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Matrix Partners’ Avnish Bajaj spots 3 trends for investing in early & growth businesses

ET Now|
Updated: Sep 30, 2019, 03.14 PM IST
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Avnish Bajaj-1200

Highlights

  • Customers’ conviction brings out the structural changes.
  • Fintech, various forms of commerce, SAS and enterprise are top places to invest in now.
  • Not sure whether this is the beginning of the bursting of a bubble.


We will get to that part where sometimes the investors get ahead of themselves and the customers. That is when the trouble starts, says Avnish Bajaj, Co-founder & Managing Partner, Matrix Partners. People are becoming much more discerning and the level of capital flow one has seen over the last two-three years in startups is going to dramatically slow down. Exactly when, I do not know, says Bajaj, in a chat with Ayesha Faridi and Abha Bakaya of ETNOW.


Given the kind of structural shifts that we are seeing in investments, particularly in the tech space, would you attribute this to conviction in a larger structural story?
I do not think investors’ conviction can bring about structural changes. Customers’ conviction brings out the structural changes and the investors either spots them early or spots them late, depending on where you end up in the cycle. If you look at your behaviour, my behaviour over the last three-four years -- between Ola, Uber in terms of transportation; Swiggy, Zomato, in terms of food delivery, bookmyshow in terms of booking tickets -- our behaviour has changed and the investors have been following that.

I know we will get to that part where sometimes the investors get ahead of themselves and the customers. That is when the trouble starts.

Fair enough. You are saying that if we had started to see that tipping point, given some of the recent global events with regards to the likes of a WeWork for example, do you see this as a change in trend? It may not hit investments back home in India, but overall in terms of an environment in tech space, perhaps you cannot run ahead of valuations to that extent?
There are a number of things that are at interplay right now. I would separate them as otherwise you can throw the baby out with the bath water. We will come to WeWork as well but if you look at the model, we just spoke about Uber, Ola, Swiggy, Zomato -- a whole bunch of them there -- and one can get into details but at a very summary level.

They are a seriously disruptive, call it 10x disruptive both on the supply side and on the demand side. There are serious gaps in the market that are being solved and that one can bring technology into play. Without technology, what does that business look like? A taxi business looks pretty good at the gross margin level. Businesses like WeWork, one could argue is just an aggregated rental business and technology has limited scope there.

If you disaggregate what has happened in the past, there are some great articles that came out over this weekend where investors were arguing about or not discussing how companies which had very low margins were expecting the same multiples of companies that have very high margins. For example, even a Zoom Video which I am sure we all use a lot, has very high margins.

When everything gets coalesced into each other and investors stop being nuanced about thinking through some of these things, that is when the problem starts. On the way up, everything played into each other. On the way down, the same thing starts happening and then for investors, the best opportunities come about. So it is going to be painful. I do not frankly know. I wish I knew whether this is the beginning of the bursting of a bubble. Was there a bubble? Absolutely there was. I do not know if this is a beginning because there will be a number of false starts but I think people are becoming much more discerning and the level of capital flow one has seen over the last two-three years is going to dramatically slow down. Exactly when, I do not know.

Recently, the finance minister blamed the penetration of cab aggregators such as Ola and Uber and the change in the mindset of the millennials who prefer to use them instead of actually owning them for leading to the decline in sales and the whole host of other car manufacturers as well say that this is one pertinent reason. While facts may dispel that notion, what are your thoughts on the future of cab aggregators? You also invested in Ola?
Yes, there had to be a controversial question. Let me say, she is actually right and unfortunately that statement was made in the wrong context, at the wrong time. If you actually look at the prior year when the auto sales were growing, a lot of the sales were being driven by the cab aggregators -- the Ubers and the Olas.

It so happens that this year the growth of the cab aggregators has slowed down and so there is a shift in the trends. As for millennials, she is right about that. In almost every business we have seen that. Millennials are on Instagram, not on Facebook, rather the generation Z. Snapchat is not a product of mygeneration. In fact in a lot of our businesses, consumer brands in the US and globally, a lot of disruption has come about because millennials just want a different experience. So, I do think that the overall trend is right. Unfortunately it was made in a context where it became a joke!

The reality is because of the changing customer preferences of millennials, who are now increasingly the highest buying power in the market a number of businesses are getting disrupted, will get disrupted and therefore new opportunities are coming out and we are betting behind the trend. As it comes to Ola and Uber, every cycle of disruption and innovation go hand in hand. It generally results in one to two years of growth upfront. I have seen this with Quikr and OLX, Flipkart, Amazon is well known; Uber, Ola now are going through it.

What happens is that when that irrational competitive behaviour starts becoming rational, there is one or two years of zero growth, sometimes even decline. The same thing happened with Flipkart and Amazon in 2016-2017. To me, this is normal. Itis a roller coaster ride for people like us. It is very hard to actually go through the stomach churning changes but it is normal.

As we move forward our tonne of mobility of problem has still to be solved absolutely. Growth is going to come back, the form factors are going to change. You are going to see a lot more two- wheelers and three-wheelers, but again it is normal.

This industry is making its way through unsustainable practices of the past which brought growth forward now kind of playing its way through a more rational period.

On the financial viability of all these new tech startups so to speak, I mean, starting off from WeWork, which is struggling with its IPO to an Uber wherein the founder himself said that it is never going to make money. Even back home, experiences with Scootsys and Swiggys of the world, which are great for the consumer but not really profitable. When do you see some of these platforms turn profitable and financially viable in that sense?
I am a venture capitalist, I do not think about profits. No, I am joking. I again think it is nuanced, if you look at how some of the consumer brands were started in the country -- whether it is Coke or Pepsi -- they lost money for a long period of time. So let me again go back to the example we had earlier; are you providing a 10x differentiated experience? If you are providing a 10x differentiate experience, generally you will be able to make money. For that, you have to hook customers.

I am sure some of you would have read or heard about this whole notion of technology adoption curve which starts with early adopters, then you have to get the mass and stuff like that. The reality is there is no problem with early adopters, but if you have to become a very large business, you have to get people who are on the fence, over on to your side. In order to do that, you have to incentivise them. This is normal, Coke, Pepsi and all sold below bottling cost in the country for a long period of time.

Like I said if you are providing a 10x differentiated experience, at some point you need to be able to make money. I am a very avid user of Scootsy. They have started charging a Rs 50 delivery fees. I did not know when and my behaviour has not changed. I remember when we started, BookMyShow used to lose money on every ticket. Then they lobbied with the government, they were allowed to start charging an internet handling fee.

Now when I book, I do not even know how many charges they are putting in, they are all starting to make money because it is a 10x experience. Again, when we are looking at investing in businesses we do think hard about this saying is this a 10x differentiated experience. We have some ways of measuring customer loyalty and how many times a customer is coming back and if we find that the customer is extremely loyal without selling things below cost, what Ola and Uber were doing if we were to take that example. They were not selling below cost, they were making money on the ride but they were pumping it back to the drivers. So, if you can make money while providing a 10x experience on a ride or on a particular unit, then ultimately you will be profitable.

The bad news is over the last four, five, six years, the cheap availability of capital and some of the large investors in the world essentially encouraging founders to delay IPOs, resulted in this problem. If you do not have to do an IPO you do not think about profitability. But it is changing and it is heading in the right direction. Fortunately, even in our portfolio whether I look at Ola, Quikr, Practo, Limeroad, Dailyhunt, Mswipe, in all of these companies, the narrative shifted to profitability about 12-18 months ago. Some of them are profitable today. Quikr broke even in India, Ola broke even in India but the narrative moved over to profitability about a year ago.

Tell a little bit more about what you are looking at -- the strategy and the companies on the radar.
The strategy is a bit more of the same but at a very macro level, in venture capital you have to get 4 Ts right -- the trend, the team, the timing and the TAM which is the target addressable market. I would say that we spent most of time figuring out teams. If we can spot a trend early, which frankly in India is a bit easier because we have to look to the west and the east and we know kind of what is coming. So we are able to spot a trend early, then we are over indexed on teams.

Generally, the markets we are investing in and the timing is driven by the teams we are seeing. More recently, we are seeing a lot in fintech but not in the traditional fintech. Fintech, historically, over the last two-three years is included in our portfolio and some of them have gone through crisis as well. Fintech is a lot more than that. Actually in this one, EU is ahead of the US and China. They have come up with some enabling regulation around neo banks. We are seeing a bunch of neo banks in India. We have announced a few of them, there is a virtual credit card company called First Principles Labs. There is another one which is focussed on the 500 million digibank. So, that is one trend. Fintech in my view is a very large sector and will continue to be for the next decade so we could easily make six to eight investments a year.

Recently we are seeing two sectors that after two-three years of under investment, are starting to become much more active. One is commerce, various forms of commerce. People had kind of given up after Snapdeal, Flipkart, Amazon, ShopClues. Again going back to the 10x experience, if from the consumer side you can create a 10x experience which you can with social commerce, influencer led commerce, tier II, tier III commerce, that is one sector which is going to create new large companies. The other one is SaaS & Enterprise. India historically has not had as much in SaaS & Enterprise and that is a sector that is taking off as well with Indian companies developing for global markets.

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