Q: Is there reason to worry about a start-up bubble?
A: I will use some data points from our portfolio. We have a fairly large portfolio, with around 125 investments, of which close to 100 are still active. Several of these were going for next rounds of financing. Most of the ones we were hopeful would get funded are getting funded. The deal sizes are slightly smaller, it is taking longer, maybe the rounds are split a little bit. But we are not in a situation where we couldn’t even raise money for a company we thought was reasonable. So, by and large, I would not fully subscribe to a doom and gloom kind of a scenario. It is a natural down cycle, so we have to live through it and hopefully at the other end of it, we will see more traction.
Q: But the big companies have not raised follow-on rounds as they did in the previous years. Is there pressure from Limited Partners (LPs) when they look at this scenario?
A: The sentiment among LPs is that they have been generally very patient. Now, the other question of these really big companies, whether they are getting money or not, that is probably tarnished by last year’s excesses. If you take all the unicorns from last year, has their performance measured up to where another round would happen at a higher valuation? The answer is probably no. Would they take money at the same or lower valuation? The answer is still no, because they still have plenty of cash left. That’s where things are locked up.
Q: What would you think of as the next things that Indian start-ups definitely have to do to break through?
A: I see this as a slow evolution. I don’t think there will be this big aha moment. It might happen if one of these bigger companies gets a good M&A or a great IPO. This is all sort of a continuum, so clearly the big ones are competing with large companies that have large resources and lot of technology. So, how well they match up on those battles is going to be important. For others that are not in that pitched battle, are they able to transform potential into revenues? I would say that the Quikr-Olx battle is not as intense as these other two (Flipkart-Amazon/Ola-Uber). If Quikr is able to get stronger monetisation over the coming quarters it will be a good test.
Q: How do Indian start-ups deal with a scenario where they are competing with the evolved companies from the US and China?
A: We will have to figure out what is uniquely defensible for us in India. Nobody would have given us a chance that Freshdesk is uniquely defensible. But it is today. So, we will have to place our bets in such categories. We clearly understand technology very well. We understand product management and speak in English. So while we do not have that walled garden where the Google of India is something else and not Google, we do have some intrinsic advantages.
What are these key advantages that we can bring to the table? That would help us build certain kinds of companies from India. We are trying to understand that. Those categories will soon start emerging. Clearly Freshdesk is one. WeChat and WhatsApp kind of companies — are there variants of that with a deeper Indian hook is what we need to look out for. We have come to a point where there will be uniquely Indian companies becoming category leaders. And then there will be India to-global kind of companies, which is not something China can easily replicate and not something even US can replicate because our cost of producing that kind of experience is lot cheaper.
Q: The idea of uniquely defensible is that something you keep in mind while evaluating new investments?
A: I think we are more and more aware of that now. It was already in our psyche because we have worked in the US and built companies in the US in most cases. We can quickly have a gut feel about what is defensible against US. I think the China beast is relatively new and we will probably take a little bit of time. We are running on the country’s roads and then there is this highway and how fast do I cross before I get run over by the car we still need to calibrate. We are learning and it is a part of the natural evolution.
Q: China has really become the elephant in the room even when we talk of the money or interest that’s coming in to fund the consumer internet companies.
A: Have they really proved something that has worked in India yet? No. There is this fear that they have a lot of money, they have the skill sets, they have done this for a similar market and maybe they can replicate it. But where is the proof of it? I think the culture is so different. Let’s see.
Q: They have the money. What does it mean for Indian companies?
A: The sell-out possibility will always be there and why is that bad? If you have been able to create a company which is really valuable and have been able to sell it, then there is nothing wrong with that. There are intrinsically harder issues to solve when you go public. Yahoo could have bought Google had they made the right bid at the right time, Google would have been more than happy to sell at that time. We would not be any wiser as to how big Google could have gotten. I don’t think there is anything wrong in that. Whether the money is Chinese or American, does it really matter? If you are looking at it objectively, probably not.
Q: So do you see consolidation happening soon?
A: I think things are changing very fast. We could see consolidation and this makes sense also. The founder has certain ambitions, and if consolidation is within the scope of that as well as investors’ ambitions, then why not? It becomes a much easier & usually faster exit.
Q: What about the evolution of the quality of entrepreneurs over the past seven-eight years?
A: That has become very good. The only caveat is that in 2015 when the excesses happened, people who otherwise would not be entrepreneurs started out; that’s the scary part. If two guys have similar backgrounds, and both are first-time entrepreneurs, one is doing for the passion of it and the other is doing it because it is cool. It is hard to pick those. But the fashion entrepreneurs generally disappear at the onset of the first downturn.
Source: Economic Times