Tarun Davda on AngelList India radio
29 mins listen

9th Jun, 2021

Tarun Davda (Managing Director at Matrix Partners India) speaks to Utsav Somani of AngelList India to take stock of the current startup scenario and Indian entrepreneurial drive 

Utsav

Hello. And welcome to the AngelList India radio. Through these conversations we’re taking you inside the minds of great investors, experienced founders and talented experts. AngelList India pioneered new concepts in startup fund raising and investing for India. You can find out more about us on angel.co/india. Let’s dive in.

Hey, listeners. Over the last few conversations we’ve had an amazing set of VCs and amazing set of founders to unpack what’s going on in this world. And today’s guest is somebody who I’ve had a close working relationship with him and his firm as well. So on this show I’m excited to welcome Tarun of Matrix Partners. Matrix is a venture firm in India, they manage close to a billion dollars, maybe over a billion. And they’ve backed some prominent household names like Ola Cabs, Razorpay and many more. So, welcome, Tarun, to this show. Today I have an interesting set of questions lined up but we’ll keep this free style like we always do on our freewheeling chats. So welcome to this show.

Tarun:

Thank you so much, Utsav. Really a pleasure to be here and great to be doing this together with you.

Utsav

Amazing. So I think a topic that’s top of the mind for a lot of people right now we’ve gone through a pretty horrible Covid phase in India right now, the second wave was devastating. But the technology world is not stopping; the startup world and the founders are resilient. What are your takes when I mentioned those two words together, Covid and Indian startups?

Tarun:

It’s been a little bit of a rollercoaster year for everybody in the ecosystem. I would say starting with obviously the personal tragedy that so many of us, our colleagues, our founders, their teams have had to go through, so it has been truly tragic in that sense. On the flip side though I think the work has been I would say unlike anything anyone had expected. I remember last March when things had just started to kind of pick up as far as Covid in India, a lot of people kind of feared the worst which is, okay, this is the end, a lot of companies will die, a lot of large companies won’t be able to make it because business will be down to zero for several months, several quarters. And obviously you know what happened and it just kind of goes back to show just how bad everyone is at forecasting. And so I think what’s played out interestingly is I think it’s become a little bit of a world of haves and have nots. I think there are certain sectors that have clearly benefited from Covid and obviously the obvious ones are Edtech and gaming and media and content and SaaS and a bunch of other verticals. But even surprisingly even companies in the Fintech space a lot of people thought that lending companies will find it really, really hard. I mean there have been some isolated cases but broadly it’s not been as bad as people feared. Travel companies, Airbnb went IPO in the middle of all of this, we’ve seen companies in our portfolio who have actually although the business in terms of actual travel bookings hasn’t sort of still picked up but surprisingly some companies are actually signing more clients today than they were signing a year ago. And so clearly I think the underlying theme is there is a move towards digital. Anyone who was not thinking about it late last year even or early last year is now actively thinking about multiple business continuity plans and digital is in the forefront of all of it. And so I would say, again,I was talking to a CEO of a very large e-commerce company recently and I was asking him saying that hey, listen, now that the dust has kind of settled what did Covid really do to your business. And I think the answer to me was depending on category and this is a large horizontal. And he said depending on the category we’ve seen acceleration of anywhere from 12 months to 24 months maybe in 36 months in some cases where people were just not willing to try because the early adopters had come in and then we were trying to penetrate this mass middle but it was just going too slow. And I think what Covid did is just accelerate that first trial, then second trial and now it’s kind of become a habit. And so I think there has been an acceleration, I think there are companies that in every sector that have tremendously gained from Covid. And then there are other companies that I think just need to hunker down, stay lean, wait for the storm to pass, especially, you know, companies in travel and some companies in mobility and so on and so forth. And I think the reality is that this is a black zone event as far as they’re concerned and it’s hard for anyone to plan for multiple lockdowns because when you start pushing the pedal on growth again. But I think what I’ve seen is the best companies have really hunkered down, really, really got a very sharp laser focus on cost structures and I actually think they will all come out significantly stronger because what’s also happened in those sectors is the weaker companies have disappeared. And so once things kind of open up I think the best one or two companies in each sector it’s clearly going to get separated as the best ones will emerge and will continue to grow even larger.

Utsav

Got it. And so, as an entrepreneur, right now a lot of power companies at AngelList India and just generally personally I interact with a lot of founders it can be overwhelming. In the sense that at one end we’re trying to deal with personal loss or you’re trying to just I mean manage your teams during these tricky times. And then you read about these large rounds which are happening I mean at crazy speed. The velocity and pace of deal making also is increasing at growth stages and stuff, so how do you as a early stage founder who’s still trying to figure out product market fit what’s your advice to them that they don’t get bogged down by this excitement or euphoria that’s going around in the ecosystem right now?

Tarun:

You know, somebody had told me -- this is an investor that I really, really respect and I had asked him this question once saying that listen, you know, it all looks very easy from the outside, right, if I’m an early stage founder or an early stage VC and I see somebody like you whose got like multiple unicorns and all of them sort of doing well and raising like large amounts of money at higher and higher valuations and I asked him, hey, you know, how does one make sense of this. And I think this was around the 2015-16 I think there was a slowdown and after the 2014 kind of bubble and I remember him telling me it was a very simple statement but it’s always stuck with me. And he said, listen, Tarun, the best ones have tested my conviction more than once. And he said even the companies that today people look on as a bellwether of Indian internet those companies have looked at days where they had like 30 days of cash, 60 days of cash. And so he said, listen, it’s always it all looks very glamorous and nice from the outside but inside I mean all these companies have their own sort of set of problems to deal with. So I think I try to keep that perspective always and I tell founders that as well that the nature of problems will obviously change but it’s not that the problems just go away when you raise 10 million or 50 million or 100 million or 200 million. And so I think it’s important for founders to keep that perspective, number one. Number two, I think they should also look at it to say like if you go back to the days of Naukri and MMT and the early Indiamart kind of days the amount of time, effort, energy it took them to raise the first 10 million and I don’t even know how many of them ended up raising more than 50 million cumulatively but today it almost seems like a joke when somebody -- every single day there’s an article in the paper saying so and so raised 50 million or 100 million. And so I would just say the depth of the market that all of us have been talking about is finally here, we finally have companies that are IPO scale. I know India has always been docked as a market that doesn’t have enough exits and I think the exits wasn’t the problem, right, it was always lack of depth of the market. And so finally I think the market is here, we have I think a dozen to maybe 2 dozen venture funded companies that technically could go IPO tomorrow if they wanted to. They all are doing triple digit 100 million dollars plus of revenue, they all have decent margin profiles, they all are growing anywhere between 50-100 percent year on year even at that scale, have strong motes, strong defensibility, you know, stuff like that, which is what is required to take a company to IPO. And so I think if at all what Covid -- going back to your first question, that’s further accelerated growth of companies. I know companies that were growing 30-40 percent the year prior and suddenly this year have grown 100 percent and that’s because of this whole sort of move towards digital. And so I think as an early stage founder I would look at that and say, hey, the next ten years are if the last ten years have been any indication the next ten years are going to be even better. And I actually see it as a massive positive and a massive motivator to say, hey, the story that all of us have been sort of looking forward to is that we’ll see a full cycle. Early stage companies will go become large companies will succeed, will go IPO eventually and more and more money then keeps coming back into the ecosystem. I think that loop is finally closing and I think when that loop closes I think we will just see -- I mean I hate to make the China comparison but the reality is some version of that is going to play out in India over the next ten years. And so whether it’s half a trillion or a trillion or whatever that number may be the reality is finally now that loop will close I think we will just see massive amounts of innovation. Talent in the ecosystem is far better today than it was five years ago or ten years ago. I remember there was a time one used to struggle to find a good product manager for the company. Today we don’t talk about it, there’s enough talent available. I remember people used to say, hey, which head of sales, head of VP sales in a SaaS company you’ve seen more than ten million dollars of revenue. Today there’s several of them. And so I think overall ecosystem has matured, founder quality has gone up, investor quality hopefully is going up. There’s more money available, rounds are happening more quickly, there’s less focus on terms and screwing your founders over as far as terms are concerned, it’s all standardized just like it got in the Valley. Talent pools are very, very deep, repeat founders have a playbook that they’re kind of showing repeating over and over again and other people are learning from that. And I think this is what eventually made Silicon Valley, Silicon Valley, or made Beijing, Beijing. So I think we’re starting to see early days of that in India and honestly I think it’s the most exciting time for anyone to startup today in India.

Utsav

I totally agree with many of those thoughts there. I think a word that’s been thrown around recently over the -- I mean it’s been thrown around by New York Times for a while actually but over the last I think year or so I think because of late stage activity and stuff it’s increasingly coming up. As a venture capitalist in India or taking cues from the global market do you think we’re in a bubble, cheap capital, public markets at a high and economies looking in an increasingly K shaped recovery phase do you ever let that word cross your mind, bubble?

Tarun:

So I think this is a hard one to answer, right, because as VCs we all tend to sort of live several years in the future for good or for bad. And so I think it’s hard to separate the optimism from the what may seem like a bubble in the moment. I think the reality is we will always go through fear and greed cycles, I think at different points in time things will reach a level where you’d say hey, is this just everyone being too optimistic. And I know last year people thought stock markets, I mean, there was a time in March where the whole world was super negative when Covid first hit and markets crashed like 40, 50, 60 percent even. And before you knew it they were back to above pre Covid levels and today stocks are at an all time high. Now will someone say that markets are in a bubble, I guess that’s one point of view. I think the way I look at it is the markets have sort of factored in multiple things and I’ll start with the public and then I’ll move towards what we’re seeing in the private markets. So I think the public markets, one is I think the first time in the world’s history there is a vaccine within a year of something this major happening on the health front. And I think people have factored in the fact that multiple geographies with large consumer spends have already been vaccinated or in the process of being vaccinated or will get vaccinated in the next three to six months, right, number one. Number two, companies have really, really cut flab and so we’re likely to see higher corporate profits than what we saw before. Third, to the point I was making earlier, in a lot of industries the strong have become stronger and will continue to get stronger because the weaker companies have been wiped out. And that’s been the tragedy where in a sector if there’s like five different companies or six different companies the reality is one or two have survived and the three or four which were less strong as far as the balance sheet was concerned or as far as just their standing in the overall competitive landscape was concerned those companies either have been wiped out or there’s been consolidation or whatever it is. And so again markets are factoring that in and saying, hey, if this company is now like three of its competitors have gone away what does this mean for their profits. And so eventually it’s all a factor of discounted cash flows. So I would say there is a rational way to explain why our markets are at the level at which they’re, now in isolated pockets are some of these companies overvalued, absolutely. So that’s always been the case and will continue to be the case. But I don’t think one can take a broad view and say, hey, everything is in a bubble, I don’t think that’s true. Same thing will apply to a lot of what we’re seeing in the private markets, right. The way I looked at a bubble in private markets is the three Vs which is value, velocity and volume. Are volume of deals going up, I mean, just before we started the call we were talking about certain angels who’ve done 45-50 deals just this calendar year already in under six months. I know some of our peer funds have done 20-30 deals already this year. And so I think the reality is volumes are significantly higher, seed deals that used to be 4, 5, 6, million pre are now standard has become 10, 12, 14 pre. If you have even some track record either as a founder previously or as a executive at a well known company with some good experience under your belt I mean it’s not uncommon for those people to raise their first seed round at 20, 30, 40 million pre and we’re seeing some of that as well. And then obviously if you look at velocity I think there are companies that are closing three rounds of financing within six months. And so I think all of these are at play in some measure but again will some of these companies not work out, absolutely. Will we see a few really -- like if you look at the 2015-16 bubble or whatever it was you look back today how many good companies came out from that bubble. Like just look back, there’s Swiggy, and there’s Urban Company and there’s like so many. Again I’m sure there’s a dozen more names that I’m forgetting but I remember this was at that time where everybody had said oh, my God, like this is the craziest bubble India has seen in the private sort of venture ecosystem. But even then there were multiple strong companies that came out and I think you’ll see the same thing this year as well. There will be companies that don’t live up to the hype and don’t execute and can’t build a team and their value prop sort of isn’t as strong as the founders and the investors thought it is or it was limited to only a small segment of users and they couldn’t expand sort of that value prop to other users. But then there will always be companies that will just go on and people will be surprised by the sheer pace at which these companies grow. And we’re seeing that in our portfolio like some of the companies that five years ago when we funded a company and the amount of time it took to reach revenue milestone one I mean today it’s happening in like a quarter of the time or a third of the time that it used to take companies back in the day like five years ago. And so I think a lot of it is I mean we see by definition we’re future backwards and so and at some level we’re pricing companies, yes, there is a bottoms up pricing and yes, there is some sense that it needs to make but the reality is the power law dynamics are so skewed in favor of getting into the best companies. And so whether you get it in a five or ten or twenty I mean if it works it doesn’t matter and if it doesn’t work it still doesn’t matter because you lose your capital and no more. And so I would say the fact that today VCs can see a clear path to large and when I say unicorn I’m not talking about 1-2 billion companies, there are companies that we know will be 5, 10, 15, 20 billion dollar companies. We already have some of them, I think the pace of creation of unicorns has gone up, the unicorns of today will be worth 5, 10, 15, 20 billion dollars in the next couple of years. And as exit sizes go up it is bound to start changing dynamics at the early stage pricing because people who have made money by getting into some of those companies early will do whatever it takes to get into the best deals even if it means paying up a high price because they’ve done the Math. And so I think one can use that logic to explain obviously paying any price and there’s always a balance between saying hey, am I just going crazy and overpaying for this or am I just very clear. And there’s always you can’t break the rule every time but there’s always the one deal or the two deals that you have very high conviction on for which it makes sense to break that rule and I think that’s what we’re seeing as a culmination where people are just saying, hey, you know what, if I want to work with this founder and if it means I need to pay up 20 pre to work with that founder I’m going to do it. And so I think that’s the thing, now does it look like a bubble from the outside, yes, it does, but is there a rational explanation to some of this behavior I think that’s true as well.

Utsav

Wow, Tarun, I think that’s the most sensible and the thoughtful answer to that question I’ve heard in the longest time. So we’ve done the macro, coming to the micro given sign off times, I mean, power law dynamics at play and venture firms increasingly investing at a faster pace do you think the traditional portfolio constructing theory for VCs is thrown out of the window where you’re not going by ownership targets anymore, you just want to get onto the best cap tables because the outcomes are so large or is that something you think about actively when you evaluate a particular opportunity?

Tarun:

So we’ve actually actively done that, Utsav, and I think the jury is out and the results we’ll know in a few years. But I’ll tell you we took a strategic call at Matrix India like 2-3 years ago and when you look at again and going back to the power law sort of dynamic that exists in our world the reality is every year there’ll be let’s assume the top five sort of tier one VCs invest in anywhere between say 50-100 startups a year. The reality is five out of those 50-100 will basically determine 90 percent of the returns. Now the question is like would you rather push for 20 percent ownership in every deal or 25 percent ownership in every deal which used to be the case and potentially miss out because today I mean all these competitors are outstanding. I mean we’re in competitive situations every single day with our peer funds and you win some and you lose some but the question very often we’ve asked ourselves is hey, what if you were to just collaborate because we know what this other VC brings to the table, we know what we bring to the table, could we potentially together actually deliver a better experience for the founders. I mean essentially we see ourselves as we being in the business of founder service and so if we can help the founder build the company more effectively and help increase the size of the eventual outcome maybe we collaborate on this one together, get in early, potentially do the next round between us and so maybe we don’t get our 20 percent but we start with 12, 13, 14, 15 and increase to 17, 18, whatever if we can in future rounds and that may still be good enough because you’re not going to win 100 percent of the deals that you compete for. And the cost of missing out can be extremely high, right, especially where you have high conviction. And again I’m not trying to generalize this because again you can’t break every rule all the time but I think applying judgment to say in which case which rule is meant to be broken I think what we’ve seen is in some deals where we have very, very high conviction we just say we’re happy to collaborate with this other fund, we have high respect for them, we know how they work, we know what they can do to help you and it actually complements very well with what we can do for you and we’re happy to strike it because there is a 50-50 chance that you’re going to lose that deal and thinking between owning zero percent of the company versus owning some double digit percentage of that company I mean you’ll always pick the latter any day of the week, right. And so I think this year especially in our most recent fund we’ve actually had probably the highest number of syndicated deals that we’ve ever had in the history of our funds. We’ve ended up doing this with a bunch of top tier funds and I think it helps because it’s good for the founders firstly because they now have two VCs, if things are going well both are hungry for ownership, if things are taking longer than they thought to sort of build you have two VCs who can sort of give you a little bit more money to kind of help things going without depending solely on one VC and it’s higher pressure for everybody to put money when things aren’t working out as well as you thought they would. And you have network of two VCs and everything else, all that goes with it. And so I actually think ownership we all at some level it matters obviously you’re not going to do a deal for 2 percent ownership as an early stage VC but as outcome sizes become larger and larger I think sensitivity towards ownership will naturally come down. It’s all a function of overall fund level Maths that people will apply and I think will reach the same answer. And I remember going to China three or four years ago and we were very proudly telling our Chinese partners I think in our fund to our median entry ownership was like some ridiculous 27 percent. And we were boasting about that to our China partner and he was like hey, you know what, like enjoy it while it lasts because it’s going to change very soon. And it’s happened, I mean, before we knew it it happened. And we had to adapt very quickly to the changing environment.

Utsav

Interesting. And, Tarun, so you’re a partner now at Matrix India and what are the things that excite you currently, what are sectors or phases that you’re tracking more closely than others?

Tarun:

Yeah. So, you know, I think there’s this one broad theme that I’ve been chasing that I really like is this whole sort of deplatformization. I think Naval had a tweet a few days ago and he said the entire world is going to be one decentralized sort of economy, right, something, I’m paraphrasing but basically he said the future will belong to decentralized sort of economy or something of that sort. But net of it is if you see our bet on Dukaan essentially what we’re seeing is there is a feeling amongst several different suppliers across different verticals to say, hey, these platforms have become too powerful, they’re squeezing us too much, we were too dependent on them to get business, our existing customers have moved there, it’s not just become a channel to get new customers. And now as they’re turning the screws to move towards profitability these people aren’t left with a choice, right, and they’re coughing up like crazy commissions and there are articles that say commissions in some verticals in India are the highest in the world. And so I think there is a overall move by some of these suppliers to say hey, you know what, can I continue to have a hybrid strategy where I depend on sort of the platforms to get me some new business but that can’t be my only way to do business. I need to have some independent channel where I’m able to sell products, I’m able to engage my existing customer base, I’m able to run promotions. And can I do all of that seamlessly using the app and I think Dukaan plays really well to the theme and we all have seen how Shopify did in the last 12-18 months. They’re growing faster and faster or for much larger base and so I think some of that theme hopefully will play out in India as well and as small businesses for every size adopt technology and start moving towards selling their products and services digitally. We have the same kind of theme in the overall creator economy space where today a creator needs to go to a YouTube or a Tik Tok or an Instagram and finding ways to monetize is hard because there’s just so much noise, there’s no real tools that these people have to manage their own sort of following. And so I think that’s the overall theme that I really like and whether it’s like products or services I think it’s going to play out. Now there is a risk that it’s still a bit too early in India but if I look out 4-5 years I think it’s definitely going to play out and then when you combine elements of community, when you combine elements of video I think it starts looking like really, really exciting and we’ve made a bunch of bets in that space. So that’s one theme I like. I really, really like gaming, I think there is -- and again when I say gaming it’s just multiple different aspects of gaming, it’s gaming tech, it’s platforms, it’s bunch of things, RMG. But if I do a two by two of TAM, or market size versus profit pools I think there are very few sectors in India that lie on the top right quadrant which is large market size and large profit pools. Edtech is merely one and there’s Byju’s and Unacademy and WhiteHat and a bunch of others which have shown that one can blitzscale really fast because the market just allows for it. And at the same time you can have very strong and healthy unit economics and actually be profitable while doing it. I think the other sector is gaming. And so I think we will see, I mean, Dream 11 has shown it, MPL is in early stages of doing it, we’ve got a company called Zupee, which is in some early stages of doing it. And we’re just seeing these companies scale incredibly fast without burning much money and it just -- I mean there’s just such a strong PMF that some of these companies see. I mean, it’s been -- I’ve been amazed to see that. And there are others obviously where we see large TAM but smaller profit pools and those tend to be the red oceans where those companies just take infinite capital to get built, eventually they will create value but it’s just a stressful journey along the way because at every stage you need to ensure that you’re the company that’s attracting the most amount of capital. And so I think these two, the top of my head obviously these do come in but obviously across if I take B2B I think India has been a nation of small businesses. We’ve got like 50-60 million of them, all of them like I said are looking to go digital but we’ve made bets in B2B marketplaces. A company called Bijnis, we’ve invested in which is doing really well, Captain Fresh, Vegrow. You know, a bunch of these companies and just the tailwinds that some of them are seeing in terms of adoption, in terms of modernizing the entire supply chain in terms of using technology to reduce like dump and wastage across the supply chain and fundamentally add value to the overall sort of economics of the industry. I mean some of it has just been really, really promising to see. So I would say broadly these 2-3 themes, there’s several more I can talk about but top of mind I think these are the ones that I really like right now.

Utsav

Amazing, Tarun. I think that’s a good note for us to end this show on. Thank you so much for coming on and sharing your valuable thoughts. I’ll keep introducing you to founders who request for an introduction. So I’ll take care of that for us and thank you again for being a great supporter of AngelList India and enjoyed working with you and having you on this show as well.

Tarun:

Same here, Utsav. It’s been a pleasure and I know you’re always very understated but I think what you guys are doing for the ecosystem is outstanding. There are very few founders who meet you or speak to you and aren’t walking away just amazed by the energy that you bring to every conversation. And thank you for being a great partner to us over these years.

Utsav

Looking forward to doing more. Thanks, Tarun.

Tarun:

Great. Thank you so much, Utsav.

 

This podcast was first published on AngelList Radio:

https://anchor.fm/angellistindia-radio/episodes/46-Tarun-Davda-Matrix-Partners-India-e12em69/a-a4755np