Bubble babies, Tough Luck & Lottery Winners — Indian Venture Capital Association 2021 Conclave, VC Panel
I admit that I miss sitting on a podium and looking in the eyes of the crowd, the live Q&A, the whole shəbăng′. Often one is speaking at conferences and #CoVID-19 has definitely enhanced the possibilities to attend. Clubhouse will probably kill this product sooner or later but until that happens here goes. What’s said in these panels is often lost with crowded panels, struggling moderators (trying their best to accommodate air time for all the speakers while adhering to the stipulated timelines) and the overload of panels and events. My own Task list of videos to watch from conferences I missed is longer than the unread emails in my Inbox. I believe I am not alone in feeling that pain.
So I decided from now on that I will capture my speaking points and publish whatever I can, crisp and fresh from the oven. These are just my speaking points / responses and captures my view rather than what was covered in the full panel yesterday.
Let me acknowledge the amazing efforts IVCA makes in bringing together GP’s, LP’s, founders and all stakeholders aside from contributing to policy debates and formation for the VC/PE space in India. Also a big thank you to my fellow speakers, Padmaja, Karthik, Sehraj, Rakesh, Sambhav.
CoVID and VC Portfolio
Question: What were the primary operational and business challenges faced by your existing portfolio entities during the last year? Generally, what is your take on how VC backed companies have fared (or rather navigated) during this period and did you see this more as an opportunity for your portfolio entities where perhaps some may have pivot to new avenues?
Response:
Caveats before I respond:
- Some of it is still WIP. The pandemic is not over yet
- I have the benefit of last 12 months of hindsight which is basically 20/20 from 2020 (pun intended)
- I saw the crisis of 2000–01 (in an entrepreneurial firm in silicon valley) and 2008–09 (as a growth PE investor in India) but this one was completely novel and hence is the scale and dimensions of issues with VC firms and their portfolio
IMHO, portfolio fell in 3 buckets:
Bubble babies
Never had a robust business case but got funded in good times and yes we had some (thankfully only a few) in our portfolio like all VC firms did. When CoVID hit, they had no cash runway, or revenue model in the short term.
As investors our job is to call these ones out early, i.e. not get overly emotional about it. The idea was to spend everyone’s energy in the right places, i.e. finding homes for the teams (aqui-hiring/selling) or settling dues and painful company closures. If one intervened early enough, founders have moved on to doing better things and as investors we have been able to spend time on better RoI situations.
Tough luck
Companies with good long term business potential but just got stuck between a rock and a hard place. FinTech lending and Shared Mobility would fall in this category as examples. The unlucky ones also had less cash runway and massive short term disruption in revenue.
We worked diligently to help these companies cut costs, re-draw a new 12 month business plan (reviewed every month or more often than that) and got them funding from within the cap table. Having institutional investors helped secure internal rounds. ‘Live to fight another day’ was the motto.
My observation of 2 decades of investing is that good founders bring their best game out in tough times. Some of these companies pivoted brilliantly, example a Social app (in our portfolio) for local discovery of retail merchants targeted at millennials (that was entirely F&B dependent before CoVID) pivoted to Groceries, Apparel and successfully positioned it as “India’s best Savings and Loyalty app”. Or look at #DailyHunt’s new short video app Josh or the amazing doubling down on home delivery by Zomato. We had a shared mobility company in our portfolio that used the opportunity of no business for almost 4 months to convert their fixed (supply) costs into variable, and made public transportation even safer and supported by more tech (payments, ticketing, tracking etc.). Today they are back to same revenue scale and doing better unit economics than pre CoVID.
Lottery winners
Perhaps EdTech and HealthTech fall in this category especially in countries like India where the underlying sectors could badly use disruption brought about by Tech innovation. These include massive tailwind companies where consumer change of 3 — 5 yrs. transpired in 6–12 months. The luckier ones also had cash, had a revenue model and solid unit economics. Here our job as an investor was to just make sure that they focus on building a stronger moat, create a huge gap between themselves and competitors. Here we nudged the founders to double down on the team, product, and work like there’s no tomorrow. These companies have emerged as clear winners with strong tailwinds behind them.
Impact of CoVID on Portfolio Selection
Question: Would you see any change in investment strategies at the growth stage? Reshaping or resizing of investment amounts and any impact on the exit strategies or timelines?
Response:
So much for risk taking nature of the VC asset class, there is a lot of herd mentality. Unfortunately the pendulum swings between ‘Greed’ and ‘Fear’ with very little balance or middle of fairway behaviour. Tactically following changes happened almost instantaneously:
Capital concentration to the category leaders / winners (see where capital has gone in EdTech, FinTech and B2B commerce in India as a case in point). Growth funds also become more sector focused and/or thesis driven. #TigerGlobal has made almost 1 investment a day in 2021 (45 investments in 54 business days until mid of March) but if you look deep enough, the bets are in just 4–5 sectors. I believe many of these investments will look good in time just like Softbank’s large bets in Coupang, DoorDash are looking now (which were called stupid and many other labels at the time those bets were made). In some sense capital is also consolidates towards gutsy and larger growth funds more so in these kinds of times
Focus moved from vanity metrics to unit economics, cash runway. Growth investors want more clarity on the exit path as well. Thankfully the massive IPO pipeline building from India and the overall SPAC exuberance (for Tech assets) helped the latter
Early stage guys are used to taking unknown unknown (unidentified) risk. If fundamentals (like Tech disruption in India) are fine, that activity continues as evidence has shown us. Later stage / Growth investors concentrate on winners / category leaders. Middle of the belly Series A, B is where contraction happens which will take some time to fill up
What’s good for India is the $20 Billion investment in Jio (during the peak of pandemic) and that increased interest from new growth investors for India.
China investments in India — ban and path forward
Question: With some bottleneck for investments from China, do you see this more of a concern or an opportunity for VC / PE space?
Response:
Chinese capital in the 3 preceding years (2017–19) used to contribute 25 -30% of total Indian VC capital which substantial with Alibaba Tech Ten Cent #Xiaomi #Fosun as some of the key investors.
India has been lucky that this capital source got substituted quickly. Geo political advantage (US and India both shifted away from China for different reasons though), and continued cheap capital from the US is finding its way into India kind of open markets. The $20 Billion Jio boost helped (other than Google, Facebook’s large strategic bets — 6 new institutional investors bet $300M — $1B each as their 1st investment in the Tech ecosystem of India).
This has fuelled more US capital interest for India. Anecdotally these days I am spending my time navigating EdTech or GamingTech India market entry strategies of large US, European VC funds (with no presence in India). No co-incidence that I am also seeing their term sheets for our Series B/C/D companies as opposed to those coming from the local and well established US VC arms (Sequoia, Lightspeed, Accel and the likes)
As promised these are the quick notes of my responses in this panel. Promised to keep it crisp and fresh while the #IVCA conference is still going through its last few panels.
More on WaterBridge Ventures and my LinkedIn and Twitter here.
