 "It's good to fund plans on napkins, but not always: Sanjay Nath")
There is a slowdown in the investment market. Some call it a bubble, others a correction; what do you think is going on?
I won’t use the word bubble, but one thing which certainly happened in B2C (business-to-customer) companies was that valuations weren’t justified. To me, a bubble means a situation where the fundamentals are not strong. However, if you look at the fundamentals of India, they’re very strong — look at mobile growth, 3G penetration and plans to roll out 4G, growth in Tier-II and III cities. What used to be called the bottom of the pyramid is now being called the middle of the diamond. Valuations are being fairly priced. It’s actually very healthy. The good part is that there is a lot of capital as all the VC funds, be it Kalaari, Accel or Nexus, raised new funds recently. They’re raising new funds in a bad market and in our own case, we’re on the route to raise $60 million.
Was this across the board or restricted to a few sectors?
In certain sectors of B2C, companies were okay to lose money to acquire customers, and that is not sustainable. If I asked an entrepreneur about his revenue model, his answer would be ‘Oh! I’ll figure it out later’. It was more of a land grab mentality. They thought they’ll capture 70 per cent of the market and if they were so big, they’ll acquire the others. If you look at the sectors where investments have happened, a lot of dollars have gone into building a front-end. Now, what I call enabling technology is emerging and these guys have sustainable business models.
You have said 15-20 per cent of your new fund will go in new technology companies.
It could be more than that. We’re looking at investing 50-60 per cent in B2C, the whole India growth story. Another 15-20 per cent in SMB (small and medium businesses) enablers and the remainder in core technology companies such as GreyOrange. It won’t necessarily be hardware, but they have IP (intellectual property), so, it’s differentiated. They’ll only need money to grow and not sustain themselves because it’s profitable. Someone like GreyOrange is selling a Butler robot, which is a solution customers will pay for and there’s the added advantage that they serve India plus international markets.
Are investors warming up to software as a service (SaaS) or still not willing to move beyond B2C?
If you look at the TinyOwls and the Housings, a lot of them came out of IIT-B (Indian Institute of Technology-Bombay). Recently, there’s a new wave suggesting a lot of entrepreneurs from IIT-B are looking to start ventures in the product and SaaS space. They have mentors from the Valley who have told them let’s move beyond B2C. But, I don’t know if it’s fully gone, because recently another start-up in the home and decor space came out of IIT-B. However, I believe, whatever sector it is, it has to be sustainable. We don’t want B2C to go away because that’s the consumer story. What we’ll see in the future is more of a balance. For instance, there's a start-up out of one of the IITs —whose founders have backgrounds in clean energy, renewables — and they’re doing a laundry marketplace. What this means is they’re trained in a certain sector, but they don’t see a business. Do you really need to go to an IIT to start a laundry marketplace? I don’t think it will go away, but we’ll see a lot of scrutiny.
What is the change you see in the entrepreneurs themselves?
Last year was the year of exuberance and a little craziness. Sometimes, it’s good to fund plans on napkins, but not always. Having said that, this year is going to be very interesting because VC funds have money, including us and some of the larger VCs. It’s a tightening of a belt around sustainable models. The quality of founders is better than ever. The reason is that they’re leaving Flipkart, Ola, Myntra and starting on their own. When I moved back from the US five years ago, we had a line-up of people leaving Google, Microsoft, but now it’s not only from them. Look at the team at RoadRunnr; they’re ex-Ola, ex-Flipkart. One of the most important things for an entrepreneur to see is a full product cycle. You have to see a product do well and then watch it crash. The problem in India is we’ve not seen a fall. We look at the bubble only in a negative way, because people lose jobs. But, look at the learnings we get from this. I don’t want to back somebody who’s failed three times because he’s only shown that he can fail, but if somebody let’s say is a product manager at Ola and launched three products, of which one failed, that is extremely valuable.
Do you think investments in India will drop this year?
To answer that, we have to again come back to the funds. Look at the size of fund: Accel has $300 million, Kalaari has a little less than double, from $160 million to $280 million, Sequoia has $900 million. That means investors have raised capital to invest. We’ve got to invest in the right company and at the right time but we cannot make them at all. So, we don’t get paid to sit on fees. The scrutiny and the quality of investments will be far greater and, again, this is very healthy.
