Real cos & entrepreneurs left now, tourists have gone back: Dev Khare, LightSpeed India

Dev Khare, Partner, Lightspeed India

California-based venture capital fund Lightspeed Venture Partners launched its first India-dedicated fund in 2015, ten years after the firm started making direct investments in India.

Through the $135-million Lightspeed India Partners I, LLC fund, and with access to its global fund, the venture capital firm invests across several stages and sectors in India, including technology-led businesses in sectors such as advertising and media, business services, financial services, healthcare, education and retail.

The India fund’s portfolio includes well-known brands including Oyo, Shuttl, Byju’s, and Craftsvilla, among others.

In an interview with DEALSTREETASIA, Dev Khare, Partner at Lightspeed India talks about upcoming sectors that are grabbing the investor’s attention and the prevailing investment environment.

Edited excerpts:

After the highs of 2014-15, there was a tapering in 2016. How do you view the current investment climate?

Ups and downs, financing cycles are a part of the nature of how this ecosystem works everywhere. We are going through a phase when we are down from 2014-15 but I would say that period was an aberration. If you track it from 2012-13, you would see a straight line and then an increase. We’re optimists at Lightspeed and generally in the venture industry, so we see the positive side in most situations.

We now have new sectors emerging that we as investors can invest in and entrepreneurs can build businesses around. 2006 onwards, there was a lot of offline. Then in the early stages of the internet there were purely information services like job portals, travel websites and news. But 2010-11 onwards, we started seeing e-commerce. In 2013-14 we started seeing online to offline businesses like cabs and food and hotels. And now from 2016 we are seeing a widening of the sectors being available beyond e-commerce and O2O into 5-6 new areas, which are very exciting.

Now that we have around 100 million real internet users, we’ve got a much vast smartphone population and you have digital payments in place with Paytm and payment gateways and so on, now you can do a lot of things.

Which are the new areas that have opened up?

Of the sectors that have opened up now, in no particular order, the first is content and media. When new users come online, they generally look for entertainment content. We’ve got a couple of bets in that space ourselves, we’ve got Sharechat, which is a regional language social network.

The second area that is interesting is online education, where we’ve invested in Byju’s, which also comes under content. A third area that’s interesting is health, which is up and coming, which is mostly digital medicine like tele-medicine, ordering of medicine, diagnostics and so forth. We don’t have any investment there yet, but we are actively looking. The fourth is financial tech, particularly lending, which has been very active in 2016. Then there is B2B marketplaces, where we have a very successful company India Energy Exchange in our portfolio and last year, we invested in another B2B marketplace Udaan. The final area is B2B software or SaaS, where we invested in a company called Innovacer and we have just closed another deal in this space, but I cannot disclose more details on it.

There are also lots of follow-on rounds happening in horizontal and vertical e-commerce as well as O2O. Our company MagicPin recently raised a round of funding. We also have companies like Oyo, Fresh Menu, Shuttl, FastFox which are doing really well in O2O.

What are your views on the e-commerce space? Much is being said about the models and profits.

I can’t talk about other companies, but we’ve been focused on sectors and models that have deep margins and large markets. So the way we think about any space, be it e-commerce, O2O, healthcare, education etc., is that if it’s a transaction oriented business, we think about high margin and frequency.

Our belief is that you have to build a company in a sustainable way, where the margins are working, repeat rates are working, engagement is high, growth is high. You have  to do that at a smaller scale and then scale up, rather than first scale up and then figure out margins and repeatability and engagements and all that. So it does mean that in an easy financing environment you might end up being a little smaller in the medium term than competitors because everybody is just going to grow their topline. But we believe that these are much more sustainable businesses which will be profitable over a time.

Exits have been a point of concern for investors. What are your views?

Exits require three things — first, scaled large companies, second, buyers and third, willing sellers.

Large scaled assets in India have only come about in the few years when they have come up in e-commerce, e-payments and so on. It takes time to reach scale and that’s when M&As start happening. The internet ecosystem in India really took off in 2010-11. So, now you have companies that are reaching scale. Next year, you’ll have more companies that reach scale. Talking about exits five years ago was pre-mature.

Second thing, you need buyers and that was something that we weren’t seeing earlier, but in the last 1-1.5 years, you’re seeing Chinese strategic investors coming in like Alibaba, Baidu, Tencent and some mid-market companies who are coming into India because growth in China is stalled. Also you have companies like Naspers from South Africa and European companies. We’re also seeing domestic M&As happening now like MakeMyTrip buying Ibibo and possibly Flipkart buying Snapdeal.

All this has only started to fall into place now and over the next few years that will come more into focus.

Third thing is willing sellers, that is slowly coming into process. Some of the valuation expectations were very high, some of the financing that were done in 2014-15 had very high valuations, and some of the M&A deals that have been offered have been at lower valuations. So psychologically some of these founders have to come to terms with selling at lower price points. So even the valuations that are being offered now may be attractive, but they’re lower than what they were a couple of years ago, so a lot of people are hesitating.

The main thing is to build assets. To talk about anything before that is premature. Our portfolio company Itzcash in the payments space was recently successfully acquired and had reached over $2 billion per year of transaction processing volume.

Are the valuations more realistic now?

If you look at 2012, 2013 and early part of 2014, there were reasonable valuations. There was an aberration of a year or so in the middle and then they came back to what they were before. So, valuations are not low, they’re pretty healthy right now. They’re as realistic as they were in 2012,13 and 14; there was just an aberration in the middle.

In terms of investment proposals or the pitches that you get, have things changed over the last couple of years?

What we’re seeing is entrepreneurs are more focused on building solid businesses and building them methodically rather than growing just for the heck of growing. We have entrepreneurs taking time figuring out their growth plans, perfecting their product, not raising excessive amounts of capital but reasonable amounts when they need to. Investors are also taking their time getting to know companies and investing. So it is healthy and not overheated now. It’s generally a good time to build a company, you can take your time finding and hiring good people. The people joining startups right now are the ones who are enthusiastic and passionate about the startup and not because they think it’s a cool thing to do. The real companies and entrepreneurs are now left, and the tourists have gone back to banking and consulting and whatever else they were  doing. I’m much happier today with the entrepreneurial talent that I see now than what I saw probably five years ago.

What is your investment thesis like?

We have different thesis in different spaces. In content, we really like user generated content and how that can lead to capital efficient businesses and social networks, so ShareChat is in that space for us. In education, we like businesses that sell directly to consumers. We like education brands and different forms of education that are possible only on the internet and not offline. Byju’s is a bet for us there.

In financial services, we like lending, we like the data that consumers are using in e-commerce transactions, banking transactions and so on. And we like businesses that use that data to figure out whether they want to lend to those consumers. In the health space we are looking at developing our thesis. In the enterprise software, SaaS space, we like companies that are US facing and are selling at high price points and we like India-facing businesses that are more horizontal across all verticals. And in B2B marketplaces, we like businesses where the internet and transaction histories and profiling can be used to create bridge between buyers and sellers in a way that only the internet can do, versus trading businesses that might trade industrial supplies and so on and have a higher working capital requirement. There are different thesis in different spaces, so it’s not one thesis that can be applied to all spaces.

Is there any plan for another India vehicle?

We have been investing in India since 2007, and we’ve been investing through the LightSpeed Venture Partners fund that historically has been investing in US, China, India and Israel. So we have been investing out of the US fund and in 2015, we raised our first India-dedicated pool of capital, LightSpeed India I, which had a $135 million pool of capital and we’re investing out of that. We have been investing together with our US, China and Israeli partners, so we can see if they are interested in investing in Indian companies that we find really attractive. We’ve done that. For example in Byju’s, LightSpeed US and LightSpeed India have both invested. So we have the ability to invest from $500,000 seed to a nearly $20 million cheque like we put into Byju’s.

Are there any plans of raising a second fund any time soon?

I can’t comment on that. But, any successful fund does want to raise a second fund and we will do that at some point in the future.

How has 2017 been so far for LightSpeed and how does the remaining part of the year look like?

We will continue to do our bread-and-butter business. Last year we made 5-6 investments, and we are on track this year as well in the six sectors I pointed out. Our existing portfolio continues to grow in their financing; Magicpin, Fastfox (in which LightSpeed had put seed money), Oyo, FreshMenu, and Shuttl have been financed. So we will continue to do both existing company financing and new financing. So, it’s a healthy pace, probably similar to last year. Maybe 3-6 investments if we find attractive companies.

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