You largely stayed out of India last year—the year the country saw record deals and start-ups raise record cash. What was the logic in staying out at a time when the start-ups space was most active?
One of the greatest investors of all time has said: “Be fearful when others are greedy and greedy when others are fearful." We, however, believe in maintaining a consistent investment pace, irrespective of the environment. Jungle invests in 8-10 companies every year and 2015 was no different. We invested in Livspace, Momoe, Snapbizz—although this got announced later—among other interesting companies in India in 2015.
Last year, you announced the first close of your second fund. In the current scenario, are you confident of hitting the $100 million target for your second fund?
Things are progressing well on the fund-raising front and we are confident about achieving our target.
South-East Asia and India are witnessing a huge Series A crunch. The past couple of years have seen an explosion in seed-funding activity. Why has there not been a similar explosion in post-seed funding?
Our belief is India has roughly 50 active early-stage VCs as compared with 100 in the US and around 250, approximately, in China. So, definitely, there is more to do on the series A/B funding landscape in our markets. On the other hand, there is growing interest in the Indian and South-East Asian start-up landscape and we view this as a big opportunity for firms like us.
In the current scenario, when funding is not going to come easy, do you see a lot more start-ups merging operations and more consolidations and mergers and acquisitions (M&As)?
We are interested in more M&A activity but one that is driven by strategic drivers and less based on vested interest of financial investors involved.
How do you see the start-ups space in 2016?
I think most start-ups have adjusted well to the new reality and are focusing on areas that are going to create long-term value and differentiation.
Most investors, who had followed a ‘push approach’, and got start-ups to adopt a win-market-share-at-all-costs approach, are now asking these young companies to slow down, and close unviable operations and lay off people.
I think it is too much of generalization to say that investors are following a “push" approach. When investors back a business, decisions are made on a collective basis and it is up to the founders to decide the pace at which hiring, spending and scaling operations should take place.
When the market turns, a seasoned entrepreneur will understand that sometimes difficult decisions need to be made—but, nobody is being “forced".
Does the slowdown in the availability of equity funding and a downward pressure on valuations create business opportunities for firms which lend to technology start-ups?
Yes, an environment as such does create opportunities for venture debt, but it does not replace equity.
Debt can be used to finance requirements such as capital expenditure, whilst equity is reserved for significant funding activities such as product development or hiring.
Also, most venture debt providers in Asia tag along on an equity financing round—so increase in venture debt rounds also indicates an overall increase in equity based financing for start-ups.
How do new start-ups founded in the midst of major market downturns do over the long haul?
While economic uncertainty is never a desirable situation, some of the world’s greatest businesses, such as Microsoft and Apple, started during a downturn.
There is less competition, talent is more easily available, and rather than rushing to expand your business, you have the luxury of doing it right.
A recession is an opportunity to build a lean, thriving company.
How do you handle it if and when any of your portfolio companies raise capital at lower valuations in a downturn?
I think it is more important to focus on getting the business right. At the end of the day, we are confident there will always be long-term investors and buyers for great businesses irrespective of market cycles.
Are we seeing a changing trend, where VCs, who traditionally put in money in later funding rounds, are now joining seed rounds?
Yes I think there is a shift in trend now. VCs are ready to back an idea at a nascent stage. If the idea is unique, investors are ready to back it from day one and partner in the entire journey rather than come in at a later stage.
Your views on another trend that we have been seeing off late—a lot more VCs are now jointly investing with angels.
Angels are typically people with vast experience and network. We view this kind of collaboration as a positive for the ecosystem.
Prime Minister Narendra Modi’s government has been trying to engage and promote the start-up community. But how much work has the government really done?
This government has definitely interacted more with the start-up community than any other government before. Start-ups are a ‘hotbed’ right now and there is also a large talent pool that is moving in the entrepreneurial direction.
For VCs in India, can they finally afford to wait because hedge funds are no longer breathing down their necks?
Well, that certainly points to a less competitive environment overall. We expect the hype to cool down and markets to rationalize over the next 6 to 12 months.
Do you share the view that valuations will correct further?
As mentioned earlier, we do expect valuations to adjust in India overall, and we believe it would be a good time to put money to work behind solid ideas.
Do downturns present exciting opportunities for VCs in India and South-East Asia?
A lot of successful start-ups have taken off during a downturn period. The cost of doing business is typically lower; there is a bigger talent pool also available. So we have seen new concepts take off during such periods. But, of course, the challenge is to be able to sustain during that period.
Most VCs follow a 6 years + 2 years + 2 years cycle, some follow shorter cycles of 5+1+1. Is that enough time for start-ups to break even and be profitable?
Not sure if that’s the case. We believe that more active and serious VCs in the market would have an 8 to 10 year fund life, which an option to extend.