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As part of the Vested MasterClass series, we will be interviewing thought leaders across various fields including tech, startups, finance, investing, and others. Given the nature of our business, we get the opportunity to interact with accomplished individuals and learn from them. We want to share our learnings with you.
Our first MasterClass is focused on startup fundraising and features Pankaj Naik, Executive Director and Co-Head of the Digital and Technology practice at Avendus. Avendus is the leading investment bank for technology deals in India. The Avendus team has advised startups such as Swiggy, Ola, Nykaa, BookMyShow, Lenskart, Zenoti and many more! Pankaj is a seasoned banker with 19 years of banking experience. Prior to Avendus, Pankaj worked with J.P. Morgan and DSP Merrill Lynch. He holds an MBA degree from IIM Calcutta. Without further delay, let’s dive into our conversation with Pankaj…
Please note that the conversation is lightly edited for clarity
Q: The first quarter of 2019 saw $3.4 billion invested in Indian startups. 43% percent of these funds went into the top five most-funded startups. Do you see the overall startup funding landscape in India improving or is it just late stage deals that are driving deal value?
A: This is a great question! We actually do this analysis all the time. You guys are right to a certain extent. The $200 million+ deals have definitely increased, this is primarily because in some sectors the winners have been identified, and they go out and raise large capital. Typically $7 billion to $9 billion of primary capital gets raised every year, of which $4.5 billion to $6 billion goes to the $200 million+ (round) category.
The $50 million to $200 million fund raise category is the one where we’re seeing a significant jump. Some of the companies that started 2-3 years ago have gone on to become market leaders and have become mature high-growth companies. These companies are now able to attract the capital required to grow further. A lot of secondary sale transactions are also happening in this category.
On the other hand, seed stage funding is also quite strong. A lot of tech and even non-tech entrepreneurs are willing to write $10,000 or $20,000 cheques. The Series A category is also doing great. Where we usually see a shallow market is Series B, C and D where the companies need to raise between $50 million to $70 million (this means a “lead investor†needs to write a cheque of $25 million to $40 million). There seems to be a slight lack of breadth and depth of investors in this category. There are new funds now launching that specifically focus on these stages, and they should be able to address this problem.
Q: A majority of the startup exits in India are through M&As and not through IPOs. Do you think the IndiaMart IPO might be a sign of changing times?
A: The IndiaMart IPO is exactly what Indian IPO investors love. It’s a tech company, it’s a high growth company, but it’s also a profitable company. If you’re a high growth, profitable company, whether you are tech or non-tech, the Indian investors are going to lap it up, especially so if you’re tech. I hope that the IndiaMart IPO gives encouragement to a lot of companies to start thinking about IPOs.
The true test, however, is that if a company is not profitable. If the company is growing fast and is able to show a path to profitability, then Indian institutional investors are able to accept it as an IPO-able company. A lot of the people in the industry do believe that investors have become more receptive. We’re seeing a lot of these investors participate in secondary sale transactions or pre-IPO investments in slightly loss-making companies.
Although, if the question is if M&A is impacting exits trends, then the answer is no. A lot of pension funds, sovereign funds or large semi-strategic players are actually taking large $200 million to $400 million bets and are willing to give exits to early stage investors or angels.
Q: A follow up question, for a lot of these unicorns is there a preference to list in the local Indian market or the US?
A: There are two things that are relevant here. Firstly, a lot of the companies incorporated in India don’t have the choice of going to the US that easily. Theoretically it’s possible, but practically there are a lot of difficulties. Companies that incorporated right in the beginning in places like Singapore, Cayman islands, US or Mauritius can do it much more easily. My sense is that the Indian market is as receptive to tech IPOs if the growth and profitability are there. Obviously the US market is more receptive to loss-making companies going public. We are seeing some change in attitude towards loss-making companies from investors in Indian market as well
Second, there’s a category of specifically tech-focused investors in the US that isn’t really present outside of the US, let alone India. But then do they understand the India story well? We do not know. Fundamentally though, listing in the US versus locally comes down to where the company is incorporated.
Q: Startup ecosystems in both the US and China are supported, in terms of funding and more, by local corporates and founders who had successful exits. Do you see this happening in India as well?
A: Unfortunately not as much. Notable exceptions of course exist like Sachin and Binny Bansal from Flipkart. Most of the tech entrepreneurs have actually been investing in angel rounds. Similarly, the Indian corporates have not been aggressively investing barring a few exceptions like the Munjals who have taken case-by-case bets.
We think that the game in India is largely played by the overseas investors. If you look at the dollar billionaires in India who got the liquidity, the number is not that large. However, there is definitely money available in the Indian corporate ecosystem which has not been aggressively investing into startups, with notable exception of Jio, which of course, is building its own eco-system through investments and acquisitions and this has let the global players take larger bets.
Q: What do you think are some differences you see in the startups of today vs. the startups from say 10 to 20 years ago?
A: Indians by default are very entrepreneurial. I think what has changed is the risk-reward equation. Startup founders by default believe in delayed gratification. They’re building something today to get the reward say 3, 5, or 10 years down the line. Now delayed gratification only works if the basic quality of life is taken care of and that has significantly changed. The general increase in disposable income or what you can earn as a founder due to the funding available has allowed people to live a reasonably good basic life in places like Bangalore, Pune, or Gurgaon.
A lot of this is also largely influenced by the development of the venture capital industry and an increase in risk appetite of these investors. Angel investors are taking $2 million or $5 million bets on people that might not have a lot of experience starting on their own and supporting them in their journey. A lot of tech entrepreneurs are giving back to the ecosystem. I’ve seen founders who themselves are at Series C, angel investing in new companies or teams that are promising. This was not the case earlier. A few years ago if you needed money, you would have to go to the traditional entrepreneurs who wouldn’t necessarily understand the business.
All this has happened because there have been exits. People are seeing others creating value, make money, and become successful. The other thing that has changed is the control mindset. The Indian entrepreneur’s mindset used to be that an investor is someone who will be a minority shareholder, and they would own majority and run the company. That has changed significantly, too. People are now comfortable owning 10% of a billion dollar business rather than owning 90% of a $10 million dollar business.
Q: You meet quite a few successful founders. Through your relationship with them, have you seen any common traits that these founders might have?
A: The most important traits I’ve seen are the hunger, passion, and the ability to not let it go. All of these are very much present in the Indian tech entrepreneurship ecosystem. I’ve seen that the Indian entrepreneur just doesn’t stop. He/she will pivot the business 2, 3, or 4 times, but will make it work. Also, ethically they feel like they have taken someone else’s money and it’s their responsibility to make it work.
While this level of passion is required to become successful, the ability to dream big has also become important. Look at Bhavish who started Ola. The ability to take on a company as big as Uber and believing in yourself – that you can do it – is not easy, and he’s done it, which is incredible. We’re not a closed economy like China, so we have all the global tech giants present in the country but the Indian entrepreneurs have survived, thrived, and actually won a lot of these battles.
Q: Any thoughts or advice for startup founders in terms of raising funding?
A: We always follow a rule of thumb of 12 months. A lot of times people think that they have a lot of money and they start looking to raise when they have 3 or 4 months of runway. There is a book called ‘What got you here can’t take you there,’ which is true for every stage of funding. What got you your seed or Series A will not get you your Series B. The later in the fundraise you are, the more it becomes about: what have you done in the business, what did you promise, what have you achieved, and where are you going from here (Tweet This!). Also for each series, it just becomes longer and longer in terms of evaluation. For example for a $50 million to $70 million capital raise, we see about 8-11 months for transactions to close. If founders reach out to investors late in the game, their bargaining power is reduced, not only for valuation but also for the investor’s rights. So my recommendation is that plan properly and right from the beginning track how the money is being spent and how much more time you have.
Q: In your long illustrious banking career, which has been the toughest deal that you’ve negotiated?
A: The toughest deals are not actually about fundraises or M&As. The toughest deals are always about hiring and retaining your best performing employees. We, at Avendus, similar to tech companies, have attempted to create a flat structure and encourage collaboration. I am increasingly seeing that while money is important, the overall job experience matters to people.
Thanks for reading!
