Be active in a downturn because that is when the opportunity is: Cherian Mathew

Mathew says that in industries where competition is huge, investors need to raise more and grow very fast, while in sectors where there is little competition, it makes sense not to rush.Mathew says that in industries where competition is huge, investors need to raise more and grow very fast, while in sectors where there is little competition, it makes sense not to rush.

Bengaluru: Investors who are looking at India on a long-term basis and have placed bets on leading companies in their sectors are in line to notch up good returns on their investments, said Cherian Mathew, founder and partner at US-based venture capital firm Firebolt Ventures, in an interview.

Edited excerpts:

What do you make of the funding frenzy that India has seen over the past 18 months?

The same thing to some extent happened in the (Silicon) Valley over the past few years. But definitely there are a set of large investors who believe that India is the last big growth story, now that China is slowing down. You can invest on the basis of several factors—profitability to growth to market size.

For instance, you invest in the belief that by 2020, you will have a billion Indians online and that will create huge opportunities, and you want to make sure you have exposure to the leading players.

Some of this may make sense to sovereign funds who have a 20-year horizon, and not so much sense for an angel investor with a three- to four-year horizon. So, it may be a bad investment for me, but a great investment for someone who is willing to take on that 10- to 20-year liquidity risk.

In 2008, most people wanted their money back, but there was not enough liquidity. If you can take such risks, there will be cases in India, where the rewards can be made. This is what drove investments to India.

Even in the US, we’ve had cases where if a company does really well, other companies look to that for comparable valuations when they do fund-raising, and because of that tendency, multiples go up. Consumer markets are bigger today then they were in 2005, because then there was very little mobile Internet—so, it is a much bigger market now.

So, that may justify the valuations of certain companies as the market will grow to become much bigger—but you cannot use that to justify the valuations of companies in different sectors and say X is valued at certain multiples, and so we, too, need that.

Long-term, India will do well. The movie I am seeing right now on India does not have anything on profitability. The question is whether the current No. 1s that have raised so much capital, and on which investors are betting on, will continue to remain No. 1s, or will new players come up and replace them.

At one time, Infibeam was among the top e-commerce companies in India—they are still doing well and profitable, but they are no longer talked about in the same league as a Flipkart. For VCs (venture capitalists), if you have invested in the No. 1s in India, and they stay in that position, the opportunities are huge.

When you look at start-ups in South-East Asia, India and even China, a lot of them are copying successful start-ups in the US. Investors, too, appear ready to fund these clones because they’ve seen it work in another geography. When will you see a lot of people attempting start-ups that are addressing unique problems/challenges related to India? Also, since investors don’t have benchmarks to evaluate such start-ups, who are catering to unique local problems, will such firms struggle to attract funding?

You are right. The reason for that is a lot of capital is coming from the US funds, or the fact that a lot of VCs here may be raising capital from the US. Most Indian VCs have US partners. When you are in Silicon Valley for, say, 10-20 years, you have a sense of what a good investment feels like.

But when someone is coming up with a new concept in hydroelectric projects or, say, a new format for fast-food outlets here in India, it is very difficult to fit that into what these US-based VCs, partners understand.

On the other hand, if you tell them that this is the Amazon of India, or Uber of India, then they get it. They may also understand certain applications and services which have demand in India, even if something similar is not present in the US. Yes, there are a lot of interesting opportunities that are India-specific that could be big. For example, a lot of the companies we call success stories today may partly be due to the fact that they’ve raised a lot of funding every 6, 12 or 18 months—whatever the number is; for such companies, raising capital will be a challenge if they are in the India-only kind of business.

Look at redBus. It was one of the companies which did not have a comparable outside India—so, you could not say they are similar to Expedia or Makemytrip and, therefore, they should be at this valuation. You could also not say this is where someone like Cleartrip is headed, and use this as a benchmark for redBus.

For such companies, you don’t have multiples to compare for, say, counterparts in China—therefore, large funding rounds in such companies will have to come from different sources such as the SoftBanks of the world, rather than the traditional VCs.

When VCs feel comfortable with such risks, only then will they fund companies doing India-specific solutions or unique solutions—it is a challenge for start-ups doing such stuff to raise capital. Such start-ups may take a lot more time to raise capital. It is because it is always easier to explain Flipkart to an investor, rather than a redBus.

What is your message to angel investors in India?

You have to be active in a downturn because that is when the opportunity is. In the US, it has been practically impossible to hire engineering talent for the last two-to-three years because you got so many companies coming up.

It was really hard for seed-stage companies to hire—this situation improves and becomes much better in a downturn. Loads of consumer and social media marketing companies pitch to me, and in a downturn, if this number goes down, it is helpful.

When VC flow comes down in terms of capital in a downturn, it could actually be a positive for angel investors. In a downturn, if someone is quitting their job to launch something, I will be optimistic about investing in such companies.

In good times, it is easy to raise money and, if you fail, there are fallback options; but you don’t have that comfort in the downturn. So, angel investors should bet on such entrepreneurs.

What is your investing philosophy?

My approach to investing is a little different from other VCs. Traditionally, VC investing is that you need to have good deal flows, pick the best companies, get in early and help out the companies after you invest. These are the four main buckets.

My approach is different. Instead of using my network for finding interesting companies, I have built an algorithm that helps me track deal flows and interesting companies. Then I reach out to these companies. This tends to give you higher quality of companies than just simply meeting all companies.

I have not made too many investments. I’ve typically focused on co-investing with established firms and I have co-invested with August Capital in Open Garden, and we are closing another investment, hopefully this week, and that is also with two other top VC firms.

On sectors, I’ve done (invested in) enterprise, Saas (software as a service), consumer mobile and two investments in IoT (Internet of Things). I prefer to look more for outliers. For instance, when you look at Facebook, that was the last big company that made waves in this space, and after that, if you had invested in other social networks, with the exception of Twitter, we have not seen many become very big or successful. Very often, you want to identify the trend before it becomes hot, rather than after it becomes hot—then it stays hot for a year, and by then there may be one leader in that segment.

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? Are VCs often pushing start-ups to a pace that they may not be comfortable with? Is venture capital killing start-ups?

VCs have different models and there are good reasons for that. One reason is that if you are conservative about growing, then someone else may get more funding—there are certain cases where 10 companies were competing in the same space, and the one that raised most capital ended up winning.

This is an example where growth has to come at the expense of all other costs. There was a ride-sharing company before Uber—they started the concept and were ahead of the time. But Uber did a much better job, raised far higher capital, and got to where it is. So, in industries where the competition is huge, you have to raise more and grow very fast. In sectors where there is little competition, it makes sense not to rush.

In my case, there is only one company where I have taken a board seat, and that is growing at a good enough pace, but not the extent that it creates risk.

Every single role—whether it be head of product, engineering, the people you have may be good at a certain stage, like when you have 10-15 employees, but may not be the right fit when you hit 100 or 500 employees. When you grow too fast, existing employees may not have the time to adapt to larger roles, and you may have to bring in more senior people, and many a times, this may cause issues.

In the US, at one point, you could do an IPO (initial public offer) at a value of $80 million to $100 million and, today, at below $500 million valuation, it does not make sense to list—the regulatory cost of going public is too much. Earlier, the tenure for stock vesting (for employees in start-ups) was four years, but today, it is about 8-12 years. Therefore, VCs may be pushing companies for faster growth.


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