These days, co-opting is the best way for tech companies to succeed, says VC

This article is from two episodes on Matrix Moments by Matrix Partners India, a podcast featuring candid conversations on what it really takes to survive the startup world. This is heavily revised from the original show transcripts. For the full interview, go here and here. 

In this interview, we looked back at 2018 and discussed the impact of the Flipkart-Walmart deal on the Indian venture ecosystem. We also talked about how things will play out in 2019 in terms of IPOs, emerging sectors, and funding. Avnish Bajaj, founder and managing director at Matrix Partners India, shared his thoughts.

How did the Flipkart-Walmart deal affect India’s ecosystem?

I believe three to five years from now, 2018 will be looked upon as a significant year when things changed in the Indian venture space. Today, if you ask people, most of them would say it’s because of the Flipkart exit. But I would argue that five years from now, it may not be the most important story.

In 2017, if you asked investors what they thought about the Indian venture space, they would say, “Well, it hasn’t delivered.” What does “delivered” mean in our business? Exits. And the Flipkart deal is obviously one of the largest exits globally.

But there are also about five to seven other exits that happened in 2018. There was Ola, Swiggy, and Oyo, among others. And that’s the larger story. A lot of other investors – not just Flipkart’s – are benefiting from their portfolio companies’ exits as well.

It’s also the first time in Indian venture ecosystem’s history that there are companies ready to exit, but the investors are not taking it. In the investing business today, it’s no longer about making 3x or 5x returns at a company level. When you have a company that’s working well, it’s now about making 10x, 20x, or sometimes 100x returns.

So we are reaching that stage of maturity where people keep their investments to compound the returns rather than just take their money when they can.

Will India ever see IPOs by consumer internet companies in the near term?

I think about 15 to 20 companies will be IPO-ready in three to five years. What does IPO-ready mean?

Today, since we don’t have a lot of companies listed in India, it’s very hard to come up with benchmarks of what it takes to have a consumer tech company listed on the Indian stock market. Interestingly, the constraint is not the regulations or readiness. The main constraint is, do you have the sophistication of the investor pool to understand this asset class? Historically, these asset classes have lost money.

I think the easiest benchmark is Nasdaq, where some of the first Chinese companies went public when they were reaching scale. And the benchmark there is very simple: US$80 million to US$100 million of high-growth, high-margin revenues and profitability.

So if you estimate how many companies in India will meet that benchmark within the next three years, it’s about 15 to 20 companies, or five to seven if it’s top of the funnel.

There has been unrest in some sectors: drivers protesting against Uber or Ola, restaurant associations against Zomato or Swiggy, hotel operators against Oyo. What does this say about the internet sector?

The reality is that the internet sector is positive as multiple industries are being disrupted. The things you mentioned happen not just in India but also globally. So I believe the question now for companies is: do you want to disrupt or do you want to co-opt?