ChIndia Chronicles : India Vs China – a qualitative study

Fresh from a 2-week long trip to China, after having interacted closely with various stakeholders in the Chinese startup ecosystem – Investors, Startups, BAT (-B) and Govt. officials, here’s the first post to capture the rich learnings.

This post aims to explore the similarities and differences between the two countries on different levels from an entrepreneur/investor point of view.

How similar is India to China?

  1. Customer behaviour – Our first takeaway from the trip is that Indian customers are similar to Chinese customers rather than US customers. This may stem from the fact that the personal expenditure per capita in India is $1,012 closer to China’s ($3,005) vs US ($37,206). The behavioural similarities are –

a) Both Chinese & Indian customers are equally sensitive to small changes in their wealth. Few supporting instances for this deduction are – the rapid popularity of the ‘Red Packets’ game on WeChat I witnessed first hand (Fig 1) and the success of the ‘Spin & Win’ exercises by Times Internet (Fig 2)

Fig 1 (right) – Excellent engagement on the WeChat group owing to a gaming feature called ‘Red Packets’ which enables people to gift other people money in a randomised (or targeted) fashion causing minor spikes in your wallet balance

Fig 2 ( Times Internet Presentation at China – India Dialog 2017, Beijing) – Satyan Gajwani, MD of Times Internet, presented a case study where they found 130% increase in M2 retention when new users were offered ‘Spin & Win’ opportunities

b) Very much like in India, majority of the Chinese consumers are not particularly loyal to a brand when there is no major differentiation in offering. From our discussions, we gather that they scout for the best prices across Taobao, JD.com, etc before ordering.

c) Also, unlike what’s widely being sensationalised, most day to day transactions are not via WeChat and cash is still highly preferred. I would argue that even though the penetration of electronic payment platforms like WePay is higher compared to India (owing to the large feet on street salesforce for these platforms), the acceptance or usage by common customers is not drastically higher than India.

d) Millenials are the Chief Procurement Officers (a term coined by Kunal Shah of Freecharge) of the Chinese households much like in India. We had an opportunity to engage with students of Peking University and gathered that the student behaviour is similar to Indians with regards to incentives, adoption of new concepts and products.

e) Another similarity is that the majority of the customer base cares more about the functionality elements of the product vs the design.

2. Market Potential – Owing to the similarity in population and rate of digital penetration, the market potential for both these countries is immense and in case of India, greatly untapped. The B2C market for e-commerce, consumer goods is huge in both the economies, but B2B market potential for SaaS is higher in India compared to China, based on our conversations.

Fig 3 – India Market Potential vs. China & US (ChIndia Dialog 2017)

3. Entrepreneurship Spirit – We could see the same spirit and zeal in founders of both nationalities. There is a strong desire to build great businesses and differentiated products. There is also a common focus to build solutions for the local market’s specific problems instead of merely following the footsteps of western innovation.

How different are we?

India & China are not only one of the largest and fastest growing economies of the world, but also one of the most ancient civilisations with strong culture and heritage. However, there are some striking cultural, structural and political differences between the two countries as elaborated below.

1.   Cultural differences:

  • The Chinese society and the Chinese startup ecosystem place a strong emphasis on communal well-being vs individual well-being owing to the communist ideology, which is different here in India. A fine example of this push towards communal well-being is the GET program (Fig 4) by Alibaba, through which 455 universities and 1000 training centres train youth in E-commerce and supply chain processes.

Fig 4 – GET plan by Alibaba Grp. to train youth in E-commerce and supply chain

  • Another difference that we found is the Chinese startups’ attitude towards competition – they refrain from talking about their competition and take an indifferent approach to their developments.
  • Unlike in India, most of the upcoming startups struggle to make it big as they are in the shadows of the BAT (who have captured different verticals & penetrated deep into the market) and hence, startups like Apus, Shareit are looking at India, Indonesia etc as their target markets.
  • The teams in Chinese startups have comparatively higher operational efficiency owing to a strong culture of discipline. The Chinese have a better work-life balance compared to their Indian counterparts.
  • Another major difference in the work and startup culture between India and China is the percentage of women in workforce and key product roles. In China, women are more than 45% of the work force while in India its 27%, according to World Bank Data. Kunal Shah, in his address to the China India conference, mentioned that a majority of Chinese startups prefer women as product managers. We were also pretty happily surprised to find a good gender diversity ratio in Chinese startups during our visits (Fig 5).

Fig 5 – Healthy gender diversity in a Chinese startup office

2. Structural differences

  • Customer segmentation of India & China is different. India’s Urban Mass is the driving factor for growth as it outweighs India’s Urban Middle while China’s Urban Middle far outweighs its Urban Mass, according a Goldman Sachs report (Fig 6).

Fig 6 – Difference shown in customer segmentation between India & China

  • Information is much more widely available for all in India compared China, owing to the controlled media. This structural difference promotes better foreign investor confidence into Indian startups vs Chinese startups.
  • Infrastructure – both physical (roads, logistics channels etc) and digital infrastructure (UnionPay, Internet connectivity etc) is far more developed in China vs India. This in turn results in differences in business growth rates and scale of operations.
  • Ease of doing business is comparatively easier in China apparently as the time taken to set up is less with most of the documentation being online. However, the legal and compliance procedures are trickier in China.

3. Political differences

  • Rapid infrastructure development and policy reform is possible in China, unlike India, owing to the centralised, one-party political system in place.
  • The political system in China strives towards a homogenous and orderly citizen behaviour – so much so that all govt officials don’t follow any religion.
  • Lastly, the media in China is controlled by the state unlike in India – a double edged sword as its inhibitive for free public opinion but constructive towards unification with lesser distraction from development goals.

Note – These are my observations and learnings from conversations and talks as part of the China – India Dialog 2017 delegation. The points mentioned above have been supported with requisite data sources wherever possible.

CERTIFICATE FOR LOWER DEDUCTION OF TAX

Take the following example:

Startup A offers service worth ₹50,000 to a larger business.

April 1, 2016 is the date on which service was availed and payment was due.
B will have to pay ₹50,000 to A. They won’t transfer the full value. Instead they will do the below:

B will transfer ₹45,000 to A
B will deposit the remaining ₹5,000 to the income tax department on behalf of A
This amount is called TDS (Tax Deducted Source) and remains to the credit of A and will be adjusted against A’s total income tax payable at the end of the year.

By March 31, 2017…
A has served 1,000 such customers and each customer has deposited ₹5,000 each to the government (Income tax department) on behalf of A. This results in total tax deposited to IT department is ₹50,00,000. Given A is a startup and possibly due to high expense base, they may not have any income and therefore no tax obligation. Or it could mean that it has tax obligation but it is less than ₹50 lakhs that is deposited. Now A will wait for filing return of income and pursue for a refund from the department.

This means that while A was not obliged to pay tax and got their refund, valuable ₹50 lakhs remained locked in and couldn’t be used.

The tax laws contain a provision where, every company estimating a loss in the subsequent year and will be locking in needless capital with government, can apply to the IT department and request for a certificate that authorises Startup A and similar cos to tell its customers not to deduct tax at 10%. The IT department may issue certification to deduct tax at as low as 1% or even 0%. It will depend on case to case.

Then what’s the catch and why can’t every company use it:

Please note that IT department wants to know following:

0. Your last year income showing such amount of profit that justifies a lower tax deduction certificate or even a Zero tax deduction certificate. There could be a profit in this year and you may still envisage a loss in the next year. That’s fine. Just that your CA should be able to justify the reasons.
0. Next year’s estimate. They will retain a copy in their records and use it to scrutinise when you’re filing your application next year possibly.
0. They need a list of all customers who you expect to transact with during the next year. Now this is where it becomes tricky. If you are a company where there are a humongous number of customers or there are a few but company can’t really predict who these will be, then you can’t be applying for this certificate.
0. So the lower deduction certificate only works best for B2B companies or B2SMB biz provided these are recurring customers.
0. You can also do part lower deduction. That means – if you have some customers who are recurring you can apply for those who are available and IT dept will allow a zero tax rate and for others they can stick to 10%.
0. Each time you raise an invoice you have to share the copy of the certificate and the annexure where the name of the customer is listed.

When giving the projections, while you need to ensure that it gives enough conviction to the IT officer that you deserve a lower deduction due to low profits or losses, do ensure that the projections are realistic.

It takes a few weeks of process to get this done.

If you have further questions feel free to reach out to me or varun@constellationblu.com.

Key takeaways from Blume Day 2017

February saw us hosting our sixth Blume Day, an annual event where our portfolio founders, mentors and advisors, fund investors, peer VCs, and the ecosystem-at-large came together to interact, network and share some wonderful ideas. This year, the event got bigger and better with separate B2B, B2C and Founder tracks, featuring an impressive line-up of guest speakers.

Here’s a preview of key highlights, straight from our founders!  

1. Blume Ventures-Draper Venture Network alliance

unnamed

“At SquadRun, we automate business processes across enterprises using human and machine intelligence and have just moved to the Bay Area as our primary market is here. Blume’s partnership with DVN has been great for us and helpful in the transition process. DVN has built a massive enterprise network that they leverage proactively to help companies with customer growth which would be instrumental for us. In addition, the Draper brand brings in a lot of credibility globally.” Apurv Agrawal, Founder, SquadRun

2. Founder’s Mentality with Sri Rajan of Bain & Company India

screen-shot-2017-03-02-at-4-08-18-pm

“The ‘Founder’s Mentality’ was a good reminder for companies to retain their competitive advantages by being competitive in spite of the growth paradox. Growth creates complexity, and complexity kills growth. The session laid down the framework that would help companies battle the growth paradox.”Allwin Agnel, Founder, PaGalGuy

3. IPOs a viable exit strategy in India – with Hitesh Oberoi of Info Edge, and Ashok Reddy, of  TeamLease

screen-shot-2017-03-02-at-4-21-17-pm

“The biggest learning for me is the need to start early (perhaps 3 years ahead). It was great to understand that IPOs don’t happen overnight and in fact, not even in a year. Consistency in growth, ability to take and margins and profits up and the ability to tell your story in a way the investor community at large is able to understand – These seem to be key ingredients of a company that is sprinting towards an IPO. Thanks for organizing that event.” Shivkumar Ganesan, Co-founder,  Exotel

4. Differentiation in a hyper competitive space with Radhika Ghai Aggarwal of  Shopclues

screen-shot-2017-03-02-at-4-26-05-pm

“First, what I found interesting  about this session was building a marketplace for Bharat (the tier III and tier IV and tier V towns) rather than for the India we know. Second, to focus on frugal innovation.” Manish Taneja, Co-founder & CEO, Purplle

5. Demonetization, UPI, Fintech – cutting through the clutter with Sony Joy of Chillr, Amrish Rau of PayU,  Vinayak Prasad of Verifone and Sri Rajan of Bain & Company India

screen-shot-2017-02-27-at-2-44-58-pm

“ With UPI and smartphones, we are on our way to have a better consumer experience for customers than anywhere in the world.  The session made us realise that now the other puzzle is to solve for the merchant side. We need to collaborate as an industry – that would mean banks and the NPCI needs to open up the system from both customer side (like UPI) and merchant side (how they receive money, customizable solutions on top of it etc)”Rajan Bajaj, Co-founder, SlicePay

Blume and Draper Venture Network – Going global, Network effects (and Founders, The World’s your Oyster!)

(this blogpost builds on the original article announcing the Blume Ventures-DVN strategic alliance, carried below) 

http://tech.economictimes.indiatimes.com/amp/news/startups/blume-ventures-enters-strategic-alliance-with-draper-venture-network/57120964

“We’re headed to the valley for prospect customer and VC meetings – who can you intro us to?”

 “Attending a conference in Singapore in two weeks, and also want to explore setting up our HoldCo and expanding into SE Asia.  Need your help”

“We recently had visitors from China and Japan, and learnt about the phenomenal growth of WeChat & mobile gaming in these 2 markets resp’ly. Want to visit Beijing and Tokyo, but don’t know where to start!”

We’ve lost count of the number of times our founders approach us with these “right here, right now” requests.  There seems to be a clear pattern behind these asks – the need for an on-demand platform consisting of global investors, customers, partners and and been there/done that founders.

And we’ve been hearing these asks way back from our inception in 2011.

Fast forward to today, just a few days after our 6th Blume Day!  Wow, has time flown!

Between Funds I and II, Karthik and I have made innumerable trips globally, especially to the valley, spending time with partners, investment professionals and platform resources of leading VCs like a16z and First Round Capital, to name just two.

Our founder wishlist, compiled over more than half a decade now, centers around some recurring founder pain points, from San Francisco to Bangalore to Singapore:

  • How can we best tap into a global network of investors, customers, partners?
  • How do we globally benchmark Blume and our founders?
  • “Smart money” is now a cliche; what specific new elements can we keep value-adding to our founders?
  • The end game: ~ 75% of all M&As take place within the $150-200M range; how do we best understand the needs of Internet giants (Google, FB, Twitter) as well as more traditional behemoths (Intel, EMC, IBM, Salesforce.com) actively scouring for India-driven plays?
  • How do we tap into increasing appetite of the Chinese, Japanese, MENA and other nearer-shore corporates and strategics?
  • How do we best help our portfolio founders tap global talent?

To map against these systemic pain points, we’ve explored many options, including hiring a senior valley-based resource, closely partnering with global VCs, and so on. We also realized along the way there is no one perfect answer, no one-size-fits-all.

After a Seven-Year Itch, we believe we’ve found the right answer, the right partner.

Enter DVN (Draper Venture Network) !

tim

Tim Draper @ the DVN Summit, November 2016, San Francisco 

In a space of over a year, we’ve come to know Tim Draper (the man behind Draper Associates, DFJ, and a closely linked yet wide array of related Draper venture entities) and the executive team of DVN.  Through them, we’ve also come to know their member funds (across the UK, Japan, Europe, North Asia, Central America, SE Asia, and of course the US) and in turn, their portfolio founders.  What has helped further seal mutual comfort – a common, shared entrepreneurial DNA between our two platforms.

Impact on constituents – what does this really mean?

1) For our Blume portfolio

Borrowing from Alex Rampell @a16z

a16z

  • Wide distribution and global scale of the DVN platform
  • Access to global customers for corporate development and eventually M&A
    • If you’re a B2B startup, access to Enterprise clients (e.g. Fortune 500 as well as new age Internet / Tech / H/W and S/W giants and upcoming startup stars)
    • If you’re a consumer internet startup, linkages to near-shore e-commerce and other B2C leaders (in Japan, North Asia, Europe, SE Asia and the US)
  • Access to other DVN member VCs (for co investments, future rounds, best practices)
  • Access to DVN LPs, Valley VCs, domain experts, founders, and advisors/mentors

2) For us (Blume) itself 

All the above [for Blume portfolio], plus

  • Joint dealflow / pipeline with fellow member VCs
  • Shared due diligence especially on cross-border plays
  • Access to DVN’s broad network of investors, advisors, CxOs, founders
  • Cross learning – sharing of insights, best practices, what mistakes to avoid!

announcement-1

3)  For our LPs 

While becoming a member fund of the DVN network, Blume retains its independence. In one sense, it is business as usual.  That said, our LPs could expect to get access to:

  • a wider pool of global peer LPs
  • a shared knowledge base for best practices, data driven insights on fund and portfolio company performance, forecasts

Sweating the details

Via an annual calendar of international conferences/events, founder synch ups and other interactive sessions, portfolio will get access to DVN’s full-stack platform. In addition to an Annual Summit in San Francisco, there are also regional conferences hosted by DVN member funds in their home markets.

When you take a deeper look at this alliance, two interesting themes stand out – scale / network effects, and home-grown entrepreneurship. These helped reinforce our belief we’d found the right partner in DVN.

trio-2

With Gabe Turner, Executive Director, DVN

Scale

Tim Draper’s big-picture vision, shared by executives of DVN, translates directly into the expansion of the network to include 10 member VCs, with us being the newest. This conviction around building and amplifying scale matches Blume’s status being consistently one of India’s most active VCs.

Home-brewed entrepreneurship

Tim Draper and the DVN executive team share a conviction that the most innovative startups seek out the best local fund managers in their home markets. This skin-in-the-game philosophy from peer “home-brewed” funds like Wavemaker (SE Asia) and Dalus Capital (Central America) again mirror Blume’s entrepreneurial DNA.

What excites us most is the network-effects this alliance can create, not just for Blume and its portfolio, but also for India-tech as a whole.  

So founders, while you keep your ears to the ground and build quietly, and whether you’re:

  • a robotics startup seeking inroads into Europe and the Americas for global customers and R&D talent,
  • an apparel supply chain platform, optimizing costs for global brands and factories,
  • a clean energy startup focused on reducing carbon emissions in Europe,
  • a made-in-India IoT automation startup targeting >50% of ARR outside India, or
  • an Indian B2C marketplace keen to incorporate best practices from China,

Founders, thanks to this alliance, the World can be your Oyster !  Full engines ahead !

boarding

 

Finding Exit Velocity: Flashback! [Part I]

For the last 3 years, at every mid-Dec Blume offsite, we have tried to understand the State of the Blume portfolio. And as a forward looking corollary, what should we expect for the portfolio in the year ahead given the larger VC trends in the country. The investing, the scaling, the pipeline selection and the portfolio management are all consistent discussion points, but what ends up as a theme on our Blume T-shirt on Blume Day in February is a manifestation of what’s top of our mind as a team.

In 2015, this was “Go Big or Go Home” – the year ended with 3 great exits (serendipitously, within a quarter – TFS, Zipdial, Promptec), 4 acquihires which returned 1-2x of capital, many write downs + “fractional price” acquihires. It also marked the first breakouts in the portfolio that were either companies reaching profitability / sustainability early or finding larger Series B and C rounds. It was a year well executed – the Blume team and the portfolio got the message and we rode some of the expected macro-momentum for that year.

In 2016, the focus was in figuring out Fund II’s portfolio construction. The legendary punchline from Hans Solo: “Never Tell Me the Odds” in Star Wars V (“The Empire Strikes Back”) guided our courage to pick outlier founders once again as we constructed the first 50-60% of the Fund II portfolio over late 2015 and all through 2016. It was also weaving the then new Star Wars “The Force Awakens” to show the power of 5 years of work – that Fund II portfolio would experience a much superior Blume platform and community offering.

 

In 2017, while witnessing some incredibly strong businesses coming out of Fund I, we yet realized that there are NO Series A/B/C formulas or templates to building a credibly large and profitable business. One has to fight the incredible odds of building in India with very little capital and all the constraints that crowd startups looking to head from Zero to grand Exits. “Exit Velocity” is an aspiration and a guide for our buildout of Fund I portfolio for the next 3-4 years (we’re 6 years in already! Feels like just the other day when we went in with our hopeful pitch and begging bowls to raise a 100cr Fund I – a miraculous 100% Indian LP fund). We knew it then but were guilty of wishing away this issue of Exit Velocity. Indian LPs were always incredulous about our pitch since they knew that if we are funding at seed over years 1 to 3, we can’t get to Exit Velocity in time for the 8-10 year exit period for the Fund. The historical evidence was on their side. It’s still our onus to prove them wrong. They are right in most part but if I have a few examples in the next couple of years that can help me return my principal at least + lots of marked up gains to harvest (that’s the target we’re playing for at Blume), we can make a huge point.

I think we can win the argument that we have started a revolutionary startup cycle of birth to exits for investors and founders in India, if we reach these milestones in more and more funds between now and 2020.

We convinced ourselves that there will be small M&A’s, large M&A’s, the emergence of more aggressive IPO buyers into growing but loss-making companies and we hoped that the relaxing of rules for smaller IPO’s on a small cap exchange will trigger another listing option. All these trends are, at best, half-hearted today and, at worst, non-existent.

So, the discovery has begun in earnest – to learn the paths to Exit Velocity, I think we will have to park most of the seemingly glorious stories of the last 7-8 years and flashback all the way to pre-2005.

Revenge of the Profit-Seekers

What’s common between these companies:

 

All public or on the verge of getting there.

All at 100’s of crores of net revenue.

Most fascinating fact – even if a couple of these firms were born/reinvented post 2001, the founders all turned entrepreneurs pre-2001. This was the era of the pre-2001 founder – who didn’t know he would be ever allowed to build an unprofitable company beyond a few years. No one told them it was possible – and the VCs hadn’t come in – and that was a good thing!

There are many others – this is not an exhaustive list – there are companies like Directi, and Photon and Zoho in Chennai which have never even raised a single $ of VC money though their journeys.

The scarcity back then (coupled with no funny money to back their competitors much more than them) helped them build robust profitable models even if they took a couple of extra years in the process. Eventually, this healthy business model helped them go public and continue to grow at a healthy 20-30% growth clip for years after going public as well. It’s wonderful. How and when this became so unsexy is beyond me.

And then over the last week, as I bring up this topic, everyone I speak to has a few names to add to this list. Citius, NetroPlus, Rategain, Fractal, lots of B2B plays that exited etc. Of course, we’ve built  incredible stories post 2005 similar to the ones above. They sit across many VC portfolios. However, the VCs’, the media and the new-age post 2013 founders have not at all played up these companies and their arduous journeys of profitability and value creation enough. They should be given the pedestal to speak from. In between, there was a joke that it was too unsexy to be profitable.

We’ve had companies like E2E and Printo in the Blume portfolio be profitable from even before we invested. They’ve grown 3-10x and stayed profitable every year in between and with ZERO outside capital and yet, there is no respect for what’s achieved – just the scale issue of whether they can get to $100’s of millions of valuation has become a holy deterrent. Now, in the last 12-18 months, we’re adding more and more to that list – Exotel, Mettl, Threadsol, Grey Orange, IDfy, Webengage, Nowfloats – some are investing in growth with their new rounds and some are boostrapping away to sustainability from their last round. I think every one of these can easily grow 5-10x from where they are today with very little growth capital over 3-4 years.

(every company in this above paragraph is already at 20cr-50cr actual annual revenues OR ARRs with the exception of GOR which is a breakout)

EVEN IF the 15-year old stories highlighted above are NOT fair comparisons to the slightly more “VC-led capital-dumped” startup frenzy of the last 3-5 years, there are some great lessons from those good ol’ founders and their startups. Talking to Hitesh @Naukri/Infoedge and Ashok@Teamlease at Blume Day (Feb 10, 2017), we picked up some valuable lessons which compound the learnings of the first 6 weeks of inputs we’ve had in 2017 – from bankers, small cap fund managers, strategics etc. All that and more coming soon in part II.

Note: The videos of the fireside panel with the both of them and the 1-on-1’s with Hitesh and Ashok will be published shortly and I won’t be able to do justice to all their wisdom (you’ll have to wait for the full recording for that) but will share my takeaways in Part II.

 

EXIT VELOCITY (Fluchtgeschwindigkeit!)

Fluchtgeschwindigkeit!

“What the Flucht is that?” asks my colleague!

“It’s German for ‘Escape Velocity’” I replied, “and Flucht is ‘Flight’” – more inspiration, or perhaps goal setting, for this year’s #BlumeDay.

Why German? There is a subliminal connection. The word ‘Blume’ is not just a phonetic play on the English word Bloom, but won the naming match for our fund in 2010, primarily, since it was the German word for ‘flower’. And with this new word discovery, I quite loved the velocity of Fluchtgeschwindigkeit!

It’s our 6th edition of Blume Day. Wow! We’ve been feeding off our own optimism for a long time. Time for a shift of gears now. Ditto for the rest of the VC ecosystem. If our founders and us (and I speak for all of India VC in some sense) don’t get our act together, we’re going to lose more precious time building the promise that is the Indian startup story. It’s inching along but inching isn’t quite the mandated acceleration towards the requisite Exit Velocity.

It’s the Year of the Rooster in China. It’s the Year of the Exit in India. Correction: It’s the beginning of the Exit Era in India. 6 years for Blume Fund I, 10 for most other Fund I’s in other Fund portfolios, even 12 years in some cases. Lets collectively figure out what engines need to revved to achieve EXIT VELOCITY. In this same timeframe (post 2005), Elon Musk has built rocketships that Escape Earth and land back too, at will. Long way to catch up. We’re just figuring out Escape Velocity from India-only revenues in most cases yet. Just saying.

No – I’m not talking paper markups, I’m not talking about the one Hail Mary (NFL jargon) exit in some portfolios. I’m talking about building a systemic and endemic path to EXIT. That doesn’t mean every company and/or its founders have to sell – it just means the company has to become good enough that someone wants to buy. There is a difference in wanting to Fund and wanting to Buy.

Exit Velocity (for the purposes of this post) is interchangeable with the concept of Escape Velocity. Without delving into the depths of physics, I tried to adapt the conventional formula for my own ability to rationalize why this isn’t working yet in India (see Inset – it’s just me trippin’, wired in with some Coke Studio music).

exit-velocity-flucht

 

 

What the Flucht is wrong with the Indian startup ecosystem? How does one make sense of the vast amounts of $ deployed and nothing back in terms of massive profits in these companies or acquisition-led $ returns or listing-related capital gains back to the investors. What’s gone wrong?

We have not invested enough into understanding what it takes to hit Exit Velocity in India. I’ve been trying to sit down and understand this with Avendus and other bankers, strategics like Amazon and Ad giants, from the online and offline worlds, Small Cap managers in the Indian public markets and it’s only been 6 weeks into 2017. Lot more of this to be done all year, hell, actually all of the coming decade. Every VC in India needs to wake up and set up a dedicated force (even if of 1 person!) to ponder, scope, build new “accelerators to Exit Velocity” and obsess about this full-time. Instead, we keep building more wannabe YC-clone accelerators, seed funds, angel groups and shoving more and more down the funnel that’s clogged the drain to Series A and how!

I can write a multi-part series on the thoughts/angst in my head. However, let me just summarize as thus.

We are, and should be, a country proud of building many many $100-$250 million exits – both in the local and cross-border markets. In INDIA CONSUMER, this means profitable businesses and/or great gross margins in sub-sectors that are growing at 2-3x of GDP growth rates. In India-built B2B, this means highly profitable $20-50 mill revenue businesses. If the ingredients hold after these milestones, just keep building – trust me, no one is complaining post that point. Just get there (Yes – am hoping founders are listening – play for the goals that matter – not just some mumbo jumbo unicorn math)

Prospective and existing LP’s in India VC also collectively need to wake up and smell the hatti kaapi at B’lore airport once in a while rather than the Java Chip Frappucino at Starbucks (which I admit, is my favorite Sbux, as is the mini small print Rs 20 kaapi at the former – the budget kaapi is the real India, jfyi). I’ve been unashamedly telling all the LPs that I meet that we need to design Funds for India where we are proud of seeing 8 of 10 great portfolio co exits being in the $100-$250 mill range and the other 2 escaping to another Orbit and then hitting a $500 mill to $2 bill exit velocity. That latter goal alone screws with too many heads of too many Series A VCs in India – who apply the entry framework of an Unicorn exit too often to all 10 of 10 – hmmm, that’s not right at Series A stage.

I’m not letting founders off the hook here. Most don’t understand the construct of the VC industry as it exists in India and expect capital to be available at will and at any size of round and at terms that are dreamy. I wish it were that simple. The collective responsibility of the Exit lies with all stakeholders. Haven’t delivered any? Don’t have friends who have delivered any? Then, don’t try to teach rules of engagement to capital providers. Run your story without Venture Capital or play by the rules of the capital’s goals. (Can write more separately about what founders’ roles are in propagating this cycle – Write to me if you want me to elaborate via a new post re: my expectations from founders)

Back to VC’s – my suggested mantra for India VC is:

Raise small funds, get these “relatively smaller” exits, keep a deep reserve for the BIG hits and park this reserve outside the fund, deploy quick, put harvesters (Read EXIT VELOCITY generators and EXIT teams) in place, go back to planting seeds and saplings and flowering plants before another harvest and rinse/repeat with 2-3 year primary sowing cycles of deployment with smaller corpuses.

The local EXIT Velocity formula should drive Fund sizes – not the other way around – by salivating for Valley Exit Velocity formulas (see Inset again on how to benchmark).

The VC Fund Structures should budget and accommodate add-on capital at will (maybe through a perpetual capital entity or listed entity)– not force fat fund sizes upon managers at inception of the Fund, accompanied with the pressure of a “big 3-4x multiple” Gun-to-the-head on that fat fund.

VCs need to revisit their own operating models in India. Least innovation and the most cut/paste in India has happened in the mothership of capital guzzlers of the startup industry – the Venture Capital Funds!

Cut/paste works if the Exit Velocity frameworks converge – they are nowhere near convergence relative to China and the US (this is probably true of overfunded cut/paste startups too)

2017 will mark the beginning of the Exit era; where the needle gets pushed by both VC’s and Founders, with whatever means available, towards EXIT Velocity on the speedometer. May the best portfolios prosper! Jai Hind!

 

 

Author’s Note: I don’t claim any scientific veracity of my adaptation of the formula – its something that I came up with to humor myself and wasn’t why I started writing the main piece. The formula doesn’t matter that much actually. It’s just a ploy to illustrate the principle. That said, I will see if the formula holds the test of time and valuation math.

Start ups liquidity management post funding – Fixed Deposit (FD versus LF)

Largely due to demonetisation, banks are flushed with liquidity. Natural outcome of this – falling interest rates. This means that fixed deposit rates that banks offer shall be lowered. 

Implications for start ups 
Startups typically raise chunky amounts during their fund raise and plan is to deploy that over a period of 12-24 months. This means that, there could be considerable time between capital being raised and money being deployed. This idle money should be placed in liquid funds or Fixed deposits so that it earns interest.  And these can be meaningful returns. For a seed plus round of US$ 1 Mn that a young startup may have raised, the interest income over a one year period can be as high as ₹20-40 lakhs. This could well be a month of burn. 

Before I proceed, let me explain the above modes of parking of capital:

1. Fixed deposits (FD) – these are to be placed with larger banks only because smaller banks do have their issues and theoretically riskier than larger banks like SBI, ICICI, HDFC and the likes. 

2. Liquid funds (LF) – these are funds that primarily invest in money market instruments with low maturity period. Its a type of mutual fund that is aimed at bridging the liquidity gap between needs of large corporations and even government for their short term needs.

FD has a lower risk return profile vis a vis LF. It means – FDs are less riskier and have lower returns relative to LF. It’s about relative risk between the two. In absolute sense, FDs also have risk in case the bank that one has opted for, collapses. But credit to RBI and india’s banking system, such instances have been very rare. Nevertheless I would always opt for larger banks and not fall for smaller banks who offer slightly higher rates of interest. 

Between both the above options, I have always recommended that startups should consider investing their surplus liquidity with FDs and less with LF. 

Selling point of an LF is that it could deliver greater returns that range from 1-3% by and large and that they could end up being tax free. Also, if there is a sudden need for money, breaking of the FD attracts pre payment penalty which isn’t the case with LFs. 

For start ups – their interest income from FDs will be tax neutral because they can offset it with losses of their burn anyways. So technically interest on FD becomes tax free and you can claim refund of the TDS. And if you file a lower deduction certificate with Income tax department, you could even get the benefit of a near zero tax deduction on the FD.  Varun and his team from Constellation (@urConstellation) have helped a few of our portfolio companies obtain this certificate and can assist in this process. In fact, we have been taking this certificate for Blume each year. This is the right time to start thinking about this certificate for lower deduction of tax for Financial Year 2017-18

Coming back to FD versus LF argument…

There is a school of thought that LFs aren’t too risky. Fair point.  LFs are a money market instrument and have market risk and on paper it’s possible in some stray scenario that their value falls due to some money market developments and we loose money as we try to redeem the funds around the same time. This doesn’t happen most of the time but given the above tax neutrality of FD, why take additional risk is the only point in question.  Besides, for urgent needs of capital, bank FDs can be structured in such a way that one doesn’t loose much of penal charges. Again team at Constellation has been doing this for quite a few of our portfolio companies. Mitul’s team should be able to help in case needed. 
And finally, if you would like to invest into LFs only, make sure you do it with advise of expert who understands the risks and can help with a decision of choosing the fund accordingly.  Do reach out to Shriya at Constellation and she may be able to assist for this. 

Spending 10 minutes on liquidity management by one of the founders personally on a daily basis will go a long way in giving a startup the financial stability that could be well be a difference between a good start up and a great startup. 
Liquidity management is much more than just the decision of FD versus LF. It includes managing burn, receivables, payables, taxes, salaries etc. Will try and extend this in the next write up.