What’s Next for Matrix over the Next Techade

Matrix Team
Avnish Bajaj
founder and managing director

Rajinder:

Hi and welcome to Matrix Moments. Welcome everyone. We’ve titled this one What’s Next for Matrix over the Next Techade. Brief explanation, first thank you to our finance minister Nirmala Sitaraman, she coined this term and she uses it to talk about India’s journey over the next decade. We’ve obviously borrowed it and excited for the next techade. Partly this is also to announce our Fund 4 closing this week so it made sense to do a podcast to collect our thoughts on different threads. Let’s start with you, Avi, fund size this time round has gone from 300 million to 550 million, what’s different and what stays the same with Fund 4.

Avnish:

Thanks, Rajinder. Great to be here, very excited to announce the next fund but like some of us veterans know announcing the fund is actually a burden and a responsibility more than anything else but we’re excited to be in the market. I just want to reemphasize that you said ‘techade’ so this is truly the next decade of tech and hence the larger fund. A decade ago we couldn’t have said techade and two decades ago obviously we couldn’t have. So if you look at digital companies in India the traction since our last fund if you were to look at the Fund 3 companies would be like if you take the top 10 they have all grown like 4-5 x, I would have thought 100x in some cases, even Fund 2 companies. So just the deepening of the market and we’ve discussed it in many episodes that this is a confluence of things that have been building over a period of time and a compounding and a credit to the government also but the entire Jan Dhan architecture which is now going on steroids, ONDC, UPI, all of this stuff, right, then Covid came. So the markets have deepened, we don’t measure our responsibility in terms of fund sizes we measure our responsibility to our investors in terms of doing the best job we can for them in generating the best returns we can. So we take and there is no perfect science to it we take a certain sense of how much the market has deepened and therefore what is the best way to capture those returns, would that be 500, yes, could it be 550, could it be 600, 700 our peers are all in this range. Could it be a billion, I don’t think so. So I think that's more the directional answer.

Rajinder:

Vikram, what’s different, what has changed for you?

Vikram:

Honestly from a strategy perspective we have found what works for us and we want to continue doing what we’re doing. And it is early stage taking to our knitting working very closely with founders it works for us and we just want to continue doing that. Now because the market has deepened just staying focused on what we’re doing is a large enough opportunity and we just want to keep doing that.

Rajinder:

So one thing that both of you have mentioned is basically the market deepening. Now clearly like there is also this larger purpose around digital nation building and where India is going over the next decade. How should one apply that to investing like are we going to see new industries getting created, is it going to be digitization, how should we play?

Avnish:

All of the above, right, but since I think you have said it so many times that we’re willing for it to happen can you explain where we’re going in terms of digital market cap very quickly.

Rajinder:

I think the headline is if you look at all companies in India today across digital today probably totals may be 120, it may be 150 billion dollars of market cap private and public. That if you look at overall public markets that constitutes maybe 3 maybe 4 percent of India’s market cap today. Our internal estimate is that 3.5 trillion public market cap over the next decade just given economic growth that will certainly get to somewhere in the range of 7 trillion. And tech which is today 3 percent or 4 percent will most certainly get to closer to 15-20 percent. As a benchmark China at one point actually got to 45 percent today it’s probably 35. The US is probably in the 30 percent range today, at peak probably it was again 35 so 15-20 percent actually makes a lot of sense and that's 20 percent that’s a trillion and a half of market cap that's coming. So there’s clearly a 10x opportunity just for the sector as a whole over the next decade.

Avnish:

Actually to layer on that so I'm thinking even longer term than that, I think you look at 2035 probably 10 trillion say 20-25 percent. Now this DPI the new term which is Digital Public Infrastructure which brings together UPI, Jan Dhan, Aadhar, ONDC, OCEN, all of these things. This DPI is a big deal and we had said way back that in Fund 3 we’re investing in digitization of India. I think a lot of market cap so therefore that 20-25 number could be 30 percent. So lots of money to be made, that's the good news. Now let me put some sobering news, I was just reading maybe 2-3 days ago our per capital income is exactly 20 years behind China. So our per capita income today is what China was in 2003. Now can you perfectly time it, no, but between 2003 and 2018 look what happened to China that has started, that's the excitement. Now to answer your question it’ll be all of the above, it will be digitization of existing sectors, lots of B2B one of the things we’ve done but lots of innovation. For the first time personally I'm seeing -- and Ola of course is leading the way, Bhavish is leading the way whether it’s batteries, Ola Electric, but semi-conductors is coming across the country, global products. So the difference versus Fund 3 if I were to say was Fund 3 was digitization of existing GDP and Fund 4 is plus plus innovation of newnity.

Tarun:

I think overall there’s also last 15 years there’s been a lot of learnings, we did a lot of digital stuff which is whether it’s mobility, food delivery, e-commerce, D2B, fintech, I think the next decade to Avnish’s point there is going to be a lot of future of computing stuff which the default answer in the last decade was this is all happening in the Valley and some of it is happening in China. And I think for the first time thanks to lot of government sort of policy changes with PLI and sort of all the stuff they’re doing I think there is a belief that if it is 20 percent or 30 percent of this talent globally is actually Indians many of them have now returned back to India. They have the knowhow, there is a government now enabling force behind it and there is an attitude amongst people that listen we can build this in India. So I think a lot of that is going to be one big change that will happen in the next ten years.

Rajat:

For me picking up on what Avnish said on what happened in China you’ve always seen these comparisons with for the first time it feels a little bit more real and here and now. The amount of compounding that we can see from here on as we go from whatever 1 in 4, 1 in 5 households which are say middle-class and above to 1 in 2 households which will be middle-class and above that's like probably 200 million such households. That level of scale and compounding we’ve just not seen and to me these companies which will start breaking out will become larger and larger that's a very interesting and personally very exciting thing for me to invest again.

Rajinder:

Yeah, I agree. I think to Rajat’s point Fund 2 which was for us 2011-12 in that timeframe mobile internet had just started. Fund 3 we had started seeing well 4G happened around that timeframe and also the first generation of experienced founders started. Today with AI and whole large group of founders who have real experience building very large companies some on the tech side, some on the business side, it seems like the timing for India actually seems very exciting. If we break this down and see how it plays down --

Avnish:

Sorry to just pause there, Rajinder, I think in terms of timing so these are the technology trends. I do think we should keep emphasizing the macro trend which we said earlier. But I’ll give you another statistic, at $2500 per capital 50 percent of spends go to the bottom of the Maslow’s Hierarchy. At $5000 that number becomes 25 percent, at $7000 that number becomes 5-10 percent. We’re going to see a boom across categories that we haven’t seen before, that was with China. And all these technology trends just puts it on steroids but that macro trend we get excited and worried about the most.

Rajinder:

I think the macro, India has been on a stronger trajectory over the last few years and obviously it has to continue to play out. But if we break down this large technology trend line plus the macroeconomic trend line and see how it plays out by sector maybe starting with consumer first what are some of the themes that you're excited by, Tarun and Rajat?

Tarun:

So we’d actually done this report as you know which was in DCI a "Digitizing consumers in India report" and I’ll just maybe borrow themes from there. I think the big one at least for me over there was more and more women coming online and more and more people above the age of 45-50 coming online are starting to transact. There was a time in India where we said all the internet usage and transacting user base was largely in metro, tier 1, tier 2, male. Today that is far more broad-based and we’re starting to see that in our companies in terms of the underlying data that great. So there will be a bunch of these that we will bet on over there. I think second is traditionally has gone where attention is, there is a lot of attention and time being spent on social media, creator economy influencer we’ve spoken about. I do think that there will be new e-commerce models that will be built on the back of these trends whether it’s video led, whether it’s influencer led. And we’re seeing some of those early – these are still early days for those companies but I do think that eventually commerce will shift to where people are spending time and attention.

Omni channel is a big theme, even if you see some of the larger vertical companies which have done well today bulk of the businesses are offline today. And I don’t think that theme goes away anytime soon, there was a time where you were just obsessed on it being online and internet but eventually you have to go where the customer is. So I think we will see that particularly in sort of media, social, gaming. AI is I think going to play a big, big role. Cost and time to create content is going to trend towards zero, that opens up a whole different set of possibilities in terms of economics of game creation, economics of content creation just crash to zero. And in business models which till today were not viable will suddenly start making more sense. So we will spend time on some of those as well, we’ve actually made one investment and we continue to make a few more.

I think the last one is there are policy changes which are happening particularly in gaming that’s been a big positive in the last few months. India as a country we’ve always had a lot of gamers and lot of people spending money online but with a lot of the tailwinds in terms of the regulatory changes my sense is that sector is just going to explode now. And so I think some of those things, those are the themes that we will spend more time on.

Rajat:

I’ll add a couple of things, as the income or disposable income and consumption becomes more broad-based even reasonable niches that companies can find will become large enough and that's where we see tremendous opportunity for new consumer brands for example where you find a consumer segment where you can serve better than incumbents it’s going to be large enough because of the demographic shift that's happening and income shifts that are happening, so that's one. Second, I think now you’ve talked about it earlier also that will finally start happening. And we’re for example seeing that in the auto segment, there’s number of SUVs that get sold or closer home Ola Electric is just off to such a fantastic start. All of these are more premium products but they’re scaling and this trend will just continue across categories and very exciting times from that perspective. We’ll continue to invest behind such product innovations and such even channel innovations across D2C brands which help people target these niche audiences.

Rajinder:

Vikram, speaking of technology trend lines at least on software and fintech it seems like things have just completely exploded.

Vikram:

Yeah. So fintech somebody was asking me whether we’re still excited in investing in fintech or has it played out. And my answer was actually it is still very early in this fintech journey. If I look at the top ten companies by market cap in fintech they have flipped over where you have 50:50 between incumbents and new players globally. That's not happened in India yet so we have a long way to go so it’s very early in that journey. And in India by and large financial services is still under penetrated and so people might be banked but are underserved. And so we’re still early on that penetration journey which means that there is a whole host of companies that are going to get created which are going to really drive financial services to that next 10 million, next 10 million and so on. And so now we bring it to life with 2-3 themes that we’re super excited about, the first is I guess transaction finance where there is transaction which has a distribution margin or a take rate as well as a financing margin and we have companies like OfBusiness, OTO, we’ve invested in a travel plus fintech company which does the same thing. I think this is just the beginning of that journey where it couples commerce plus fintech in different business models.

The second is especially in wealth and insurance tech penetration is still very low and actually wealth and insurance penetration is also very low. So we’re going to see a lot of tech first distribution models as well as made for tech products in some of these areas. That's the second thing that we’re super excited about.

The third to Avnish’s point there are all of these open protocol systems which are borrowing from UPI and are coming up. There’s OCEN, there’s AA, there’s UPI Lite which is coming, there’s credit on UPI that is coming, all of which is going to lead to an explosion of bank tech which is tech consumed by both fintechs, banks and NBFCs but also new product companies that are going to get there. So overall continue to be excited by fintech at least for us it’s an evergreen sector that we’ll continue to invest in. SaaS we have really built that and early portfolio through Fund 3 and we’re super excited about investing there. And at the macro levels it looks like the software stack of the world is going to turn over and in that journey India has always played a role but more through services. I think this time around in that journey India is going to play a role through SaaS and enterprise software whether that marketshare is going to be 20 percent, 30 percent debatable but that's going to be a very large number at the macro level. Second the talent ecosystem is the best we’ve seen in that market and it’s because there’s a bunch of people who have been operating in the Indo US corridor building SaaS enterprise products for the last 5-10 years. And when they’re starting these companies they’re doing so with confidence where they’re building global companies from the get go. So which means that they’re hiring teams here, in the US or whichever remote location that they’re working in they have design partners in those companies, they have networks to operate in those countries and therefore they’re building much larger companies than they’ve ever done before. And then there’s of course AI that is all pervasive in how those companies are developing software, how those companies are going to market, how deeply it is built into that product not just at the interface level but also in just how the data science is being used to deliver new insights to those customers. So that's the third trend line which is sort of super exciting.

Rajinder:

Just sounding to all of you the opportunity set A looks really exciting and B it seems very different from the opportunity set from 3-4 years ago. So maybe talk a little bit about the team and how that's also evolved keeping in mind how this opportunity set is evolving?

Rajat:

Good and maybe I can take that. So as we also started investing behind experienced founders for example or as the talent ecosystem in general in India has increased dramatically the quality of founders who are coming out was starting to build in their domain has gone up tremendously. To keep with the times we’ve also evolved as well so over the last 2-3 years added a bunch of people who come from these marquee internet companies or marquee SaaS companies. They’ve founded companies before, they’ve come in and they’re all looking to invest in their own domains. So in that way the team structure has changed quite a bit from 4-5 years ago and we couldn’t be more excited about that.

Tarun:

I think it’s also the expectations, right, like as the profile of the founders that we’re engaging with, as the ecosystem itself matures I think the founders are also wanting to engage with people who can both help them get to the next level of nuance but can also push them to think about things that maybe they haven’t still thought through. And we have to keep up with the times, right, so our team like across every sector now we have people who have spent maybe a decade in that sector as operators and as builders. And I think we’re already seeing early results of how that translates in terms of quality of conversations, quality of conviction. The kind of opportunities that they want to pursue, the kind of founder engagement that we’re seeing and so I think it’s been a conscious effort over the last or two for us.

Avnish:

So this business while moving from hunting and picking to being hunted and picked and to put it another way it is becoming a pull business where access to the best founders and them picking you is going to determine and this is classic persistence of success business. So I do think therefore the team has to change to match that. Very importantly by the way our operating team, I think one of our big -- something that we feel very proud of is that our founders compliment Matrix but not for the people around here or in the investment team but for the operating team whether it’s in recruiting, whether it’s in marketing, whether it’s in CorpDev, like so many, legal, finance. So we do tend to roll up our sleeves a little bit more and that team also you guys are being involved in strengthening that so that continues.

Rajat:

No, for the first time that team is larger than our investing team so we’ll continue to build.

Vikram:

Only thing I’ll add is from a nature of opportunity perspective in each of those sectors they’re just getting deeper and the opportunity in getting more nuanced where only a domain expert can actually see that opportunity from that lens whether it is SaaS, whether it is consumer, whether it is fintech. And, second, in all of these cases because there are multiple companies going after them the GTM actually becomes very important and we really want to be the best partners on thinking through some of that GTM which I think horizontal folks can't do but domain folks can.

Rajat:

So we’ve talked about the market and the environment but maybe Rajinder you can tell us and our audience a little bit of how the LPs in general are feeling about the Indian market.

Rajinder:

Actually everyone should add but I think the headline at least from some of the conversations that I’ve had I think the positives are that the Indian growth story is still strong, that's at the macro level. Second is digitization and digital companies continue to grow, there continues to be enough headroom for many of these companies to keep growing. I think some LPs have started it in acknowledging and that the profitability and the unit economics of many of these companies in India have actually significantly improved and there are now multiple companies that are at scale and profitable not all. And of course I think the founder quality has always been strong, I think one other thing that’s changed is I think the Indian market took call it a decade to get to a place where companies could go public. Now the first set of companies have gone public and there is a belief that there will be a cycle of IPOs to come over the next several years.

I think the concerns we’ve talked about it in other contexts but there is obviously a global liquidity kind of squeeze so how does that impact larger companies, how does that impact companies going public. And then I think specific to our market there have been a few blowups on the governance front which I think due to either lack of focus from founders or investors or just an awareness of best practices I think companies were not at the mark they needed to be. So I think those are clear things to improve but at a high level if you just think about the big picture which is India has 5 billion dollar plus companies, on the public markets it has about 100-120 companies that have that kind of scale. In private markets on tech we now have 17-18 companies which are at that scale. So it’s not a small number, it’s actually a significant number. Some of them have gone public, there are actually many more that are expected to go public and in our own portfolio we have companies that we expect to go public hopefully in the next few years. So overall view is positive, optimistic, certainly India is a bright spot relative to other markets. China has its own issues, US has its own issues, but cautious optimism perhaps.

Vikram:

I would say – I’d pick up from that, so where the world is India seems like a bright spot but there is still skepticism and it is a responsibility and obligation of everyone in this ecosystem to continue to deliver and let me just double click on that. So Indian markets are at all time highs or near all-time highs whereas rest of the world is not. And so people are wondering what’s happening in India and what we say is that hey, you know what, high interest rates and inflation were built into our model and therefore built into the India model and therefore growth has kept up in India. And so when you see companies declaring results they’re at or ahead of plan and capital efficiency or economics have gotten better. Right, so those are the signals they’re seeing and you can point to those. So that makes people curious but a lot of LPs have burned their hands repeatedly where India has always had this promise and then something happens. So what they need to see is predictability and consistency of performance. And I would say from a venture ecosystem perspective it’s probably two things, the first is predictable consistent exits. And we had some of that in ’21, a sort of hits and hiccups in ’22 but still some good companies went public. And so 2023 it looks like second half again some of these will happen but it just needs to start happening like clockwork because then that entire full cycle starts working for the LP, so that's one. And then the second is consistency of performance by and large of the scaled portfolio without some either governance issues or something coming in the way.

Tarun:

I think just double-clicking on that point I think the other thing at least in some of the conversations what we heard is why IPOs are important while there were secondary exits that were happening. The belief that those marks were real and the fact that to Vikram’s point how repeatable is this. Eventually public marks are real for better or worse and they do go up and down in different markets but at least those are considered much more real. And the market has shown that while some of these companies were priced ahead and have corrected the market is actually absorbing and sustaining multiple companies between 5-10 billion now in public market prices. And so I think that in my mind this was the biggest change in the conversation compared to sort of earlier where the belief that okay now the entire cycle we’ve gone through it once and now this is seeming more repeatable and sustainable I think that was a big sort of point in the conversations.

Avnish:

I think a little bit, yeah, more pessimistic take on that though is that what do they see, they see listing price X current price Y and all of them are below listing price. What that misses is three years ago none of them existed and today they’re. So it’s our job to educate and more importantly to perform such that there are more of these. I would say India has flattered to deceive many times, we all got it all the top geared too early in the country in 2006, market wasn't deep enough, so 2021 we were hot but so was everybody. The real differentiation will be when we’re hot and others are not, right, I don’t know. So if you look at ’21 ended up, ’22 becoming a World War or close to it so ’22 everybody went into freeze China run to the US maybe where else should we look. ’23 was maybe we should look at India but now look at India’s track record let’s see. And therefore to this point of consistence performance I think if the markets will open up eventually hopefully end of the year maybe early next year. I think if we deliver our IPOs and exits you will see India breaking out late next year to ’25. Then you will see the real deluge where others are not getting it and we’re getting it, so that's my hope.

Rajinder:

If I started by calling it the techade I'm going to put all of you on the spot, if you had to call it five years out how many public internet digital companies do you think India will have and let’s put some kind of a threshold let’s say above a 2 billion market cap or about a 3 billion market cap like how many do you think there will?

Tarun:

I think there’ll be at least – in how many years you said, three years?

Rajinder:

Five.

Tarun:

In another five years probably 20-25 more in the next five years, I don’t know what you guys think.

Avnish:

In five years 40-50.

Vikram:

I’ll say something in between.

Avnish:

There are five VCs so you’ll get eight different answers so the question is how many companies are there more than 2 billion of market cap.

Rajinder:

I think that is closer to --

Avnish:

300? So if you have to back our earlier statement that 20 percent penetration will happen it should be about 16. Now that is why market cap so there’s a little bit of fudging.

Vikram:

I just don’t know if it happens with this five years its 8-10 IPOs a year that run rate sounds high to me.

Avnish:

No, we already have 10 companies. But then the year of a deluge you have 20 and then.

Tarun:

So I was reading this line and its really struck with me, I think it was in Ruchi Sharma’s book and he says on India where he says that India has consistently disappointed both the optimist and the pessimist. And so I think there are people who are always too optimistic and they end up disappointed and then there are people who will always have the sort of bearish view and India continues to out deliver on that. And so the real answer may be somewhere in the middle so who knows.

Rajinder:

That's exciting so you said 20-25 more so that's cumulative call it 30-35, Avi said somewhere 50-55, I think we’ll take that happening somewhere in that range. I think and obviously setting us up well for the next five years after that. And any other updates on Fund 4 that we haven’t covered.

Avnish:

Well, first of all we thank our LPs. This time we’ve had the privilege to have had LPs over the last 15 plus years who have stuck by us so we’re very deeply grateful. This time we’ve actually also added a few new LPs which is also – we’ve been investing by the way I think people in the ecosystem know this, but we’ve been probably invested already in 20 plus companies from Fund 4, we’re investing since early ’22. We did end up chatting with new LPs this time which took a little bit longer, it always does, so decided the announcement is not in line with when the investing of this fund started. But deeply grateful to all the LPs who have supported us and welcome to the new LPs, so that's the key update.

Tarun:

So I think the only other thing I would add is because it is a big initiative so I think Bangalore I remember 2015 Vikram and Rajat moved here. We know I think as a team we’ve done a fantastic job led by both these people in terms of just building up our access, reputation, founder relations over here in Bangalore. I think we’ve also come to be known as people who can sort of bring community together, we’ve invested a lot in that. I think it comes very naturally to us. We do want to replicate that in Delhi, we’ve started by opening up a new office in Delhi which is in Gurgaon, we do feel that the ecosystem is now ready. There’s, A, we have a strong portfolio of OfBusiness, Stanza, Zupee, Park+ and many others. Also there’s now large scaled up companies with great talent pools over there, so between Zomato, Urban Company, Paytm and several others I do think that the ecosystem is at a point where a lot of entrepreneurial activity is happening which is what we saw I think in Bangalore 5-7 years ago. We do want to be able to make that same contribution towards that community in sort of bringing it together, be part of that community, nurture that community. We’ve had senior people hired and a few people moved from Bangalore to Delhi so that's going to be a big focus in this fund over this cycle.

Avnish:

And just from this it may be a lesser known fact, you know, 5 years ago if you asked people when we started Bangalore office 8 years ago there was a view that everything will move here and we’re here so we’ll have here also. But the reality is partly number of profitable unicorns are in Delhi but Covid also helped. So people have learnt how to live and work remotely, some are still moving to Bangalore to scale but there’s now enough of a talent pool so the reality is Delhi NCR has 30-35 percent of the deal flow and consistently over the last multiple cycles. This has, Bangalore has 40-45 percent so actually there are these two ecosystems that have developed very differently from the US where now New York is developing but for the longest time it was just Silicon Valley. And I think New York is also developing post Covid.

Tarun:

And Miami.

Vikram:

So picking up on the thread on founder communities in this fund we’re doing less sort of seed, pre-seed activity in the fund but what we’ve realized is there are these founders and super nodes and they’re the first port of call for early founders starting up and we’ve a founder syndicate and there’s more to come on that and there’ll be a separate announcement on that but we are bringing founder communities together who can then invest and help a founder at that very early stage, so more to come on that.

Rajinder:

Thank you. Excited to be on this journey with you and excited for the next techade.

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