State of the indian Venture Ecosystem – Part 2: Forecast 2019

In an attempt to forecast for 2019, this episode of Matrix Moments talks about the trends we expect to play out, sectors expected to explode (or not), the changing face of the average Indian entrepreneur and how 2018 will impact the momentum of 2019. Tune in to hear Avnish Bajaj, Founder & Managing Director, Matrix Partners India, take us through this.

Salonie:Hi and welcome to ‘Matrix Moments’. This is Saloni and I am here with Avnish Bajaj, Founder & Managing Director of Matrix Partners India. Today's episode is about state of the Indian venture ecosystem - a forecast for 2019. Avnish, if you were to name sectors that you believe will emerge stronger this year, what will those be?

Avnish:Thank you for having me back Saloni and good to be doing this early in the year. This is not a forecast for 2019, I will only call it a forecast if you promise not to play it again next year when we are proven wrong.

Look, the reality is that we are in the business of forecasting, but at the same time it is the whole uncertainty of the business, in a good way, is about the fact that things keep continuously evolving.

So, I will tell you how at least we look at sectors and forecasts, right. You know that our philosophy is ‘founders first’. We have always talked about the fact that if he had to pick between founders and markets, given that we would want to pick both, but if we were forced to pick between them, we would pick founders of a market. Sectors are effectively markets. So, I would say we go where the founders take us and that is our philosophy.

Now, the extent of understanding sectors and trends, which is, I believe very critical in venture investing is to figure out who are the smartest founders out there. We need to be smart enough about a sector or a trend to figure out and back a person who's smarter than us. And that's the whole objective of figuring things out.

So, number one, we think the founders have their eyes and ears and nose or whatever closer to the ground, we tend to follow them. We will let them figure out what are the trends, but at the same time, look at markets globally, look at what is happening on the ground in India, look at what is happening in a portfolio company and form certain views, not rigid views but form certain views. One of the better-known investors calls it “strong views, weakly held” and we try to practice that.

So now, where do we think or where do I think personally some of this thing on sectors is headed - so let's take two-three examples. If you look at FinTech, I think FinTech entered a bubble until about September of 2018 when the NBFC bubble burst.

Now I think we're in the middle of a churn in that sector and the wheat is going to get separated from chaff. Does it mean that the FinTech opportunity has changed? Absolutely not. FinTech is and financial services in general is a very deep important sector for call it in the next five-seven years, could be even a decade, where you would see multiple large companies getting created every year. To me, this is the best time to invest in FinTech because all the easy money, so to speak, is gone, the entrepreneurs who were being opportunistic about it would not do it anymore because they realized it's a very difficult time to start. So, I would say that's a sector that entrepreneurs should be encouraged to start in right now as opposed to get scared by the current environment.

Another sector which has kind of gone through that in the last two-three years is e-commerce. Starting with the infamous kind of battle between Flipkart, Amazon, Snapdeal, Shopclues, I think entrepreneurship pretty much froze in e-commerce. People assumed that you just can't compete, you can't come up with new businesses. I think with the data explosion, with social commerce elements picking up more and more, with AR/VR kicking in, video kicking in, voice kicking in, I think e-commerce is right to be disrupted. I am not saying the large companies won't win, but I think there are tight niches in which one can create very large businesses by catering to customers in a different fashion. We all know about WhatsApp based selling that is picking up, there is Facebook groups based selling and there are businesses that are getting started in this overall genre of social commerce, but I think it goes beyond that, I think there is video commerce, I think there is voice commerce, I think all kinds of commerce is going to come in, where the “one size fits all” approach of the large companies is not going to work.

Enterprise, SaaS, B2B – these are sectors, specifically B2B and logistics was very hot three years ago, again we are not seeing company creation. I think as technology is deepening more and more B2B companies need to get started. Enterprises should pick up, SaaS should pick up because the spends at the domestic level by the potential customer is going up in these sectors. So, I think when you put it all together it's really where the entrepreneur seizes the opportunity, where the founder seize the opportunity. I think there's opportunity everywhere.

Salonie:With regards to funding, how do you see the flow of capital between early to mid and later stage, just recently there has been a lot of capital infusion made in the later stages?

Avnish:Yeah. So, I would say the story of 2018 was about, reasonable level of volume in seed and A, low volume in B and C stage, you know, if you're saying series A Series, B and so on. And then an absolute explosion in later stage, D plus and billions of dollars has been raised. Where do I see it going 2019 - I actually don’t know? I think the later stage seems to have attracted so much that it probably will slow down a little bit.

What I'm hoping more than forecasting is that the B and C picks up because if you believe that quality companies are being formed at seed and series A, if we believe that the market is deepening, so by definition a bunch of those companies should be hitting metrics and stages and milestones where they should be fundable for Series B and C. In 2018 that was one segment of the market, call it B plus or D minus is how I like to call it, B plus to D minus is where there was less funding then probably companies would need. And I would say that these hopefully goes up, my view is that that will probably go up.

I think seed and A is kind of running at steam, it's not crazy. In 2015 we have spoken about characteristics of a bubble in the past, a bubble has three Vs to it – volume, value and velocity. So, too many companies are getting funded at very high prices and very quickly. I don't see any of that playing out right now. Even the latest stage where the valuation seems high, it’s not like lots of companies are getting funded and very, very fast. So, I think it's net-net stable. I would say if I were to summarize, seed2A should be similar, BC go up, D plus go down.

Salonie:Okay, what about the profile of founders? How has this evolved over the years?

Avnish:I think this is the story that we don't all speak about and some of it is clearer with hindsight than in the moment, but the profile has been changing significantly. If you look at the first generation, so to speak, of these rockstar entrepreneurs, whether it is Sachin, Binny, Bhavesh, Ritesh, Sashank - there are a lot of these young, change the world profile. There are others also we have in our portfolio, Pranay of Quikr, Suchi of LimeRoad, Manish of Mswipe, Dailyhunt, they are more I would say mid stage and I don't like to classify by age because I don't think that's relevant. I think it's more by stage, what have they done in the past and they are more experienced profiles.

I think that's making a big comeback and the shift has happened without people realizing it. We are seeing a lot more of people, now I will give an age just to give people, from the 20s instead of it being concentrated in the 20s, I would say the concentration right now is in the 30s and there are enough of the 40s in terms of age. And I think that has been a big shift.

Also, we have done some analysis which is interesting that the large market cap creation or the large share of market cap but, of course, with Flipkart exit that would become obvious, has been created by the 20 somethings. But the failure rate is also large in terms of the number of companies that has become meaningful, whereas the failure rate and how companies are successful and the success rate rather of the 30s and 40s and the more experienced ones is higher.

If you think about it, it kind of makes logical sense because they are more experienced, they have seen more things, they may be able to navigate uncertainty better and I would say lately also because they are in very interesting companies right in the trenches doing work which is at the cutting edge or the forefront of dealing with customers, they are getting a lot of signals which they are able to read and say, hey - this is a very good business opportunity.

So, I would say net-net the profile of founders has moved from less experienced to more experienced and we are seeing overall entrepreneurship go up. And I wouldn't say that the quality is dramatically different because even the less experienced ones were very high quality but that's that would be the net-net change.

And I think overall if you look at it globally, this keeps changing, the cycles keep happening. Google and Facebook were founded by 20 somethings, but if you look at lately some of the entrepreneurship coming out whether it was Uber, which was an experienced entrepreneur, it's changing, so it goes in cycles. I think India is now increasingly converging towards the global trend of more mid stage career executives or more experienced people branching out to serve businesses.

Salonie:Okay. Thanks, Avnish Bajaj. Thank you for listening 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.