Singapore: While Silicon Valley has seen multiple cycles of over-inflated valuations followed by over-corrected valuations, the industry in India is still relatively young, and this is the first time the country is witnessing a cycle where start-ups are seeing valuation markdowns, down rounds, business model pivots and shutdowns, says Ben Mathias, managing director and head of India operations, Vertex Venture Management, the venture capital (VC) arm of Singapore-based investment company Temasek Holdings (Pvt.) Ltd, in an interview.
“In India, we are now seeing the first wave of mortalities but you will continue to see companies fail, just as you will continue to see companies become wildly successful. Venture capital is a high-risk, high-return business," he added.
Vertex largely stayed out of India during the past 24 months when the country’s start-ups saw record funding. Have you missed out on some of the good deals, or on having some of the exciting start-ups in your portfolio?
No. In fact, we are fortunate that we went slow during 2014 and 2015 when the markets were overheated.
Many of our VC peers are now having to deal with insider funding rounds or down rounds. We don’t have to deal with any of those. We did however make a few investments during that period such as FirstCry (online store for baby products) and Yatra (online travel firm) that have turned out very well for us. FirstCry is by far the market leader in its category and Yatra just announced a transaction which will take them to a NASDAQ listing.
What is Vertex’s strategy for India?
We are looking to invest in early-stage and mid-stage ventures in enterprise technology, consumer Internet/mobile and financial technology. We like to invest in companies where we can bring more to the table beyond just capital. For example, companies that are looking for a South-East Asia expansion where we can leverage our significant network in the region.
Vertex now has an office in India, in Bengaluru, a city considered as the country’s information technology (IT) and start-up capital. Karnataka (of which Bengaluru is capital) has also become the first state to have a dedicated start-up council. But when it comes to action on the ground, has the state government walked the talk?
To be honest, the start-up momentum in India is so strong right now, there isn’t a whole lot needed from the government. Like everyone else in Bangalore, I wish the state government would get its act together on urban infrastructure. That being said, amid all the traffic jams on the Outer Ring Road, you will find a dozens of start-ups in every kilometre. I do think, however, that the state governments need to find ways to encourage entrepreneurs in sectors that may not attract overseas venture capital but that would have a high impact in the country.
For example, business in areas like agri-tech and tele-health could be addressing a large rural Indian market but will have longer gestation periods than most venture capital funds would look for.
When you look a the start-up ecosystem in South-East Asia, how does it compare with India? What are the similarities and the key differentiators?
Singapore has always had a mature start-up ecosystem that has been proactively cultivated by the government. Outside Singapore, we see Indonesia as an emerging hub and are getting a lot of deal flow from there. It now has 90 million Internet users and growing, and this is driving a lot of Internet-oriented businesses.
Our portfolio company, HappyFresh was started in Indonesia. Similarly, Malaysia has a vibrant start-up ecosystem and our portfolio company Grab was founded out of there. We are also closely tracking Thailand, Vietnam and the Philippines.
All these countries, including India, have one thing in common which is (that) they are still seeing rapid growth in mobile-first Internet users across their emerging middle-class populations.
So we are seeing similar themes emerging across all these countries.
Singapore has seen a lot of government funding towards kick-starting the start-up ecosystem. India is trying to attempt the same thing now. But in a country like India, will government intervention turn out to be worse for the sector? Rather, should the government not focus on improving the ease of doing business?
There is no shortage of entrepreneurs in India and today, the venture capital ecosystem is well established... The Indian government should look to Singapore as a model for how the government should encourage entrepreneurship without being interfering. Rather than investing on its own, the government should sponsor venture capital funds that have a focus on these priority sectors and lets these investors find the right entrepreneurs to back.
Should Singapore, which is a gateway to the Association of South-East Asian Nations (Asean), be the first port of call when Indian start-ups look at expanding abroad?
It already is. The first expansion for Indian companies outside India is into South-East Asia. The most efficient way to do this is from Singapore. At Vertex, we encourage and help facilitate this with our portfolio, not just for our Indian companies but also those that were started in other SEA countries.
In the recent past, do you think that many of India’s nascent start-ups lost the plot in the glitz of inflated valuations, even before they could get a hang of their basic modalities?
Realize that inflated valuations happened globally in 2014 and 2015. In fact, the situation was far worse in Silicon Valley and China.
Companies such as Zenefits, Snapchat, Dropbox and Square have come down significantly from their peak valuations.
So it would be unfair to say that anybody lost the plot in India.
Silicon Valley has seen multiple cycles of over-inflated valuations followed by over-corrected valuations. In India, the industry is still relatively young, so this is the first time we are seeing a cycle like this; so it has caused a few shocks in the system. However, it will happen again.
When one looks at the VC scene in India, valuation markdowns, down rounds, business model pivots, shutdowns and investment write-offs have become the staple this summer. Where did it all go wrong? Why did the sector—read VCs—fail to read the early warning signs?
Nothing has gone wrong. Valuation markdowns, down rounds, business model pivots, shutdowns and investment write-offs are an inherent part of venture capital. For every 10 start-ups a VC fund invests in, it will typically lose money in five, make modest returns in three and make great returns in two. So at least half of all start-ups will go through some existential challenge..in their life. Many successful entrepreneurs such as (LinkedIn co-founder) Reid Hoffman and (Amazon founder) Jeff Bezos failed in their earlier ventures before they became successful. In India, we are now seeing the first wave of mortalities, but you will continue to see companies fail, just as you will continue to see companies become wildly successful. Venture Capital is a high-risk, high-return business.
India is seeing a huge Series A crunch. Many start-ups that are trying to raise Series A funding have only been able to raise a seed plus, bridge or pre-Series A rounds. Why has the explosion in seed funding activity not expanded to post-seed funding?
The emergence of various incubators and seed investors in the last few years has completed the start-up ecosystem in India.
However, when you seed a company, you are typically backing little more than a founding team with an idea.
One has to expect that many of these ideas will not work out and that is completely okay.
The best companies go on to raise their next rounds and the rest drop off. That is exactly how it should be.
How much blame do investors have to share for some of the problems start-ups in India and South-East Asia are confronted with currently? Often, it was the investors who had pushed their portfolio companies to adopt a win-market-share-at-all-costs approach, something that is becoming unviable in a weak funding market. Now, the same investors that were pushing start-ups to grow fast are forcing these young companies to shut operations in areas that eat up too much money and fire employees.
Yes, there have been several instances where companies in India were over-capitalized and given too much money too early.
And investors do have to take the blame for many of these.
Again, this was not unique to India but something that happened in all major start-up ecosystems.
When you make an investment, you do so based on certain assumptions. When those don’t pan out, you need to rework your plan. This happens within large corporates as well.
Do you think the VC space in India, due to the herd approach to investing in the past, has resulted in capital being concentrated in a few segments and leading to valuation bubbles? Yet, are there also some sectors/industries that investors are still undervaluing?
Sectors fall in and out of favour based on macro-trends and sometimes, perception. Ten years ago, telecom and media were the darlings of the venture capital industry in India, driven by the rapid adoption of mobile and cable-TV connections.
After that came sectors such as microfinance, energy and healthcare. Then in 2014, the cost of a smartphone started to drop and this caused the internet growth to cross the tipping point. This led to a lot of capital going into consumer Internet.
Today, there are entrepreneurs doing exciting things around sectors such as digital lending, IoT (Internet of Things) and enterprise SaaS (software as a service). New sectors will continue to emerge while other sectors will mature.
We’ve been celebrating the Indian start-up scene for some years now, but where is India’s Google? China built its own Google—Baidu (helped by its government policies), and Alibaba has displaced Amazon there… When will we see such meta-level start-ups in India?
We are already seeing many successful companies come out of India that are fast becoming global leaders in their categories.
MuSigma, Zoho and Freshdesk for example. The level of technology talent in India is so tremendous, it is inevitable that we will produce world leaders.