India will rival US in churning out internet tech cos: Rise Capital founder

In a Q&A, Nazar Yasin dwells why he left Tiger Global, and how Rise Capital stood out from the crowd with its focus on emerging markets and Indian regulatory changes

Last month when Rise Capital founded by Nazar Yasin announced setting up its operations in India, many Indian entrepreneurs would have noted it. For Yasin founded Rise Capital after leaving Tiger Global, which has been one of the most aggressive investors in India. He was among the handful of lead managers at Tiger that looked into all the private investments globally. In an interview with Shivani Shinde, he talks about why he left Tiger Global, how Rise Capital stood out from the crowd with their focus on emerging markets and Indian regulatory changes. Edited excerpts:

How is Rise Capital differentiating itself from the other Silicon Valley based funds?

We're focused on investing in emerging markets, and digital companies. And we define emerging markets as everything that's not the US, Europe and China. For us Latin America, Africa, the MENA region, India and Southeast Asia are the main focus areas. The reason is very simple, that is where most of the stuff in the world is. For instance, emerging markets are the regions from where we will see the most internet users coming from, most of GDP growth will come from these regions and more importantly most of the unicorns that are built in the US are being built by immigrants. And immigrants are often from emerging markets.

Almost 80 per cent of the engineers in the US are foreign born. Earlier the trend would be that people would come to the US to study and they would stay but things have really changed in the world over the last five to 10 years. One of the reasons for this is the US immigration policy. So a lot of people who came to the US for studies are heading back home and starting their companies.

Two, the pandemic really changed people's behaviour and the thought process about where they want to be, and many now want to be closer to family, be closer to where they're from.

Digital technology has taken over every aspect of business, and every part of the traditional economy is now being disrupted and revolutionised all around the world. We believe that the future of market cap creation is going to come from emerging markets and India is obviously a big part of that. We think that India will surpass China as a tech ecosystem, simply because China builds for China, India builds for the world. India will be one of the main rivals to the US in terms of production of global internet technology companies.

How do you also differentiate yourself to entrepreneurs who are being chased by large fund houses in India?

We're all former operators and entrepreneurs ourselves at Rise Capital, we have built these things before and we have had success. That's helpful in terms of connecting with entrepreneurs. The other point is our emerging market focus. We may be based out of Silicon Valley but because of our focus our understanding of the emerging market is immense, there's a lot more similarity from other emerging markets to India then there is from Silicon Valley. Consumer behavior, demographics, how people do things and pay for things, access to credit are identical across emerging markets and there are similar challenges. Having these insights can be of importance for founders.

Do the valuations in India bother you?

In 2021 valuations got crazy. We at Rise opted not to be active in the second half of 2021. Historically most companies trade at a 1x of the PEG ratio. Internet and software companies tend to trade at a PEG ratio of 1.5x to 2x. Because after five years, they tend to continue growing at an accelerated rate. Hence they can demand this slight premium in the PEG ratio. Last year PEG ratios in software internet companies were 4x or 5x. And that just makes no sense because the underlying assumption then is that the software company is going to grow forever, at like 20%. No company ever grows 20% forever because if they do that every company can be a trillion dollar company.

So in 2021 valuation got crazy but now they've come back down. And it typically takes six to 12 months for those valuations to be reflected in the private markets. This process is going to continue to unfold over the next few months in the private markets. We would expect to see some contraction in multiples, and we're seeing this in India and in other markets as valuation multiples are coming down. And this scenario is healthy to see valuations coming down.

In hindsight, you think entering India in 2022 is a better decision?

We really liked the timing. India as an ecosystem has hit an inflection point, more unicorns were created in India last year than in China. From a funding point, India compared to China gets one-third of the dollars. If you compare India to the US, which we think is a better proxy, because the US builds the world and India builds for the world, even on a GDP adjusted basis, India only gets one-fifth on an absolute basis. We think it's still early in India.

Penetration levels of E commerce or for that matter other businesses is still very low, but growing very quickly, a lot of upside. Markets like India tend to leapfrog.

What will the strategy in India be?

We are focused on companies that have internet enabled business models. These businesses can be from healthcare, retail, services economy or agritech. We understand the internet enabled business.

We'd like to get involved at the earlier stages of a startups journey so this can be either series A or series B and our cheque size can start anywhere from $100,000 to $10 million.

When we invest we try to find models that can be replicated in other markets as well or find markets where they can find a good fit. Once we do that then the only criterion is to evaluate the team and the founders. There are some absolutely spectacular founders we've been able to meet in India, and we have made a handful of investments.

At present, Rise Capital has just one person leading the India geography, do we see you adding more people as well?

It's not going to be big. You know, a lot of people are shocked to find this out, but when I was in Tiger Global, there were three people doing all the private investments globally. We're big believers in the lead model and accountability model, you won’t find us deploying armies of analysts in a market. I'm sure the team will grow over time but it will never be a big one.

What is more exciting about being in an emerging market, valuations or innovation?

It's about the impact they create. We are a commercial returns driven fund, but the types of businesses that we invest in have such enormous impact on their ecosystems, that it's just fantastic.

To take a step back and look at some of the investments that Tiger Global did in India, like Flipkart and Ola. Look at the impact they've had on India's ecosystem, massive. Millions and millions of people, drivers, merchants, could transform their lives on a daily basis. It is about the opportunity to back entrepreneurs who could well be the next Jeff Bezos, and Elon Musk's, and so on and so forth.

This is really exciting for us at Rise Capital, and to partner with those entrepreneurs and help them on their journey, because these are very rare and special human beings who can really change entire economies.

One of the side effects of hyper growth in emerging markets is that though there is room to grow, from a regulatory standpoint too things are evolving. What's your take, when it comes to India?

There's a good piece to it and a bad piece to it. Many governments have taken the approach of supporting and building their own tech ecosystem. Let's create policies to make that happen. They've either committed funding to entice venture funds to invest in the ecosystem or support local venture funds and that's all good.

But there are some policies that some governments are doing and there's talk of a brain drain kind of situation in India where crypto founders are leaving India and going to places like Dubai. That’s a scenario that no government wants. You want to attract these innovators and keep then within the country. It's definitely unfortunate. From a Rise Capital perspective, we can invest in the company in Dubai instead of India.

What made you leave Tiger Global and start your own fund?

At Tiger Global the fund sies had started to get very large and the focus started to be much more on the US and China and towards later stage activity. I'm a former entrepreneur, and I like working with entrepreneurs and conversing with them and helping out and being part of the early part of their journey. This was becoming harder to do at Tiger. I made the decision to leave and focus on earlier stage founders, earlier stage companies, across emerging markets.

I do believe that from the fund perspective our focus on the emerging markets was a bit early. We started in 2014. I had started to see smartphone adoption in these markets, but that hadn't quite translated into business traction for startups.