indian Venture Ecosystem - Part 1: A Look Back at 2018

Salonie: Hi, and welcome to Matrix Moments. This is Salonie. And I am here with Avnish Bajaj, Founder & Managing Director, Matrix Partners India. Today’s episode is about the state of the Indian venture ecosystem: a look back at 2018.

So, Avnish we all know the significance of the Flipkart exit and venture ecosystem, but what exactly has this deal changed within the space? Are there any direct after effects or consequences you have noticed since the exit? And relatedly, will India ever see IPOs with consumer internet companies in the near term?

Avnish: Thank you, Salonie. Good to be back. Happy New Year to everybody. I know I am recording this in the New Year. I hope we play it also soon enough while it’s still relevant, but it’s good to be back. Look, I believe 3 to 4 to 5 years out, 2018 will be looked upon as a significant year when things changed in Indian venture. And today if you ask people, most people would say that is because of the Flipkart exit. Now, of course, the Flipkart exit is going to be a very large part of the story. But it’s not the full-stop. And I would argue five years out, it may not be the most important story.

And the way to think about that is that if you look back at the last decade or more that I have been doing this and our investors have been investing in the country, the biggest - if you were to ask our investors even as early as exactly a year ago - as late as exactly a year ago, what they thought of Indian venture, they would say, “Well, Indian venture has not delivered.” And what does “delivering” mean in our business? It’s about exits. Is about sending money back. It’s about making returns that’s why people invest. And the Flipkart deal is obviously the largest exit not just in India, it’s one of the largest exits globally. So it’s a very big deal.

However, there are about 5 to 7 other exits that have happened in the year. We have all read about them. There is Ola. There is Swiggy. There is - what are the other companies? There are whole bunch of them that have had exits for the - OYO I believe has had exits early investors. So, I think if you go through the list, there are whole bunch of them. And that is the larger story because one swallow does not a summer make. It is about - one or two investors would have benefited out of the Flipkart exit and it was very important for the Indian ecosystem. But, it’s a fact that a broad swath of investors are getting exits across the companies if they want them.

And, it is the first time in the Indian venture ecosystem history where there are companies that are ready to give exits to investors and investors are not taking it, which means that earlier investors did not have the choice or the option to get an exit. Today, they have the option to get the exit and they are not taking it because that’s now switched into compounding of value. Ultimately in our business, it’s not about 3x returns, 5x returns at a company level. When you have a company that’s working well, it’s about 10, 20, sometimes 100x returns. And for the first time, we are reaching that stage of maturity in the venture ecosystem where people are sitting on their gains and their investments even when they can get exits to compound in value rather than just taking their gains when they can get it.

Salonie: And what about IPOs? Do you see this increasing?

Avnish: Yes. Sorry, that was the second part. So, I would say, Look, the IPO I think that is one of the more exiting parts. I think these exits and we spoke about some companies, right? Swiggy, Ola, OYO. I think there are probably 15 to 20 companies that I believe will be IPO ready in 3 to 5 years. Some of them may be IPO ready this year. Some may be IPO ready next year. Now of some them are in our portfolio and we have spoken about them. And there are others that are outside our portfolio. What does IPO ready mean? Today since we don’t have a lot of these companies listed in India, it is very hard to come up with benchmarks of what does it take to take a consumer tech company public on the Indian stock market. Interestingly the constraint is not either the regulations or the readiness and all of that. The main constraint is do you have the sophistication of the investor pool to understand this asset class because often these asset classes historically have been losing money.

So, I think in that context, the easiest benchmark is to talk about NASDAQ IPO which where even some of the first Chinese companies went public when they were reaching scale. And the benchmark there is very simple. It’s $80 to $100 million of high-growth, high-margin revenues. And generally, with - either they are already profitable or good path to profitability. So, if you apply that benchmark and say how many companies in India will meet that benchmark within the next three years, it’s about 15 to 20 companies. Now if that is the top of the funnel, I believe 5 to 7 will actually go public. And I think if one were to say what is one looking for and I know we’ll have a separate session on kind of a 2019 forecast. But if I were to say currently what is it that I am excited about and I am watching this year to see how companies progress on those benchmarks. It’s no longer about getting product market fit and some early monetization and some scale. Now it’s really about are you tracking to IPO scale. And I think you will find that 15 to 20 will, if not more. And hopefully in 3 years, it’ll be a 100. But if 15 or 20 are going to track in that direction, hopefully 5 to 7 will actually go public.

Salonie: Right. There’s also been a lot of talk around policy issues related to ecommerce and angel tax. What is your view on this?

Avnish: My view is that they are very bad things. The challenge in India is we talk a lot about ease of doing business while always kind of making disease of doing business happen. And that said, I have a view that there is a gap between the government and the policy maker’s intent and what happens. You have to think about the fact that there is a - we are often called an elephant as an economy. But there is this decade long kind of a system of bureaucracy that is just churning in a certain direction. And even if the direction changes from top, it doesn’t spill, it doesn’t actually percolate down. And the same things keep happening. So, all the ministers are on record, even some of the tax chairmen are on records saying this is not something they want. They don’t want it enforced. Yet, the bureaucrats keep sending out notices, right? So I think there is a gap between intent and actual execution. I think the intent is good.

I actually believe the intent - we have historically had this issue of tax terrorism in this country. Angel tax is considered another manifestation of tax terrorism. The stated intent right from the prime minister down and the finance minister down is we won’t do any tax terrorism. I think they do want to. And I do believe that India should move from innocent - move from guilty until proven innocent to innocent until proven guilty. But that needs to translate through my guess is some kind of rules, notification. So, one rule I heard about, which I think is very progressive, is that angel tax has been used - by the way, it has been abused. This method has been abused in the past for money laundering. And what happens in India is because of that one person who is abusing the system, 99% or 99 people are all assumed guilty, right?

Now one proposal I heard was that they are thinking of saying that if it is a primary issuance of shares in a company, it cannot be - this angel tax cannot be the assumed situation because most of the abused for money laundering and all that or other forms of money happen in secondary issuance of shares. So, we’ll see. I think the ecommerce policy also seems out of nowhere. Now some of it has already been there for a while and it’s being enforced. I just think uncertainty is the enemy of investor mindset, investor conviction on a market. And I think what happens with our policy is there is too many kneejerk reactions.

I think this ecommerce policy hopefully won’t get implemented. It’s about what is good for the customers, not what is good for a certain type of businesses. And I think what we need with the government is a little bit more of consistency in policy and not going for these kneejerk reactions. The good news is that there is enough very quick reaction that happen from various players in the ecosystem and associations. And as a result, at least even in the ecommerce policy, there was a notification out saying, “Hey, we are still in consultation and stuff like that.” And also, we have to make sure that this is not in some ways being used as crony capitalism that we are not coming up with policies that help one or two people, which has been an issue with India in the past. So, I am hopeful that that is not the intent. Again, I don’t believe that is the intent. It may be getting managed at some lower levels. But hopefully, we will see policies that are good for business and for consumers and not for certain people.

Salonie: Okay. Similarly, in other sectors there has also been unrest with the Ola, Uber drivers protesting; restaurant associations against Zomato, Swiggy; hotel operators against OYO, pharmacies against epharmacies. Would you say that this is a beginning of trade unionism and obstructionism for the internet sector?

Avnish: Well, I certain hope not. Look, the reality is that the internet sector we actually talk about it as a positive, right? That we are disrupting multiple businesses. We are disrupting multiple industries whether it’s financial services, restaurants, taxies, pharmacies, everything. And by the way, this is not Indian phenomenon, this is a global phenomenon. We have had the Uber drivers and other ride hailing company drivers have been striking in other places. Now I believe that and this has been something that people are discussing now globally which is that do you really want to disrupt or do you want to co-opt?

So, on one side one can say that, “Hey, let us create entire new ecosystem.” We are bringing new people into the economy. Some people call it the gig economy. So, you are bringing new workers. You are bringing in new ways of doing things, but yet there are old needs that need to fit into the new ways which is what happens to health insurance, what happens to other forms of safety nets. On the flipside, you have an existing workforce that will be disrupted and potentially be out of the system. If I were an entrepreneur in today’s day and age, I would actually try to bridge that gap. I would actually bring those industries together. I’ll give you one example, we have an investment in company called DailyNinja which uses milk vendors for delivery.

For the longest period over the last 2-3 years until this type of business model came about, the biggest challenge with local delivery was the cost of that delivery boy because that delivery boy has been hired specifically for this purpose. And these companies are competing against each other, bidding that up, ultimately losing a lot of money. Why not co-apt the delivery boy who goes to your home every day, the milkman?

So, I think there are opportunities. One has to think out of the box. If auto drivers and taxi drivers existing ones not the ones on this platform, are getting disrupted, they have been doing a great job for decades. Can we co-opt them? Can we upgrade their skills? Can we get them into this ecosystem? Now the problem is a lot of those people want to do it. The vested interest whether it’s the local political parties for whom they are the vote banks, they actually get in the way. But, I would say long term my view is this is normal. It’s happening everywhere else. It is part of disruption.

As an entrepreneur, as a participant in the ecosystem, my advice would be figure out more ways of bridging the gap, bringing the old into the new and giving the benefits of the old to the new. And I think that’s the way to make this sustainable. But I would not get overly worried about it. I think things up and down. The pharmacies have taken up court cases. They have been struck down. They have been stayed. These things go up and down. My only advice can be to the entrepreneurs, which is how best do you navigate, and mine would be co-optation not competition.

Salonie: Okay. Thanks, Avnish. Thank you for listening. And you can find the transcribed version podcast on www.matrixpartners.in. You can also follow us on Twitter and LinkedIn for more updates.